Over the last two decades, a quiet revolution has taken place in construction dispute resolution across much of the common-law legal world. Following the lead of England and Wales, many foreign jurisdictions now make expedited adjudication processes available to construction companies. This list includes all Australian territories, Singapore, Malaysia, New Zealand, Scotland and Ireland. These processes were designed to avoid the costs and time of litigation, and to reduce the likelihood that a project will be delayed because an unpaid party is unable to continue work. Detractors argue that these benefits can come at the expense of accuracy. New York makes a similar process available—expedited arbitration under the Prompt Payment Act. This article explores some of the similarities and differences between the processes available in New York and England and Wales.
England and Wales
In England and Wales, adjudication is available to parties to a construction contract under the Housing Grants, Construction and Regeneration Act of 1996, §108 (the Construction Act). The adjudication procedure’s aim is to protect the cash flow of smaller contractors and subcontractors during construction. Often when payment disputes became snarled in lengthy and expensive litigation, it would threaten the ability of these companies to complete projects.
The availability of adjudication is compulsory. It cannot be contracted around although the parties do not have to invoke it. To initiate adjudication, one party serves the other with a notice of adjudication, providing basic details of the dispute. The parties then either agree on an adjudicator, or one is appointed. Adjudicators can be legal experts, such as barristers, or technical experts, such as engineers or quantity surveyors who have trained and qualified as adjudicators. The initiating party has seven days from the service of the notice of adjudication to serve its referral notice, which provides a detailed account of its case and whatever documentation and expert reports are necessary. After this step, the defendant’s response (again to comprise the detailed case and all supporting evidence) is usually due within a seven- or 14-day time period after receipt of the referral (depending on whether the adjudication is being carried out under the scheme provided for in the Construction Act, or under a contractual procedure). The adjudicator must issue a final decision within 28 days of the referral notice. Parties may extend this time period by consent but generally only by another 14 days. There is no discovery.
Decisions of the adjudicator are binding in the interim. Absent exceptional circumstances, the losing party in an adjudication proceeding must pay over money owed at the time. Adjudicator decisions can be overturned by a suit in the courts or in arbitration (depending on the dispute resolution route selected in the contract), but in practice this is hard to do. Courts and arbitrators will only overturn an adjudicator’s decision if the adjudicator lacked jurisdiction, or the process was inconsistent with “natural justice”—for example, if the adjudicator was biased.
Although the adjudication process in the UK was originally designed to cover disputes over interim payments, it is not limited to those claims, and some parties have brought more complex matters in adjudication, such as claims for delay and disruption, extensions of time, wrongful breach or termination of contract, and professional negligence. Adjudications can be brought at “any time,” so parties may find themselves disputing the final account in adjudication months or even years after the end of a project.
Adjudication has proven to be very popular and has been hailed for reducing the costs of construction disputes. However, some abuses of the process have been noted, such as the practice of “ambushing” opponents by filing around major holidays or when the accounts are being finalized (although adjudicators are aware of this tactic and take a dim view of such practices).
The Construction Act, as amended by the Local Democracy and Development Act of 2009, is a further effort to ensure prompt payment in construction projects and sets out a strict payment regime. This regime requires regular payments and notices regarding payments at particular times (known as payment notices and “pay less” notices) and sets payment deadlines. Failure to issue a payment notice and/or a pay less notice means the applying party is entitled to be paid the amount it has applied for in its payment application. Contractors have exploited failures by employers to comply with the payment processes provided for under the Construction Act. This use of the adjudication process as a quick method to recover monies from the employer is known as a “smash and grab” adjudication.
New York’s Prompt Payment Act, N.Y. Gen. Bus. Law Art. 35-E (PPA) shares many features with the Construction Act. Crucially, though, the PPA only governs claims for “undisputed invoices.” See, e.g., Southgate Owners’ Corp. v. KNS Bldg. Restoration, No. 651927/2013, 2013 WL 5869518 (N.Y. Sup. 2013). Thus, all an owner or general contractor has to do to avoid arbitrating a dispute is to find a reason to dispute the invoices, such as claiming that work was not performed or not performed adequately.
The PPA covers many construction projects, but has several exclusions, including exclusions for small and mid-sized residential projects. Like the Construction Act, the PPA seeks to ensure timely payment of subcontractors and smaller contractors. Accordingly, it sets out payment requirements for private construction projects. Payment requests must be approved or disapproved within 12 days and paid within 30 days of approval (seven days if a contractor is passing on money to a subcontractor). If either review or payment is not forthcoming, the aggrieved party can provide a notice of the non-payment and attempt to resolve the dispute.
If attempts to resolve the dispute have not been successful within 15 days, aggrieved parties have a right to seek expedited binding arbitration in front of the American Arbitration Association (AAA). Under the AAA’s expedited procedure, the AAA selects an arbitrator if the parties cannot agree upon one. The arbitrator holds a hearing (or receives paper submissions) within 30 days of the appointment, and produces a decision within 14 days of the hearing or submissions. An extension of seven days may be granted, but longer exceptions are available only in exceptional circumstances. If an oral hearing is held, it usually does not exceed one day. There is no discovery. As with adjudication decisions in England and Wales, arbitrator decisions are very difficult to overturn. See N.Y. C.P.L.R. § 7511. In addition to its arbitration provisions, the PPA also provides a safe harbor for subcontractors to cease working in the event of non-payment without risking being found in breach of contract or losing access to their equipment.
Unlike adjudication under the Construction Act, the uptake of PPA arbitration has been relatively slow. This is most likely due to the fact that the PPA is only available for undisputed amounts, whereas adjudication can be used for disputed sums. Secondly, parties may be reluctant to invoke the PPA’s provisions because this action may destroy the ongoing business relationship that is essential to the construction project. However, it should be noted that this result is not seen as a bar to the use of adjudication in England and Wales. Indeed, the use of adjudication during a project can be beneficial for relationships allowing the parties to resolve their issues and move on with the project. Thirdly, the measures available under the PPA may be limiting the occurrence of non-payment.
Several lessons may be learned from the experience of England and Wales. First, counsel should take note of the PPA as a potential avenue for speedy and affordable recovery when disputes arise. Second, construction counsel should recognize potential disputes and be prepared to act quickly because the expedited arbitration timeline is short, and arbitral awards are difficult to overturn. This concern is heightened by the potential for abusive “ambush” tactics. Third, construction counsel should be aware of the tendency for the scope of matters subject to arbitration to expand. Adjudication in England and Wales is now being used for matters more complex than was originally intended. Although the PPA is more clearly limited in scope, there is always the possibility that savvy litigants may attempt to bring in other matters when it is in their interests. Moreover, international clients may see the benefit of the use of adjudication elsewhere and seek to set out adjudication processes in their contracts.
Lawrence A. Dany is a partner and Nicholas R. Boyd is an associate at Eversheds Sutherland (US). Kathryn Patel is an associate at Eversheds Sutherland (International).