The price of freedom

It is well known that the construction industry had adjudication imposed on it to cure the ills of poor cash flow and long adversarial disputes. Its intentions were honourable – to return shareholder value and improve the industry's standing with the City.

The suggestion has been made, however, that the rough justice dispensed by adjudication is bankrupting the industry. I suspect that the act is only exposing some of the truths of the industry, but in a stark and brutal way.

The industry is now effectively paying the price for the cure that the act was supposed to deliver. That price may, however, be higher than it really needs to be.

For example, the act limits parties’ contractual freedom to a degree by requiring them to have a compliant adjudication system and to follow certain procedures in relation to payment. However, the act still leaves parties with a lot of room for manoeuvre, and this does create unnecessary costs for the industry.

First, the proliferation of different adjudication systems involves parties and their advisers in a certain amount of time and cost in familiarising themselves with their provisions. They may also distribute these costs in an apparently unfair way.

This was reinforced recently by the decision in Bridgeway vs Tolent. In this case, the contract contained a clause requiring that the party that brought an adjudication would have to bear all the costs of so doing. When this was tested, the judge ruled that there was nothing to stop the parties agreeing further terms to those required by the act, even if they did look “a bit unfair”.

The simple way to loosen the link between adjudication and insolvency is to limit parties’ rights to modify adjudication rules or to impose the scheme for all adjudications

Second, the amendment of adjudication provisions gives rise to more court cases, as was the case with Bridgeway. Although court decisions have been useful in providing guidance to parties, the number of different rules and systems means that it will take a long time before all contentious issues have been aired and decided. These grey areas in the law will encourage parties to take a point to court, especially when they are facing insolvency and feel they have nothing to lose.

One argument in favour of against allowing different adjudication rules is that they are analogous to amended and bespoke contracts: not ideal, perhaps, but a recognition that parties may have particular needs not catered for in the standard forms.

However, whereas a party engaging another to construct a building may have a legitimate interest in the contract terms for the construction, can the same really be said in relation to a dispute resolution mechanism?

For instance, parties to litigation do not have the option of agreeing what rules of the court will or will not apply – or with what modifications. Even the options in the Arbitration Act are limited in scope, and arbitration is supposed to be a process based on consensus.

The result of these extra costs is an increased risk of insolvency. Perhaps we must expect insolvency to be a feature of reported cases: a system designed to improve cash flow is always likely to be a bedfellow of insolvency. And it may be those parties that do not adapt to the impact of adjudication on cash flow who will be among the first to fail financially.

It will take time for parties to realise that holding back funds for long periods while a case is fought out in court or arbitration is no longer practically possible. In this way, adjudication has aided cash flow – but only if the paying party has the funds to meet a decision. In this context, requiring the provision of a bond prior to compliance with an adjudicator’s decision is unlikely to aid cash flow.