Adjudication in Construction Law

Darryl Royce

Document

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CHAPTER 7 Other jurisdictions

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7.1 Introduction: Republic of Ireland and other common law jurisdictions

7.1 Part II of the Housing Grants, Construction and Regeneration Act 1996 applies to the United Kingdom and Northern Ireland.1 Statutory provision for adjudication relating to construction contracts in the Republic of Ireland is contained in the Construction Contracts Act 2013.2 Under this legislation ‘construction contract’ means an agreement (whether or not in writing) between an executing party (a contractor or sub-contractor) and another party, where the executing party is engaged for: carrying out construction operations by the executing party; arranging for the carrying out of construction operations by one or more other persons, whether under sub-contract to the executing party or otherwise; providing the executing party's own labour, or the labour of others, for the carrying out of construction operations. ‘Construction operations’ has the same meaning as that under the UK legislation,3 although without the exemptions for work connected to oil, gas, minerals and sites relating to nuclear processing, water or effluent treatment, chemicals, pharmaceuticals, oil, gas, steel or food and drink, and it includes making, installing or repairing sculptures, murals and other artistic works that are attached to real property. Contracts for architectural, design, archaeological or surveying work, engineering or project management services, or advice on building, engineering, interior or exterior decoration or on the laying-out of landscape, are included.4 Contracts with residential occupiers are outside the

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definition where the value of the contract is not more than €10,000 and the floor area of the dwelling is not greater than 200 square metres.5 Contracts between a state authority and its partner in a public private partnership arrangement are not construction contracts.6 7.2 If and to the extent a main contract does not make adequate provision for interim and final payments or a payment claim date and the period between that date and the date on which an amount is due, the payments schedule to the Act will apply.7 The schedule will apply to a sub-contract except to the extent that it makes provision which is more favourable to the executing party than that which would otherwise be made by the schedule.8 Except after the occurrence of specified circumstances relating to insolvency, a provision in a construction contract will be ineffective to the extent that it provides that payment of an amount due under the construction contract, or the timing of such a payment, is conditional on the making of a payment by a person who is not a party to the construction contract.9 There is provision for payment claim notices and responses where the other party or specified person contests that the amount is due and payable.10 The executing party may suspend work by giving notice where any amount due is not paid in full by the day on which it is due.11 A party to a construction contract has the right to refer for adjudication any dispute relating to payment arising under the construction contract (a ‘payment dispute').12 The adjudicator must be agreed as one of the parties’ own choice, agreed from a panel appointed by the Minister of Public Expenditure and Reform or appointed by the chair of the panel.13 Persons selected shall be members of the panel for a period of five years commencing on the date of selection and shall be eligible for reselection at the end of the period of five years,14 although the minister may, for good and sufficient reason, remove a member of the panel.15 The provisions for the conduct of the adjudication are similar to those applicable under the UK legislation, except that the adjudicator must comply with a code of practice published by the minister.16 The decision of the adjudicator, if binding, shall be enforceable either by action or, by leave of the High Court, in the same manner as a judgment or order of that court with the same effect and, where leave is given, judgment may be entered in the terms of the decision.17 Where any amount due pursuant to the decision of the adjudicator is not paid in full before the end of the period of seven days beginning with that on which the decision is made, the executing party may suspend work under the construction contract by giving notice in writing.18

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7.3 There has been a proliferation of similar legislation in other common law jurisdictions directed to securing payment for construction work and providing for the adjudication of disputes. This legislation is often influenced by a long history of statutes in many jurisdictions conferring a right to a lien on property in favour of a contractor.19

7.2 Australia: Overview

7.2.1 Previous legislation

7.4 Existing Australian legislation directed to the security of payment (SOP) for contractors and sub-contractors consisted of the New South Wales Contractors Debt Act 1977, the Queensland Subcontractors’ Charges Act 1974, the Australian Capital Territory Contractors Debts Act 1897, the Northern Territory Workmen's Liens Act 1893, the South Australia Worker's Liens Act 1893 and the Tasmania Contractors’ Debtors Act 1939. Each of these Acts provided a mechanism for a contracting party to recover an outstanding debt from a party higher up the contractual chain by allowing an unpaid sub-contractor to take a charge, lien or other form of security over payments to the principal contractor from the contractor or client which had engaged the principal contractor. Thus, if A had contracted with B for the latter to complete some construction work and if B owed C money for work completed relating to that work, then C could take action under the relevant Act to recover from A the debt owed by B.20

7.2.2 Recent legislation

7.5 Recent security of payment legislation for the construction industry in Australian is based on two different models, the East Coast Model, used by New South Wales, Victoria, Queensland, Tasmania, the Australian Capital Territory and South Australia, and the West Coast Model, employed by Western Australia and the Northern Territory, both of which are based on the UK Housing Grants, Construction and Regeneration Act 1996. Both models seek to provide a speedy dispute resolution mechanism for payment disputes by defining the rights of the parties and giving access to rapid adjudication for the resolution of payment disputes.21 Within the East Coast Model states, a divergence has occurred between Victoria and New South Wales derived from section 85 of the Victorian Constitution Act 1975, whereby it has been held that the Victorian Building and Construction Industry Security of Payment Act 2002 does not limit the court's jurisdiction by excluding or

