Potential problems with the Construction Contracts Act, 2013
12 July 2016
The Irish Construction Contracts Act, 2013 will apply to all construction contracts entered into after 25 July 2016. The Act introduces new payment provisions and also gives a party to a construction contract the right to refer a payment dispute to adjudication for resolution. Similar legislation exists in the UK and elsewhere, and has generally been regarded as a success.
Although welcome, the legislation as it currently stands may give rise to some problems once implemented. These include an issue in relation to appointments made by the chair of the Ministerial Adjudicators Panel, whether bonds and collateral warranties could be considered construction contracts for the purposes of the Act, abandoning the adjudication before the adjudicator’s decision, the residential exemption and agreeing the adjudicator on the sixth day.
Adjudicator appointments made by the chair
An adjudicator can be appointed either by agreement between the parties, or if agreement cannot be reached, the appointment can be made by the chair of the Ministerial Panel of Adjudicators from the panel of adjudicators formed pursuant to the Act.
The adjudicator’s appointment is a crucial stage in the adjudication process. If the appointment procedure is flawed, there is a strong case that everything that flows on from that point is also flawed. The adjudicator will have no jurisdiction to reach a decision on a dispute in question.
As matters currently stand, there is a very strong argument that any appointment made by the chair will be flawed, particularly, if a party can show they were prejudiced; consequently, the courts will not enforce any decision reached by an adjudicator under such an appointment. Section 8(1) of the Act provides that: ‘The Minister shall from time to time select persons to be members of a panel … to act as adjudicators in relation to payment disputes and shall select one of those persons to chair the panel.’
The language used in the Act is mandatory and does not allow for any discretion. Accordingly, in order for appointments to be valid the sequence of events should simply be: (1) select the group of panel members, and; (2) select the chair from that group. Presumably, one of the reasons for this was that once the panel was established, the Minister could select the most appropriate candidate from this group, to be the chair. This sequence as laid down in the Act appears not to have been followed.
In effect, the process could be described as putting ‘the cart put before the horse.’ The appointment term of the chair of the panel runs from 8 July 2015 to 7 July 2020 (published in Iris Oifigiúil, 14 July 2015) while the appointment terms of the members of the panel runs from 8 December 2015 to 7 December 2020 (published in Iris Oifigiúil, 15 January 2016). Hence, with the chair’s appointment coming first in July, the chair could not have been selected from the group of panel members appointed the following December. It is also arguable that the panel itself is not properly constituted for a similar reason. In essence arguably, the Minister did not follow the procedure laid down in the Act, the chair’s appointment is flawed; any adjudicator appointment made by the chair will be flawed, and any decision made by such an adjudicator will be unenforceable.
In light of the above, if a party to a construction contract is considering adjudicating a payment dispute, it would be unwise to request an appointment to be made by the chair until the above is rectified. Instead, the parties should seek to agree an adjudicator of their own choice. In doing this, the parties will benefit from saving legal costs associated with challenging the above appointments procedure.
Collateral warranties and bonds
The Act allows a party to a construction contract to refer a payment dispute to adjudication for resolution. In order to avail of this right the contract in question must be a ‘construction contract.’ Such a contract is defined in the Act as including ‘carrying out construction operations.’ In turn ‘construction operations’ is defined, and it includes items that one would normally associate with building works such as construction, alteration, repair, maintenance and so on. Almost identical provisions are contained in UK legislation.
An interesting issue arises regarding whether and in what circumstances collateral warranties can amount to construction contracts. Consequently, if it is considered a construction contract, a payment dispute arising thereunder could be referred to the new adjudication procedure. Guidance on this point can be drawn from the UK case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd  EWHC 2665 (TCC).
In Parkwood, a landlord entered into a construction contract with the contractor (Laing). The contractor also entered into a collateral warranty agreement with the tenant (Parkwood, the beneficiary under the warranty) towards the end of the construction period. Defects in the works arose which were not remedied by the contractor. Parkwood sought to enforce its legal rights under the warranty and sought a declaration that the collateral warranty was a construction contract. There was no authority on that point prior to this case.
