Disputes in the construction industry are often complex, costly, and time-sensitive. To provide a swift and cost-effective resolution process, statutory adjudication was introduced in the UK under the Housing Grants, Construction and Regeneration Act 1996 (HGCRA). This legislation created an accessible dispute resolution mechanism, ensuring that construction projects are not unduly delayed by lengthy legal battles.
Statutory adjudication provides parties with the right to refer disputes to an adjudicator at any time, allowing decisions to be made within a strict 28-day timeframe. This makes it a particularly valuable tool in an industry where cash flow and project timelines are critical. The process is intended to be fast, efficient, and enforceable, offering an interim binding decision that remains in effect unless overturned by arbitration or litigation.
However, not all construction-related contracts are subject to statutory adjudication. Section 105(2) of the HGCRA sets out specific exclusions, meaning certain types of contracts do not benefit from this dispute resolution process. These exclusions have been the subject of significant judicial criticism, with courts frequently addressing their scope and interpretation. Over the years, case law has also reshaped adjudication, refining key aspects such as jurisdiction, enforceability, and the role of natural justice.
This article explores what statutory adjudication is, how it works, and its legal limitations. We will examine how courts have interpreted exclusions, recent cases that illustrate their application, and how the adjudication landscape has evolved since its introduction.
What is a Construction Contract?
For statutory adjudication to apply, the dispute must arise from a construction contract as defined by the HGCRA. Without a valid construction contract, a party cannot rely on statutory adjudication as a means of dispute resolution.
Definition Under the Act
Section 104(1) of the HGCRA defines a construction contract as an agreement, whether written or oral, that involves any of the following:
- Construction operations – including building, engineering, or installation works.
- The provision of labour for such operations.
- Professional services such as architectural or design work in connection with construction.
For a contract to fall within the scope of statutory adjudication, it must include any one of these criteria, provided it is not excluded under Section 105(2). The Act covers both traditional construction contracts and consultancy agreements related to the industry.
Why Does It Matter?
If a contract does not meet the definition set out in the Act, the parties cannot compel adjudication, and disputes may need to be resolved through other means, such as litigation or arbitration. This is particularly relevant when considering the Section 105(2) exclusions, which remove certain agreements from the scope of statutory adjudication.
Additionally, the Local Democracy, Economic Development and Construction Act 2009 (LDEDC Act 2009) removed the requirement that contracts must be in writing for adjudication to apply, broadening access to the process. However, the precise terms of an oral contract can sometimes be harder to establish, leading to jurisdictional challenges in adjudication proceedings.
How Does Adjudication Work?
Adjudication is designed to be a fast and cost-effective method of resolving disputes in construction. The process is governed by Part II of the HGCRA and follows a strict 28-day timeline unless an extension is agreed upon. This ensures that disputes are resolved swiftly, helping maintain cash flow and minimising project disruptions.
The adjudication process involves the following steps:
- Notice of Adjudication: The party initiating the adjudication (the referring party) serves a notice of adjudication on the opposing party (the responding party). This outlines the nature of the dispute and the redress sought.
- Appointment of an Adjudicator: The parties must agree on an adjudicator within seven days of the notice being served. If they cannot agree, a nominating body (such as the Royal Institution of Chartered Surveyors (RICS) or the Technology and Construction Solicitors’ Association (TeCSA)) will appoint one.
- Referral Notice: Within seven days of the notice of adjudication, the referring party must submit a referral notice detailing their claim, supporting evidence, and legal arguments.
- Response from the Responding Party: The responding party submits their defence within the timeline set by the adjudicator, typically within seven to 14 days.
- Further Submissions (if required): The adjudicator may allow further submissions, request additional evidence, or hold a meeting or site visit if necessary.
- Adjudicator’s Decision: The adjudicator must issue a decision within 28 days of receiving the referral notice. This can be extended by 14 days if the referring party agrees or longer if both parties consent.
Adjudication decisions are interim binding, meaning they must be complied with immediately but can be challenged later in court or arbitration. Despite this, courts have consistently upheld adjudicators’ decisions, reinforcing the principle that ‘pay now, argue later’ applies in construction disputes.
Adjudication has been widely enforced by the courts, with the landmark case Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] confirming that an adjudicator’s decision must be followed even if there are errors in fact or law. The next section will explore this case in more detail and its impact on the enforcement of adjudication decisions.
