Rush to judgment

Let us start with the recent decisions on adjudication. The Project Consultancy Case tells us that the courts will look carefully if there is genuine doubt about the adjudicator’s jurisdiction, but where jurisdiction is clear – in other words, in the majority of cases – the courts will hardly intervene at all.

Once you have the adjudicator’s award, you can go straight to the court and ask it to shorten its usual procedures. That is the message of the Outwing case. The judge will enforce the award without questioning its fairness, because he is obliged to do so, and that is the message of the Macob case – despite the judge’s comment that many people would consider the mandatory adjudication timetable to be “unreasonably tight, and likely to result in injustice”. Nevertheless, the judge signalled that the fairness of a decision cannot be examined until there is a full arbitration or court hearing, a year or two later.

Predicting the outcome of construction disputes has never been easy, and it will get gradually more difficult. At present, we still use the system of precedent. If a court clarifies an issue, we know another court or arbitrator will follow suit. This works because the decisions are published. If the decisions were not published, the system of precedent would start to dry up. Eventually, judges and arbitrators would quite probably reach different conclusions on identical clauses. Certainty would have disappeared and risk would have increased – which is exactly what is beginning to happen. This is because cases that once could have gone to court can now only go to arbitration, where awards are confidential and generally not published.

It must therefore follow that, over time, there will be less public clarification of issues specific to the industry and to its unique contracts. The trend was started by the Arbitration Act 1996. When it came into force at the beginning of 1997, the courts lost their ability to override an arbitration agreement, and to insist on bringing a dispute into court – to merge all the disputes on one project into a single court case, for example.

The act also reduced the range of opportunities for getting a court to review an arbitrator’s decision. The outcome is obvious: more and more decisions will never see the light of day, and subsequent adjudicators, arbitrators and judges will have less precedent to follow.

So risk is becoming less easy to quantify. It is too early to tell how the industry will react, but if companies have too many bad experiences, if adjudication gets a reputation for producing injustice that is rubber-stamped by the courts, with unpredictable chances on review, then commercial people may start to look for ways around it. Since they cannot contract out of adjudication (adjudication can be imposed irrespective of what the contract says under section 108 of the Construction Act), commercial people might think about avoiding the contracts themselves. If the industry is looking for fewer contracts, the obvious place to look is subcontracting.

Although some main contractors may grow new direct labour forces from scratch, others might go for outright ownership, building a system of subsidiaries. Others might go for a hybrid – a contract that makes a strategic alliance, which is neither outright ownership nor subcontract. Such alliances may well fall outside the definition of a construction contract.

We will have to wait and see whether the courts would regard adjudication, with its timetable that many regard as unreasonably tight and likely to result in injustice, as an appropriate method of resolving disputes for a contract in which putting up a building is only the peripheral goal; the main aim being to unite the strategic interests of two commercial organisations.

This idea is not as unlikely as it may sound. The power of the Construction Act is reminiscent of a previous act of parliament that imposed rights that could not be contracted out of. In the 1970s, landlords of dwellings were unable to exclude the rent acts. When a dwelling was let on a tenancy, the legislation invariably gave the tenant an automatic right to stay for the rest of their life.

Since landlords could not contract out of this risk, many decided it was not worth taking at all. The private rented sector withered away and did not revive until the rent acts had been abolished. The entire market changed fundamentally. If adjudication comes to be seen as overly risky, perhaps the construction industry is in for structural change as well.

So, will we ever become comfortable with adjudication? Its full implications are unknown, but another case decided this summer should have rung alarm bells. In A&D Maintenance & Construction Ltd vs Pagehurst Construction Services Ltd, the judge noted that the act says adjudications can be started “at any time” – even after the end of the contract.

If this is the case, there is a nightmare scenario lurking. Just as the limitation period is about to end (12 years if the contract is a deed; six years if not), a letter hits the main contractor’s doormat. It is from the client, complaining about defects. Not far behind it is an adjudication notice, and within seven days, an adjudicator receives a clearly-worded, carefully-summarised claim prepared over the past few months by the client and its new consultants.

The adjudicator has no option but to reach a decision within 28 days. If this one results in the likely injustice identified in the Macob case, it could be catastrophic for the contractor. Nevertheless, the court will enforce it without questioning its fairness. That there might be a chance of overturning it at an arbitration in two years’ time cuts little ice with the bank.

With the possibility of this sort of risk, who knows what long-term changes will be planned in the boardrooms of the UK construction firms?