The Chartered Institute of Arbitrators (CIArb) | Fast Dispute Resolution Methods “Adjudication”

The Chartered Institute of Arbitrators (CIArb) | Fast Dispute Resolution Methods “Adjudication”

The Chartered Institute of Arbitrators (CIArb) | Fast Dispute Resolution Methods “Adjudication” 1024 657 Cocking & Co
Ian Cocking‘s new article is published on CIArb (East Asia Branch)‘s newsletter today. This is the second article in the technical series, “Fast Dispute Resolution Methods”.

Overview

This is the second article in the technical series, “Fast Dispute Resolution Methods”. We will be looking at “adjudication”, a topic which drew the attention of many following the introduction of Security of Payment (“SOP”) Provisions into public works contracts in Hong Kong from 31 December 2021.

Adjudication is a simple and expeditious method for resolving payment disputes. It is commonly associated with construction disputes, but not necessarily so. It adopts a “pay now, argue later” approach which aims at improving the cash flow situation among sub-contractors, consultants and suppliers. The adjudication decision is binding pending referral to arbitration or court.

There are two types of adjudication, namely statutory and contractual adjudication. Statutory adjudication is a mandatory step included in SOP legislation for construction disputes in a number of jurisdictions, such as the UK and Singapore. Contractual adjudication is based on parties’ mutually agreed terms.

SOP Legislation

Since SOP is a new initiative for Hong Kong, the Development Bureau (“DEVB”) issued a Technical Circular (Works) No. 6/2021 on 5 October 2021 to incorporate mandatory SOP conditions into all new public works contracts and sub-contracts. Additional Conditions of Contract (“ACC”)/ Special Conditions of Contract (“SCC”) amend the General Conditions of Contract (“GCC”), including NEC forms accordingly. Through the experience gained in the public sector, it is hoped that legislation (which is being drafted) can be implemented smoothly covering the public and private sectors.

The main differences between Hong Kong’s contractual adjudication and SOP legislation are:

  1. Court enforcement is replaced by a right to apply to the employer for direct payment;
  2. Adjudication decisions will not be set aside by the Court. An aggrieved party must challenge the decision in arbitration, which will not be until after completion;
  3. There is no statutory register of adjudicator nominating bodies (“ANBs”). The selection of ANBs is from DEVB’s Register.

Payment and Adjudication Process

The ACC/SCC include the following “Four Mandatory Requirements”:

  1. Payment response and payment shall be made within 30 and 60 days respectively from the date of payment claim;
  2. Conditional payment provisions shall be rendered ineffective and unenforceable;
  3. Claimant may refer a payment dispute to adjudication and the adjudicator shall deliver a decision within 55 working days from the date of his appointment;
  4. Claimant may exercise a right to suspend/ slow down if an admitted or adjudicated amount is not paid.

There has been some controversy as to whether the scope of adjudication should extend to extension of time awards (“EOT”) as well as time-related payment issues. Under the present scheme, it has been decided that:

  1. An adjudicator shall have the jurisdiction to decide time-related costs forming part of the payment dispute;
  2. In so doing, the adjudicator shall have the jurisdiction to decide EOT entitlement;
  3. The adjudication decision on time-related costs forming part of the payment dispute is binding on an interim basis, but the EOT so decided by the adjudicator is not;
  4. A party shall not usually be liable for liquidated damages if the works have been completed within the EOT decided by the adjudicator. However, the parties’ right to challenge EOT decisions through arbitration remains unaffected.

HKIAC’s Security of Payment Adjudication Rules

The Hong Kong International Arbitration Centre (“HKIAC”) is one of four ANB’s, and the first to publish its rules. On 23 February 2022, HKIAC’s “Security of Payment Adjudication Rules” (“Rules”) came into force. The Rules are tailor-made for adjudications where the parties have agreed that:

  1. “the SOP Provisions for Public Works Contracts shall apply to their contractual relationship and HKIAC shall act as the ANB or words to similar effect; or
  2. the Mandatory Subcontract Conditions for Security of Payment – SOP Provisions for Relevant Subcontracts shall apply to their contractual relationship and HKIAC shall act as the ANB or words to similar effect.”
    (see Article 1.1 of the Rules)

The Rules provide complementary procedures for the conduct of adjudication, such as the communication methods between the parties and the adjudicator and govern relevant fees and expenses. If the Rules conflict with the SOP Provisions or a mandatory provision of any applicable law, the SOP Provisions or law shall prevail.

NEC Contracts

Under SOP, a contractor is entitled to suspend works if there is a nonpayment of an adjudicated sum. This is added as a new compensation event in Clause 60.1. The dispute resolution provisions are also amended. Note that the NEC 4 dispute resolution clauses (W clauses) incorporating adjudication provisions are not used in Hong Kong public works NEC contracts. The Hong Kong Government has drafted its own dispute resolution clause – ACC Clause G1B. This Clause G1B is also amended to tie-in with the mandatory SOP Provisions. If any party is aggrieved at the SOP adjudication decision, it may refer the dispute to mediation, and if mediation fails or is refused, then to arbitration.

In Hong Kong, NEC sub-contracts are rarely used even in projects adopting NEC main contracts. NEC main contracts have a shorter cycle (35 days). Therefore, a project with an NEC main contract but other forms of sub-contract may have different payment cycles. This will create cashflow challenges that have to be carefully managed.

Enforcement

For the reasons explained above, if unpaid, enforcement by a subcontractor of an adjudication decision will rest on direct payment by the employer. This depends upon an unbroken chain of contracts incorporating the SOP Provisions. If direct payment is not made for any reason, a sub-contractor will have to rely upon the pressure it can bring to bear on the defaulting party by exercising a contractual right to suspend/ slow down its works. The sub-contractor will not be liable for any loss and damages suffered by others, and will be entitled to EOT and prolongation costs as a result of the suspension. However, the rest of the supply chain will be left to deal with the consequences.

Whilst voluntary contractual adjudication has existed in public sector contracts since 2005, very few have eventuated. However, the stage is finally set for adjudication to come to Hong Kong.


ORIGINALLY PUBLISHED ON CIArb NEWLETTER

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