21 July 2015

The Future is Adjudication

I accept that this headline doesn’t make the future look very exciting. I wish I could have written that the future is something else but I’m not as sure about flying cars as I am about adjudication. Its benefits are being seen in more regions globally, and governments everywhere are enacting legislation for a mandatory right of adjudication in construction disputes. Well, not quite everywhere. In the Gulf region we have not seen much take up of adjudication as is provided for in standard FIDIC contracts nor enactment of the statutory version. There are good reasons for this. First is the laborious “multi-tiered” FIDIC dispute resolution process. Secondly there are problems with enforceability of adjudication awards (or “Decisions”): there have been some recent court judgements which cast doubt on enforceability, although these are also specifically about the FIDIC provisions. A more general problem is that in the Gulf region we are constantly talking about the difficulties of enforcing arbitration awards in local courts, and I have to admit that adjudication does not avoid those problems.

All that said, adjudication has major advantages over other disputes processes. Those advantages deserve consideration by parties entering into in any construction contract.

Adjudication is the examination of a dispute, leading to a binding, but not final, decision on it. Of course it can be used in any commercial context but it has been developed mostly in construction. This’s no surprise because construction disputes are often very complicated, therefore costly and time-consuming to resolve. Adjudication is a direct response to this problem: it does not attempt to be an alternative to arbitration or litigation, which are intended to produce final and binding decisions. Instead, adjudication provides an interim-binding decision which is enforceable pending final resolution in arbitration or litigation or by settlement. In order to be useful, adjudication needs to be:

  1. Relatively quick;
  2. Relatively cheap; and
  3. “Good enough”

You will have noticed that none of these “golden rules” is absolute. Clearly the third one must be set in a balance with the other two. “Good enough” means a process allowing a decision to be reached, which the parties at least consider to be a credible interim outcome, if not the one they ultimately think they can get. That means allowing enough time to examine the dispute and enough process for it to be presented. It also means appointing an adjudicator with sufficient experience and skills to do  the job. It will therefore take a certain amount of time and cost.

In my view the whole point of adjudication is to get to the “most likely correct” result (or near to it) before the parties embark on their final dispute resolution. In other words, to get the right amount of money (more or less) into the right pocket before the pain begins. In practice the adjudicator’s decision will often avoid the arbitration or litigation entirely. So long as it is a credible decision, it will be a sharp spur to the parties to settle; a “reality check” to one or both of them.

Adjudication is therefore more than “quick and dirty” arbitration. It can free the parties from the attrition of their dispute so long as it meets the above golden rules. In my view the main problem with using it in the Gulf region is that it is encountered almost exclusively in the form of the FIDIC Dispute Adjudication Board (“DAB”) procedure which goes nowhere near meeting those rules.

The FIDIC Experience

All of the FIDIC “long form” main construction contracts include a DAB within the disputes provisions in clause 20. The provisions are almost the same in each form and the main problems exist in all of them. In my view the whole disputes process is far too long and laborious to follow, and still it is not clearly drafted.

I have written about Disputes Boards more generally (see Gulf Construction November 2014) so this is a brief recap. If a party wants to have its dispute adjudicated, it takes a long time even to get to the start line. To begin with, anything such as claims for additional time or money need first to be determined by (in the Red Book) the Engineer, who has 6 weeks to respond to any claim. After that – and if a DAB has already been set up – the dispute can be referred to the DAB which then has another 12 weeks to give a decision. This decision is binding on the parties and will become final also if neither party gives a Notice of Dissatisfaction. FIDIC provides for arbitration as the final disputes process. Note that this is the quicker version as provided in the Red Book. The Yellow and Silver Books provide for the DAB to be set up on an ad hoc basis once a dispute has arisen.

All of this is far too long and, as with everything in construction, time is money. Given long periods to make their cases and respond to each other’s, the parties and their advisors will fill that time expensively. It becomes more like a full arbitration.

Additionally, court decisions have highlighted problems with enforcing FIDIC DAB decisions. These problems came to light a few years ago and there has been a lot of discussion about whether those decisions are correct but since FIDIC itself has now acknowledged the problem, we have to take it that this is real and not localised.

Briefly, in CRW Joint Operation v PT Perusahaan Negara TBK (2011) SGCA 33 the Singapore Appeal Court upheld the SG High Court’s refusal to enforce summarily a DAB decision which was “binding” but not “final and binding” as a Notice of Dissatisfaction had been given. This was surprising at the time and much criticised. It has been followed up now by a new Singapore High Court decision between the same parties (ref (2014) SGHC 146) concerning the same DAB decision referred to court a second time. Here, the court partially allowed summary enforcement of a DAB Decision, essentially on the basis that this enforcement was expressly applied for as an interim measure and not a final decision. That decision has however been appealed and we’ll have to see whether the SG Appeal Court sees anything different in this from its first ruling.

What does seem to be clear from the meticulous analysis in those cases of FIDIC clause 20, is that it is ambiguous in important areas. Such is the fuss that FIDIC has issued both guidance and suggested amendments to deal with the problem. The amendments are:

  1. An express provision on enforceability of merely binding decisions without other steps needed; and
  2. Allowing a sum awarded by a DAB to be included in subsequent interim payment applications.

These are already features of the FIDIC Conditions for Design Build and Operate (Gold Book). The guidance is a positive, pragmatic step by FIDIC. It is also, of course, a tacit admission that projects on the unamended clause 20 are going to have trouble with enforceability of DAB decisions.

The International Experience

Many countries now have some form of statutory adjudication imposed into construction contracts (i.e. mandatory contract provisions) and others are planning to bring it in. In all of them the strong common intention is to make available an interim disputes process which is of practical use – in terms of the above “golden rules” - and has teeth, being enforceable summarily. Some have followed the UK’s Construction Act in allowing any dispute to be referred and others allow only payment issues. The UK experience is that payment (whether in valuation, delay and disruption claims, withholding for alleged defects or whatever) is pretty much the subject of most referrals anyway. 

Statutory adjudication has been hugely successful in the UK and the more recent feedback from other countries is also good. It is interesting to see that it gets criticism both for being too “rough and ready” (it allows only 4 weeks from referral to decision) and too much like arbitration! This is maybe a good sign that it is doing something right. Adjudication may be triggered by either party at any time. Contract provisions attempting to delay this by requiring some examination of the dispute as a precondition to referral, have been ruled unlawful.

I have seen no signs of a similar statutory system in Middle East countries (and I admit there are obvious enforcement issues in the region) but contracts can include provisions for a short, low-cost route to a binding interim decision. I hope this becomes part of the fabric here as it is in other places. The benefits are plain to see.

A Guide to Investing in Australian Real Estate

Investing Down Under offers a quick overview of the legal, taxation, FIRB and structuring issues you may encounter when investing in Australian real estate.

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    Arbitration agreements frequently impose preconditions to arbitration, requiring parties to engage in a combination of mediation, conciliation, good faith negotiations and/or other mechanisms first.

    24 May 2017

    Real Estate partners Simon Ricketts, Steven Cowins and William Naunton share their top five takeaways from this year's Property Week's forecast dinner.

    15 February 2016

    A recent Court decision in Singapore is the latest to look at the question of an "unconscionable" call on a bond

    12 February 2016

    Why are Dispute Boards not more widely used in the Middle East - a region which should benefit more than most from them?

    28 September 2015

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.