Adjudication update 6

As this has been a quiet summer for new adjudication cases, we have an opportunity to follow the Government's lead and take stock. Statutory adjudication is now more than four years old and by many measures it has been a great success. The number of adjudications has risen from year to year and adjudications score high satisfaction ratings in industry surveys.

Statutory adjudication was however introduced with the express aim of accelerating and simplifying construction disputes without the need for the involvement of lawyers. Here the record is less clear cut. Adjudication has so far given rise to something like 125 court decisions and (other than a seasonal dip) there is no sign of the flow abating. At the same time, the Government's recent consultation exercise examining possible improvements to adjudication has produced only meagre results while new guidance for adjudicators published during the summer arguably represents a missed opportunity.

Judicial trends

Before we look at the results of the Government consultation exercise and the guidance document it is worth exploring the reasons for the continuing high level of litigation generated by adjudications. This has its roots in two key characteristics of adjudication:

• its one size fits all approach and
• significant gaps in the legislation, notably with regard to enforcement of adjudicators' decisions.

Realistically, both of these features of statutory adjudication were probably unavoidable. Imposing a maximum value on disputes referable to adjudication would have inevitably led to abuse. For the same reason the enabling legislation had to be as generally worded as possible and could not be too prescriptive, although parliament's failure to provide an effective code for enforcement of adjudicators' decisions - as it has done for High Court judgments and arbitration awards - is less easy to understand.

One answer may be that adjudication was envisaged from the start as a way of nipping problems in the bud and resolving small disputes during the course of works before they escalate. This philosophy can be seen, for example, in the current (May 2000) draft of the Society for Construction Law Delay Protocol, reported on in the last Bulletin, which recommends that disagreements on extensions of time should not be left until the end of the project but referred immediately to adjudication in the absence of agreement.

While we all have experience of contracts which have proceeded in this way, there is still significant - and understandable - resistance to reaching for an adjudicator whenever problems arise. After all, again for the best of reasons, the law makes it clear that either party can adjudicate "at any time".

As a result, adjudication has evolved into what might be called a two tier system. The first consists of the vast majority of the 5,000 or so adjudications which statistics indicate have taken place to date. These are relatively straightforward disputes of modest size either on small contracts or where the referring party has embraced the philosophy of prevention rather than cure noted above. In these cases the adjudicator's decision is either implemented, successfully ignored or leads to some form of compromise agreement and never gets anywhere near the courts.

The second tier is very different. Although small in number these adjudications are significant in value and are generally concerned with substantial and complex disputes. As Judge LLoyd noted in Balfour Beatty Construction Ltd v Lambeth London Borough Council (12th April 2002), reported in our last Bulletin, adjudication does not lend itself readily to resolving claims of this kind. Forcing such disputes into an adjudication straightjacket often has a number of consequences:

• where the stakes are high the parties' advisers will seek to exploit every gap or uncertainty in the rules to advance their case or prevent effective enforcement. A recent example is Earls Terrace v Waterloo (Valentine's Day 2002) in which the claimant argued unsuccessfully that a contract signed pre-Act but varied afterwards came within the Act
• adjudications are now increasingly expanding to exceed the 28 or 42 day timetable and there are instances of adjudications lasting several months and including successive oral hearings
• inevitably, such adjudications generate ever greater largely irrecoverable costs and
• as a result of all this, the industry is increasingly seeing such adjudications not as provisional or temporary in their effect, but as final. In the words of Judge LLoyd in the Balfour Beatty case: "It is now clear that the construction industry regards adjudication not simply as a staging post towards the final resolution of the dispute in arbitration or litigation..."

These developments have led to the courts adopting a more rigorous approach to enforcement. This reflects a recognition of the need for greater judicial vigilance. Judge LLoyd again put it well in Balfour Beatty:
"It has become all the more necessary that, within the rough nature of the process, decisions are still made in a basically fair manner so that the system itself continues to enjoy the confidence it now has apparently earned."

