ADJUDICATION in Construction Contracts John Redmond BA, FCIArb, Solicitor b Blackwell Science 0 2001 by John Redmond DISTRIBUTORS Blackwell Science Ltd Marston Book Services Ltd Editorial Offices: PO Box 269 Osney Mead, Oxford OX2 OEL Abingdon 25 John Street, London WClN 2BS Oxon OX14 4YN 23 Ainslie Place, Edinburgh EH3 6AJ (Orders: Tel: 01235 465500 350 Main Street, Malden Fax: 01235 465555) MA 02148 5018, USA 54 University Street, Carlton USA Victoria 3053, Australia Blackwell Science, Inc. 10, rue Casimir Delavigne Commerce Place 75006 Paris, France 350 Main Street Malden, MA 02148 5018 Other Editorial Offices: (Orders: Tel: 800 759 6102 781 388 8250 Blackwell Wissenschafts-Verlag GmbH Fax: 781 388 8255) Kurfiirstendamm 57 10707 Berlin, Germany Canada Login Brothers Book Company Blackwell Science KK 324 Saulteaux Crescent MG Kodenmacho Building Winnipeg, Manitoba R3J 3T2 7-10 Kodenmacho Nihombashi (Orders: Tel: 204 837-2987 Chuo-ku, Tokyo 104, Japan Fax: 204 837-3116) Iowa State University Press Australia A Blackwell Science Company Blackwell Science Pty Ltd 2121 S. State Avenue 54 University Street Ames, Iowa 50014-8300, USA Carlton, Victoria 3053 (Orders: Tel: 03 9347 0300 The right of the Author to be identified as the Fax: 03 9347 5001) Author of this Work has been asserted in accordance with the Copyright, Designs and A catalogue record for this title Patents Act 1988. is available from the British Library ISBN 0-632-05651-7 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or Library of Congress transmitted, in any form or by any means, Cataloging-in-Publication Data electronic, mechanical, photocopying, recording Redmond, John, B.A. or otherwise, except as permitted by the UK Adjudication in construction disputes/ John Copyright, Designs and Patents Act 1988, without Redmond. the prior permission of the publisher. p. cm. Includes bibliographical references and First published 2001 index. ISBN 0-632-05651-7 Set in 10.5/12.5 pt Palatino 1. Construction contracts-Great Britain. by DP Photosetting, Aylesbury, Bucks 2. Arbitration and award -Great Britain. Printed and bound in Great Britain by 3. Great Britain. Housing Grants, Construction MPG Books Ltd, Bodmin, Cornwall and Regeneration Act 1996. I. Title. KD1641 .R43 2001 The Blackwell Science logo is a trade mark of 343.4Y078624- dc21 Blackwell Science Ltd, registered at the United 00-068030 Kingdom Trade Marks Registry For further information on Blackwell Science, visit our website: www.blackwel1-science.com Contents Preface vii Chapter 1 Introduction 1 1.1 Background to the legislation 1 1.2 Adjudication in standard contracts before the Act 4 1.3 What is adjudication? 6 1.4 Appeal and review 11 1.5 Who are the adjudicators? 12 1.6 The future 13 Chapter 2 Construction Contracts and Construction Operations 16 2.1 Definition of 'construction operations' 16 2.2 Exclusions from the definition of 'construction operations' 19 2.3 Definition of 'construction contract' 22 2.4 Exclusions from the definition of 'construction contracts' 26 2.5 The mixed contract 30 2.6 Limits of date and place 30 2.7 Residential occupiers 34 2.8 Contracts in writing 35 Chapter 3 The Statutory Right to Refer Disputes to Adjudication 39 3.1 Definition of dispute 39 3.2 Required contractual provisions 45 3.3 The incorporation of institutional rules and other terms 55 3.4 The adjudication provisions of the Scheme for Construction Contracts 56 iv Contents Chapter 4 Starting Adjudication 57 4.1 Timing 57 4.2 The notice of adjudication 60 4.3 Service of the notice of adjudication 66 4.4 Identification or selection of the adjudicator 67 4.5 Request to an adjudicator nominating body 70 4.6 Terms of agreement with the adjudicator 71 4.7 Procedure if the appointment system fails 73 4.8 Objections to specific adjudicator 75 4.9 Revocation of appointment and resignation of the adjudicator 76 Chapter 5 Preliminary Matters - the Referral Notice and Jurisdiction 83 5.1 Time for delivery of the referral notice 83 5.2 Form and contents of the referral notice 86 5.3 Related and unrelated disputes 91 5.4 Questions of jurisdiction 93 Chapter 6 Conduct of the Adjudication 101 6.1 Overriding duties of the adjudicator 101 6.2 The exercise of initiative by the adjudicator 105 6.3 Failure to comply 112 6.4 Representation of the parties 116 6.5 Confidentiality 118 6.6 Timetable for decision 120 6.7 Standard forms of appointment 125 Chapter 7 The Adjudicator’s Decision 127 7.1 The duty to decide 127 7.2 The matters in dispute 129 7.3 Power to open up certificates etc. 134 7.4 Decision on payments 136 7.5 Interest 140 7.6 Form and content of the decision 142 7.7 Binding nature of the decision 150 7.8 Mistakes 152 7.9 Adjudicator’s immunity 154 Contents v Chapter 8 Costs 158 8.1 Adjudicator’s right to fees and the power to apportion 158 8.2 Right to require security for his fees 165 8.3 Power to order payment of costs 169 Chapter 9 Enforcement 174 9.1 The Act and the Scheme 17 4 9.2 Application for summary judgment 178 9.3 Other enforcement procedures 181 9.4 Challenges to enforcement 185 Chapter 10 