{"id":111993,"date":"2022-06-21T13:16:08","date_gmt":"2022-06-21T12:16:08","guid":{"rendered":"https:\/\/www.pbctoday.co.uk\/news\/?p=111993"},"modified":"2022-06-21T13:16:08","modified_gmt":"2022-06-21T12:16:08","slug":"construction-dispute-resolution-keep-adjudication-costs-down","status":"publish","type":"post","link":"https:\/\/www.pbctoday.co.uk\/news\/planning-construction-news\/construction-dispute-resolution-keep-adjudication-costs-down\/111993\/","title":{"rendered":"Construction dispute resolution: How to keep adjudication costs down"},"content":{"rendered":"

Neil Boothroyd, adjudicator, arbitrator, mediator at Gateley Vinden, offers a range of insights focused on construction dispute resolution<\/h2>\n

Even with careful drafting of contracts, and the best will in the world, costly construction disputes still arise.<\/p>\n

Often seen as a \u2018pay now, argue later\u2019 process, adjudication<\/a> is normally used for construction dispute resolution<\/a>, as the parties to a construction contract<\/a> cannot contract out of it.<\/p>\n

Adjudication is designed to safeguard cash flow<\/a> for businesses by stopping one side from withholding payments from the other for long periods of time. But adjudication isn\u2019t the end of the story. The adjudicator\u2019s decision often lasts until practical completion, when it can lead to arbitration or litigation if not accepted.<\/p>\n

How can the cost of a dispute be kept at an affordable level?<\/h3>\n

Especially when one party is content to incur significant costs to argue their case, and that in turn requires the other side to respond in kind, causing costs to spiral out of proportion to the amount in dispute.<\/p>\n

In most disputes a real consideration is the likely costs incurred in achieving a construction dispute resolution, but in circumstances when the amount is less than say \u00a3100k the costs can quickly become out of proportion to the value of the dispute.<\/p>\n

His Honour Judge Stephen Davis\u2019 suggestions for controlling party costs<\/h4>\n

Much has been written about low value adjudication schemes, particularly in the construction industry, and this article does not seek to further explore that area. Instead, I reflect on His Honour Judge Stephen Davis\u2019 suggestions for controlling party costs that he set out in case of The Sky\u2019s the Limit Transformations Ltd v Dr Mohamed Mirza [2022] EWHC 29 (TCC).<\/p>\n

In brief, the case concerned a residential occupier defending a claim for payment relating to building work valued in total at c.\u00a3120k.<\/p>\n

The amount in dispute was less than half the final total value.<\/p>\n

A mediation<\/a>, following an early court direction, failed to achieve a construction dispute resolution and, for reasons that are not clear, the parties could not or would not engage in adjudication.<\/p>\n

The only remaining route to a construction dispute resolution, therefore, lay at court.<\/p>\n

The parties each engaged multiple experts in addition to their legal teams and incurred considerable costs that far outweighed the sums in dispute. Consequently, the value of the dispute became a secondary consideration to the contest to recover party costs. It was this issue that prompted HHJ Davis to outline proposals for how the court could manage and direct proceedings to deal with similar disputes in a way that sought to minimise or even limit party costs.<\/p>\n

The proposals provide for a process managed by a TCC judge, which in summary includes:<\/h4>\n
    \n
  1. Limited disclosure of documents.<\/li>\n
  2. Single joints expert to deal with technical matters.<\/li>\n
  3. A stay for mediation, or if the parties are unwilling to mediate, compulsory early neutral
    \nevaluation.<\/li>\n
  4. In the event of no settlement following step 3, limited witness statements may be provided before a tightly controlled 1 day trial in court.<\/li>\n<\/ol>\n

    HHJ Davis stated the view that approved costs for each party should not exceed \u00a325k for this process including expert, mediator and legal fees.<\/p>\n

    Full details of the proposals can be found in paragraphs 6-9 of the judgment.<\/p>\n

    At a recent CPD event hosted by the Association of Northern Mediators, HHJ Davis invited
    \ncomments concerning his proposals. Amongst broad acknowledgement of the benefits offered by his suggestions was recognition that the facts of that case lent ideally to adjudication or expert determination proceedings, each of which may follow a similar structure to that proposed by the judge, but that those proceedings are absent the power to limit party costs. Alternative suggestions for how the parties could have consented to resolve their dispute included evaluative mediation, and a modified version of adjudication.<\/p>\n

    As mentioned above, none of these alternative routes could be pursued because, in the absence of agreement, the other party could not be mandated to engage in those proceedings.<\/p>\n

    How can mandatory and affordable access to justice be provided quickly?<\/h3>\n

    The issue that HHJ Davis\u2019 proposals seek to address then is: how can mandatory and affordable access to justice be provided quickly? This issue raises broad and complex public policy concerns including, for example, consideration of Article 6 of the European Convention on Human Rights (ECHR) for fair hearings. This point was also identified by the Right Hon. Sir Geoffrey Vos in a recent lecture. I do not go into detail on these issues here but am conscious of the need to consider broader constitutional factors as part of any proposed solution.<\/p>\n