Akenhead J, in analysing the wording of the collateral warranty, concluded that it was a construction contract for the carrying out of construction operations. Emphasis was placed on a number of points including:
- The recital and a clause of the collateral warranty set out that the underlying construction contract was ‘for the design, carrying out and completion of a … development’;
- A clause in the warranty contained the express wording that the contractor ‘warrants, acknowledges and undertakes.’ The undertaking involved doing something which, in this case meant, designing, carrying out and completing the remaining works in accordance with the contract. Thus, the contractor undertook to comply with the contract;
- A clause in the warranty set out the remedies to be provided to Parkwood (the beneficiary) by the contractor including the reasonable cost of repair, renewal and/or reinstatement. It also provided that, in the event of the contractor’s breach, the contractor was liable for further damage or losses incurred by the beneficiary up to a certain limit; and
- Although the warranty was agreed towards the end of the construction period, it was not merely guaranteeing a past state of affairs. It provided that the contractor would actually carry out and complete the works to a standard called for by the contract.
As the Irish and UK legislation is identical on relevant issues that arose in Parkwood, the above suggests that if this issue occurred in Ireland, a similar outcome is probable. However, it does not mean that all collateral warranties may be within the scope of the Act. It will depend on the wording of the warranty in question. Import considerations include whether the contractor gives an undertaking to the beneficiary to carry out operations, or merely, warrants a past state of affairs regarding quality. Mindful of this, Akenhead J pointed out that:
‘It does not follow from the above that all collateral warranties given in connection with all construction developments will be construction contracts under the [UK] Act. One needs primarily to determine in the light of the wording and of the relevant factual background each such warranty to see whether, properly construed, it is such a construction contract for the carrying out of construction operations.
‘A very strong pointer to that end will be whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out such operations. A pointer against may be that all the works are completed and that the Contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard.’
Performance bonds also raise a similar issue as to whether and in what circumstances a performance bond can amount to a construction contract. Consequently, if it is considered a construction contract, a payment dispute arising thereunder could be referred to the new adjudication procedure. It is interesting to note that in the UK bonds are specifically excluded from the definition of a construction contract but in Ireland no such exclusion exists.
Clarification on this point would be helpful, and save a party considerable legal cost in testing such a matter before the courts. It is certainly arguable that a performance bond could be considered a construction contract for the purposes of the Act, provided that the underlying contract to which it relates is a construction contract within the meaning of the Act. To determine if a bond could be considered a construction contract an examination of the bond’s exact wording, on a case-by-case basis, is required.
Considering a typical bond, it will state that the contractor has agreed to complete the works. It then continues with a term along the lines that the guarantor will satisfy and discharge damage sustained by the employer in accordance with the contract. The bond usually continues by stating that: ‘The Employer shall permit the Guarantor to nominate a completion contractor to perform the stipulations and provisions of the Contract which the Contractor shall have failed to perform and observe …’
The Act states that ‘arranging for carrying out of construction operations’ is a construction contract. With the contract clause outlined, it is arguable that the Guarantor in nominating a completion contractor is ‘arranging for the carrying out of construction operations’ and therefore a construction contract. Consequently, a payment dispute under the bond could be adjudicated upon pursuant to the Act.
Abandoning adjudication before adjudicator’s decision
The Act is silent on what happens in circumstances where the Referring Party commences the adjudication process and then abandons it, even at the eleventh hour. Consequently, there is no adjudicator’s decision.
Such a course of action may be attractive to a referring party, for example, where the responding party’s response document has identified a strong defence, or the adjudicator has failed to accede to a particular request, or the adjudicator has given a preliminary indication of an unfavourable decision. The withdrawal may be unfair to the responding party as the referring party may reformulate its claim, taking account of previous weaknesses, and refer the matter to adjudication again, perhaps to a different adjudicator.
One would think that an obvious way to overcome this type of situation would be to penalise the referring party in relation to costs. However, under the Act, each party bear their own legal and other costs in connection with the adjudication. The adjudicator can direct how his or her fees, costs and expenses are to be apportioned but this can only be done in accordance with the decision of the adjudicator. Consequently, if there is no decision the adjudicator is powerless in apportioning the fees.
