Adjudication Costs

The government introduced Construction adjudication over 20 years ago to provide a swift and cost-effective way of resolving construction disputes. The aim was to achieve this by a quick procedure which would prevent either party from recovering its legal costs for adjudication in any circumstances. By simplifying and accelerating the procedure it was hoped that parties could proceed without legal advice and without fear of having to pay the bigger party’s legal costs if it failed.

Unfortunately, in the two decades that have followed, construction adjudication has become more technical with parties often using lawyers. As a result adjudicator’s fees, normally paid by the losing party, but often paid by the winning party pending recovery from the losing party, have risen to levels that present a significant risk for any party considering referring a dispute to an adjudicator. Risk and costs are inevitable but for smaller disputes they have become disproportionate to the benefits.

Low value adjudication services have been introduced to address this problem for smaller disputes. This blog outlines how those services operate and how parties can best use them.

Statutory adjudication was introduced by the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”). It applies to parties to a “construction contract” and provides for a 28-day procedure, although parties can agree to extend this period. The adjudicator’s decision is interim-binding, meaning that it is binding until the dispute is finally determined by legal proceedings, arbitration or by agreement. For this reason, adjudication is often described as ‘pay first, argue later’.

A party must consider a number of things when pursuing a dispute – at the top of those considerations will be: (i) how long the dispute will take to resolve, (ii) the chances of success; and (iii) how much it will cost. The objective of adjudication was to promote cash flow in the construction industry and encourage parties to resolve their disputes at any time. By providing a cost-efficient and speedy solution to disputes, adjudication was intended to be an attractive alternative to arbitration or litigation.

The intentions for adjudication were good. However, the process has ended far from where it began. Adjudicator fees have risen to a level that prejudices the weaker party.

In terms of the average figures for adjudication, in November 2017 the Adjudication Society produced a paper on Adjudicator’s Fees. The average hourly fee charged by those adjudicators who participated in their research was £210, while the average total fee was £8,878 per adjudication. The costs can therefore be significant and notably these only reflect the adjudicator’s fees, not the costs the parties incur themselves.

The TeCSA, CIC and RICS services will provide certainty for parties regarding the adjudicator’s fees. This reduces at least some of the uncertainty regarding costs for the adjudication process. However, a number of points are of note from the above:

• A party wishing to refer a matter to adjudication must check whether an adjudicator nominating body is provided for in the relevant contract and act accordingly.
• The key difference between the TeCSA and CIC services is how the two services apply. As is outlined above, the CIC LVD MAP is a separate set of adjudication rules whereas the TeCSA service applies when TeCSA makes an appropriate appointment. The TeCSA service only seeks to limit the fees the adjudicator can charge, and consequently, it is unnecessary for the responding party to agree to use the service. However, in the case of the CIC LVD MAP, the parties either have to have agreed in their contracts to refer low value disputes under this procedure or reach such an agreement after the dispute has arisen. It is in both parties’ interests to keep costs low; however this does mean the application of the CIC LVD MAP may not apply as smoothly in some cases.
• Nonetheless, this is also the advantage of the CIC LVD MAP. The TeCSA service is limited to adjudicator appointments made by TeCSA. This is to be contrasted with the proposed CIC LVD MAP, which can be used by any appropriate nominating body.
• While both services cap fees for adjudicators and therefore provided increase certainty, there are differences in terms of the level of fees under both services. In particular in respect of disputes between £25,001 – £50,000, for which TeCSA provides for a lower cap.
• In respect of both services, parties will need to consider whether their dispute is appropriate. For example, the TeCSA LVD adjudication service is for liquidated sums and so some disputes will not be appropriate for consideration under the service. Further, both services define the level of a low-value dispute differently – TeCSA provides its service for disputes up to £100,000, whereas CIC provides its service for disputes up to £50,000. However, the CIC service does provide for some flexibility on this upper limit for disputes of a higher value.

Adjudication can still be a cost-effective and perhaps most importantly, a speedy solution to a dispute. To ensure that the benefits of adjudication outweigh the risks and the costs, parties should bear the following in mind:

• The proposed CIC LVD MAP includes a boilerplate LVD adjudication clause for parties to include in their contracts. Moving forward, parties should consider whether they wish to include this clause or a similarly worded clause in their contract.
• A point which emerges when reflecting on the services above is that while the service can cap the fees of the adjudicator, there is no similar cap on the parties’ costs. Consequently parties should plan their costs and consider the most proportionate way to conduct their dispute.
• For that reason, parties should be mindful of adhering to the established parameters of adjudication to save unnecessary costs. (i) For example, ensuring that a dispute has ‘crystallised’ to avoid the costs of having to restart an adjudication which has been prematurely commenced. Section 108 of the Construction Act entitles a party to give notice of its intention to refer a dispute to adjudication “at any time”. However, there is no right to adjudicate unless the dispute has crystallised. (ii) Parties should also review the dispute resolution clauses of their respective contracts. Some contracts will provide for a ‘tiered’ approach to dispute resolution, meaning that adjudication must be used before arbitration or litigation can be. This is another common pitfall through which unnecessary costs and time are lost. (iii) A referring party should take care with their notice of adjudication, which defines the scope of the matters to be dealt with by the adjudicator. The referring party must ensure that their referral notice does not go beyond their notice of adjudication, as this would give rise to a jurisdictional challenge. In practice, it is often best to draft these two documents at the same time for this reason.

The LVD schemes have not, and cannot, resolve entirely the problems of rising costs and complexity in adjudication. However, they are a meaningful step in restoring some balance. Parties should give real consideration to using these services as disputes arise and providing for these services in their contracts moving forward.