This paper is based on a presentation by Marc Sukkar at the Conferencia Internacional Solucion de Controversias en el sector de la Construccion Sociedad Peruana de Derecho de la Construcción Society of Construction Law Peru Pontificia Universidad Catolica del Peru Centro de Analisis Y. Resolucion de Conflictos
Lima, Peru 22 – 23 May 2013
Introduction
Contrary to popular belief adjudication is not a new concept but one that has been around in the United Kingdom since the early 1970’s. It was used in the construction industry in certain subcontracts in response to widespread and epidemic delay of legitimate payments by contractors to subcontractors as and when they became due. In Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 Lord Denning knew the importance of ‘cash flow’ in the building industry famously stating that ‘it is the very lifeblood of the enterprise’.
Adjudication was also a familiar tool for construction disputes in the United States. In a report by the Law Council of Australia, “The use of Dispute Resolution Boards and their expansion beyond Construction Matters”, 27 November 2012 international adjudication or dispute resolution boards (DRB) was first used in the United States on the second Eisenhower Tunnel, Colorado in 1975. The first tunnel was a financial disaster due to fighting between parties during the construction phase. Implementation of the DRB within the contract documentation saw construction of the second tunnel run smoothly with few disputes. Any disputes that did arise were settled quickly.
Adjudication found its way in building agreement forms such as ACA and BFP Forms in 1982 and 1984. In 1995 FIDIC introduced dispute adjudication boards (DAB) in its Orange book and in 1996 introduced the option of a DAB in its Red book. In 1998 FIDIC took the bold step of applying the DAB procedure to its entire suite of contracts thereby abandoning the engineer’s role as quasi arbitrator. The World Bank saw the advantages of adjudication and in 1995 insisted on dispute review boards on all projects it funded in excess of US$50 million. It has now become the standard in all World Bank projects.
The high costs and delays associated with traditional dispute resolution systems and the real risk that parties along the contractual chain became insolvent led to concerns amongst many within the UK building industry about payment and cash flow, especially subcontractors. In response the UK government ordered a Review of Procurement and Contractual Arrangements in the United Kingdom Construction Industry. This review resulted in the publication of a report by Sir Michael Latham in 1994 called “Constructing the Team” dubbed by the industry as the Latham Report. The Report recommended a speedy system of dispute resolution by an impartial adjudicator with adjudication being the normal method of dispute resolution. In 1996 Parliament responded by enacting Part II of the Housing Grants, Construction and Regeneration Act which came into force on 1 May 1998.
Adjudication has been introduced in all states and territories of Australia, New Zealand, Singapore and in very limited parts of the United States. Adjudication has been recommended in Hong Kong and South Africa. It can be found in many national (JCT, NEC, ICE, Norwegian Fabrication Contract (NF 87/NF 92), international (FIDIC) standard form agreements and as a service by international institutions (ICC).
Definition and object
In November 2002 the Hon Mr Justice Forbes described adjudication as:
“....the Construction Industry’s own bespoke and unavoidable decision making process, which is designed to provide a fast and efficient, albeit provisional, resolution of a contractual dispute which is capable of being speedily enforced through the Courts.”
Judge Behrens QC considers adjudication as a quasi legal proceeding whereas Judge Bowsher QC said proceedings before an adjudicator were not legal proceedings. Lord Ackner described adjudication as:
“What I have always understood to be required by the adjudication process was a quick, enforceable interim decision which lasted under practical completion when, if not acceptable it would be the subject matter of arbitration or litigation. That was a highly satisfactory process. It came under the rubric of ‘pay now, argue later’.”
Adjudication is not arbitration or litigation, although there are many similarities to arbitration.
In Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] BLR 93 Justice Dyson succinctly and clearly summarised the general nature of adjudication which is regularly quoted by other judges, lawyers and academics, a passage which remains definitive and according to Justice Forbes is well worth repeating:
“The intention of Parliament in enacting the Act was plain. It was to introduce a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring the decisions of adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement: see s. 108(3) of the Act and paragraph 23(2) of Part 1 of the Scheme. The timetable for adjudications is very tight (see s. 108 of the Act). Many would say unreasonably tight, and likely to result in injustice. Parliament must be taken to have been aware of this. So far as procedure is concerned, the adjudicator is given a fairly free hand. It is true (but hardly surprising) that he is required to act impartially (s. 108(2)(e) of the Act and paragraph 12(a) of Part 1 of the Scheme). He is, however, permitted to take the initiative in ascertaining the facts and the law (s. 108(2)(f) of the Act and paragraph 13 of Part 1 of the Scheme). He may, therefore, conduct an entirely inquisitorial process, or he may, as in the present case, invite representations from the parties. … Crucially (Parliament) has made it clear that decisions of adjudicators are binding and are to be complied with until the dispute is finally resolved.”
Section 3(1) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (‘Act’) clearly sets out its sole purpose to ensure that any person who undertakes construction work or the supply of related goods and services under a construction contract is entitled to receive, and can recover, progress payments in relation to that work, goods and services.
Section 3(2) provides a statutory entitlement to receive progress payments even if the construction contract fails to make provision for same. The means to ensure a person can recover progress payments are spelt out in section 3(3).
Building and Construction Industry Security of Payment Act 1999 (NSW)
Scope of the Act
The Act applies to any construction contract, whether written or oral, or partly written and partly oral, s.7(1). ‘Construction Contract’ is defined as a ‘contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party’, s.4.
Construction work is comprehensively defined at section 5(1) but does not include ‘drilling for, or extraction of, oil or natural gas, the extraction...of minerals, including tunnelling or boring, or constructing underground works for that purpose’, s.5(2). Although section 5(2) excludes drilling and extraction of oil, natural gas and minerals, the construction of infrastructure for those purposes will fall within the scope of section 5(1).
The term ‘construction contract’ also refers to ‘related goods and services’ which is defined in section 6.
Exclusions
- a construction contract that forms part or contains a loan agreement, ss.7(2)(a), 7(3)(b), 7(3)(c);
- a construction contract that forms part or contains a contract of guarantee, s.7(3);
- a construction contract that forms part or contains a contract of insurance, s.7(3);
- a construction contract for the carrying out of residential building work on such part of any premises as the party for whom the work is carried out resides in or proposes to reside in the dwelling, s.7(2)(b);
- a construction contract where it is agreed that consideration for the work or for related goods and services is to be calculated otherwise than by reference to the value of work, goods or services supplied, s.7(2)(c);
- where the party is an employee of the party for whom the work, or related goods and services is carried out, s.7(3)(a);
- where the construction work is carried outside NSW, s.7(4)(a); or
- where the related goods and services supplied in respect of construction work is carried outside NSW, s.7(4)(b).
‘Pay when paid’ clauses
A pay when paid provision of a construction contract has no effect in relation to any payment for construction work carried out or to be carried out including agreements for related goods and services, s.12(1).
Contracting out and the Crown
Section 34 will not allow any party to exclude the operation of the Act in whole or any part. The Act does not affect any right that a party may have under a construction contract, such as the ability to bring civil proceedings allowed under the contract or at law, ss.32, 3(4). The Act also binds the NSW government, as far as the law permits, s.33.
Adjudication under the Act
Payment claims
A person who has undertaken to carry out construction work, or to supply related goods and services, is entitled to a progress payment, s.8. Section 13 empowers a person who is or who claims to be entitled to a progress payment to serve a payment claim.
The payment claim must:
- identify the construction work or related goods and services to which the progress payment relates;
- indicate the claimed amount; and
- state that it is made under the Act, s.13(2).
When to make a claim
The reference date for making a progress claim is a date determined by or in accordance with the contract, s.8(2)(a), or if no express provision is made the last day of the month in which work was first carried out and the last day of each subsequent month, s.8(2)(b).
