Practical Law

Coulson J recently spoke to the London Common Law and Commercial Bar Association about adjudication and posed the question, is adjudication a model for all commercial dispute resolution?

While adjudication is the norm in construction disputes, attempts to expand it beyond the construction sphere have met with little success. Should parties be so reluctant to consider adjudication as a model for dispute resolution? In this blog post, I look at the advantages and disadvantages of using adjudication to resolve disputes outside of the construction industry.

Adjudication: what is it and how does it work?

Under the Housing Grants Construction and Regeneration Act 1996 (Construction Act 1996), parties to a construction contract have a right to refer a dispute to adjudication at any time. The adjudicator often has specialist legal or industry knowledge and provides a decision on the dispute (in relation to both issues of law and fact) within a short time (28 days from the date of referral to the date of the adjudicators’ decision, unless extended by agreement) and at minimum expense.

The decision of the adjudicator is “temporarily binding”. The parties can still seek to have their dispute finally determined in the courts (or by arbitration) if they choose to do so. However, in the meantime, the adjudicators’ award is enforceable by application for summary judgment (save in very limited circumstances). Anecdotal evidence suggest that very few construction disputes are finally determined by the courts or by arbitration; in the vast majority of cases the adjudicator’s award is accepted or the parties negotiate a final settlement of the dispute.

The implementation of adjudication under the Construction Act 1996 extends well beyond resolving payment disputes. The parties can refer a dispute to adjudication at any time up to and including the expiry of the limitation period. Consequently, complex, high value, multi-party disputes involving allegations of professional negligence may be referred to an adjudicator long after the construction project in question has been completed.

If adjudication is suitable for such claims in construction, why is it not suitable for commercial disputes generally?

The benefits of adjudication

Adjudication offers the possibility of obtaining an enforceable decision in a very short period of time and at a fraction of the cost of litigation.

Referral to adjudication can have a number of tactical advantages:

• For the referring party: in construction, the referring party dictates the scope and timing of the dispute. The referring party may already have spent weeks or months preparing its case before it refers the matter. As a result, the responding party is often at a comparative disadvantage.
• For the receiving party: if an award is made in a party’s favour, it is very difficult for the paying party to resist enforcement of the award. For the receiving party, the advantages are three-fold: an adjudicator’s decision in their favour is likely to have a chilling effect on the other party’s attitude to litigating the dispute further; the paying party’s “war chest” will have been depleted by (a) the costs of adjudicating and (b) making payment pursuant to the adjudicator’s award; and, on the other hand, the receiving party’s war chest will have been bolstered by the award.
• Costs: while the adjudicator will usually have power to determine who should pay his or her fees and expenses (unless otherwise agreed), in relation to the parties’ costs, adjudication is a no costs arena (again, unless otherwise agreed). The result is often that the costs are less than those incurred in litigation, not only because the process is much quicker, but also because there is no prospect of recovering any costs from the opposing party.

Whether any of the above can truly be described as an advantage of adjudication is debatable: it mainly depends on the position of the parties.

The one consistently cited advantage of adjudication is the extent to which, despite adjudicators’ decisions having only “temporary finality”, for all practical purposes, they result in the final resolution of the dispute.

Plainly, it is a benefit that so many disputes which might have otherwise resulted in lengthy, expensive litigation have been resolved comparatively quickly with a minimal burden on court resources. In that respect, what is good for the construction industry is good for commercial dispute resolution as a whole.

The disadvantages

Perhaps the greatest disadvantage of adjudication is the risk of “rough justice”. This risk arises in two ways: the speediness of the process and the difficulty of challenging an adjudicator’s decision.

As discussed above, the referring party is at an advantage in the presentation of their case. The responding party has little time to respond. It is not difficult to see how that approach can lead to decisions that are wrong.

Moreover, because the adjudicator’s decision does not finally determine the parties’ rights, the court will not decline to enforce an adjudicator’s award even where the decision is based on an error of fact or law. The TCC will only decline to enforce to adjudicators’ decision where the adjudicator has acted in breach of their jurisdiction or in breach of the requirements of natural justice (in the context of a fast-paced procedure). In addition, the court may stay enforcement of a decision where the receiving party is insolvent.

Proponents of adjudication will rightly point out that, as an adjudicator’s decision is of only temporary finality, a disappointed party can litigate the claim in the conventional way in the hope of a different outcome. On one view, the relative scarcity of construction disputes being finally resolved by litigation may suggest that the vast majority of parties are happy with the quality of the adjudicator’s decision. However, that may be too simplistic a view:

• Firstly, the majority of disputes referred to adjudication in construction are disputes about interim payment or delay in on-going contracts. The disadvantages of adjudication are limited in those circumstances because the parties’ contracts will provide for a final account where the effect of an incorrect adjudicator’s award can be corrected.
• Secondly, a party that is unsuccessful in adjudication may, as a result of the adjudicator’s decision, find itself too cash poor to commence litigation.
• Thirdly, a number of insurers exclude adjudication and adjudicators’ awards from their construction professional indemnity policies. Insurers, who are experienced litigators, are clearly sufficiently concerned about the risks posed by temporary finality, that they are not willing to provide cover in respect of adverse adjudicator’s decisions.

Professional negligence adjudication pilot scheme

The MoJ introduced the Adjudication Scheme Trial for Professional Negligence Claims in February 2015. As Ramsey J set out in the foreword, it is the view of some practitioners that “adjudication is particularly appropriate in resolving disputes in professional negligence cases where without some fundamental view on the merits, the parties may not be able to resolve their dispute.”

The trial scheme is voluntary and applies only to claims against solicitors with a value of less than £100,000. The adjudicator’s decision will be enforceable by proceedings and an application for summary judgment in the County Court.

So far, the take up of the scheme has been very poor. Why are parties so reluctant to refer matters to adjudication where adjudication appears to have been so successful at resolving disputes in construction?

Adjudication beyond construction

It is perhaps unsurprising that adjudication has not been embraced more widely:

• Adjudication is unfamiliar territory to those outside of the construction industry and it is understandable that parties are reluctant to commit themselves to an unfamiliar process which takes place within a short time frame.
• One can understand why insurers are reluctant to commit themselves to adjudication with the potential disadvantages of temporary finality and a rough and ready result.
• An adverse adjudicator’s award can significantly alter the balance of power in negotiations; if a claimant is successful in adjudication, it is the defendant who must initiate proceedings to reclaim the money paid (together with bearing the attendant cost and delay in the meantime).
• There are other alternatives and the parties can choose an ADR process which best suits them. In the circumstances, commercial parties in dispute can look to mediation or early neutral evaluation to pressure a party into an early-negotiated settlement, rather than being forced to adjudicate at the election of one party.

In construction contracts, the right to refer a matter to adjudication is implied into the contract by statute. No party can contract out of it or prevent another party referring a matter to adjudication. There is no equivalent term implied into other types of contract. In the circumstances, adjudication will only be an option where the parties either (i) agree to include such a term in their contract or (ii) agree to refer a matter to adjudication after a dispute has arisen.

Given the disadvantages of temporary finality and the approach to enforcement taken by the court, it appears unlikely that commercial parties will choose to adjudicate at present.