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restricting judicial review by the court, whether by certiorari or otherwise, of a determination of an adjudicator under the Act.22 7.6 While this schism over reviewability may have turned the River Murray into something of a gulf, a whirlpool of judicial activity in relation to the legislation has, nevertheless, continued during the past decade, especially the case north of that river, in New South Wales and Queensland.23 Generally speaking, the courts in those states are currently upholding adjudication decisions on a ‘pay now, argue later’ basis, and as a concomitant of this, it is accepted that an adjudicator's decision need be neither reasonable nor correct in order to be enforceable so long as it otherwise complies with the basic and essential requirements.24 In Victoria, it remains the position that relief in the nature of certiorari, on all of the grounds available under the writ, including error on the face of the record, is not excluded.25 7.7 It seems to be a truth universally acknowledged that the current level of inconsistency across state borders is a matter which ought to be addressed on an urgent basis. At the same time, there is a palpable sense of incredulity by observers that consistency has not been able to be achieved already. It is not obvious why sub-contractors in one state or territory have better prospects of receiving payment for their work than sub-contractors working in any other state or territory.26 It has been suggested that it is surely now time to capture the best from all jurisdictions and consolidate them into a coherent national framework.27 A ‘Dual Process’ of adjudication has been proposed, which is a combination of the existing process in New South Wales, Victoria and Queensland, described as the ‘Certification Process', and the process of adjudication in the United Kingdom, Western Australia, Northern Territory and New Zealand, described as the ‘Traditional Process'. Under the Dual Process, the procedure for adjudicating progress claims would be slightly different to the procedure for adjudicating claims for debt or damages, described as ‘Extra-contractual Claims'.28 A further proposal is that of selecting the Queensland model as a benchmark with further improvements to optimize the adjudication of complex payment

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disputes, which would include criteria for the time frame of complex claims, the appointment, regulation and powers of adjudicators, together with a review system on the merits to control the quality of adjudicator decisions replicating the Singapore model.29

7.2.3 Australia: East Coast Model

(a) Payment schedules

7.8 The East Coast Model renders void ‘pay when paid’ clauses in building and construction contracts and gives a person performing work under a construction contract the right to progress payments, due either on the contractual date or, if there is no such date, 10 days after a payment claim is made. A central feature is the ‘payment schedule'. A claimant (a contractor or sub-contractor) is to serve a progress payment claim on a respondent (a main contractor, employer or owner) who must then provide a payment schedule within a defined period of time, stating how the claim will be met or any reasons for withholding payment of any amount, or both. The payment schedule has two functions: first, it gives the claimant the respondent's reasons for not paying any claimed amount; and, secondly, it provides a trigger for adjudication or debt recovery if the respondent fails to act on the claim.30

(b) Failure to pay and adjudication

7.9 When a respondent fails to provide a payment schedule within the specified time, the claimant can recover the amount claimed as a judgment for a debt in court or seek adjudication of the claim. In either case, the respondent loses the right to raise a counterclaim or rely on any other reasons for non-payment in its defence. The claimant is also entitled to serve notice on the respondent that it will suspend work or the supply of goods and services. The same consequences apply if the respondent provides a payment schedule, but fails to make payment accordingly. Where the payment schedule is in an amount less than that claimed, the claimant may seek adjudication.31 7.10 Authorized nominating authorities (‘ANAs') are appointed by the government, and they administer groups of adjudicators, train adjudicators and ensure they meet standards. Adjudication is applied for by making an application to an ANA, which then refers the application to an adjudicator. An adjudicator's decision is binding on the parties and is final within the operation of the security of payments legislation. If a respondent fails to make payment in accordance with an adjudicator's decision, the claimant is entitled to recover the amount claimed with interest and any unpaid adjudication fees as a judgment for a debt in court. Owner builders are not covered by the Acts, which exclude construction contracts related to the drilling or extraction of oil and natural gas or the extraction of minerals.32

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7.11 The main defects with the East Coast Model have been contended to be as follows:33

• The ‘rubber stamp’ approach engenders intractable litigation: In a very significant proportion of cases, there is no determination on the merits at all. Statistics show that the vast majority of claims are ‘waved through’ with 100% of the sum claimed being awarded, often for technical not substantive reasons. Interstate experience demonstrates that mandating payments without assessment of the substantive merits tends to lead to the aggrieved party taking an intransigent attitude in subsequent litigation, exacerbating disputation and encouraging costly litigation.
• No freedom to agree on adjudicators: The East Coast Model's inflexible rules relating to adjudication selection has created a parasitic industry of adjudicators with a monopoly over adjudication. This leads to:
- (1) Poor quality adjudicators;
- (2) Unhealthy forum shopping;
- (3) Inadequate processes; and
- (4) Unhealthy effect of ‘closed shop'.
• Restrictions on hearings: Because hearings are restricted, the decisions lack finality (thereby necessitating further litigation) and promote poorer decision-making by the adjudicators.
• Timescales: Requiring the entire adjudication process to be completed within 10 days is too short for all but the simplest of cases. This time frame gives the respondent less than a week to properly assess and respond to a claim.
• Ambush claims: An applicant can take many months to prepare a claim but the respondent only has days to respond. This unfair practice can reinforce an intransigent approach to subsequent litigation.
• One way street: The East Coast Model only permits damages claims allowable by way of defence, but not attack. This distorts the adjudication process and encourages subsequent litigation.
• Exclusion of financial institutions: In recent years, there has been an explosion in tripartite agreements for construction work between financiers, head contractors and clients, driven from the Eastern states.

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