The resolution of disputes in the construction industry is usually achieved through a tiered system of escalation, starting with mediation followed by adjudication, arbitration, and litigation. However, this is mostly driven by behaviours and established working relationships as, according to the Construction Act, a dispute can be referred to adjudication at any time.
In some contracts, such as NEC, there is an order of precedence whereby a dispute must be referred for adjudication first. If one party remains unhappy with the decision they can refer the dispute to either arbitration or litigation.
With JCT requiring each party to give serious consideration to mediation, NEC4 has more recently also followed the alternative dispute resolution route as there are now express provisions for a range of dispute avoidance mechanisms. These include, for example, the referral to senior representatives prior to the appointment of an adjudicator and for a Dispute Avoidance Board to rule on disputes, albeit these processes do not detract from the parties right under the Construction Act to refer to adjudication at any time.
However, if you are considering the referral of a dispute to a third party, what is the difference between adjudication and arbitration, how long is the process, and what steps are required to reach a conclusion? Knowing the answer to these questions will enable you to weigh up your course of action dependent on the severity and value of the dispute at hand.
How is each defined and what is the difference?
The statutory right to adjudicate on construction contracts is provided through the Housing Grants Construction and Regeneration Act 1996. Where any contract for construction works does not contain express provisions for adjudication, the Scheme for Construction Contracts steps in to imply terms into the contract. In the case of arbitration, the legislation is provided by the Arbitration Act 1996 which is a consolidated version of three previous acts centred around arbitration and founded on previous case law.
In terms of adjudication, this is dealt with by way of an independent third party adjudicator, whereas a single arbitrator or a panel can decide arbitration. After the adjudicator has issued their decision there is no right of appeal and it must be enforced. However, an adjudicator’s decision can be revised by subsequent arbitration hearings and awards or by litigation but the inability to challenge the decision is much in keeping with the ethos of the Construction Act i.e. ‘pay now and argue later’ to keep cashflow moving in the industry.
Another key point of difference between the two is that the adjudicator cannot award costs, only their own fees, whereas the arbitrator’s decision or ‘award’ has the power to order costs with the successful party usually awarded legal costs.
The Arbitration Act follows itself follows three basic principles and is often used in other disputes, not just the construction industry, such as employment, trade unions, and disputes by individuals. The three principles are:
- Fairness – the tribunal must be impartial and seek to find natural justice through fair resolution
- Party autonomy – The parties involved are free to decide how the dispute reaches resolution
- Non-intervention by the court – Arbitration is a process of alternative dispute resolution not involving the courts and the Act states they should not intervene
If the adjudicator has issued their decision but one of the parties is dissatisfied, they can register this and then refer the dispute to arbitration or litigation. Such decisions are usually based on the scale of the dispute but also the requirement for sensitivity as, under arbitration, the arbitrator has the power to grant privacy whereas litigation is open to the public, including the press. In the case of both arbitration and litigation the outcome is the same in that it is legally binding.
Whilst Adjudication starts with the referring party issuing a Notice of Adjudication, arbitration starts with the referring party issuing a ‘request for arbitration’ or a ‘notice of arbitration’. As is usually the case, these notices are rarely served ‘cold’ to the other party as a dispute will likely have been crystallised over time and therefore senior representatives of both organisations are likely to have met previously in an attempt to resolve the matter.
If the parties have decided that they are unable or unwilling to resolve the dispute without third party intervention, this is where they will need to understand the process of both adjudication and arbitration to decide which is best for them.
What do you need to do to start proceedings?
The process of adjudication is to adhere to a very strict timetable to arrive at a decision within twenty-eight days. However, the process to arrive at a decision via arbitration could take anything from a few weeks to many months depending on how fast the flow of information is between the parties and the timetable set by the arbitrator or panel.
After the serving of notices between the parties and the initial exchange of information, the appointment of an arbitrator is arguably one of the plus points to litigation. Each party can either agree on a single arbitrator, appoint their own arbitrator who together then appoint a third arbitrator who acts as the chair, or they are selected by a mutually chosen professional institution.
The benefit of this process over litigation is that each party can select someone that is an expert in their field and therefore will already have an in depth understanding of the industry and their claim. This is as opposed to a judge via litigation who may have limited specialist knowledge.