Similar UK legislation is also silent on the issue of abandoning adjudication. However, the problem has been interpreted by the UK courts. In Midland v Carillion Construction (2006) 107 ConLR 205 at 232, Jackson J stated: ‘I have come to the conclusion that it is impossible to read into [the adjudication legislation] any restriction prohibiting a party from withdrawing a disputed claim which has been referred to adjudication … (i) There is nothing in the [adjudication legislation] which suggests that any such restriction is intended. (ii) Adjudication is an informal process which arrives at an interim resolution of disputes pending final determination by litigation or arbitration.
‘It would be contrary to the statutory purpose to prohibit a party from withdrawing from such a process any claim which it did not wish to pursue. (iii) If there were such a restriction, it would have the bizarre consequence that parties would be forced to press on with bad claims in adjudication. This would lead to wastage of costs and resources on the part of all parties …’
In Lane Group Plc v Galliford Try Infrastructure (2011) 141 ConLR 46, consideration was given to whether withdrawing from adjudication could constitute an abuse of process. Jackson J, in concluding that it did not, stated that: ‘During the course of argument, the court raised the question whether [the Referring Party’s] conduct could be characterised as abuse of process … [Counsel for the Referring Party] pointed out … that abuse of process has no place in adjudication ..: I accept that submission … My first view … was that [the Referring Party] could not be permitted simply to drop the first adjudication and then adjudicate before a different adjudicator whom it preferred … [The Referring Party’s] … conduct was permissible under the contract.’
Interestingly, adjudication legislation in the Northern Territory Australia has mechanisms in place to deal with the notion of abandoning adjudication. The legislation permits the referring party to withdraw from the adjudication by way of notice to the other party and the Adjudicator. However, the adjudicator must refuse withdrawal if the other party objects, and in the opinion of the adjudicator, the party objecting has a legitimate interest in obtaining a determination.
Moreover, in circumstances where a party has incurred adjudication costs because of the other party’s frivolous or vexatious conduct, the adjudicator has power to decide that the vexatious party pay some or all of the costs (preparation and adjudication costs). This provision gives teeth to the legislation and ensures that a referring party thinks carefully before embarking on adjudication.
The abandoning of adjudication may give the referring party an unfair advantage in the process and lead to forum shopping. Perhaps the Act should take some steps to prevent this from happening. In such circumstances it would be helpful if the Act gave the adjudicator the power to award all of his or her fees, costs and expenses against the referring party without the need to reach a decision on substantive matters.
At least this would provide some incentive for the referring party to proceed with the adjudication. Alternatively, a more substantial approach could be implemented such as the one contained in the Northern Territory’s legislation.
A dwelling with a floor area of not greater than 200 square meters is excluded from the provisions of the Act, provided that one of the parties to the contract is a person who occupies, or intends to occupy, the dwelling as his or her residence. This means that the payment provisions contained in the Act, and the right to refer a payment dispute to adjudication for resolution are not available to the parties under such a contract. In order for a dwelling of this type to be excluded from the ambit of the Act both criteria must be met.
The floor area condition should be straightforward to calculate, but the Act does not specify a method of measurement, or state whether the area is gross or net. It would be better if the Act specified these in order to eliminate foreseeable disputes on the interpretation of the floor area provision. However, the provision relating to occupation, or intended occupation may be more difficult to determine. A similar occupational stipulation is contained in UK legislation. Consequently, it is helpful to review how the UK courts have interpreted the position.
In Westfields Construction Ltd v Lewis  EWHC 376 (TCC), clarity was brought to the occupational provisions. The defendant (employer) contracted with the plaintiff (contractor) to carry out works on a dwelling. A dispute arose and following adjudication the defendant was required to pay an amount to the plaintiff. The defendant refused to pay on the grounds that the adjudicator did not have jurisdiction to decide the dispute as the defendant at the time of the contract occupied the property, and intended to occupy in the future. Therefore, the adjudication provisions did not apply. The plaintiff contended that the defendant did not occupy or intend to occupy the property and that the Adjudicator did have jurisdiction to deal with the matter.
Ultimately, on the evidence, Coulson J found that the defendant did not occupy or intend to occupy the property. Consequently, the adjudicator had jurisdiction to decide the dispute. Coulson J found that: ‘Occupation is not to be tested by a single snapshot in time … but instead requires ongoing occupation (including, if appropriate, an intention to occupy in the future) … it would be a nonsense if someone who was moving out of a house in order to rent it out or even sell it … could still rely on the residential occupier exception merely because, at the precise time that the contract was agreed, he lived in the property in question. In my view, such a person would fail both the intention and occupation tests.’
