Both sides now – The return of Arbitration in construction disputes in the United Kingdom?

This summer saw the re-release of Joni Mitchell’s 1970’s back catalogue of albums, that included her most famous ballad “Both Sides Now”. Punk rock heralded the demise of the 1970’s singer song writer in the same way that Adjudication, with its fast-track decision within 28 days of the Adjudicator’s appointment, consigned Arbitration to the past. Arbitration in construction disputes is for the Woodstock generation whereas Adjudication has endured in modern times to give a quick decision of the Adjudicator at a manageable cost. Adjudication resembles “combat rock” and Arbitration was and still is the comfortable easy listening of the past. I have seen Adjudication and Arbitration from “both sides now, from win and lose” and I am able to compare them both to one another.

In my former life as Legal Counsel and construction contacts draftsman and negotiator for Bovis Lend Lease (now Lend Lease) one of the first instructions issued by the Head of the Legal Department was that the rights of the parties to commence Arbitration, rather than legal proceedings, should be deleted from the contract. This was at a time when Adjudication had already replaced Arbitration as the means of resolving construction disputes. The enforcement of the Adjudicator’s decision is achieved by an application for summary judgment in the Technology and Construction Court. For this reason, it was felt necessary by the Head of the Legal Department to leave open the opportunity to obtain a final decision by legal proceedings in the courts, rather than by Arbitration, if the interim enforcement of the Adjudicator’s decision by the Technology and Construction Court was to be later challenged.

This meant that the Arbitration clause in building contracts became a dead letter and would be routinely deleted by lawyers of blue-chip organisations such as Bovis Lend Lease, as it then was. It was not envisaged at that time, when I routinely deleted the Arbitration clause from the building contracts that would pass across my desk, that the complexity which has in recent years been visited upon the enforcement of the Adjudicator’s decision would become so evident as it has.

But is it time for unpaid Contractors to ditch Adjudication and to instead choose Arbitration to resolve construction disputes? This would of course represent a huge sea change away from the automatic choice opted upon by contractors throughout the UK to appoint an Adjudicator in their attempt to obtain a quick decision for immediate payment of sums owed to them by the building employer or main contractor. It would mean that contractors would be advised to include clauses in their contracts that give the parties the opportunity to choose Arbitration as an alternative to Adjudication, as a method of dispute resolution, when they have not been paid for work they have carried out.

Adjudication was the shock of the new in construction disputes of in the 1990’s and it shook the construction industry out if its complacency when it was introduced 25 years ago to address the “cash flow” problems faced by Building Contractors and Subcontractors from the unfair refusal of Employers or Main Contractors to pay for work carried out, leading in some case to their potential insolvency. The attraction of bringing an Adjudication rather than an Arbitration is that it if unsuccessful the loser must pay the winner on an interim basis, but this does not stop the loser from seeking a final decision in the courts later on. Adjudication is a binding interim decision so that the loser must “pay now and argue later” and if it does not pay now, the winner can apply to the Technology and Construction Court of the High Court for enforcement of the Adjudicator’s decision.

All construction lawyers in the UK are acutely aware that the recent developments in case law in the Technology and Construction Court have begun to narrow the circumstances in which the unpaid building contractor or sub-contractor can obtain a quick and enforceable decision from the Adjudicator.

The “smash and grab” procedure has been largely discredited because it has been characterised as being opportunistically used by contractors to take advantage of a purely procedural breach by the employer, developer or main contractor, to obtain rapid payment to them by the Adjudicator’s decision, where payment is claimed under a construction contract in the absence of any payment or pay less notice being issued by the payer. In such circumstances the amount claimed in any application for payment will have become the “notified sum” in accordance with Section 111 of the Housing Grants and Regeneration Act 1996 (as amended), whereby the paying party is obliged to immediately pay the sum claimed regardless of any dispute over the proper valuation of the application for payment.

The recent decision of CC Construction Limited -v- Raffaele Minicione [2021] EWHC 2502 is the latest in a line of decisions of the Technology and Construction Court (TCC) in recent years that will cause anxiety to contractors because of the increasing uncertainty and unpredictability of the outcome of Adjudications that they commence for recovery of monies owed to them. This is because of concern that if the Adjudicator fails to properly consider the Employer’s or Main Contractor’s defences of set off against the Contractor’s claim for unpaid monies owed to them by the building Employer or Main Contractor, the Adjudicator’s decision will not be enforced by the TCC. The court made a fine distinction between the decision of the Adjudicator who correctly rules that a set off defence is “untenable” and a wrongful and deliberate failure to consider a set off defence at all. In the latter case the enforcement proceedings in the TCC will fail. Contractors will be holding their breath that the Adjudicator has correctly addressed defences of set off before making his decision, when commencing proceedings for the enforcement of Adjudication in the TCC.

