Construction Adjudication in Ireland

Anthony Hussey

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9780367595555
• eBook ISBN: 9781317284161
• Topic: Law
• Subtopic: Arbitration, Negotiation & Mediation in Law
• Index: Law

The Construction Contracts Act 2013 introduces adjudication for the construction industry in Ireland for the first time. The essence of adjudication is in providing a means whereby disputes as to payment under a construction contract are resolved quickly and cheaply. The key feature distinguishing adjudication from other processes is that the money found due by the adjudicator must be paid pending the outcome of arbitration or litigation. Its primary function, therefore, is to ensure cash flow for contractors and sub-contractors.

Leading construction lawyer Anthony Hussey's new book is the first to provide a section by section analysis of the Act itself, an analysis of the Code of Practice, and a discussion of the likely constitutional issues to which the legislation will give rise.

This practical legal reference is aimed at all those involved in construction contract disputes, be they lawyers, architects, engineers, quantity surveyors, contractors and sub-contractors.

p.1

1 Introduction

Following the collapse of the Irish banking system and consequently the Irish economy in 2008, a large number of developers and main contractors in the construction industry became insolvent. The insolvency of the main contractors highlighted the extent of their indebtedness to numerous sub-contractors. It was clear that a culture of payment deferral in respect of sub-contractors had been in operation for many years, with the effect that the insolvency of the main contractors not only meant that sub-contractors were not paid in relation to recent developments but were also not paid for work carried out in earlier days when the industry was at its most profitable. Sub-contractors pressed hard for the introduction of legislation which would ensure that sub-contractors would be paid promptly as a matter of right. In the years following the collapse of the economy, the Government, though approving of the concept, was not prepared to devote the time necessary for the introduction of legislation. Seanad Eireann, the upper house of parliament, does have a rarely used entitlement to introduce legislation. A senator, Fergal Quinn, took a special interest in the issue and in May 2010 introduced through the Senate the Construction Contracts Bill. Once introduced, the Government, and indeed also the opposition, pledged to support the Bill. Notwithstanding that support, the legislation in the form of the Construction Contracts Act (hereinafter referred to as the Irish Act) was not passed into law until 2013. Although passed into law, its commencement was subject to an appropriate ministerial order being made. This order was made in April 2016; it provided that the Act would apply from the 25th day of July 2016.

The Irish Act essentially does two things. First, it provides a mechanism whereby main contractors may, and sub-contractors will, be paid promptly for the value of their work as the contract works proceed. Second, it introduces adjudication in relation to payment disputes with a view to ensuring that payment cannot be unduly delayed simply because it is disputed in whole or in part.

Adjudication is arguably the most radical interference by the legislature of any country in which it has been introduced in respect of the right to contract on such terms as the parties deem appropriate, with the possible exception of legislation prohibiting unfair terms where such legislation applies. The legislation providing for adjudication was first introduced in the UK in 1996, New South Wales followed in 1999, and a number of other Australian states subsequently passed similar legislation. Adjudication legislation is also in force in New Zealand, the Isle of Man, Singapore and Malaysia. In all of these jurisdictions, adjudication is an option and is not a mandatory process for the resolution of disputes. It is availed of extensively, particularly in the UK and in Australia.

p.2

The purpose of adjudication in the words of Dyson J in Macob Civil Engineering Limited v Morrisson Construction Limited:¹ ‘Was to introduce a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring the decisions of adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement’.