Payment 205 10.1 Introduction 205 10.2 The right to stage payments 206 10.3 Timing and quantification of payments 208 10.4 Notice of amount to be paid 209 10.5 Notice of intention to withhold payment 210 10.6 Right to suspend 212 10.7 Conditional payment provisions 214 10.8 The Scheme 218 Appendix 1 Housing Grants, Construction and Regeneration Act 1996 232 Appendix 2 The Scheme for Construction Contracts (England and Wales) Regulations 1998 241 Table of Cases 253 References to Housing Grants, Construction and Regeneration Act 1996 257 References to Scheme for Construction Contracts 258 Subject Index 259 Preface The first four months of 1998 were a period of frantic activity for construction lawyers. We had all been astonished at the way in which Sir Michael Latham’s suggestions for the regulation of pay- ment terms in the construction industry had been adopted by a Conservative Government, who most had thought would have an antipathy to such legislation. We were frankly terrified by the prospect of having to deal with the new dispute resolution system that somehow would produce decisions in just 28 days. We had spent the previous two years warning our clients that something quite remarkable was about to happen, and now the days were counting down. Contracts were frantically being drafted and revised, main contractors were asking us to devise complex avoidance measures and some of us were spending our weekends attending courses to train to be adjudicators. Not everyone wanted adjudication to work, and many of its supporters feared that it would fail. Several highly respected and very senior construction lawyers argued that it was offensive to the traditions of the common law and would lead to serious injustice. Many thought that the courts would find it difficult to enforce the decisions of adjudicators and for this reason the system would never get off the ground. So it was that despite enormous excitement, there was a great deal of nervousness as the construction industry awaited the new dawn on 1 May 1998, the day when Part 2 of the Housing Grants, Construction and Regeneration Act 1996 was to come into force. Like so many dawns in these rather damp islands, this one was something of a disappointment. There was no blinding flash of transformation for the construction industry. Weeks went by with no apparent changes at all. Standard forms of contract had been changed, but many old editions were still being used. New instructions for the lawyers all seemed to concern contracts made months before, and adjudication was not available. But something in the undergrowth was stirring, and by February 1999 one adjudication decision found its way to the Technology and Construction Court. It was enthusiastically greeted by Mr Justice viii Preface Dyson. Others followed in a steadily accelerating flow, most with a similar success, and it became clear that adjudication was working. As a result more and more construction businesses are taking their disputes to adjudication. It is not just the weapon of the oppressed subcontractor; many employers and main contractors are using the procedure to achieve a rapid and comparatively inexpensive reso- lution of a seemingly intractable argument. Several excellent guides to this new process were published shortly before or shortly after the Act came into force in May 1998. I have enormous admiration for their authors, who were obliged to speculate about how and indeed whether adjudication would work. Two years later, with a host of court decisions on which to draw, I have had a much easier task. While there will doubtless be a con- tinuing stream of new cases in which adjudicator’s decisions in particular circumstances will be tested, the principles are now established. There is certainly no longer any need to speculate about whether or not adjudication will succeed. With disputes being referred to adjudicators at an estimated rate of 2000 per annum there is no longer any doubt. The speculation now is on how far the process will spread. Why should it be confined to the construction industries? The technology and construction industries are served by the same specialist court which has heartily endorsed adjudication. When will the tech- nology industry demand the same benefit as construction? How about transport? In twenty years’ time the advent of adjudication may be seen as a far more significant development in dispute resolution than the reforms of civil procedure with which lawyers have also been grappling in recent times. I apologise to my female friends and colleagues who may be offended by my consistent reference to the adjudicator as ’he’. I have no doubt that the day is coming when my computer will tell me how to move randomly between gender so as to achieve com- plete equality, but until then it seems simpler to stick to ’he’ and ’him’ and ask the reader to interpret appropriately. The Housing Grants, Construction and Regeneration Act 1996 is referred to as ’the Act’ unless the context is likely to give rise to confusion, and I have shortened the Scheme for Construction