Having recently succeeded in a construction Arbitration and having “lost” an enforcement of an Adjudicator’s award in the Technology and Construction Court of the High Court last year, in the much discussed and reported judgment of Lane End Developments Construction Limited -v- Kingstone [2020] 1BLR Plus 41 Construction Law Reporter 7 September 2020, CILL 4 October 2020, of last year, I can say that I have seen Arbitration and Adjudication from both sides now.

Adjudication has been successfully utilised by the unpaid building contractor or sub-contractor, where he can obtain a decision for immediate payment of the sum claimed, after the developer, employer or main contractor fails to issue an effective “payless notice” in answer to a “payment notice” of the building contractor or sub-contractor. However, the “smash and grab” procedure that takes advantage of this procedural breach has in recent years been called into question by the courts.

This is of course because “smash and grab” can lead to an unjustified win-fall payment in favour of the building contractor or sub-contractor merely because of a procedural breach of the developer, employer or main contractor in their failure to issue an appropriate “payless notice”. The Court of Appeal in S& T (UK) Limited -v- Grove Developments [2018] ECA Civ 2448 sought to redress the apparent injustice of the “smash and grab” by deciding that even if the building developer, employer or main contractor is compelled to pay the sum awarded by the Adjudicator to the Contractor or Sub-Contractor, this does not prevent the Employer, Developer or Main Contractor from commencing a second adjudication to ask the Adjudicator to decide upon the “true value” of the unpaid contractor’s or subcontractor’s final account. In this way the Adjudicator is asked to decide upon what is actually due to be paid, regardless of whether the correct payment or payless notices have been issued. However, the snag and down side for the Employer, Developer or Main Contractor is that he must pay the building Contractor or Sub-Contractor the sum awarded by the Adjudicator in the first Adjudication before he commences a second Adjudication to ask the Adjudicator to assess the “true value” of the Contractor’s or Sub-Contractor’s final account.

In addition to this development, is the tendency of Developers, Employers, Main Contractors to mount Part 8 claims in the Technology and Construction Court to “head off” and to prevent the Part 7 enforcement summary judgement claim of the Adjudicator’s decision brought by the unpaid Contractor or Sub-Contractor. The typical challenges to enforcement of the Adjudicator’s decision in the Technology and Construction Court of the High court are breaches of natural justice by the Adjudicator and lack of jurisdiction of the Adjudicator.

In JRT Developments Ltd v TW Dixon (Developments) Ltd (TWD) [2020] 10 WLUK 106, the TCC ordered a stay of a “smash and grab” adjudication to prevent a “manifest injustice” to a development company TW Dixon (Developments) (TWD). The court decided that the circumstances of the case were such that it would be manifestly unjust to the defendant unless it granted a stay of execution of the enforcement of an adjudicator’s decision.

This principle was established in Wimbledon v Vago [2005] EWHC 1086 (TCC). However, since Galliford Try v Estura [2015] EWHC 412 (TCC), there has been limited scope for the defendant (the paying party) to argue that there should be a stay because it will cause “manifest injustice”.

A stay of execution of the enforcement of an adjudicator’s decision was previously only ordered in limited circumstances, when the court found that the claimant (the unpaid party) would be unable to repay the sum, if the adjudicator’s decision was reversed in a subsequent arbitration or litigation proceedings. Nevertheless, the Judge found that TWD would be forced into liquidation if it was compelled to pay the sum awarded in the adjudication and if the claim was not stayed it would be deprived of the opportunity of seeking redress. It would therefore recover little of the money claimed following the trial of the overall dispute.

The Judge found that the circumstances of the case were “exceptional”, that TWD would suffer manifest injustice if enforcement was not stayed. This was because the defendant was unlikely to recover the judgment sum following and if they were successful in the full trial of the dispute.

Last year in Lane End Developments Construction -v- Kingstone Civil Engineering [2020] 1BLR Plus 41 Construction Law Reporter 7 September 2020, CILL 4 October 2020, I appeared as Direct Public Access Counsel for Kingstone Civil Engineering in a Part 7 claim for enforcement of the Adjudicator’s decision. The Technology and Construction Court declined to enforce the Adjudicator’s decision on a Part 8 application to set it aside the Adjudicator’s decision. This application to set aside the Adjudicator’s decision was made on the grounds that, amongst other things, the Adjudicator had been wrongly appointed as a result of the application for the appointment of an Adjudicator to an Adjudication nominating body, in this case the Royal Chartered Institute of Surveyors, being served before the service of the notice of adjudication by the contractor upon, in this case, the developer that has refused to pay the amount awarded by the Adjudicator.