A different, but equally valid, description of adjudication was given by Lord Ackner at the report stage in respect of the legislation in the House of Lords: ‘Adjudication is a highly satisfactory process. It comes under the rubric of “pay now, argue later” which is a sensible way of dealing expeditiously and relatively inexpensively with disputes which might hold up important contracts’.²

In the countries in which it has been introduced, adjudication is not an option under the legislation in respect of every construction contract. The legislation everywhere provides for exceptions. However, once the concept of adjudication is introduced by legislation, there has been a tendency to amend standard forms of contract to provide for adjudication. One of the contracts excluded by the UK Act of 1996 relates to residential dwellings. It was held by the Technology and Construction Court in Picardi v Cuniberti³ that a contractual requirement for adjudication in respect of such an excluded project was not an unfair term and accordingly was enforceable. Therefore, adjudication, while only an option under the legislation, may very well be compulsory by virtue of the terms of contract between the parties. If adjudication takes place pursuant to the terms of the contract, it is not statutory adjudication, but subject to the procedural rules incorporated in the terms of contract, which in turn are usually very closely aligned to statutory adjudication.

The Irish Act is a very simple one comprising 12 sections and 13 pages. The fact that it took three years to pass the legislation when there was no opposition to it, and that even then it took a further three years to put in place the measures necessary for its implementation, suggests that the legislative system is far from perfect.

Unfortunately, the Irish Act itself is also far from perfect. This was recognised by Senator Quinn who instigated the legislation and by the Construction Industry Federation who lobbied to have the legislation dealt with effectively and efficiently. When the Government first took the Bill under its wing, it sought to introduce safeguards it thought to be appropriate that would, if introduced, have wholly defeated the purpose of adjudication. These included a provision that adjudication would only apply in respect of contracts with a value in excess of €200,000, and that an adjudicator’s determination would only be binding if a bond was provided for the sum of money to be paid under it. It took so much time and effort to persuade the Government to withdraw these provisions that the promoters of the legislation were inclined to live with any other defects rather than delay the matter further.

p.3

Section 9 of the Irish Act provides that the relevant minister: ‘may prepare and publish a Code of Practice governing the conduct of adjudications’. In reality, the legislation is incomplete without such a Code of Practice being published. A number of draft of the Code were circulated for comment by the Department to the relevant stakeholders prior to the Code of Practice being finally published the 25th July 2016.

Under section 8 the Minister was to appoint adjudicators from members of a panel to be created by the Minister. It was necessary to put in place the panel of adjudicators and to appoint a chairperson in relation to it prior to the implementation of the legislation. The panel of adjudicators has been completed. The list of panel members is available on the Iris Oifigiuil Website (http://www.irisoifigiuil.ie/archive/2016/january/IR150116-2.pdf).

The elephant in the room, in so far as the Irish Act is concerned, is the Irish Constitution of 1937. It is conceivable that the Irish Act would be struck down in its entirety on the basis that the Irish Act does not incorporate sufficient (or any) safeguards to ensure that the requirements of constitutional justice will be met. This is considered unlikely. However, it is likely that the Irish courts on constitutional grounds will balk at the prospect of enforcing adjudicators’ decisions that are clearly incorrect. The courts in the UK and elsewhere have robustly supported adjudication to the extent of enforcing decisions that were manifestly incorrect. The difficulty is that once one departs from this principle it is challenging to set a limit as to the extent to which the courts should go in ascertaining whether or not the decision is incorrect. The test under the Arbitration Acts 1954–1998 was whether there was a fundamental error on the face of the award. Ultimately, however, the courts arguably went beyond that test and significantly so in the Supreme Court judgment in Galway City Council v Samuel Kingston Construction Ltd.⁴

The Code of Practice requires that adjudicators’ decisions be reasoned. There will always therefore be a basis for arguing that the adjudicator’s decision is wrong. If the courts are prepared to set aside a decision on that basis alone, the whole purpose of the exercise could be defeated, i.e. a temporary entitlement to payment both quickly and inexpensively.

The real difficulty for the Irish courts may centre on the constitutional right to have issues of fact in dispute tested through oral evidence and cross examination. If that entitlement is assiduously applied, it may be possible for a respondent to render the process incapable of practical application.