The payment claim must be served within a period determined by the construction contract or 12 months after the construction work was carried out, whichever is the later, s.13(4). Furthermore, a claimant cannot serve more than one claim in respect of each reference date, but can still claim previous unpaid amounts in a subsequent claim, ss.13(5) and 13(6).
Where to serve the claim
A payment claim must be served on the person who is liable to make the payment, s.13(1).
A progress payment becomes due and payable on either the date set out in the contract, or ten business days after a payment claim is made in relation to the payment, s.11(1).
Interest is payable on the unpaid amount of a progress payment that has become due and payable at the rate prescribed under the Civil Procedure Act 2005 or as specified under the construction contract, whichever is the greater, s.11(2).
The claimant is also entitled to exercise a lien in respect of the unpaid amount over any unfixed plant or materials supplied by the claimant for use in connection with the work, s.11(3). However, a lien or charge existing before the date on which the progress payment becomes due and payable takes priority, s.11(4) and the Act confers no rights against a third party who is the owner of the unfixed plant or materials, s.11(5).
Payment schedule
The respondent (the person on whom the payment claim is served) may reply to the claim by providing a payment schedule to the claimant, s.14(1). The payment schedule must identify the payment claim to which it relates, s.14(2)(a) and the amount of the payment (if any) that the respondent proposes to make (the scheduled amount), s.14(2)(b).
The time for response is within the time required by the relevant construction contract, or 10 business days, whichever expires earlier, s.14(4).
If the amount specified by the respondent in the payment schedule is less than the amount claimed by the claimant, the schedule must indicate why the scheduled amount is less, s.14(3). If the respondent is withholding payment for any reason, the schedule must indicate the respondent's reasons for withholding that payment, s.14(3). It is essential and vital to set out in the payment schedule all of the reasons relied upon, as the respondent will not be allowed to rely on grounds not specified in a payment schedule in any subsequent adjudication due to section 20(2B) limits the respondent to only raising those issues outlined in the payment schedule.
No response to payment claim
If the respondent does not provide a payment schedule within the time required, the respondent becomes liable to pay the claimed amount on the due date for the progress payment, s.14(4)(b).
Other scenarios
There are three scenarios in which the payment claim may be dealt with and each is subject to the respondent’s behaviour. The Act allows for the respondent if it:
- fails to serve a payment schedule;
- serves a payment schedule but fails to pay;
- served a payment schedule but the scheduled amount is less than the claimed amount.
In the first two situations, a statutory debt arises, and the claimant may either commence litigation to recover the sum or make an application for adjudication, s.15(2). If the claimant commences litigation, it is effectively applying for summary judgment, as the respondent is not entitled to bring any cross-claim or raise any defence in relation to matters arising under the construction contract, ss.15(4)(b) and 16(4)(b). If the claimant makes an application for adjudication, the application must be made within the following time frames:
- where the respondent fails to pay the scheduled amount, within 20 business days after the due date for payment, s.17(3)(d);
- where no schedule was provided, the claimant must give a notice of an intention to make an adjudication application within 20 business days following the due date for payment, s.17(2)(a). The respondent may provide a payment schedule within 5 business days of the notice, s.17(2)(b). The adjudication application must then be made within 10 business days after expiry of the 5 day period, s.17(3)(e).
Finally, where a schedule indicates an amount less than that claimed, the claimant's must adjudicate within 10 business days of receipt of the payment schedule, s.17(3)(c).
Adjudication process
The adjudication application must be made in writing, s.17(3)(a), be made to an authorised nominating authority, s.17(3)(b), must identify the payment claim and payment schedule (if any) to which it relates, s.17(3)(f), and may contain submissions relevant to the application, s.17(3)(h). A copy of the adjudication application must also be served on the respondent, s.17(5). It is then the duty of the authorised nominating authority to refer the application to an adjudicator as soon as practicable, s.17(6).
