Neil Boothroyd, adjudicator, arbitrator, mediator at Gateley Vinden, offers a range of insights focused on construction dispute resolution
Even with careful drafting of contracts, and the best will in the world, costly construction disputes still arise.
Often seen as a ‘pay now, argue later’ process, adjudication is normally used for construction dispute resolution, as the parties to a construction contract cannot contract out of it.
Adjudication is designed to safeguard cash flow for businesses by stopping one side from withholding payments from the other for long periods of time. But adjudication isn’t the end of the story. The adjudicator’s decision often lasts until practical completion, when it can lead to arbitration or litigation if not accepted.
How can the cost of a dispute be kept at an affordable level?
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.
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 £100k the costs can quickly become out of proportion to the value of the dispute.
His Honour Judge Stephen Davis’ suggestions for controlling party costs
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’ suggestions for controlling party costs that he set out in case of The Sky’s the Limit Transformations Ltd v Dr Mohamed Mirza [2022] EWHC 29 (TCC).
In brief, the case concerned a residential occupier defending a claim for payment relating to building work valued in total at c.£120k.
The amount in dispute was less than half the final total value.
A mediation, 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.
The only remaining route to a construction dispute resolution, therefore, lay at court.
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.
The proposals provide for a process managed by a TCC judge, which in summary includes:
- Limited disclosure of documents.
- Single joints expert to deal with technical matters.
- A stay for mediation, or if the parties are unwilling to mediate, compulsory early neutral
evaluation. - In the event of no settlement following step 3, limited witness statements may be provided before a tightly controlled 1 day trial in court.
HHJ Davis stated the view that approved costs for each party should not exceed £25k for this process including expert, mediator and legal fees.
Full details of the proposals can be found in paragraphs 6-9 of the judgment.
At a recent CPD event hosted by the Association of Northern Mediators, HHJ Davis invited
comments 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.
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.
How can mandatory and affordable access to justice be provided quickly?
The issue that HHJ Davis’ 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.
In disputes concerning relatively modest sums, which in my experience of the construction
industry 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
subsequent enforcement proceedings.
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.
In an industry that has become accustomed to relatively speedy resolution in the form of
adjudication, the option of litigation, even using the small claims court (Money Claim Online), simply takes too long, and other court actions are prohibitively expensive.
For low/modest value claims, HHJ Davis’ proposals would provide an option for parties to consider and would satisfy a number of the policy considerations mentioned above. 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.
What about adjudication?
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).
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’ proposals may provide a realistic option in the interim.
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.
Is the determination of the ‘true value’ of an interim valuation really just a finding of the ‘notified sum’?
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’s decision. However, the main argument worth noting related to whether a true value adjudication can be binding on a subsequent interim valuation.
Bexheat Limited v Essex Services Group Limited
Essex Service Group Limited (ESG) engaged Bexheat Limited (BHL) in a construction contract for MEP works worth £1,035,000 under a bespoke agreement. In seeking summary judgment of an adjudicator’s decision, Mrs Justice O’Farrell awarded BHL £724,827.88 in respect of its interim application number 23 for the gross value of £2,010,121.74.
The outcome
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.
The first adjudication decided the true value of BHL’s interim valuation number 22 in the Gross sum of £1,319,830.61 and entitled BHL to a payment of £141,646.35. ESG paid BHL the sum decided.
Mrs Justice O’Farrell 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).
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 ‘true value’ of the account subsequently became effectively redundant.
Why was this decision the right one?
Being a quantity surveyor by background the effect of this decision doesn’t feel quite right. How can an adjudicator’s 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?
However, on analysis of the specific details in this case I agree with Mrs Justice O’Farrell, and I have summarised below the reasons why:
- BHL’s interim application for payment for valuation cycle 23 was issued before the commencement of the first adjudication proceedings. Therefore, its application when issued
could not in practice have taken account of the subsequent decision of an adjudicator. - Mrs Justice O’Farrell found that the first adjudicator’s decision was limited to the true value
of valuation cycle 22 and so would not necessarily provide a good defence in payment cycle
23. Although counsel argued that the ‘true value’ would not change between cycles 22 and
23, whether the true value had changed had not been adjudicated upon. - ESG did not raise the issue of the first adjudicator’s 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.
- Although the first adjudicator’s 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.
Jurisdictional challenges
Mrs Justice O’Farrell pointed out to ESG that the issues it was now raising in enforcement
proceedings were essentially challenges to the jurisdiction of the second adjudicator, and
by 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
in the second adjudication and did not reserve its position, ESG could not now seek to
challenge jurisdiction at enforcement.
Should a determined true value be binding?
In the specific circumstances of this case, I agree with the judge’s 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’Farrell J’s 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.
One concern that arises naturally from this situation is the extent to which the binding nature of an adjudicator’s 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 ‘evidence’ in a subsequent payment cycle.
In this case, the binding effect of the first adjudicator’s 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.
Without knowing more about the specific project in this case, it is impossible to know
whether the true value determination in valuation cycle 22 (or parts of it) subsequently
had any further binding effect by, for example, being adopted in later valuation cycles.
The case makes an interesting read for the reasons discussed above but also provides
other 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.
When is a bank holiday not a bank holiday? Calculating the periods of days in adjudications
A useful reminder of the calculation of the periods of days, excluding bank
holidays, in adjudication.
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.
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.
Schedule 1 of the 1971 Act provides a list of days for each of England and Wales, Northern Ireland, and Scotland.
Paragraph 1 of Schedule 1 for England and Wales lists five bank holidays as being:
- Easter Monday.
- The last Monday in May.
- The last Monday in August.
- 26th December if it be not a Sunday.
- 27th December in a year in which 25th or 26th December is a Sunday.
The 2nd May did not appear in this list and the last Monday of May is 30th May 2022. (This latter date would be relevant to the calculation of the date by when my decision must be reached, assuming a 28 day process).
Therefore, with reference to Schedule 1 of the 1971 Act, the 2nd May was not a bank holiday for the purposes of calculating the period by when the Referral was to be served.
However, the Gov.uk website listed the 2nd May 2022 as being a bank holiday and does not show the 30th May 2022 as being a bank holiday and so something was not quite right when compared to the days in Schedule 1. The Gov.uk website is a reliable source of information and I wanted to reconcile the disparity. This was readily done by locating the
Royal Proclamations (in satisfaction of S1(2) and 1(3) of the 1971 Act) in the Gazette for the new and amended bank holiday dates for 2022 that aligned with the Gov.uk listing.
The last Monday in May was not a bank holiday this year. Due to the Queen’s Platinum Jubilee celebrations, this date had been moved to Thursday 2nd June 2022 to precede the additional bank holiday on 3rd June 2022.
It follows the above that I was able then to correctly determine the dates for the service of the Referral and the date for reaching my decision.
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