Dispute resolution under the subcontract

Four methods of dispute resolution exist under the Standard Building Subcontract (SBCSub):

• mediation
• adjudication
• arbitration and
• litigation.

The subcontractor only has ten days from issue of the final payment notice to challenge any of the following issues or else the notice becomes conclusive:

• quality of any materials or goods or of the standard of an item of workmanship that had expressly been reserved for the approval of the architect/contract administrator
• valuation of the subcontract works
• subcontractor's entitlement to extensions of time
• subcontractor's entitlement to direct loss and expense or
• contractor's reimbursement entitlement.

If proceedings of any kind have already been issued prior to the issue of the final payment notice, those proceedings must be progressed in 12 months of the final payment notice in order for the notice not to be deemed conclusive on the matters referred to in the proceedings (clause 1.8.2 SBCSub/C and SBCSub/D/C).

Mediation

Mediation is recognised under clause 8.1 of SBCSub/C and SBCSub/D/C as a means whereby the parties may attempt to resolve their dispute. As a completely consensual process, by its definition mediation cannot be made mandatory. Mediation is a voluntary method of dispute resolution.

Mediation usually involves a non-judgmental neutral third party (the mediator) who takes the disputing parties through the following stages in order to encourage them to seek a flexible resolution to the issues in dispute:

• introduction
• exploration and objective self-evaluation
• negotiation and
• settlement and conclusion.

On reaching agreement as a result of the mediation process, the disputing parties can opt to have their agreement reflected in the terms of a legally binding contract.

The only commercial pressure to use mediation as a form of dispute resolution is that it is the quickest and cheapest form of dispute resolution, usually taking only a day. The process involves the parties' time, the mediator's costs and the venue and travel costs but can involve a resolution that is more than simply a monetary order. For example, an agreement reached through mediation may include a discount on future work or a side sell that benefits one of the parties. A monetary order is the only order obtainable from any other form of dispute resolution. Therefore, the mediation process is more flexible.

Disputing parties are currently being strongly encouraged by the UK courts to try and resolve their dispute before instigating litigation. This is through the threat of onerous costs sanctions (not to be ignored lightly) for lack of participation, without justification, in mediation before seeking redress via litigation.

Adjudication

Adjudication is a product of the enactment of the Housing Grants Construction and Regeneration Act 1996 (the 'old' Construction Act) whereby all qualifying construction contracts must comply with the Act by incorporating a mandatory adjudication process for the resolution of disputes. If the qualifying contracts do not comply with the Act, the Scheme for Construction Contracts (the default mechanism contained in the statutory instrument regulations) will be automatically implied. The ‘new’ Construction Act (the Local Democracy Economic Development and Construction Act 2009) and the corresponding ‘new’ Scheme also apply.

Article 4 of SBCSub/A and SBCSub/D/A incorporates adjudication in accordance with clause 8.2, which states that the Scheme rules must apply, subject to the following conditions:

• Clause 8.2.1 – the adjudicator/adjudicator nominating body must be the person named in item 16 of SBCSub/A or item 17 of SBCSub/D/A. Where no adjudicator has been named and no nominating body has been selected, then the referring party may select any one of the nominating bodies listed in item 16/17, i.e. AICA, CA.com, CIArb, RIBA, or RICS.
• Clause 8.2.2 – if the dispute or difference is or includes a dispute or difference relating to clause 3.11.3 of SBCSub/C and SBCSub/D/C (i.e. instructions to open up for inspection or to test any further similar non-compliant works) and whether a direction issued under that clause is reasonable in all of the circumstances, then to decide such a dispute the adjudicator must (where practicable) have appropriate expertise and experience, or appoint an independent expert with such expertise and experience.

The adjudication process has the following special characteristics:

• adjudicators are not bound by previous adjudication decisions
• the issue between the parties must be in dispute, i.e. the parties must be able to establish disagreement on the issue or procrastination by one party rather than simply a lack of response by one party to an overaggressive assertion by another party
• the adjudication can only resolve one dispute – although case law has made it clear that one dispute may consist of a number of issues, but each adjudication cannot consist of more than one dispute without both parties' consent
• the adjudication process is confidential
• the adjudication decision is made in 28 days (or such other time period as the parties may agree) and the adjudicator is free to set the timeline and rules of the adjudication in that 28-day (or such other extended) period
• adjudication is an interim decision and therefore the adjudicator could make the wrong decision in both fact and in law provided that they answer the question referred to them.

