We’re not there yet

How has the Construction Act fared in its first recession? First, the good news. The statutory right to adjudicate has generally met its aim of being a reliable way of resolving disputes quickly. Its popularity is clear from last year’s big rise in adjudications – one nominating body, the Technology and Construction Solicitors Association, saw a 50% rise in nominations.

More adjudications means more enforcement proceedings: about 5% of decisions go to court for enforcement and fewer than 1% are not enforced.

But there is growing concern about adjudication’s cost-effectiveness in some cases. The courts recently enforced a decision awarding £97k. It seems that in the end the adjudicator’s fees and the parties’ costs, together, exceeded the sum awarded.

This would be bad enough if the result was a final judgment – but the position is worse because the result is only temporarily binding. All these costs are wasted if either party opts to litigate or arbitrate the dispute. At present most parties accept adjudicators’ decisions, but it is unclear whether this will continue after the recession when those who feel wronged by a decision have more cash for a rematch.

Claimants suffer when those ordered to pay sums by adjudicators go insolvent. Before Lancsville Construction Ltd entered administration, two decisions were enforced against it requiring it to pay £58k. The “winner” won’t see any of that, and will have to bear its adjudication and litigation costs, and into the bargain pay the adjudicator (who had ordered Lancsville to pay most of his fees).

The court confirmed that if a defendant fails to acknowledge service of the enforcement proceedings, default judgment may be entered. But many defendants acknowledge service and put the claimant to the time and cost of a hearing.

Conversely, a party that is awarded a sum by an adjudicator may (because, say, the recession has hit its finances) be unable to pay it back if the dispute were re-decided against it. A claimant in such a case may be unable to execute a judgment enforcing an adjudicator’s decision.

We have no cheap way of enforcing decisions as in Australia, where decisions are enforced without troubling a judge.

It is said that adjudicators’ decisions are enforced even if wrong on the facts or law. However, recent cases suggest that may not always be so (see Tony Bingham’s article in Building, 26 February and Forest Heath DC vs ISG). If before an adjudicator’s decision is paid, all or even part of the dispute can be – and is – re-decided by a court or arbitrator, the decision will be superseded. The key factor for a court in doing this is whether issues are involved that are not substantially factual. The court will only re-decide issues, before giving a judgment enforcing an adjudicator’s decision, if it can do so without delay.

This will encourage parties to defer paying adjudicators’ decisions while seeking a different final result. It also makes disputes that are not substantially factual less apt for adjudication, if when enforcing an adjudicator’s decision it may be re-decided. These include disputes that turn on matters of contractual interpretation – which are commonly adjudicated.

How is the payment regime faring? There is no evidence that it has achieved its goal of improving cash flow. In fact, lengthening payment periods are reported. The National Specialist Contractors Council says only 4% of subcontractors were paid within 30 days during the second half of last year. The regime was toothless when suppliers accepted price reductions imposed by housebuilders on existing contracts.

If and when the act’s changes come into force, they will have no impact on nine out of 10 of the avoidance devices identified in my article of 16 November 2007. Ironically, one upshot of the review is the government’s recognition of the efficacy of two devices – final and binding payment decisions and trustee stakeholder accounts – which it did nothing to ban. Even the ban on clauses that require one party to pay the other’s costs, win or lose, may unintentionally permit them if the clause simply empowers the adjudicator to apportion their charges.

If and when the ban is interpreted, the government’s answer to a parliamentary question by Nick Raynsford, confirming its real intentions, may be critical.

It is only a partial reflection on the Construction Act that many of the above problems arose from the recession. Many also apply to some extent to litigation or arbitration. But they do show, if proof were needed, that the act is not a panacea for the industry’s disputes and cash flow issues – least of all in a recession when the impact of market forces is clearer than ever.