First published in Construction Law
Statutory adjudication has been a great success in the UK, where it was first introduced. Other jurisdictions are following the UK lead and introducing more flexibility to the process.
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Over the course of the last 16 years, the UK construction industry has become increasingly familiar with statutory adjudication, introduced as part of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) in 1998. Initially designed to abolish bad payment practices in the industry and improve cash flow, adjudication was also intended to deal with works being suspended for long periods of time whilst lengthy disputes were resolved. With the introduction of adjudication, it has become possible to obtain a decision in just 28 days, and if court enforcement is required, this generally takes place within a further 14 days.
To that extent, adjudication has been transformative in allowing parties who have not been paid to claim what they are owed in a relatively short period, and to that degree can be considered a success. Whilst initially slow to gain acceptance in the UK, once the courts demonstrated that they would robustly enforce adjudication decisions, adjudication developed a momentum of its own. Indeed, it could be argued that adjudication has been almost too successful in the UK, and at times has been both widely used and abused, with parties using it to refer all kinds of disputes to adjudication, including those that are totally unsuited to the fast-track procedure.
Following legislative amendments in 2011 (as contained in Pt 8 of the Local Democracy, Economic Development and Construction Act), statutory adjudication now applies to oral contracts as well as written ones. Court decisions have also helped to shape the adjudication procedure as it now stands, contributing to the recent amendments to the primary legislation such as incorporating a slip rule to allow an adjudicator to correct a clerical or typographical error. Whilst parties have been inventive in finding ways to resist enforcement, it is now fairly clear that there are only two potential options for challenging enforcement in the UK, these being (i) where the adjudicator did not have jurisdiction to make the decision, and (ii) where there has been a serious breach of the rules of natural justice.
Just as the use of adjudication has spread across the UK construction industry, it has successfully expanded across the globe, with Hong Kong being the latest jurisdiction to introduce security of payment for its construction industry through statutory adjudication, following in the footsteps of Australia, New Zealand, Malaysia and Singapore. New South Wales was the first state in Australia to take this step, with the Building and Construction Industry Security of Payment Act of 1999, followed by legislation in Victoria (2002), Queensland (2004) and Western Australia (2004), whilst New Zealand introduced the Construction Contracts Act in 2002. Perhaps unsurprisingly, the use of fundamentally different models in Eastern and Western Australia has now led for calls for a new harmonised national scheme.
In 2005 Singapore introduced the Building and Construction Security of Payment Act. The general aim behind all the legislation was, as in the UK, to ensure that money flows down the contracting chain by prohibiting 'pay if paid' or 'pay when paid' clauses in construction contracts.
Since the late 1990s, stakeholders in the Hong Kong construction industry have undertaken a critical review of the practices and culture of the industry and considered routes for reform. Indeed, in April 2002, the Construction Industry Review Committee (CIRC) was appointed to comprehensively review the state of the industry and to recommend measures for improvement, and reported that 'further consideration should be given to the merits of, and the need for, enacting security of payment legislation having regard to local circumstances and in the light of overseas experience.'
In the decade that followed the CIRC Report it was recognised that security of payment was fundamental to developing a healthy, professional and competitive construction industry, and the long-awaited security of payment legislation is expected to commence its public consultation shortly (the tentative consultation period has been identified as April to June 2015, with the legislation expected to come into effect as early as 2016).
In terms of its scope, the proposed legislation will apply to construction activities carried out in Hong Kong (main contracts, sub-contracts, consultants and suppliers), as well as those construction activities performed outside Hong Kong provided that the work products are finally delivered to, and incorporated into, a project in Hong Kong. As is now the case in the UK, the proposed legislation will apply to construction activities regardless of whether the contract was made orally or in writing. Conditional payment provisions (eg 'pay if paid' or 'pay when paid') will be prohibited and have no effect if included in a contract. Although wide in scope, it will exclude construction contracts with residential occupiers for a value of less than HKD5 million, as well as employment, insurance, guarantee and investment contracts.
Whilst parties to an applicable contract will be free to agree when and how frequently claims for progress payments can be made, how the progress payments are to be calculated, and when the progress payments are to be made, the agreed due dates cannot exceed 60 days for interim payments and 120 days for final payment. Where parties do not expressly agree any of these matters, default provisions will apply to the contract. Under the proposed legislation, the claiming party would be entitled to adjudicate a claim for a progress payment even without having to fulfil a condition precedent to their contractual entitlement to the claim.