This concern with fairness has manifested itself in recent decisions in two key areas which, although overlapping, are worth considering separately:

• the need for the dispute between the parties to have crystallised before the start of the adjudication and
• the need for procedural even handedness during its course.

The courts have long concluded that there can only be an adjudication where there is a pre-existing dispute. This was clearly stated, for example, by Judge Thornton in Fastrack Contractors Limited v Morrison Construction Limited and another (4th January 2000). In that case Judge Thornton looked at when a dispute effectively crystallises for this purpose:

"A "dispute" can only arise once the subject-matter of the claim, issue or other matter has been brought to the attention of the opposing party and that party has had an opportunity of considering and admitting, modifying or rejecting the claim or assertion."

That much is clear, and we have had recent experience of successfully defending an enforcement action where the claimant had jumped the gun in precisely that way.

But what constitutes an effective dispute for this purpose? In Edmund Nuttall v Carter Limited (21st March 2002) Judge Richard Seymour decided controversially that in order to qualify for adjudication, it was essential for the referring party to have previously raised with the other side not only the subject matter of the claim in question, in the manner noted by Judge Thornton, but also the key facts and arguments underpinning that claim. If the claimant, in the words of Judge Seymour, abandons these wholesale in formulating his adjudication claim, then this constitutes a different dispute which cannot be referred in that form. According to Judge Seymour, the purpose of adjudication is to enable the parties in the absence of agreement, to submit to an adjudicator for decision "the facts and arguments which they have previously rehearsed among themselves."

The adjudicator as inquisitor

Judge Seymour is surely right in principle to say that adjudication should not simply be a means of continuing negotiations by proxy and ambushing the other side into the bargain. In his decision he also made it clear that there could be no objection to a party refining its case for the purposes of adjudication. The question is clearly one of degree. In reality, though, the boundary between refinement and the unacceptable moving of goalposts will not always be clear. And what happens if the referring party's case changes at the instigation of the adjudicator? This takes the debate into the realm of procedural fairness.

It also goes to the heart of the adjudication process. As is well known, the legislation provides (HGCRA Section 108(2)) that:

"The contract shall... enable the adjudicator to take the initiative in ascertaining the facts and the law."

The Scheme goes further and entitles the adjudicator to seek documents from any party "including... any written statement... supporting or supplementing the referral notice". This approach is reflected in other adjudication rules and contractual procedures.

On this basis, it could be argued that far from being cast in concrete before the adjudication starts, the dispute (in the broader sense adopted by Judge Seymour) is actually what the adjudicator says it is. In a recent adjudication on which we acted, the highly experienced adjudicator posed a series of detailed questions to the referring party based on his reading of the referral notice. This resulted in significant changes to the dispute referred - and arguably to the improvement of the referring party's case. It also contributed to the high costs of the adjudication. On the other hand, the claim was for well over £1 million, the costs incurred were a fraction of what they would have been had the dispute been litigated or referred to arbitration and (as far as our clients were concerned) the adjudicator came to the right answer!

More significantly, in the context of procedural fairness, he gave our clients a reasonable opportunity to respond to the new material generated by his enquiries. It was the adjudicator's failure to adopt a similar approach which resulted in his decision being set aside in the Balfour Beatty case.

There remains the risk, however, that by using his inquisitorial powers, the adjudicator will improve the referring party's case in a way which (post-Nuttall) is not open to the referring party itself - an odd situation on any view. There is another issue here. The Balfour Beatty dispute concerned an application for an extension of time. In such a situation, the opposing party should surely be entitled to argue that the referring party has simply not proved its case. We successfully adopted this approach in an adjudication last year. On the other hand Balfour Beatty appears to be authority for the proposition that, even if the claim as advanced would otherwise fail, it is open to the adjudicator to re-write the claim as long as the other side has a reasonable opportunity to respond. Can this be right? It seems certain that this issue will give rise to further litigation.

