The Turning of the Tide? – Cash Flow and Adjudication under the Construction Contracts Bill

Better cash flow in the industry. On 16 July 2013, the Construction Contracts Bill finally passed through Dail Eireann and will soon become law. The Construction Contracts Act (the “Act”), when enacted, will provide a much needed positive boost for the industry.

The last 6 years in Ireland has been bleak for those working in construction: turnover shrank from its peak at €39 billion a year, to just €7.5 billion last year. In these difficult times, where margins are already extremely tight, reliable cash flow is of paramount importance.  While there are some complaints that the Act has come too late for many, it will provide important protection for those working in construction going forward.

The Act will seek to achieve better cash flow in three key ways:

Firstly, by requiring that all construction contracts (which term is broadly defined and subject to limited exceptions only) include adequate mechanisms for determining both the amount and the periods for interim payments. Standard forms used in Ireland generally set out payment provisions which will comply with this requirement. In addition, the Act will provide that where a payment claim notice is submitted and the amount is contested by the paying party, the paying party has 21 days to deliver a response setting out the amount that it proposes to pay and the reasons for the difference between that amount and the amount claimed This response must also set out the basis of the calculations used to arrive at the amount to be paid. If this is not agreed between the parties, then the amount paid shall be the amount included in the withholding notice.  The receiving party can, of course, dispute the assessment and refer the matter to adjudication.   A fundamental protection now enshrined in the Act is the outlawing of pay when paid clauses such that even where payment has not been received from someone higher up the contractual chain, this will not provide a basis for refusing to pay or withholding part payment from sub-contractors.

Secondly, the right of suspension for non-payment is now put on a statutory footing. The Act will allow a party, who has not been paid by the day on which payment is due, to suspend work provided a written notice has been delivered to the paying party at least 7 days before the proposed suspension is to begin. The Act also ensures that time will be added to the contract programme to take account of the suspension, both for the suspending party, but also for other contractors involved in the project whose works may be affected by the suspension. The right to suspend will end immediately on payment being made, or when a notice of adjudication is delivered.

Thirdly, and perhaps of particular significance, is the introduction of a fast track dispute resolution procedure through a statutory entitlement to refer disputes relating to payment to adjudication. Adjudication provides a speedy and cost effective means of dispute resolution, with the decision of the adjudicator binding on the parties, unless and until it is overturned, either by the courts or by an arbitrator, depending upon the agreed dispute resolution forum within the particular construction contract. This means that where an adjudicator decides that payment is due, that payment must be made. If the Irish Courts follow the approach taken by the courts in the UK, the enforceability of adjudicator’s decisions will be strictly upheld, subject to only very limited exceptions.

‘A fundamental protection now enshrined in the Act is the outlawing of pay when paid clauses such that even where payment has not been received from someone higher up the contractual chain, this will not provide a basis for refusing to pay or withholding part payment from sub-contractors’

Adjudication: what you need to know!

So how will adjudication work, and when might it not?

The Act will give a party to a construction contract the right to refer any dispute to adjudication “at any time”.  This entitlement cannot be restricted to after completion of works, say, or by having to go through other steps under the contract before adjudication. Once the dispute has crystallised, either party may, but is not bound to, refer the dispute to adjudication.  A dispute could even be referred to adjudication after an arbitration in respect of the same dispute has commenced.

From the date that the referral is made, the adjudicator must reach a decision within 28 days. This period can be extended by up to a further 14 days with the consent of the party referring the dispute, or by a longer period where both parties agree.  Most adjudications are likely to be over, therefore, within a matter of weeks. This compares with the current situation where a binding award or decision, whether through arbitration or from the Courts, can take anywhere between 6 months to three years, or even longer.

Adjudication will transform dispute resolution in construction: the real value of adjudication is that it provides an answer quickly, which decision must then be complied with. This will ensure that an answer to a dispute over payment will be arrived at quickly, and money will flow. When the Housing Grants, Construction and Regeneration Act 1996 introduced adjudication into the UK construction sector, many expressed concern that the speed of the process would lead to the erosion of judicial procedure and that justice would be cast aside. The courts were quick to emphasise, however, that the time constraints of the new procedure made clear that “the need to have the ‘right’ answer has been subordinated to the need to have the answer quickly”. Indeed, adjudication is often referred to as a means of “rough justice”, but at least there is justice of some kind!

The real challenge in Ireland will be getting to grips with the peculiarities of this new dispute resolution procedure. Two key elements are fundamental to the process.

Firstly, the adjudicator must have jurisdiction to decide the dispute. This may relate to the appointment of the correct person as adjudicator, as agreed by the parties, say, or by the correct nominating body. The question of jurisdiction will also require the adjudicator to answer the right question in arriving at his or her decision. Where an adjudicator exceeds his or her jurisdiction, this may result in a refusal by the courts to uphold the decision. A party making a referral to adjudication will need to be careful to ensure that the notice of adjudication, which commences the process, accurately describes the dispute. ‘Am I entitled to be paid €10,000?’ requires a ‘yes’ or ‘no’ answer, and once that answer is given, the adjudicator has decided the dispute and has no further jurisdiction. ‘What am I entitled to be paid?’ allows the adjudicator to determine the amount.

Secondly, adjudicators will be required to act impartially. This has been interpreted in the UK as requiring adjudicators to comply with the rules of natural justice. This, in essence, means firstly that there should be no bias on the part of the adjudicator, and secondly, that the parties should be given the right to be heard.  Adjudicators will need to be careful not to impose their own views for those of the parties, where either technical or legal arguments have not been raised by either party.  There is to be a further Code of Practice to govern the conduct of adjudications, which is likely to expand guidance on the procedure to be followed, but this has still to be published.

There has been, and continues to be, a plethora of case law from the UK on these issues which will certainly assist in guiding us successfully through this new process. There will, of course, be numerous elements of the Act that will require clarification through decisions of the courts here and we shall have to wait and see what answers are provided.

‘From the date that the referral is made, the adjudicator must reach a decision within 28 days. This period can be extended by up to a further 14 days with the consent of the party referring the dispute, or by a longer period where both parties agree’

Conclusion 

Along with many others, we commend Senator Feargal Quinn and all those who got behind the Act to bring it through to the eve of enactment.  The Irish construction industry will now have a piece of legislation that, although not perfect, will revolutionise dispute resolution and ensure that payment practices which inhibit cash-flow become a thing of the past.  And a review of the Act in a couple of years, once it has bedded in, will allow any imperfections which cannot be resolved through the courts, to be ironed out.

Whatever happens, these are certainly more positive times for construction!

Niav O’Higgins, Head of Construction & Engineering (niav.ohiggins@arthurcox.com ), and Jamie McGee, Paralegal, Construction & Engineering (jamie.mcgee@arthurcox.com), Arthur Cox

 

Arthur Cox can be contacted at:

t: +353 (0)1 618 0000