Submissions
The Act does not specify any precise manner or form as to the claimant's submissions. It is usual practice for the claimant to make submissions on legal points, and provide the adjudicator with additional evidence on which he or she can rely, such as witness statements, expert reports, statutory declarations or any other additional documentation. In this regard, the rules of evidence do not apply.
Adjudication response
Where the respondent provides a payment schedule, the respondent may lodge with the adjudicator a response to the adjudication application within 5 days of the receipt of the application, or 2 days after receiving notice of an adjudicator's acceptance of the application, s.20(1). The response must be in writing, s.20(2)(a), identify the adjudication application to which it relates, s.20(2)(b), and may contain submissions, s.20(2)(c). As stated earlier, the response cannot include any reasons for withholding payment unless those reasons have already been included in the payment schedule, s.20(2B).
Determination
Once the adjudicator has accepted the application, the matter must be determined within 10 business days, s.21(3)(a), or within such further time as the parties agree, s.21(3)(b), beginning from the end of the period within which the respondent may lodge a response, s.21(1).
The adjudicator may request further written submissions and must give the other party an opportunity to comment, s.21(4)(a), may set deadlines for further submissions, s.21(4)(b), call a conference which is to be conducted informally and the parties are not entitled to any legal representation, ss.21(4)(c) and 21(4A), carry out an inspection of any matter to which the claim relates, s.21(4)(d).
The adjudicator is to determine the amount of the progress payment, the date on which the amount becomes payable, and the rate of interest payable on the amount, s.22(1). In reaching his or her determination, the adjudicator must only consider the Act, the construction contract, the payment claim together with submissions, the payment schedule together with submissions (if any) and the results of any inspection carried out, s.22(2).
The determination must be in writing and include reasons, s.22(3).
The amount of the progress payment is to be calculated in accordance with the terms of the contract, s.10(1)(a). If there is no express provision with respect to the matter the amount is to be calculated based on the value of construction work carried out in accordance with section 10. The work is to be valued, having regard to:
- the contract price, 10(1)(b)(i);
- any other rates or prices in the contract, s.10(1)(b)(ii);
- any variation agreed to by the parties by which the price is to be adjusted by a specific amount, s.10(1)(b)(iii); and
- the estimated cost of remedying the defect, s.10(1)(b)(iv).
In the case of materials and components that form part of any work, they may only be included in the valuation if they have become the property of the party for whom the construction work is being carried out, s.10(2).
Once an adjudicator has determined the value of the work or related goods and services this value will be applied in any subsequent adjudication, unless either party satisfies the adjudicator that the value of work has changed since the previous determination, s.22(4).
If the determination contains a clerical mistake, an error arising from an accidental slip or omission, a material miscalculation or mistake in the figures, person, thing or matter referred to in the determination or a defect in form, the adjudicator may on his or her own initiative or on the application of either party correct the determination, s.22(5).
Adjudicator’s fees
The claimant and respondent are jointly and severally liable to pay the adjudicator’s fees and expenses, s.29(2), and they are to be borne in equal proportions or in such proportions as determined by the adjudicator, s.29(3). There is no right under the Act for an adjudicator to require security for his or her fees and expenses prior to accepting the appointment. However, it is common practice for adjudicators to withhold delivery of the determination until those fees and expenses have been paid as allowed under section 29(5). As a direct consequence, this has led to the claimant usually paying 100% of the fees, and then claiming them back from the respondent.
Enforcement of the adjudication
Adjudication certificate
The Act provides a simple and effective mechanism for the quick enforcement of an adjudication determination.
Once a determination has been made, the respondent is required to pay the adjudicated amount 5 days after the determination is served on the respondent, or later determined by the adjudicator, s.23. If the respondent fails to pay the claimant can request an adjudication certificate from the authorised nominating authority, s.24(1) The certificate must state the name of the claimant and respondent, the adjudicated amount and the date on which payment was due, s.24(3). The certificate may also include any interest that is due and payable, s.24(4), and the respondent's unpaid share of the adjudication fees, s.24(5).