Whereas the wording of the Irish legislation is not above criticism, in the bigger picture this is likely to be of little consequence. The expectation is that the very implementation of the Act will change the culture and, in particular, the treatment by main contractors of sub-contractors. This has been the experience elsewhere. One commentator’s appraisal of the New Zealand Act some four years after its implementation was summarised as follows:

The Act’s biggest effect has, undoubtedly, been simply because it exists. Employers and contractors (at least those who are familiar with the Act) are, I believe, being more sensible about payment than they were or may have been previously, because they do not wish to get involved in an adjudication.⁵

p.4

The fact is that elsewhere, adjudication has changed the culture partly because disputes referred to adjudication rarely go beyond that point to arbitration or litiga-tion. This was recognised as early as 2002 by his Honour Judge Humphrey Lloyd:

It is now clear that the construction industry regards adjudication not simply as a staging post towards the final resolution of the dispute in arbitration or litigation but as having in itself considerable weight and impact that in practice goes beyond the legal requirement that the decision has for the time being to be observed.⁶

Throughout this book reference is made to the legal position in the UK as if there was only one law applicable in the UK. This is because the law in relation to adjudication is to all intents and purposes the same in all parts of the United Kingdom. The legislation providing for adjudication, not just in the UK, but elsewhere, tends to be titled in a particularly wordy fashion. When referring to legislation, the author has preferred to refer to the country or state of origin, such as the New South Wales Act rather than its official title, i.e. Building & Construction Industry Security of Payment Act 1999. A number of abbreviated descriptions have been used for this and other purposes. A full list of these is included at page xiii.

International context

The purpose of legislation introducing adjudication in most countries was similar to that which motivated the Irish Government – a desire to ensure fluidity in cash flow and, in particular, to ensure that sub-contractors would have the mechanism available to secure early payment for their work. In summing up the requirement for such legislation across Australia, one commentator put it as follows:

Cash flow is especially pertinent for smaller sub-contractors who rely on it to meet debt obligations and keep their businesses solvent. Made vulnerable by their dependence on payment, these sub-contractors can be taken advantage of by upstream debtors seeking to increase their margins by deliberately withholding payment in the hope that their creditor will become bankrupt. Recognising that these practices could not be allowed to prevail, governments took action to address the problem.⁷

This legislation, across the world, tends to include provisions which are not strictly related to adjudication. For instance, nearly all contain provisions prohibiting pay when paid type clauses. Some also seek to secure payments due to contractors and sub-contractors through trust provisions, and some also seek to empower a sub-contractor, of whatever tier, to obtain payment directly from the party who employs the party with whom it has a contract. This publication, however, is not concerned with these peripheral issues. It is concerned with adjudication and the payment provisions linked to adjudication through the Irish legislation.

p.5

On the whole, the legislation in the European countries (the UK, the Isle of Man and Ireland) tend to be similar in terms of the underlying principles and noticeably different to the legislation of the non-European countries, i.e. Australia, Singapore, Malaysia and New Zealand. The following comparisons arise:

• The legislation provides a definition for the construction contracts to which it applies. This is common to all countries and there are subtle differences in each jurisdiction.

• The term construction contracts is defined in most of the non-European countries to include the supply of materials and components for installation through a construction contract. Supply contracts ar...

Table of contents

• Cover Page
• Construction Adjudication in Ireland
• Title
• Copyright
• Contents
• Preface
• Foreword
• Abbreviations
• Table of Cases
• 1 Introduction
• 2 The Scope of the Act
• 3 Exclusions From the Scope of the Act
• 4 Payment Entitlements
• 5 Payment Claim Notices
• 6 The Adjudication Process
• 7 Selection of Panel of Adjudicators
• 8 Extent to which adjudicator’s Decision is Binding
• 9 Enforcement
• 10 Right to Suspend Work
• 11 Fees, Costs and Expenses
• 12 Code of Practice
• 13 Constitutional Issues
• 14 Miscellaneous Matters
• Appendix A Construction Contracts Act 2013
• Appendix B Code of Practice Governing the Conduct of Adjudications
• Index