Contracts to ’the Scheme’. I started writing this book while a partner at Laytons and com- pleted it as a partner at Osborne Clarke OWA. In both firms I have had enormous support, and many a happy hour debating finer points of the adjudication process. Many of the better ideas have come from my colleagues, but of course any mistakes are my own. Preface ix I must also thank the publishers Blackwell Science and in parti- cular Julia Burden whose enthusiastic encouragement has been invaluable. Finally, I should also remember my son Sam, who I have had to push off our computer rather too often in recent months. I have aimed to state the law as it stands at 1 November 2000. John Redmond Osborne Clarke OWA Bristol CHAPTER ONE INTRODUCTION 1.1 Background to the legislation The Housing Grants, Construction and Regeneration Act 1996 came into force on 1 May 1998. This book is about Part I1 of that Act, which itself is often known as the 'Construction Act'. That single statute is so fundamental to everything discussed in this book that, with the exception of one or two passages where there might be some confusion, it is generally referred to in this book as 'the Act'. Housing Grants and Regeneration, each important pieces of legis- lation in their own right, have nothing to do with the remarkable Part 11. The most significant piece of legislation to affect the con- struction industries within the lifetime of anyone currently working within them was hidden between two parts of the Act that for most will remain unread. It is natural to ask where the story started that led to this extra- ordinary statute. The obvious answer is the report Constructing the Team published in July 1994. On 5 July 1993 the House of Commons was told that there was to be a 'Joint Review of Procurement and Contractual Arrangements in the United Kingdom Construction Industry'. The result was not a Government report, prepared by a commission striving to find consensus and achieving compromise, but a wholly personal report by one man - Sir Michael Latham. His task was to define and address problems perceived but insuffi- ciently defined within the construction process. Latham sum- marised his purpose in the foreword to the report: 'The Review has been about helping clients to obtain the high quality projects to which they aspire.' Latham made 30 principal recommendations, many of which had several subsidiary suggestions. They covered an enormous spec- trum of issues, including aspects of public procurement, training and professional education, quality control, technical research and latent defects insurance. None of these found their way into the Act. 2 Adjudication in Construction Contracts There were however several recommendations that can be seen as direct precursors to the Act that was to follow four years later: There should be a system of standard form contracts usable in all construction and similar projects, covering all aspects of the project from appointment of the first design consultant to the engagement of the last subcontractor. That system should be based on the New Engineering Contract (also known as the Engineering and Construction Contract), with some amend- ment to embrace 13 requirements set out by Latham. One of those requirements was provision for speedy dispute resolu- tion by an impartial adjudicator, referee or expert. Both public and private sector clients should use the New Engineering Contract. Legislation should be introduced prohibiting the amendment of the standard form with regard to payment and interest, reinforcing the right to refer disputes to adjudication, requiring advance notice of set-off, and protecting similar rights in bespoke contracts. Adjudication should be the normal method of dispute reso- lution. Dispute resolution in the construction industry was a particular concern, and not only for Sir Michael Latham. While he was reviewing contract practices in the industry, Lord Woolf was car- rying out a review of the English court system. He was considering the problems of time and cost in litigation. Annex 3 to the 1996 Woolf Report gave a fascinating insight into these aspects of actions in the Official Referees’ courts, now renamed the Technology and Construction Court. In 205 such actions, normally involving construction, the mean duration from instruction to conclusion was 34 months, with the median at 30 months. Costs as a percentage of claim value averaged 158% in claims of less than €12,500 and 96% in claims of €12,500- €25,000. The costs were not the actual costs incurred, but the costs that the losing party had been ordered to contribute to the winner through the process of taxation, or court assessment. On the basis that taxed costs probably represented 75% of actual costs paid by the party, the total figure would be 30% higher, and could then be doubled to account for one more party. Thus a typical claim for €10,000 would involve costs of €41,000. Working through the figures provided in the annex, the costs of a two party action involving a typical €200,000 dispute would total at least €165,000.