Loopholes 'R' us

Let me start by putting a question to contractors and consultants. How many of you have entered into an agreement that incorporates an unamended standard adjudication procedure (such as those provided by the JCT, the ICE, or the TeCSA) or, alternatively, a contract that incorporates the adjudication procedure in the Scheme for Construction Contracts. My guess is that most of you will have signed up to some bespoke adjudication procedure or an amended standard procedure. I say this because the Constructors Liaison Group’s analysis of 100 subcontracts and works contracts concluded that most included bespoke arrangements or amended standard procedures.

Section 108 of the Construction Act, which deals with adjudication, was drafted on the basis that parties would be free to write their own adjudication procedures provided that they incorporated the eight compliance points in the section; otherwise, the Scheme for Construction Contracts would apply. It was felt by many (myself included) that the industry would find it easier to use one of the standard procedures. How wrong we were.

In fact, a profitable industry has sprung up, dedicated to drafting procedures that include the compliance points while, at the same time, aiming to thwart the intentions behind section 108.

The result of all these bespoke arrangements is to generate two disputes. The first is about whether or not the particular procedure is in accordance with the legislation; or whether – possibly – it should be struck down on other grounds, such as being contrary to public policy. The second is the dispute arising under the contract. So, an inadvertent consequence of section 108 is that we will have to anticipate two disputes instead of the one that should be the subject of the adjudication.

The CLG report disclosed the prevalence of pre-dispute procedures designed to frustrate the referral of disputes to adjudication “at any time”. These require the parties to go through an open-ended process of discussion and negotiation at different levels before adjudicating. Other provisions require the subcontractor to submit its disputes to the main contract adjudicator even where it has already begun an adjudication under the subcontract.

Some of the legal dodges being used:

• Compulsory open-ended mediation
• ee must provide bond
• Referring party to pay all costs
• Money paid to third-party account

There are provisions designed to draw adjudication’s teeth. There has already been much discussion in these columns about trustee stakeholder accounts, but other provisions have come to light. For example, there are provisions that enable a payer under an adjudicator’s decision to demand a bond from the payee as a condition precedent to payment. Although – hopefully – most would agree that this is noncompliant because the adjudicator’s decision is required to be binding and enforceable on an interim basis, such a requirement will create another dispute.

Then there are the horrendous provisions on costs. These require the referring party to bear all the costs and expenses of the other party as well as the adjudicator’s fees and expenses. The calculated assumption in these subcontract clauses is that the subcontractor will be the referring party. Such provisions have been upheld by His Honour Judge Mackay in Bridgeway Construction Ltd vs Tolent Construction (11 April). But there are even more pernicious clauses doing the rounds. Here is one example: “The works contractor shall indemnify the management contractor in respect of any costs, charges, expenses, damages or any other loss resulting from a decision of the adjudicator which is subsequently changed or amended howsoever by a decision of an arbitrator or the court.”

Now the lawyers among you may consider that such provision is invalid on public policy grounds. That is to say, that it is deliberately aimed at negating a statutory entitlement and should, therefore, be declared void. But, after the Bridgeway Construction case, one cannot be so confident about the public policy argument. The consequence of provisions such as these is that more and more firms in the industry will refrain from using adjudication. I am aware of instances where this has happened.

So, what is the answer? Very simple. As soon as the opportunity arises, an immediate change should be made to section 108. This will require the parties to operate a mandatory adjudication procedure that is incorporated in the act by way of a schedule. The scheme could provide a suitable template, although there will, no doubt, be considerable discussion on whether the scheme, as drafted, would be appropriate. There are other rules around, such as those published by the Construction Industry Council, that could also be considered suitable candidates for a statutory procedure.