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Explanatory Notes
Appointment of an Adjudicator
B136 Appointment of an Adjudicator
EXPLANATORY NOTES
This Agreement is intended for use where two Parties, A and B, have entered into a contract which contains a provision that any dispute between them will be referred to adjudication and they have decided to appoint an adjudicator for the life of the contract, before any dispute between them has arisen. The Adjudicator will usually be appointed when the contract to which it refers has been signed.
Adjudication is a process where a dispute between two Parties to a contract is referred to an independent third party, the Adjudicator, for a decision. That decision will be binding on the Parties but if either of them is not satisfied with the Adjudicator's decision, the contract will usually provide for the dispute to be finally settled either by arbitration or by the courts. Adjudication is not a procedure which has any precise legal definition. However, adjudication is distinguished from arbitration in that it is a summary procedure and usually, as with this Agreement, the Adjudicator is required to issue his decision within a short period. In this Agreement, we have provided for 28 days.
The process of adjudication has some statutory force in England in relation to construction contracts: since 1998, parties to a construction contract in England have had a statutory right to require that any dispute is referred to adjudication. The underlying objective is to enable a rapid interim decision on any dispute to be obtained during the course of the contract: court procedures and arbitration tend to involve months, if not years, of process before a decision is reached. Adjudication therefore offers an interim solution as the project progresses. The Adjudicator's decision will usually be open to challenge unless the contract expressly states that after a specified period, if neither Party has given notice of dissatisfaction, the decision will be final and binding.
Turning to the specific clauses of this Agreement:
1. APPOINTMENT
This clause establishes the appointment of the Adjudicator and its duration. If the contract is for a fixed period, the clause appointing the Adjudicator should specify when his appointment comes to an end. If the contract does not clarify this point, then so long as either Party may have a liability to the other under the contract - under English law this could be as long as 6 or 12 years - any disputes might still be subject to the adjudication agreement.
2. ADJUDICATION PROCEDURE
This clause, in 2.1, allows either Party to refer any dispute to the Adjudicator. The reference must contain details of the dispute and the matters on which the Adjudicator's decision is requested. The reference is sent both to the Adjudicator and to the other Party and the other Party then has time in which to respond.
The Adjudicator is given freedom as to how to handle the adjudication, provided that he issues his decision within the time specified in this clause - 28 days, unless this is varied either by the Party making the reference, or by agreement between the two Parties. These time periods are compatible with English law on adjudication relation to construction contracts.
Since adjudication is a short process, the Adjudicator may issue his decision based on the information given to him or, if he so decides, he may want a meeting with the Parties to give each of them an opportunity to present its case.
When issuing his decision, the clause states that the Adjudicator need not give reasons unless one of the Parties requires him to do so.
3. FEES & PAYMENT
The basis upon which the Adjudicator's fees are to be calculated are to be contained in a Schedule. This will usually involve either a daily or an hourly rate for the time which he spends on the adjudication. Since the Adjudicator is being retained to handle all disputes arising out of the contract between A and B, he may require a retainer in addition to fees for time spent on each adjudication which is referred to him. See commentary under the Schedule below.
The clause provides for the Adjudicator to issue his invoices after his decision but in a case where the decision period is extended beyond 28 days there is scope for him to issue interim invoices.
This clause makes it clear that A and B will be responsible for paying the Adjudicator's fees and expenses in equal shares. If either of them fails to do so, then the other will have this responsibility and can then recover the amount which he pays from the Party in default.
4. LIABILITY
It is usual for an Adjudicator to be exempted from any liability and to be protected from any third party claims and the wording is designed to achieve this.
6. TERMINATION
This clause allows both Parties, together, to terminate the Adjudicator's appointment at any time. Similarly, the Adjudicator has the right to terminate his appointment.
7. NOTICES
It is usual to specify that notices must be in writing. This clause also emphasises the fact that documents being sent by a Party to the Adjudicator or by the Adjudicator to one of the Parties, will be copied to the other Party at the same time.
8. LAW & LANGUAGE
The law governing the adjudication will normally be the same as the law governing the contract to which the adjudication relates. The language will also usually be the same as the language of that contract.
SCHEDULE
The Schedule sets out the basis upon which the Adjudicator's fees will be calculated. The opening paragraph contemplates the possibility of a retainer being paid, either a 'one-off' fee or a periodic payment for the duration of the appointment. For each dispute referred to him, whether or not there is a retainer, the hourly basis is provided for here. The Schedule also deals with travelling time which may or may not be paid for at the full hourly rate.
The Schedule also refers to some of the expenses which will be reimbursable. It is unlikely that the adjudication process will involve substantial travel, but if this is a possibility, it is sensible to agree in advance on such matters of detail as the class of air travel which the Parties are prepared to reimburse.