Statutory Adjudication in Practice: Macob v Morrison
The case of Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] is one of the most significant early decisions on statutory adjudication in construction. It confirmed that adjudication decisions must be enforced promptly and in full, even if they contain errors. This ruling set the foundation for how courts treat adjudication decisions, reinforcing the principle of ‘pay now, argue later’.
Macob Civil Engineering Ltd carried out work for Morrison Construction Ltd under a construction contract. A payment dispute arose, and Macob referred the matter to adjudication under the HGCRA. The adjudicator ruled in favour of Macob, ordering Morrison to make a payment. However, Morrison refused to comply, arguing that the adjudicator’s decision contained errors in fact and law and was, therefore, unenforceable.
The Technology and Construction Court (TCC) firmly rejected Morrison’s argument. The court ruled that:
- Adjudication decisions must be enforced promptly, even if they contain errors.
- The adjudicator’s role is to provide a quick resolution, and parties cannot delay payment by challenging the decision’s accuracy in court.
- The correct way to challenge an adjudicator’s decision is through arbitration or litigation, not by refusing to comply.
This case established that courts will not interfere with adjudication decisions unless there has been a breach of natural justice or the adjudicator lacked jurisdiction. It reinforced that adjudication is intended to provide certainty and cash flow in the construction industry.
The ruling has been followed in numerous later cases, strengthening the robust enforcement of adjudication decisions. Even where a party believes the decision is incorrect, they must comply first and challenge later – a principle that remains central to adjudication today.
How Adjudication Has Changed
Since the introduction of statutory adjudication in construction, numerous court decisions have refined and shaped its application. While the HGCRA laid the foundation, case law has clarified key aspects such as jurisdiction, enforcement, natural justice, and procedural rules.
Below, we explore some of the most significant developments in adjudication through key legal principles and judicial rulings.
Contracts in Writing
Originally, the HGCRA 1996 only allowed adjudication for written contracts. This led to disputes over whether agreements made verbally could benefit from statutory adjudication. However, the LDEDC Act 2009 removed this requirement, allowing both written and oral construction contracts to be adjudicated.
Costs
Adjudication is intended to be a cost-effective method of dispute resolution, but costs can escalate quickly. While parties generally bear their own costs, adjudicators now have more discretion in awarding costs, particularly where contracts include cost-sharing clauses. However, some cost provisions have been deemed unenforceable, particularly where they attempt to undermine the adjudicator’s authority.
Decisions
Adjudicators’ decisions are interim binding, meaning they must be followed unless successfully challenged in litigation or arbitration. Courts have consistently ruled in favour of enforcing adjudicators’ decisions, reinforcing the principle of ‘pay now, argue later’.
Dispute, Not Disputes
Adjudication can only resolve a single dispute at a time. This means that a referring party cannot bundle multiple disputes into one adjudication unless they are sufficiently connected. If a party attempts to introduce multiple disputes, the adjudicator may lack jurisdiction, making the decision unenforceable.
Enforcement
The courts have taken a pro-adjudication stance, ensuring that adjudication remains an effective and reliable dispute resolution method. Challenges to enforcement are rarely successful unless the adjudicator has clearly exceeded their jurisdiction or there has been a breach of natural justice.
Errors of Fact or Law
Errors made by an adjudicator do not usually provide grounds to refuse enforcement. As established in Macob v Morrison (1999), adjudicators’ decisions must be followed, even if they are wrong in fact or law. Parties can only challenge errors through arbitration or litigation.
Human Rights Act 1998
There have been arguments that statutory adjudication breaches the right to a fair trial under Article 6 of the Human Rights Act 1998. However, courts have consistently ruled that adjudication is compatible with human rights, as decisions are only interim binding and can be challenged later.
Impartial and Unbiased
Adjudicators must remain impartial and independent. If there is any evidence of bias, a party can challenge the decision. The test is whether a fair-minded observer would conclude that there was a real possibility of bias.
Interest
Adjudicators have the power to award interest on sums awarded in adjudication. This has been confirmed in various cases, and most adjudicators now automatically apply interest unless the contract states otherwise.
Interim Binding
Adjudication decisions are binding until overturned by arbitration or litigation. This means that even if a party intends to challenge the decision, they must comply first. Courts have reinforced this rule to prevent delaying tactics that disrupt cash flow in construction projects.
Jurisdiction
A frequent ground for challenging adjudication decisions is that the adjudicator lacked jurisdiction. This may arise where:
- The contract does not fall under the HGCRA.
- The adjudicator was not properly appointed.
