One of the most significant issues affected by the COVID-19 crisis is cash flow. Cash flow is the lifeblood of every industry, but it is critical in construction, write Killian Dorney and Cian O’Gorman.
With some payments having been delayed, deferred or simply not been made, parties within the contractual chain on construction projects may look for other avenues through which cash can be obtained. One area they may look to is claims.
In recent years, on account of the level of activity in the industry, claims may have been left to gather dust, since it has been more profitable to get on with new work and new projects.
However, with the recent slowdown in activity and suspensions due to COVID-19, that position has changed and progressing with valid claims can be a viable method for cash strapped businesses to obtain funds in order to stay operating.
Dispute resolution options
Dispute resolution clauses come in many forms. In construction contracts, a stepped dispute resolution procedure is generally included.
The initial step may involve two directors meeting within a certain period of time in order to attempt to resolve the dispute amicably.
This may then be followed by either mediation or, more usually, conciliation. The final step will generally be arbitration or litigation.
Adjudication, which is a dispute resolution procedure prescribed by statue, the Construction Contracts Act 2013 (Act), is a process that is available only to parties to a construction contract (which definition includes professional appointments) regardless of whether it is expressly provided for in the parties’ contract. Even if a contract says that the Act doesn’t apply, that term will be ineffective – you cannot contract out of the Act.
Adjudication is available ‘at any time’ and a decision will usually be provided within 28 days from the date that the Referring Party delivers its initial submission, known as the ‘Referral’.
The adjudicator’s decision is binding, unless and until a different decision is reached in arbitration or litigation and importantly, the sums awarded in adjudication are payable in accordance with the decision (usually within seven days of the decision).
Adjudication is therefore an extremely efficient method to compel a party to engage with you and obtain money, quickly, assuming your claim is successful.
Before commencing a dispute resolution process
Statute of limitation issues aside, the primary matter to consider before progressing with a claim, notwithstanding the applicable dispute resolution forum, is whether you have a valid entitlement or, put simply, whether you have a ‘good’ claim.
An early, frank assessment of the merits of your claim is critical before progressing with a claim. This will avoid an 11th hour realisation, after costs have already been incurred, that your claim is not as good as you initially thought.
Early, specialist, legal advice will help you both identify your entitlements and develop the right strategy to maximise your entitlements. It will also help you to identify any weaknesses in your own position, which is critical, particularly in the context of knowing what a good ‘deal’ is, if you are minded to settle the matter in without prejudice negotiations.
After assessing your claim, the main two issues to consider before embarking on a dispute resolution process are time and money. How long will it take? And, how much will it cost?
This will vary on a case by case basis, as different types of disputes are better suited to different types of dispute resolution processes.
For example, where both parties are in agreement that there is an entitlement but the dispute relates only to the amount to be paid, mediation might be appropriate, particularly if the parties are not too far apart on the figures and if maintaining the commercial relationship is paramount.
However, in the current climate, what seems to be occurring regularly is that one party is suffering significant cash flow issues with the other party disputing any entitlement to payment at all.
For these situations, where obtaining payment in short order is critical and where the dispute is limited to payment issues, adjudication is appropriate.
Commercial negotiation
In our experience, notwithstanding that you may have decided to proceed under a formal process in order to resolve a dispute, it is always worthwhile attempting to amicably resolve a dispute at an early stage, or indeed at any appropriate stage, through commercial meetings and without prejudice negotiation.
The threat of adjudication in such discussions, particularly at the outset of a matter, can assist in focusing parties’ minds and regularly leads to early settlement.
But, even if settlement does not occur, the commercial negotiation process will give you a feel for how the opposing party might approach the dispute once you commence a formal process.
One matter to be aware of in commercial negotiations is what information you choose to disclose and the basis upon which it is disclosed. If you are making any concessions, all discussions should be held on a ‘without prejudice’ basis so that anything you say cannot later be used against you in the formal dispute resolution process.
Adjudication procedure
Assuming that early without prejudice negotiations have failed and on the basis that adjudication is the most appropriate formal process to proceed with, the first step is to commence the process by delivering on the counterparty a relatively simple document called the 'Notice of Intention to Refer Payment Dispute to Adjudication', colloquially known as the ‘Notice of Intention to Refer’.
The Notice of Intention to Refer identifies in simple terms what your payment claim is. Although it is a short document and relatively straightforward, it is vitally important to draft it correctly as it sets out the scope of the dispute and it is from this that the adjudicator’s jurisdiction emanates.
Essentially, the Notice of Intention to Refer tells the other party what the dispute is and tells the adjudicator what it is he or she has to decide upon.
After delivering the Notice of Intention to Refer, you will need to have an adjudicator appointed. This is done either by agreement or, in the absence of agreement, by applying to the Construction Contracts Adjudication Service.
You will then need to deliver your Referral. As mentioned above, the delivery of the Referral commences the 28-day period under the Act within which the adjudicator’s decision is to be delivered. Once delivered, the sums identified in the decision will usually be payable seven days after the date of the decision.
Even though adjudication provides only an ‘interim’ binding decision, meaning that a party can proceed to arbitration or litigation to try and achieve a different result, from a time and cost point of view, due to its binding nature, a favourable adjudication decision can result in payment being made quicker than through any other available formal disputes process.
Extremely attractive
For that reason, it is extremely attractive and contrasts starkly when compared with the more traditional construction dispute route of conciliation followed by arbitration. It is the difference between obtaining money in a matter of weeks (about eight weeks in total from the date you issue a Notice to Refer to the date money should be paid) and a matter of years (up to two years or more) in the context of conciliation followed by arbitration.
The same is true from a costs perspective and depending on the complexity of the dispute, an adjudication can be run very efficiently. Even when disputes are complex, the difference in fees in adjudication versus conciliation/arbitration can be significant, and in some instances is the difference between tens of thousands for an adjudication (if even) versus hundreds of thousands for conciliation/arbitration.
Consequently, for the construction professional, contractor or subcontractor, adjudication can be an attractive method by which to unlock funds quickly and cheaply, when compared to other formal dispute resolution methods.
Adjudication might therefore be a viable option for a business to obtain the vital cash flow needed to maintain it and its people during the current COVID-19 crisis and beyond.
For more information on any of the topics raised in this article, please contact Killian Dorney on +353 (0) 1 536 9629 or at k.dorney@beale-law.com, or Cian O’Gorman on +353 (0) 1 536 9634 or at c.ogorman@beale-law.com