Consultation and guidance

Finally, as I have mentioned, there have been two other developments worthy of note since our last Bulletin. The first of these is that construction minister Brian Wilson has announced the steps which the Government intends to take in the light of the recent industry wide consultation process on adjudication. These are confined to a limited "tweaking of the Act", as one commentator put it, and the endorsement of recently-published guidance for adjudicators. The purpose of the tweaking is to outlaw contract provisions used by some main contractors requiring subcontractors who adjudicate against them to pay both sides' costs whatever the outcome. Apparently it is not intended to remove the parties' right to agree to give the adjudicator jurisdiction in respect of the parties' costs - an increasingly significant issue given the rising cost of large adjudications. More generally, the Government has, it seems, set its face against legislating to proscribe other contractual provisions which, while within the letter of the Act, move the goalposts in favour of one party.

By and large, therefore, it seems that the Government is proceeding on the basis that any necessary improvements to the adjudication process can be left to guidance rather than legislation - and specifically, to the slim 12 page document published in July by an authoritative construction industry umbrella group.

This is broken down into seven sections under the following headings:

• Natural justice or procedural fairness
• Challenges to jurisdiction
• Intimidatory tactics
• Unmanageable documentation
• Reasons for the decision
• Accidental errors or omissions
• The parties' costs.

A number of these sections have been drafted to provide accessible advice to adjudicators on the effect of relevant court decisions. To test the accuracy and usefulness of the guidance, let us check how it deals with Carter v Nuttall and its predecessor Fastrack, both touched on above. These decisions are in essence concerned with the jurisdiction of the adjudicator where there is arguably no dispute. Oddly, in the section entitled "Challenges to Jurisdiction"the guidance gives the absence of a dispute as an example of a jurisdictional challenge but says nothing about the proper definition of a dispute for this purpose and leaves the adjudicator to form his or her own view. It also says nothing about Carter v Nuttall or Fastrack.

In the section called "Unmanageable Documentation" however, we find this advice to the adjudicator, cross-referenced to both cases:
"Consider whether the documentation properly relates to the dispute being adjudicated or to another issue, which may or may not be a dispute between the parties. The introduction of matters that have not been canvassed by the referring party at or before the referral may point to there not yet being a dispute within your jurisdiction."

This represents on the whole a sensible approach to the problem. It is however pretty woolly. There is again no definition of "dispute". Also, there is no guidance on what the adjudicator should do if the documentation does in fact turn out to relate to a dispute falling outside the adjudication.

What about the use of inquisitorial powers? Here we find this:
"Although your role is investigatory and inquisitorial, when undertaking investigations ask yourself whether you are attempting to make or supplement one party's case; do not argue the case for one of the parties, either before or when giving your decision, or in setting out your reasons."

This is good advice. If followed faithfully, though, it would result in an adjudicator taking a rather more cautious view of his powers than the approach endorsed in Balfour Beatty v Lambeth which, despite its significance, is not mentioned.

As to the rest of the guidance, this is broadly common-sensical and useful although its treatment of the topics it covers is in no sense comprehensive. The document has been criticised though for not tackling a wider range of subjects. By way of example, the Guide does not tackle the following commonly-asked questions:

• Is an adjudicator, once nominated, entitled to impose his terms and conditions on the parties?
• When (if ever) should the adjudicator admit an abatement, set-off or counterclaim?
• What happens if there are inconsistencies between the notice of intention to refer and the referral notice?
• What should the adjudicator do if one party is insolvent?

This at least is not the authors' fault. The problem is that many such issues (left untouched by the Act, the Scheme and most sets of rules) have not been finally decided by the courts - and some may never be. Despite all the activity chronicled in this article, therefore, the adjudicator is left to make his own decisions on such matters - surely material for Bulletins to come!

For further information please contact Henry Sherman at [email protected] or on +44 (0)20 7367 2526.