In the UK, when adjudication was first introduced, the residential exemption was intended to protect ordinary householders, not otherwise concerned with property or construction work, and without the resources of even relatively small contractors, from what was a new and untried system of dispute resolution. It was felt that what might be the swift and occasionally arbitrary process of construction adjudication should not apply to a domestic householder. Nowadays, the residential exception may be difficult to justify.
In the above case, Coulson J stated that: ‘Adjudication in construction contracts is generally thought to have worked well, and it has certainly reduced costs. Is it not time [for the residential exemption] and the other exceptions to statutory adjudication to be done away with, so that all parties to a construction contract can enjoy the benefits of adjudication? I would venture to suggest that that would be a more commercially sensible outcome than that which has been achieved, for both parties, in these enforcement proceedings.’
It is interesting to note that at a time when the UK courts are questioning the justification for the exemptions to adjudication legislation, the Irish legislation contains these exemptions. Perhaps, overtime after the legislation is introduced it may become evident that the exemptions in the Irish legislation should be removed.
Agreeing an adjudicator on the sixth day
The appointment of an adjudicator is a very important step in the adjudication process. If the adjudicator is not properly appointed, the courts will not enforce the adjudicator’s decision. The Act allows the parties to agree an Adjudicator of their own choice within five days from the service of a Notice of Adjudication. Section 6(3) of the Act states that: ‘The parties may, within five days beginning with the day on which notice … is served, agree to appoint an adjudicator of their own choice … ‘
Of course, this five-day provision is important to prevent the process from dragging on. However, interpreting this provision literally, means that the parties cannot agree an adjudicator of their own choice after this period has expired. Moreover, the Act makes it clear that its provisions apply where the parties ‘purport to limit or exclude its application.’
If for example, the parties agree upon an adjudicator on the sixth day after service of the Notice of Adjudication, it may be tempting to continue on with the process on the basis of that agreement. However, this may be a dangerous course to employ. In these circumstances it is advisable to start the process again. This means that the initial Notice of Adjudication should be abandoned, a fresh Notice drafted and re-served; and the Adjudicator agreed within five days of the re-served notice.
Consequently, the process of adjudication will be slowed down by a few days, but this is better than discovering through lengthy and costly court proceedings that an adjudicator’s decision is unenforceable because of an invalid appointment.
In light of this, perhaps s6(3) of the Act should be amended to include a provision whereby the parties can agree an adjudicator of their own choice after the expiry of the five day period. In this way if agreement is reached, the adjudicator’s appointment is valid and a decision enforceable. Practically, this would mean that the parties would not have to start the process again in order to comply with procedural niceties.
The above illustrates some potential problems that may arise under the Act and its interpretation. Perhaps now is a good time to address these issues rather than parties having to go through lengthy and costly courts proceedings for clarification. The difficulties could be easily addressed. Although all the issues identified are important, the first point in relation to nominations by the Chair of the panel is of fundamental importance. If this is not rectified there is a strong case that many adjudications will be unenforceable.
Consequently, successful parties in adjudication will have to pay the costs of unsuccessful enforcement proceedings. Clarity on whether collateral warranties and bonds are to be considered construction contracts would also be welcomed. Including provisions to deal with Referring Parties that abandon adjudications may help the process run more smoothly.
Paul Hughes MSCSI, MRICS, MCIOB, Barrister-at-Law, PhD.
Hughes Construction Claims Resolution (HCCR) provides a comprehensive construction claims service in relation to the conduct and management of claims, adjudications, conciliations, mediations and arbitrations. It offers its services to all involved in the construction industry including contractors, sub-contractors, clients, suppliers and design professionals.http://www.engineersjournal.ie/2016/07/12/problems-construction-contracts-act-2013/http://www.engineersjournal.ie/wp-content/uploads/2016/07/Construction-Contracts-Act-2013-a-1024x683.jpghttp://www.engineersjournal.ie/wp-content/uploads/2016/07/Construction-Contracts-Act-2013-a-300x300.jpgCivilconstruction,Construction Contracts Act,contractors,legislation