- The dispute was not crystallised before adjudication.
If jurisdiction is challenged, courts will examine whether the adjudicator had the authority to decide the dispute.
LDEDC Act 2009
This Act introduced key amendments to adjudication, including:
- Removing the requirement for contracts to be in writing.
- Preventing ‘Tolent’ clauses, which attempted to make one party bear all adjudication costs.
- Allowing adjudication clauses to apply to oral contracts.
Limitation
Adjudication claims must be brought within the contractual or statutory limitation period. If a claim is time-barred under the Limitation Act 1980, it cannot be pursued through adjudication.
Natural Justice
Adjudicators must follow natural justice, meaning both parties must be given a fair hearing. If an adjudicator fails to consider key evidence or acts unfairly, the decision may be challenged on the grounds of procedural unfairness.
Nomination
The appointment of an adjudicator is crucial. If an adjudicator is not properly nominated under the terms of the contract or by a recognised body, the decision may be unenforceable.
Residential Occupiers
One of the key exclusions from adjudication under Section 105(2) of the HGCRA is contracts with residential occupiers. This means that homeowners engaging contractors for private work cannot use statutory adjudication unless expressly agreed in the contract.
Severability
If an adjudicator’s decision contains both valid and invalid parts, courts may sever the unenforceable aspects and uphold the rest. This approach ensures that adjudication decisions are not entirely dismissed due to minor jurisdictional issues.
Smash-and-Grab Adjudication
This refers to payment disputes where one party claims an automatic entitlement to payment due to a failure to issue a valid payment notice. Recent case law has made smash-and-grab adjudications more difficult, as courts now require a more detailed substantive defence from responding parties.
Stay of Execution
In certain circumstances, a court may grant a stay of execution, delaying enforcement of an adjudication decision. This is typically granted where:
- The enforcing party is at risk of insolvency.
- There are exceptional circumstances making enforcement unjust.
However, stays of execution are rare, as courts generally uphold adjudication decisions.
The Section 105(2) Exclusions
While statutory adjudication applies broadly to construction contracts, Section 105(2) of the HGCRA introduces key exclusions, meaning certain contracts are not eligible for adjudication. These exclusions have been the subject of much legal debate and judicial interpretation.
Section 105(2) of the HGCRA states that certain types of agreements are not considered “construction contracts” for adjudication. The exclusions primarily relate to the following:
- Drilling for, or extracting, oil or natural gas: This means contracts relating to work carried out on offshore oil rigs or gas extraction facilities cannot be adjudicated.
- Mineral extraction: Works associated with mining and quarrying, including the extraction and processing of minerals, fall outside the scope of statutory adjudication.
- Power generation, water, and transport infrastructure: Contracts involving:
- The construction of power stations
- Water and wastewater treatment plants
- Dams, reservoirs, or underground pipelines
- Transport infrastructure, including railways, tunnels, and airports, are excluded from statutory adjudication.
- Manufacture or delivery of building components: If a contract only involves the manufacture or supply of materials (without associated installation services), it does not qualify as a construction contract. However, where installation is included, it may fall under adjudication.
- Residential occupiers: Contracts with private homeowners for work on their property cannot be adjudicated unless adjudication is expressly included in the contract.
Why Do These Exclusions Exist?
The rationale behind these exclusions is that certain industries and infrastructure projects operate under different legal and commercial frameworks, often with their dispute resolution mechanisms. For example, oil and gas projects frequently have bespoke contracts that include alternative forms of dispute resolution, such as expert determination or international arbitration.
Similarly, large-scale infrastructure projects often involve public authorities and complex funding arrangements, which may be better suited to arbitration or litigation rather than the rapid, interim nature of adjudication.
The Consequences of Exclusion
If a contract falls within the Section 105(2) exclusions, the parties cannot use statutory adjudication to resolve disputes. Instead, they must rely on the dispute resolution mechanisms set out in their contract, which may include the following:
- Arbitration
- Litigation in the Technology and Construction Court (TCC)
- Mediation or expert determination
For contractors and subcontractors working on excluded projects, this means that they lose the ability to refer disputes to adjudication, which can lead to longer and more expensive legal battles.
In the next section, we will explore judicial criticism of these exclusions and how courts have interpreted them in recent cases.
Judicial Criticism of the Exclusions
The Section 105(2) exclusions in the HGCRA have been widely criticised by the courts, particularly regarding their lack of clarity and inconsistent application. Over the years, several cases have examined these exclusions, questioning their fairness and impact on contractors and subcontractors who are left without the statutory right to adjudication.