This led to one construction disputes commentator, Jonathan Cope, Director of MCMS Limited, in his review of the decision in Practical Law of 15 September 2020 “Jurisdictional reservations revisited”, to invoke a 1960’s tune “People are Strange” sung by another musical icon of the past, the Doors’ Jim Morrison.

In Price v Carter [2010] EWHC 1451 the court decided that a party to a contract containing an Arbitration clause is entitled to commence Arbitration and he is not compelled to commence Adjudication instead of Arbitration. He is contractually entitled to pursue Arbitration and in doing so to obtain a final and binding decision of an Arbitrator. The employer cannot argue that the contractor should commence Adjudication instead and has no choice to either contest the Arbitration or to reach a settlement of the amount claimed. However, if Arbitration is started, the employer can start a parallel Adjudication, if it so wishes. Mr Justice Edward Stuart ruled at paragraph 15 of the Price v Carter decision that the effect of Article 6 and 7 in the JCT Minor Works Contract is that a party who wishes to refer a dispute for resolution has the choice of either Adjudication or Arbitration. If a party chooses Arbitration the other party has no option but to accept that choice.

This begs the question that, in light of recent developments in the case law of the Technology and Construction Court, should construction contract draftsman now decide to include the Arbitration clause in the contract as the means by which a final decision by Arbitration can be made, rather than to delete the clause and to instead choose legal proceedings, by which a final and binding decision of the court can be made? If the Arbitration clause is stated to apply in the contract, this will mean that if Arbitration is commenced, the Arbitrator will reach a final and binding decision that cannot easily be overturned on appeal or challenge.

This is unlike Adjudication, which is only an interim decision and whilst the court will in enforcement of the Adjudicator’s decision order that the sum claimed must be paid, the payer has the option of applying to the court for a final and binding decision from the court as to the true amount that should be paid to the claiming Contractor or Sub-contractor by the Developer, Employer, of Main Contractor, as the case may be.

The Arbitrator’s decision is final and binding. This perhaps is the single most important advantage of commencing Arbitration where the Contractor or Sub-Contractor is faced by an errant Developer, Employer of Main Contractor that refuses to pay to them the amount claimed and who has significant resources to strongly contest an Adjudication enforcement in the Technology and Construction, that the Main Contractor or Sub-Contractor will find difficulty in challenging, due to its limited financial resources in meeting the legal costs of such challenge.

The main disadvantage of commencing Arbitration is the high legal costs that will be incurred because the procedure largely, but loosely, mirrors that of court proceedings. This will mean that the drafting of the pleadings, witness statements, disclosure, hearings of fact, submissions on the law and fact, the hearing of expert evidence followed by the Arbitration Award and submissions can rack up extremely high costs. The general rule is that costs follow the event, so that the winner of the Arbitration will obtain an award of their legal costs against their opponent, although arguments over proportionality of costs may come into the equation in extreme cases, when the Arbitrator assesses liability for costs and the amount of costs to be awarded, after he makes his award on the merits of the dispute.

Therefore, those who commence Arbitration should be aware that there are high risks with regard to the award of costs, so that there needs to be a certainty of victory by the Claimant or an acceptance by the Claimant that if their claim fails, they will more than likely be found liable by the Arbitrator to pay the Respondent’s legal costs. The use of expert evidence is likely to be relied upon in an Arbitration and it is therefore recommended that the Claimant will wish to receive firm expert advice upon the merits of the claim before the Arbitration is commenced for this reason.

In Adjudication costs do not “follow the event”, so that if the Referring Party (the Claimant) obtains a decision in their favour that the Respondent should pay them a sum of money he cannot claim his legal costs against the Responding party. However, the legal cost in an Adjudication will be more manageable than those in Arbitration because of the shortness of Adjudication procedure, that is designed to bring about a quick and interim decision.

One factor that might tip the decision in favour of the commencement of Arbitration is that this process is private and confidential, so that the Arbitrator’s decision cannot be published by the victor. This is the reason that the successful Claimant in a recent Arbitration who I represented as Direct Public Access Barrister cannot publish the findings of the Arbitrator’s Award. This means that if the Claimant seeks the publicity and acclaim of a rock star upon being victorious in his dispute, Arbitration will not be for him.

But is the old ballad of Arbitration about to make a comeback? Perhaps it never went away and due to the complexity and challenges that are now being thrown down by decisions of the Technology and Construction Court in Part 8 claims, that are being made to stop enforcement of the Adjudicator’s decision by developers, employers and main contractors, who decline to pay the hard pressed and unpaid contractor or sub-contractor, in years to come construction lawyers might be heard to say in hushed tones, “I love Arbitration”, in the same way as Emma Thompson said of Joni Mitchell in the movie “Love Actually”.

Anthony Philpott