It is intended that the contractor whose payment claim has been disputed or ignored will have the right to commence statutory adjudication, with the legislation setting a strict time limit within which to make an application for statutory adjudication. The parties may appoint an adjudicator after the dispute to be adjudicated has arisen. If there is no agreement, the nominating body named in the parties' contract will appoint by nomination an adjudicator, otherwise the adjudicator will be appointed by nomination from the HKIAC Hong Kong International Arbitration Centre. However appointed, the appointment must take place within five working days of commencement of the adjudication.
In terms of time frames once adjudication has commenced, it is proposed that the responding party will have 20 days to serve its response from the date of receipt of the claimant's submissions, although this time period may be shortened or extended by the adjudicator without the parties' consent. The adjudicator will have 20 working days from the date of receiving the respondent's response to make his decision, but this period may be extended up to 55 working days from the date the adjudicator was appointed without the parties' consent, or extended further with both parties' consent.
It is anticipated that 55 working days will become the usual period for disputes of greater size or complexity, with knock-on implications in terms of the cost of the adjudication. Under the proposed legislation, each party will bear its own costs of the adjudication, although the adjudicator will have the power to determine which party pays the adjudicator's fees. It is therefore possible that the losing party will face a significant liability in relation to fees.
If the losing party fails or refuses to comply with the decision of the adjudicator, the adjudicator's decision can be registered as a court judgment and enforced by the courts accordingly. In terms of grounds on which to challenge a decision, these are limited to procedural grounds of unfairness, a failure by the adjudicator to act independently and impartially, or the adjudicator acting without or outside his jurisdiction (not dissimilar from the grounds for challenging the decision of an adjudicator in the UK). In that the adjudicator's decision is only provisionally binding, the parties to it are not prevented from commencing separate court or arbitration proceedings to seek a final determination of the dispute.
Following a decision of the adjudicator, the proposed legislation gives the contractor the right to suspend work for non-payment of sums that have been determined by the adjudicator as being due and payable, conditional on the contractor serving written notice of suspension on the employer and the site owner. As an alternative, the contractor may suspend part of its work or reduce the progress of its work, as a result of which the contractor will become entitled to additional time and reasonable costs for any delay and disruption caused by the suspension.
Security of payment
There are various ways in which the proposed legislation can be seen to mirror that of security of payment legislation in other jurisdictions. It limits adjudication to disputes involving claims for extensions of time, and delay and disruption cost, and also contains anti-ambush provisions (features of the Australian systems, lacking in the UK), providing the adjudicator with the power to disregard evidence or submissions that should have been provided beforehand, and encouraging parties to submit their submissions and supporting evidence as soon as possible to allow each to have a reasonable time to consider them.
In addressing the above, as well as providing the parties with the right to appoint their own adjudicator (by agreement) and permitting flexibility of time limits without the parties' consent, Hong Kong seems to have learnt lessons from the experiences of others.
In that the proposed legislation reflects some of the key provisions contained in the security of payment legislation in jurisdictions such as the UK, it seems inevitable that the process in Hong Kong will be open to the same criticisms as faced in other jurisdictions.
One of the main issues with adjudication is identified as being the quality of adjudicators, especially those with little 'real life' experience of construction disputes. To the extent that most adjudicators are appointed by a nominating body, the parties have little control over who is selected (unlike arbitration). Issues can arise when adjudicators without formal legal training are asked to grapple with interpreting complex contractual issues, and depending on which part of the industry the adjudicator comes from, they are open to claims of perceived or actual bias. Indeed, in the UK, the TCC judiciary have, on occasion, been openly critical of some of the adjudicators' decisions which they are obliged to enforce.
Extended time periods
The possibility of an extended time period for adjudication can also lead to the incurring of significant costs, and can mean that what was intended to be a quick and cheap process becomes increasingly drawn-out and expensive. Overall, the adjudication process is expected to have widespread consequences for the construction industry in Hong Kong, causing a major shift in the balance of power between contractors and employers, and replacing arbitration and litigation as the mechanisms of choice for resolving construction disputes.
As Hong Kong awaits the coming into effect of the proposed legislation, it is interesting to speculate which jurisdictions might next look to introduce some form of security of payment legislation to regulate their domestic construction industry. Whilst the continuing growth of the construction industry in the Middle East might suggest that it would be the next region to adopt adjudication for payment disputes, adjudication is not recognised as a form of dispute resolution in the underlying Civil Code of, for example, the UAE, and would not give rise to a binding award.
In that it would still be necessary to pursue a matter through arbitration or the local courts, and re-litigate the substance of the dispute, adjudication to some extent would only add another layer of bureaucracy and expense to a process that in any event would have to proceed to arbitration or the courts. Other common law jurisdictions, though, may yet adopt adjudication.