    In disputes concerning relatively modest sums, which in my experience of the construction
    \nindustry make up a significant proportion of the number of disputes, litigation is not a realistic option due to the prohibitive costs involved. Adjudication is accepted as providing relatively rough and ready justice due to the timescales involved and is acknowledged as having become highly legalistic in its procedural administration and suffers criticism of having become expensive, particularly when you factor in the potential additional cost for
    \nsubsequent enforcement proceedings.<\/p>\n

    In circumstances (as in the case in question) where there is no consensual method of construction dispute resolution available, thereby making the only available route to justice via the courts, what can a party do to avoid the significant costs of making its case in court? Is it fair that a party can bring a case as a tactic to negotiate a discount or to spend as much as it can afford, out of proportion to the sums in dispute? I note that such approaches are not necessarily limited to low or modest value disputes.<\/p>\n

    In an industry that has become accustomed to relatively speedy resolution in the form of
    \nadjudication, the option of litigation, even using the small claims court (Money Claim Online), simply takes too long, and other court actions are prohibitively expensive.<\/p>\n

    For low\/modest value claims, HHJ Davis\u2019 proposals would provide an option for parties to consider and would satisfy a number of the policy considerations mentioned above.\u00a0 Although, if successful, I wonder how soon such a process would quickly become overburdened, especially if it subsequently became attractive as an alternative to adjudication, or other methods of construction dispute resolution. Recent headlines concerning court workloads and backlogs suggest the courts are already struggling. As positive as a new shorter and cost controlled option would be, it would likely further impose an additional burden on a system that is already suffering and may ultimately lead to delays that negate the time benefits of such a procedure.<\/p>\n

    What about adjudication?<\/h3>\n

    Adjudication was intended, in part, to address concerns about the volume of claims in the industry and to ease some of the burden on the court system. However, the limiting factor that prevents adjudication being a viable alternative in these circumstances is that it is not mandatory (neither is mediation or any other form of non-court resolution in the absence of agreement).<\/p>\n

    Therefore, what appears to be required is a government review examining the cost (in a broader sense to include representative costs) of civil justice and how systems may be designed or modified to balance the competing considerations of time, cost, and providing a fair hearing. HHJ Davis\u2019 proposals may provide a realistic option in the interim.<\/p>\n

    I would, however, like to see further discussion and consultation about how mediation, adjudication, expert determination, or arbitration may be afforded a mandate to consider the cost of those proceedings, so that the benefits of such approaches can be available in circumstances that dictate they should be adopted as a common sense and realistic alternative to expensive litigation.<\/p>\n

    Is the determination of the \u2018true value\u2019 of an interim valuation really just a finding of the \u2018notified sum\u2019?<\/h3>\n

    In Bexheat Limited v Essex Services Group Limited [2022 EWHC] 936 (TCC), a range of key issues were covered including severance, joinder, and setoff against an adjudicator\u2019s decision. However, the main argument worth noting related to whether a true value adjudication can be binding on a subsequent interim valuation.<\/p>\n

    Bexheat Limited v Essex Services Group Limited<\/h4>\n

    Essex Service Group Limited (ESG) engaged Bexheat Limited (BHL) in a construction contract for MEP works worth \u00a31,035,000 under a bespoke agreement. In seeking summary judgment of an adjudicator\u2019s decision, Mrs Justice O\u2019Farrell awarded BHL \u00a3724,827.88 in respect of its interim application number 23 for the gross value of \u00a32,010,121.74.<\/p>\n

    The outcome<\/h5>\n

    The decision that was enforced resulted from the second of three adjudication proceedings, where only the first two reached a decision because the adjudicator in the third adjudication resigned for lack of jurisdiction.<\/p>\n

    The first adjudication decided the true value of BHL\u2019s interim valuation number 22 in the Gross sum of \u00a31,319,830.61 and entitled BHL to a payment of \u00a3141,646.35. ESG paid BHL the sum decided.<\/p>\n

    Mrs Justice O\u2019Farrell noted that in the process of deciding the true value in the first adjudication, the adjudicator necessarily worked through detailed arguments, evidence, and figures in respect of measured works, preliminaries, variations, and claims for additional costs to establish the true value (paragraph 51).<\/p>\n

    In the enforcement proceedings relating to the second adjudication decision, ESG argued that the true value determined in the first adjudication was binding on the parties in respect of subsequent valuations. For a number of reasons, this was found not to be the case and therefore the determination of the \u2018true value\u2019 of the account subsequently became effectively redundant.<\/p>\n

    Why was this decision the right one?<\/h5>\n

    Being a quantity surveyor by background the effect of this decision doesn\u2019t feel quite right. How can an adjudicator\u2019s determination of the true value of an account not have a bearing on subsequent valuations, particularly where determinations are likely to have been made on at least some elements of entitlement and quantum?<\/p>\n

    However, on analysis of the specific details in this case I agree with Mrs Justice O\u2019Farrell, and I have summarised below the reasons why:<\/p>\n