In adjudication, the referring party gets one week to review the referral notice and provide a response. Once this response is received the referring party has just three days to provide a rejoinder, if they so decide, with the adjudicators decision then provided just three days after this on the 28th day. This period can be extended by a further fourteen days to an overall forty-two days, but this is only by agreement from the referring party.
If you contrast the above to the process of arbitration, then after serving a Request for Arbitration the defending party has thirty days to provide a response. Then a process to appoint the arbitrators commences who, once appointed, will agree a timeframe in which information is exchanged, reviewed, responded to by each party and considered by the arbitrators. Dependent on the case and the information presented, a hearing may not be required, but in most cases the dispute will be complex enough that it has reached this point and therefore a hearing will be held during which evidence is presented by both parties and witness statements are heard and examined.
Following this and in conclusion, each party summarises their position to the arbitrator, including any relevant case law they are seeking to rely on, before the arbitrator or panel then retires to consider their verdict.
Once the arbitrator has arrived at a decision then, like adjudication, they will provide a written response explaining how they have arrived at their decision, this is called the award. In the case of arbitration, the decision is binding. There is limited recourse for appeal as the grounds upon which the decision can be challenged are limited to:
The tribunals conduct being improper
- It has responded to points that it was not asked to
- It can be proven there is an error in law in their final decision
- If a challenge is made, the party making the challenge can apply to have the award set aside.
A summary timetable including the actions involved by the parties in both adjudication and arbitration is provided below:
[table id=11 /]
Can you launch either or is there an order of precedence?
According to JCT, if the standard negotiation between the parties does not work then each party is to give serious consideration to mediation. However, it is not compulsory to use this option and you have the option to refer to adjudication at any time through the Construction Act. Notwithstanding this, the default unamended position in JCT is arbitration in the event a dispute should arise.
JCT Contracts can of course be amended if the parties have a preference and are free to choose arbitration as a course of resolution with the option remaining for litigation later if they so choose.
NEC3 states a two-stage approach to dispute resolution with the first being adjudication followed by tribunal i.e. arbitration or litigation. However, once the adjudicator has provided their decision, to proceed to the next step one of the parties must notify their decision to proceed to a tribunal within four weeks or else silence is taken as acceptance of the adjudicator’s decision as a final judgement.
In NEC4 these provisions have been expanded to include referral of a dispute to senior representatives before adjudication and a new option, which if selected, provides for a ‘Dispute Avoidance Board’ and should be considered as an alternative to adjudication. This is reflective of other international forms of contract such as FIDIC which contain dispute escalation provisions such as ‘Dispute Adjudication Board’.
How can the decisions for either be legally enforced?
If you have won an adjudication and wish to enforce the decision you will need to take it to the Technology and Construction Court, if the other party does not act on the decision. Once in front of the TCC, there are limited grounds for the other party to challenge the decision as they will have to evidence the adjudicator made decisions outside of their jurisdiction or there was a breach of the rules of natural justice i.e. a fair and impartial hearing.
If the other party wishes to make a challenge on the grounds of jurisdiction, they could claim the referred dispute was not the same one that had crystallised or that it had not crystallised in the first place as some examples. In terms of natural justice, some examples whereby they would have to evidence the adjudicators failings could include not consulting with both parties before making a final decision, taking advice from a third party without prior agreement, or only considering the submissions from one party.
If using arbitration and the arbitration award is binding, then it is enforceable through the courts without a rehearing of the issues and with a short process to get through the courts in the first place. Unless the award is challenged, and there are limited grounds upon which to do so, then the award determines the rights and obligations of the parties. As with adjudication the challenging party would have to evidence breach of natural justice via conduct or an error of law. The finding of facts by the arbitrator can rarely be challenged through.
The paths to dispute resolution through either adjudication or arbitration both arrive at a decision or ‘award’, but clearly there are different time and cost implications of using one versus the other.
Whilst adjudication can be overturned through arbitration or litigation, the intent is clear in that it must be enforced straight away. Therefore, if the dispute links back to payment, the twenty-eight-day process is a decision and the TCC enforcing adjudication decisions means that, in the UK, arbitration is not the favoured option. However, outside of the UK construction industry, arbitration is often used as a vehicle to settle high value disputes.
About Dean Suttling
A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.