The original and the best? Adjudication in England, Wales and Scotland

Introduction

England, Wales and Scotland got their own construction payment regime in May 1998. The Construction Act has been in force for over 25 years now, and it has been transformative of payment practices and dispute resolution in the construction and engineering industry in these jurisdictions. Its success has led to the legislation being adapted for use throughout the world, including Singapore, Malaysia, Australia, New Zealand, Ireland and more recently, Hong Kong. Legislation is also in the process of being introduced in Thailand.

 

Which statutes govern the payment regime in England, Wales and Scotland?

The Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009. Taken together, these are referred to as the Construction Act. The Construction Act came into force in May 1998 and has been going for over 25 years. It was amended in 2011 to include oral contracts as well as those in writing.

The Construction Act is supported by secondary legislation in the form of the Scheme for Construction Contracts (England and Wales) Regulations 1998, and the Scheme for Construction Contracts (Scotland) Regulations 1998, which were amended by the Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011 and the Scheme for Construction Contracts (Scotland) Amendment Regulations 2011.

Northern Ireland has a separate regime, governed by the Construction Contracts (Northern Ireland) Order 1997 and the Scheme for Construction Contracts in Northern Ireland Regulations (Northern Ireland) 1999 (both as amended). This regime is outside the scope of this note.

 

Briefly, what is the effect of this legislation?

The Construction Act implies a right to regular staged payments for contractors and subcontractors into all construction contracts (with certain limited exceptions). It also provides the right to refer a dispute to adjudication (a quick and relatively inexpensive method of dispute resolution) at any time. It gives a right to any party who has not been paid, usually a contractor or subcontractor, to suspend works until it receives payment. Finally, it prohibits "pay when paid" provisions in the contracts to which it applies.

 

To what type of contract does the payment regime apply?

The Construction Act applies to construction contracts, which are contracts for the carrying out of construction operations. A number of industries are excluded – including but not limited to drilling for/extraction of oil or natural gas, extraction of minerals and works supporting nuclear processing, power generation and water treatment.

However, it is testament to the success of the Construction Act that these industries, which were successful in lobbying to be excluded from the ambit of the Construction Act, now often include contractual adjudication provisions in their contracts.

 

What types of disputes can be referred to adjudication?

All types of disputes can be referred to adjudication. Uniquely, the Construction Act confers a right on any party to a construction contract to refer a dispute to adjudication at any time. There is no restriction on type of dispute (and no limit on value or complexity).

Originally, it was expected that, since the Construction Act had introduced the right to interim payments, the parties would use adjudication to determine disputes regarding valuation of those interim payments. However, adjudication has been used to determine all types of disputes including defects claims, final account disputes, and even professional negligence disputes involving architects and engineers.

 

What is the format of an adjudication?

Adjudication under the Construction Act is a 28-day quasi-judicial procedure, which is relatively informal. The parties submit memorial style submissions within a very short timetable (which can be extended by agreement of the parties), and the adjudicator produces a written decision. At the option of the adjudicator, the parties can meet or attend a site visit, although this takes place in only about 10% of adjudications. The adjudicator's decision contains declarations and instructions about amounts to be paid under the construction contract, as well as a ruling on which party should pay the adjudicator's costs. Each party bears its own legal costs of the adjudication.

 

How are adjudicator's decisions enforced?

An adjudicator's decision is binding and enforceable on the parties, unless/until they settle their dispute, or refer the dispute to arbitration or court proceedings for final determination. Most losing parties pay up/comply with the adjudicator's decision without the need for enforcement, but for those that refuse to do so, the courts have developed a speedy enforcement process.

There are limited grounds for resisting enforcement, which are that the adjudicator exceeded his or her jurisdiction or failed to comply with the rules of natural justice. According to the results of a survey on construction adjudication by Kings College London and the Adjudication Society, last year the courts fully enforced 77% of cases in which enforcement was sought.

 

What impact has the payment regime had on the UK's construction industry?

The Construction Act is widely heralded as a great success, and adapted versions of the regime have been introduced throughout the world. The intention of the Construction Act was to drive good behaviour with regard to regular payment throughout the industry. It does seem to have been successful at increasing the regularity of payment. A significant percentage of adjudications are so-called "smash and grab" adjudications – where the paying party has failed to comply with its notice and payment obligations; however, the legislation hasn’t prevented a number of very high-profile main contractor insolvencies. One can only guess at whether the recent spate of construction insolvencies would have been worse without the legislation.

 

What reforms do you expect to the regime?

No reforms to the regime are expected imminently. The government conducted a consultation in 2018, and we are not aware of any planned changes following that consultation. In future, one possible change might be to include within the ambit of the Construction Act those industries that previously lobbied to be excluded. Others would be to introduce a guideline on conflicts of interest or reform of the practice of withholding retention monies.