      \n
    1. BHL\u2019s interim application for payment for valuation cycle 23 was issued before the commencement of the first adjudication proceedings. Therefore, its application when issued
      \ncould not in practice have taken account of the subsequent decision of an adjudicator.<\/li>\n
    2. Mrs Justice O\u2019Farrell found that the first adjudicator\u2019s decision was limited to the true value
      \nof valuation cycle 22 and so would not necessarily provide a good defence in payment cycle
      \n23. Although counsel argued that the \u2018true value\u2019 would not change between cycles 22 and
      \n23, whether the true value had changed had not been adjudicated upon.<\/li>\n
    3. ESG did not raise the issue of the first adjudicator\u2019s true value determination as a defence in the second adjudication, and therefore there was no basis on which the second adjudicator was able, or required, to consider any effect the true value determination may have.<\/li>\n
    4. Although the first adjudicator\u2019s decision was issued before the date by which ESG could have issued a Pay Less Notice in respect of valuation cycle 23, it failed to do so.<\/li>\n<\/ol>\n

      Jurisdictional challenges<\/h3>\n

      Mrs Justice O\u2019Farrell pointed out to ESG that the issues it was now raising in enforcement
      \nproceedings were essentially challenges to the jurisdiction of the second adjudicator, and
      \nby which it was seeking to effectively oust the adjudicator and make his decision invalid. As ESG had not raised a relevant jurisdictional challenge on the grounds described above
      \nin the second adjudication and did not reserve its position, ESG could not now seek to
      \nchallenge jurisdiction at enforcement.<\/p>\n

      Should a determined true value be binding?<\/h3>\n

      In the specific circumstances of this case, I agree with the judge\u2019s analysis and reasoning. Although, I must confess to having a lingering concern about the extent to which this case may be viewed as authority for a proposition that a true value determination of an interim payment cycle is confined to that payment cycle. I do accept O\u2019Farrell J\u2019s important clarification in paragraph 57 that any difference in the true value between cycles 22 and 23 had not been adjudicated on. The key point being that while there are likely to be components of the true value determination that will not change in subsequent payment cycles, there are equally likely to be components that will change, and until the basis of those changes are properly assessed it cannot be said that the true value determined in one payment cycle is binding.<\/p>\n

      One concern that arises naturally from this situation is the extent to which the binding nature of an adjudicator\u2019s decision may survive in subsequent payment cycles and provide assurance of predictability in the outcome of future valuations. The test in subsequent true value adjudications would follow the criteria for establishing whether the dispute is one that has already been determined (this principle and authorities are discussed in the judgment). This would involve consideration of the extent of fact and degree to which the basis for determining the value of any component of the valuation has substantially changed. This may sound to some like an opportunity to re-argue the true value of parts of the account by seeking to adduce new \u2018evidence\u2019 in a subsequent payment cycle.<\/p>\n

      In this case, the binding effect of the first adjudicator\u2019s decision appears to have been limited, for specific factual reasons, to payment cycle 22. In this sense, for that payment cycle the value decided effectively became the notified sum to be paid and not the binding true value of all or part of the account.<\/p>\n

      Without knowing more about the specific project in this case, it is impossible to know
      \nwhether the true value determination in valuation cycle 22 (or parts of it) subsequently
      \nhad any further binding effect by, for example, being adopted in later valuation cycles.<\/p>\n

      The case makes an interesting read for the reasons discussed above but also provides
      \nother helpful summaries and clarifications concerning contractual terms being consistent with the Housing Grants Construction and Regeneration Act 1996 and The Scheme for Construction Contracts (England & Wales) Regulations 1998 in relation to set-off and joinder. It provides a useful reminder to parties engaged in adjudication to carefully consider jurisdiction and to raise suitable challenges at the appropriate time.<\/p>\n

      When is a bank holiday not a bank holiday? Calculating the periods of days in adjudications<\/h3>\n

      A useful reminder of the calculation of the periods of days, excluding bank
      \nholidays, in adjudication.<\/p>\n

      In a recent CIArb adjudication appointment the date of the Notice fell seven days before the May Day bank holiday Monday. So, when drafting my directions for service of the Referral, I sought to exclude the 2nd May from the calculation of the seven day period by which the Referral is to be served, due to it being a bank holiday. Before I issued my direction, I checked the schedule of bank holidays as referred to in S116 of the Housing Grants Construction and Regeneration Act, that prescribes how periods are to be calculated and which days are treated as bank holidays for the purpose of this calculation. S116(3) excludes bank holidays from the period to be calculated, including Christmas Day, Good Friday and those stated in the Banking and Financial Dealings Act 1971.<\/p>\n

      S1(1) of the Banking and Financial Dealings Act 1971 states that the days specified in Schedule 1 of the Act are bank holidays, and that these days are subject to amendment by Royal Proclamation under s1(2). S1(3) permits further Royal Proclamations granting a special day to be a bank holiday.<\/p>\n

      Schedule 1 of the 1971 Act provides a list of days for each of England and Wales, Northern Ireland, and Scotland.<\/p>\n

      Paragraph 1 of Schedule 1 for England and Wales lists five bank holidays as being:<\/p>\n