The Construction Contracts Act 2013 (the “Act”) introduces a number of key protections aimed at improving cash flow in the construction industry, including requiring that there be an adequate payment mechanisms in all construction contracts, with minimum payment provisions for sub-contractors, as well as a statutory right to suspend works for non-payment.
Fundamental to these protections is the statutory entitlement introduced by the Act to refer disputes relating to payment to adjudication. The introduction of the right for parties to refer disputes relating to payment to adjudication, which experience in the UK has indicated provides a quick (albeit not necessarily correct), and temporarily binding answer has the potential to revolutionise dispute resolution under construction contracts. This article looks at the statutory framework of this new dispute resolution procedure and the key features of which you should be aware.
The model for adjudication under the Act broadly follows the process which was introduced into the UK construction industry in 1996 , but has some notable differences. These differences mean that whilst many of the court decisions which have clarified the adjudication process for those working in construction in the UK may provide some assistance, they will not answer all the questions which arise.
So what does the Act say?
Which disputes can be referred?
The Act confers the right on a party to a construction contract to refer “any dispute relating to payment arising under the construction contract” to adjudication . So what disputes will be properly referable to adjudication? The dispute must be one “relating to payment” – whilst most disputes can ultimately be seen as a dispute about an entitlement to be paid, whether for work carried out, or variations to that work, or by reason of claims for additional monies, the interpretation of what a ‘dispute relating to payment’ is will be central to the breadth of application of this new statutory dispute resolution procedure. The dispute must also arise under the construction contract, which may exclude claims for breach of contract, where the contract does not provide any specific mechanism for dealing with the particular breach. Claims for damages, unless captured within the contract, may not, therefore, be included.
The right to refer disputes to adjudication cannot be excluded but is optional i.e. a party to a construction contract can choose not to exercise this entitlement.
When can disputes be referred?
In line with the intention of the Act to improve cash flow, disputes can be referred at any time. This means that the entitlement to refer a dispute to adjudication cannot be limited, whether by reference to works having to reach practical completion, say, or by having to pursue another dispute resolution procedure, whether formal or informal, before an adjudication can take place.
How many disputes can be referred at the same time?
The adjudication process is commenced by the claiming party serving a notice of intention to refer the payment dispute for adjudication. If the Irish courts choose to follow the decisions in the UK, this notice will be important in defining the extent of the dispute which has been properly referred and the issues comprising the dispute will need to be adequately set out. Key to the role of the adjudicator will be ensuring that he or she has a full understanding of the dispute(s) referred and answers the right question(s), even if that answer is wrong.
In contrast to the regime in the UK, however, the Act allows the adjudicator to deal at the same time with several payment disputes arising under the same construction contract (or indeed, under related construction contracts ): what is not clear, however, is whether this ability to deal with more than one payment dispute at the same time means that the claiming party can refer more than one dispute at the same time (with the notice of intention to refer) or whether the referral of different disputes (subject to separate notices) can be brought together and dealt with by the adjudicator at the same time.
Who will be the adjudicator?
The Act provides that the parties can either agree an adjudicator of their choice or select one from the panel to be constituted by the Minister , such agreement to be reached within 5 days of the notice of intention to refer a dispute to adjudication. This suggests that it is not anticipated that parties should agree the adjudicator in their contract but might include the names of possible adjudicators which will be considered for appointment, in the first instance, in the event of a dispute arising. If the parties are unable to reach agreement, the adjudicator will be appointed by the chair of the panel. The Code of Practice provides further guidance on the timing of an adjudicator’s appointment, whether by agreement or from the panel. This is critical (and was a significant gap within the Act) as the timing for issue of the notice of referral, which will dictate the timetable for the adjudication, runs from the date of the adjudicator’s appointment.
Timetable for adjudication
One of the key features of adjudication is the short timeframe within which the procedure is to be completed. This is fundamental to the key aim underpinning the legislation, namely, to ensure that monies flow promptly, particularly during the course of works, and that any disputes about payment are resolved as quickly as possible. The claiming party is required to refer the dispute, by giving notice of referral accompanied by all relevant supporting documents, within 7 days of the adjudicator’s appointment. Whilst the parties can agree to a longer time period, the Act provides that the decision of the adjudicator must be made within 28 days of the referral, or where the referring party agrees, within 42 day of the referral. The Code of Practice further mandates the adjudicator to use reasonable endeavours to process the payment dispute in the shortest time possible. We can anticipate that the time periods set out in the Act will be strictly applied, and a decision given outside the 28 or 42 days, or longer period that may be agreed, will not be enforceable.
