The continued proliferation of legislation providing for the mandatory adjudication of construction payment disputes is a welcome step in the global trend of encouraging alternative and interim dispute resolution. Experience of dispute resolution models of this type feeds into international practice in jurisdictions where this is not, presently, the norm, with positive results for all.
Last month Malaysia became the latest country to bring into force legislation providing for the mandatory adjudication of construction payment disputes.
A welcome step
Malaysia’s Construction Industry Payment and Adjudication Act 2012 took effect on 15 April 2014. With it, Malaysia joined a growing list of common law jurisdictions that have adopted legislation aimed at facilitating swift resolution of payment (and sometimes broader) construction disputes.
While there are important differences in the approaches taken in different jurisdictions (considered briefly below), the spread of this type of legislation is a welcome step in a wider, global trend of encouraging alternative and interim dispute resolution, particularly in the field of construction and engineering projects, as well as standardising dispute resolution techniques.
The construction industry has always been at the forefront of globalisation. That trend shows no sign of abating, particularly with project participants from emerging economies increasingly joining those from more developed economies in pushing beyond their borders.
Organisations like the ICC and FIDIC play a proactive role in establishing a global investment environment where commercial conflicts can be efficiently resolved via a range of different dispute resolution methods. These methods, including adjudication, dispute boards, mediation and expert determination, all have their roots in domestic legal systems and have been exported for international use. As parties become more regularly exposed to alternative and interim dispute resolution options (including statutory adjudication), those processes will become more widely accepted with positive benefits for all project participants.
The UK’s Construction Act 1996 was the pioneer legislation for payment protection and mandatory adjudication. It has been imitated (some would say improved) in roll-outs in many other countries including Australia, Singapore, New Zealand and now Malaysia. The Republic of Ireland has also enacted the Construction Contracts Act 2013, however a commencement date is awaited.
The primary objective of these Acts is to alleviate the cash-flow problems that can have a deleterious effect on contractors and other construction industry suppliers. In doing so, each Act prescribes a quick-fire adjudication procedure (ranging from seven to 45 days) and a quick and efficient way for these interim decisions to be enforced pending final resolution by arbitration or litigation.
Similarities in approach
The various Acts share certain core provisions:
- “Pay when paid” clauses are prohibited.
- A statutory right to progress or stage payments, if not provided for in the contract.
- A prescribed approach to valuing progress payments.
- Any withholding of payment must be formally notified.
- A statutory right to suspend performance for non-payment, even where one does not exist in the contract.
- Contractors have the right to refer payment disputes to adjudication.
Differences in approach
The key areas where jurisdictions have taken a different approach include:
- The scope of disputes referable to adjudication.
- How a contractor’s progress payment entitlements are determined, that is, whether by reference to the contract or a statutory regime or both.
- The adjudication schemes for resolving disputes.
- Whether the parties may agree their own adjudicator or whether they must defer to an appointing authority.
- The extent to which the adjudicator may proactively investigate the relevant facts and law.
- Enforcement procedures.
I will focus, briefly, on the first of these – the scope of disputes referable to adjudication.
Malaysia has followed Singapore and New South Wales, Queensland, Victoria, South Australia, the Australian Capital Territory and Tasmania in Australia in only permitting the referral of a pure payment dispute to adjudication. In practice, this means that only contractors or suppliers may initiate claims against their principals. Owners (or main contractors as against their sub-contractors) are not able to start an adjudication.
Other jurisdictions such as the UK, New Zealand and the remaining Australian states and territories (Western Australia and Northern Territory) permit the referral of a wider range of payment related and, in some cases, non-payment related disputes arising under a construction contract. This may include, for example, extension of time claims, claims for damages and extra-contractual claims such as those based in tort.
There are well-rehearsed pros and cons of the conflicting approaches. One of the key criticisms levelled at the wider scope of disputes model is that it subjects more complicated disputes to a quick-fire decision making process that may not be appropriate in the circumstances. In doing so, it does not advance the primary objective of these types of Acts, which is to facilitate cash-flow.
Proliferation is a positive development
Whatever the approach taken to the resolution of construction disputes in a particular jurisdiction, the proliferation of mandatory alternative and interim methods of dispute resolution is a positive and welcome development. I expect that as experience of these models grows, it will feed into practice in relation to dispute boards and adjudication on projects in jurisdictions like the Middle East, where such methods have yet to gain real traction.
This article was first published by Practical Law Construction as part of our regular construction blog series in which we share our practical experiences of working in construction and engineering and give our opinion on the current and future legal developments that shape and will shape the industry. To read more from the series, visit the Practical Law blog.