Key Areas of Judicial Criticism
Uncertainty in Defining Exclusions
One of the main criticisms of Section 105(2) is that the wording of the exclusions is vague, leading to disputes over whether a contract is covered by the Act. For example:
- Infrastructure Projects: While power stations and water treatment plants are excluded, related work such as civil engineering or maintenance can sometimes fall within adjudication.
- Manufacturing Contracts: If a contract includes both supply and installation, it may be covered by the Act, but if installation is a separate agreement, it may not be.
This has resulted in conflicting legal interpretations, with some contractors arguing that they should be entitled to adjudication while others have sought to avoid adjudication obligations by arguing that their contracts fall under the exclusions.
Impact on Contractors and Subcontractors
The exclusions disproportionately affect smaller contractors and subcontractors, who often rely on adjudication to secure timely payments.
- On large infrastructure projects, subcontractors working on construction-related elements (such as foundations or internal fit-outs) may be denied adjudication simply because the overall project is a power station or a railway.
- This creates cash flow issues for contractors and delays in dispute resolution, which contradicts the ‘pay now, argue later’ principle of adjudication.
Judicial Attempts to Narrow the Exclusions
Courts have, in some cases, attempted to interpret the exclusions narrowly, ensuring that where possible, adjudication remains available. Cases have highlighted that:
- If a contract includes both excluded and non-excluded work, adjudication may still be available for the non-excluded parts.
- The nature of the work, rather than the overall project, should determine whether adjudication applies.
Inconsistency with the Purpose of the HGCRA
The primary objective of the HGCRA was to ensure that disputes in construction are resolved swiftly and cost-effectively. However, the Section 105(2) exclusions create a two-tier system, where some contractors can use adjudication while others must resort to costly litigation or arbitration.
Critics argue that this undermines the purpose of the Act, as it denies some construction professionals the right to a quick and efficient dispute resolution process.
Recent Case: Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020]
A notable case that delves into the Section 105(2) exclusions is Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC). This case provides insight into how courts interpret the exclusions.
The Facts
Engie Fabricom (UK) Ltd (“Fabricom”) was contracted by MW High Tech Projects UK Ltd (“MW”) to install a fluidised bed gasification plant at a site in Hull. Disputes arose regarding payments, leading Fabricom to seek adjudication under the HGCRA. MW contested the adjudicator’s jurisdiction, arguing that the work fell under the Section 105(2)(c)(i) exclusion, which pertains to sites where the primary activity is power generation.
The Technology and Construction Court (TCC) had to determine whether the primary activity at the site was waste treatment or power generation. If waste treatment was the primary activity, then the sub-contract works would fall within the definition of construction operations under the HGCRA, and the adjudicator’s awards would be enforceable. However, if power generation was deemed the primary activity, the works would be excluded from adjudication under Section 105(2)(c)(i) of the Act.
The Decision
Justice O’Farrell ruled that the facility’s primary purpose was power generation, making it fall under the Section 105(2) exclusion, which prevents statutory adjudication. The court placed significant weight on the fact that the performance guarantees in the contract focused on electricity production rather than waste diversion. Additionally, the plant used pre-treated refuse-derived fuel (RDF), meaning only limited waste treatment occurred on-site, further reinforcing its energy recovery function. The requirement to achieve R1 (recovery) status under EU law indicated that the site’s principal purpose was energy production, not waste disposal. Financially, the facility was designed to generate most of its revenue from electricity sales to the National Grid and government subsidies, supporting the conclusion that it operated as a power plant rather than a waste treatment facility. As a result, the adjudicator had no jurisdiction, and Fabricom’s claims were dismissed.
The Takeaways
This case underscores the importance of:
- Assessing the Primary Activity: Courts will closely examine the primary function of a site to determine the applicability of statutory adjudication.
- Contractual Clarity: Parties should clearly define the scope of work and consider whether their contracts might fall within the Section 105(2) exclusions.
- Jurisdictional Awareness: Before initiating adjudication, it’s crucial to assess whether the HGCRA applies to the specific operations involved.
This decision highlights the nuanced application of statutory adjudication in the construction industry and the need for parties to ensure they are clear about the nature of their contractual engagements. If you’re unsure, we can help. Our experienced construction adjudication solicitors can advise you with your application and contractual obligations. Contact our team today on 0330 173 3980 or send us an email to info@witansolicitors.co.uk.