CONSTRUCTION CONTRACTS IN THE UNITED KINGDOM
Please note that Construction Contracts for work within the United Kingdom are likely to be affected by Part II of the Housing Grants, Construction & Regeneration Act 1996 ( the "Construction Act").
Our documents are prepared for international use and not all of them contain provisions which are compatible, or fully compatible, with the Construction Act. These notes are designed to assist purchasers of our contracts who wish to use the documents within the UK.
The Construction Act applies to contracts for "construction operations" within the UK. Broadly speaking, this covers all contracts involving building operations, whether new buildings or maintenance or repairs of old buildings, within the UK. The main exception is construction work for residential occupiers.
The Act contains certain mandatory provisions relating to payment and adjudication as a means of resolving disputes.
PAYMENT
Sections 109 to 113 of the Act deal with payment.
1. Payment
Where a contract duration is likely to be 45 days or more, a construction contract must provide an adequate mechanism for determining what payments become due under the contract, when they become due and contain provision for final date for payment of each sum becoming due. The following wording in a payment clause may be appropriate to deal with this provision:
"Within 5 days after the end of each month, the Contractor will submit an application to the Employer for payment in respect of work carried out during that month. Within a further 5 days the Employer will issue to the Contractor a certificate showing the amount due and the final date for payment which will be 20 days from the date of the Contractor's application."
2. Withholding of payment
Section 111 makes it illegal for a party (usually the Employer) to withhold any amount from a payment which has become due unless within a specified period before the final date for payment, that party has given an effective notice of its intention to withhold payment. That notice must specify the amount to be withheld and the grounds for withholding each such amount.
Suggested wording is as follows:
"If the Employer wishes to withhold any payment which has become due under the Contract, he shall, not less than [5] days before the final date for payment of that amount, give notice to that effect to the Contractor specifying in the notice each amount to be withheld and the reasons."
3. Pay when paid
Section 113 of the Act makes it illegal for a Contract to contain a "pay when paid" clause - i.e. a provision which makes payment under the Contract conditional upon the payer receiving payment from a third party. In other words, a Main Contractor cannot make payment to a Subcontractor conditional upon payment being received from the Employer under the Main Contract.
4. Suspension
The right to suspend performance of a Contract is given under Section 112 to a party who has not received payment in full of the amount which has become due by the final date for payment and no notice of withholding has been given. In those circumstances, the payee must give 7 days notice of its intention to suspend performance, and if payment is made within that period, the right to suspend ceases. There is no need to give this right of suspension expressly in the Contract as it is covered by the wording of the legislation. Some commentators have argued that an Employer would be entitled by contract to exclude the right of a Contractor under Section 112 to give notice of suspension. Not everyone agrees with this argument.
ADJUDICATION
Section 108 of the Construction Act contains provisions which give any party to a Construction Contract the right to refer a dispute arising under the Contract to adjudication. The section states that a party can give notice at any time of his intention to refer a dispute to adjudication and the timetable must be designed to secure the adjudicator's appointment and the referral of the dispute to him within 7 days of the notice, with the adjudicator's decision within 28 days from referral. This 28 day period may be extended by 14 days with the consent of the referring party or for any other period by agreement between the parties.
The adjudicator must act impartially and be able to take the initiative in ascertaining the facts and the law.
The adjudicator's decision will be binding (and must be implemented) until a dispute is finally determined by legal proceedings, arbitration or agreement. If the Contract states, the adjudicator's decision can be final and binding.
It is not possible to contract out of these provisions and if the Contract is silent on adjudication, there is a statutory scheme - the Scheme for Construction Contracts, which will apply.
Thus, even if the Contract is silent, a party to a Contract to which the Act applies can require that a dispute is referred to adjudication.
There are a number of organisations which will appoint an adjudicator and which have adjudication rules which are compliant with the Construction Act. These include most of the main professional bodies - RIBA (Royal Institute of British Architects), RICS (Royal Institution of Chartered Surveyors), ICE (Institution of Civil Engineers) etc.
A suggested clause, under which reference is made to one of those organisations, is as follows:
"Either party may refer a dispute arising out of this Agreement to adjudication by giving notice to the other party. The adjudicator, if not appointed by agreement between the parties, shall be appointed by the President of the [Institution of Civil Engineers] on the application of either party. The adjudicator shall act impartially and be free to take the initiative in ascertaining the facts and the law. The adjudicator shall be required to reach a decision within 28 days of referral or such longer period as the parties may agree.
[The adjudicator's decision shall be binding on and implemented by the parties and unless either party gives notice to the other within [60 days] from the date of the decision, it will be final and binding on the parties and will not be subject to any further legal proceedings."]
It should be noted that the Construction Act is so written that if a Construction Contract does not comply with the Act, the Contract will, in effect, be supplemented by the (statutory) Scheme for Construction Contracts. This sets out details of provisions with respect to payment by instalments and adjudication which will take effect in those circumstances.
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