Enforceable as a judgment debt
An adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and becomes enforceable as a judgment, s.25(1). If the respondent commences proceedings to have the judgment set aside, the respondent is not entitled to bring any cross-claim, to raise any defence in relation to matters arising under the construction contract, or to challenge the adjudicator's determination, s.25(4)(a). In addition, the respondent is required to pay into court as security the unpaid portion of the adjudicated amount pending final determination of the proceedings, s.25(4)(b).
Right to suspend construction work
The claimant may also serve a notice to the respondent of the claimant's intention to suspend construction work, ss.15(2)(b), 16(2)(b) and 24(1)(b). The claimant may suspend the carrying out of construction work under a construction contract if at least 2 business days have passed since notice has been given, s.27(1). The respondent is liable to pay the claimant any loss or expense incurred as a result of the claimant exercising its right to suspend works, including removing from the contract any part of the work or supply, s.27(2A). The claimant is also not liable for any loss or damage suffered by the respondent because of work not being carried out during the suspension, s.27(3).
Challenging the determination
In practice, an adjudicator's determination will only be set aside in very limited circumstances. So, what are the grounds, if any, to set aside an adjudicator’s determination?
This issue was clarified in two important decisions by the NSW Court of Appeal in Brodyn Pty Ltd v Davenport [2004] 61 NSWLR 421 and Transgrid v Siemens Ltd [2004] 61 NSWLR 521. The grounds to set aside an adjudication determination are:
- One of the essential pre-conditions for the existence of an adjudicator's determination has not been met, i.e. challenge as to jurisdiction of the adjudicator. Hodgson JA in Brodyn identified the following essential pre-conditions, inter alia, the:
- existence of a construction contract between the claimant and the respondent, to which the Act applies, ss.5 - 7;
- service by the claimant of a valid payment claim on the respondent, s.13;
- making of an adjudication application by the claimant to an authorised nominating authority within the time-limits imposed, s.17;
- reference of the application to an eligible adjudicator, who accepts the application ss.18 and 19;
- determination by the adjudicator of a valid application, ss.19(2) and 21(5) by determining the amount of the progress payment, the date on which it becomes or became due and the rate of interest payable, s.22(1), in writing and with reasons, s.22(3).
- The determination was not a bona fide attempt by the adjudicator to exercise the power afforded to it under the Act, i.e. where there is fraud by the claimant in which the adjudicator is also involved or where the fraud did not involve the adjudicator.
Where a question is raised before an adjudicator, the adjudicator's determination will not be void if he or she has answered the question incorrectly. However, if the adjudicator does not answer the question, there may be a basis for arguing that he or she did not make a bona fide attempt to exercise his or her power under the Act. - A substantial denial of natural justice. The Court in Brodyn held that a failure by the adjudicator to consider the submissions provided by the parties would amount to a substantial denial of natural justice, although simply misinterpreting these submissions or misapplying the law would not.
Further, the Court's approval of the decision in Emag Constructions Pty Ltd v Highrise Concrete [2003] NSWSC 903 indicates that natural justice will be held to have been denied where there has not been strict compliance with the timing and service requirements of the Act, particularly the requirement that the payment claim be served on the respondent or delivered to its ordinary place of business.In TQM Design and Construct Pty Ltd v Dasein Constructions Pty Ltd [2004] NSWSC 1216 it was held that a failure by the adjudicator to consider an adjudication response made by the respondent, even where the respondent's payment schedule has been considered, will also amount to a denial of natural justice.
The contents of this article is intended to provide a general guide to the subject matter and does not constitute legal advice. Ferrer Lawyers always recommend that you obtain legal advice prior to entering into any contract. If you’re having contract issues or require representation for adjudication call (02) 8823 3588 or email us with your enquiry at This email address is being protected from spambots. You need JavaScript enabled to view it. for further information, guidance or assistance.