Conduct of the Adjudication
The Act requires the adjudicator to act impartially in the conduct of the adjudication, and to comply with the Code of Practice published by the Minister. In addition, the adjudicator may take the initiative in ascertain the facts and the law in relation to the dispute. The Code of Practice expands upon these core issues which must be adhered to by the adjudicator. In particular, the adjudicator must
– observe the principles of procedural fairness, and
– act impartially and independently and without bias.
The Code of Practice also sets out possible options for the procedure of the adjudication and the directions which an adjudicator might make in this regard, ensuring always that the procedure is commensurate to the nature and value of the dispute. The above principles, however, will be paramount and compliance with the same will underpin the enforceability of the adjudicator’s decision. These requirements will, however, need to be measured within the context of the limited time available for the process. That said, the need for procedural fairness requires that the responding party knows the claims being made and has an opportunity to respond. Further, if the adjudicator forms a view or decides to follow a particular argument which has not been presented by either party, the adjudicator should give the parties an opportunity to make submissions on this view or argument.
Any conflicts of interest or other factors that could give rise to an apprehension of bias should be promptly disclosed and may be such that the adjudicator should decline to act.
Will there be formal hearings?
Whether meetings with the adjudicator form part of the process will depend upon a number of things, including the nature of the dispute, the submissions of the parties and the extent to which there are conflicts in evidence put forward by the parties. Indeed, where material facts are in issue, a meeting may be essential to enable the adjudicator to test the parties’ evidence. Any meetings must be with both parties – procedural fairness will not allow the adjudicator to meet, or indeed, speak with one party, absent the other.
It is likely, however, that many adjudications will be conducted on the basis of written submissions only, and where meetings do take place, these are unlikely to consist of formal evidence or cross examination of that evidence, as would be expected in an arbitration or court proceedings. Ultimately, each adjudicator is likely to develop the procedure by which they can meet the requirements for issuing a decision within the short time frame allowed, whilst allowing the parties the opportunity to present their respective positions.
Will there be reasons for the decision?
The Act is silent on this, but the Code of Practice provides that the decision should be in writing and signed and dated by the adjudicator, and unless otherwise agreed in writing by the parties, should include the reasons for the decision.
Status and enforceability of the adjudicator’s decision
A key characteristic of adjudication is that the decision of the adjudicator is intended to be binding in the interim – this feature of adjudication in the UK is what has made it so successful. Thus, the Act provides that the decision will be binding on the parties until the payment dispute is finally settled between the parties or a different decision is reached, either by an arbitrator’s award or a decision of the court. The intention of the Act, therefore, is that where a decision provides for payment from one party to the other, that payment must be made, unless and until the decision is overturned. The Act also provides that where monies due on foot of an adjudicator’s decision are not paid, the receiving party is entitled to suspend works until payment is made. This very important right of suspension for non-payment of an adjudicator’s decision is, however, emasculated by the provision that the right to suspend works will cease if the decision is referred to arbitration or the courts. Indeed, the entire question of how an adjudicator’s decision can be enforced, if not complied with, remains very uncertain, and there is a real danger that a quick decision that payment is due may be undermined by a much longer process for enforcing that decision.
Costs of adjudication
The Act provides that each party will be responsible for its own costs of participating in the adjudication. The adjudicator may, however, issue directions within his or her decision as to how the adjudicator’s fees and expenses are to be paid, and may direct that all of these be paid by only one, typically, the paying party. In the absence of such direction, the parties will bear these fees and expenses in equal share and will be jointly and severally liable to the adjudicator for the same.
The introduction of adjudication into the arena for resolving payments disputes arising under construction contracts is a very significant development. It may provide ‘rough justice’, given the speed of the process, but if it encourages parties to move on from issues that can arise during a project and not end up in protracted disputes, this must be welcomed. A number of very important questions remain, however, as to how adjudication will work in practice and we must wait to see how parties and the courts respond to this new process.
Niav O’Higgins, Partner & Head of Construction & Engineering Group Arthur Cox
Arthur Cox, Earlsfort Centre, Earlsfort Terrace, Dublin 2
t: +353 (0)1 618 0000