The notice of adjudication is vital as it sets out the dispute and the confines of the adjudicator's jurisdiction, i.e. the adjudicator can only answer the question they are asked in their decision, to do otherwise is to exceed their jurisdiction. P.1(3) of the Scheme states the notice of adjudication should set out:

• details of where and when the dispute has arisen
• the nature of the redress sought and
• the names and addresses of the parties to the contract (including any addresses specified for purposes of notices and adjudication).

The adjudicator is usually appointed on the basis of the JCT Adjudication Agreement although this is not mandatory. A different form of adjudication agreement could be used if the parties wish.

Because the adjudication is a contractual process, where an adjudicator's decision is not adhered to, this represents a breach of contract. An adjudication decision is an interim measure and if not complied with therefore needs to be enforced through the courts. It is common for adjudications to face the threat of jurisdictional challenges (from the responding party) in order to undermine the enforcement process. However, the reality is that unless the jurisdictional challenges are raised by the parties at the appropriate time and have substantial merit, in the vast majority of cases they are given short shrift by the courts.

If an adjudicator issues a decision post-final payment notice and one of the parties wishes to have the issue determined by arbitration or litigation, it must launch its subsequent proceedings in 28 days or else the adjudication decision will become finally binding on both parties.

Arbitration

Item 2 of the SBCSub/A and SBCSub/D/A specifies whether arbitration will apply to the subcontract. Arbitration is not applicable unless agreed to by both parties, i.e. unlike adjudication it is not statutory backed and therefore a mandatory dispute resolution mechanism for the subcontract. Arbitration is incorporated into the SBCSub/C and SBCSub/D/C by Article 5 of SBCSub/A and SBCSub/D/A and clauses 8.3 to 8.8.

Arbitration, as with adjudication, is a contract-based method of dispute resolution that utilises a third party, the arbitrator (usually with relevant technical expertise), to hear the dispute(s) and issue a judgment in the form of an award (except that an arbitration award, unlike an adjudication decision, is final (clause 8.6)). In that sense, arbitration has the judicial characteristics of litigation and often carries similar time and monetary costs. The costs of arbitration are often substantial. However, like adjudication, arbitration is private and confidential.

Arbitration is supported by the Arbitration Act 1996, and as it is final and binding, where a party tries to go to litigation, the other party may apply (under section 9 of the Arbitration Act 1996) for the litigation to be stayed.

The arbitrator has the ability to set the proceedings and timing that is convenient for the parties subject only to the Arbitration Act and the rules of the JCT 2016 edition of the Construction Industry Model Arbitration Rules (CIMAR) specified for use in SBCSub and can hear multiple disputes arising out of or in connection with the subcontract.

Under item 16/17 of SBCSub/A and SBCSub/D/A, the nominating body for an arbitrator is CIArb, RIBA or RICS.

Arbitration was originally conceived as a way of using a technically minded arbiter to settle disputes. The arbiter could provide an independent third-party judgment/award in the form of a completely confidential dispute resolution procedure. This would therefore be achieved outside the formal constraints of the court system. However, legislation has been introduced to regulate and provide a framework on which arbitration should be carried out. This has led to the increasing burden of case law on the arbitration process. Over time, arbitration has simply become a mirror image of litigation, incurring similarly exacerbated time and monetary costs in order to resolve the dispute.

The introduction of adjudication as a statutory-based method of dispute resolution has numerous advantages for the subcontractor and contractor. It must be carried out in a finite period and yet maintains the advantages of arbitration such as a technical arbiter and a confidential process. This has resulted in arbitration, at subcontract level, being diminished almost into extinction. More often than not, arbitration is seen as obsolete and disproportionately costly to the value of the project and the value of the claim involved at subcontract level. This is particularly true given the alternative option of a speedy method of dispute resolution through adjudication.

Litigation

The starting point under any UK litigation relating to construction disputes is the Construction and Engineering Protocol invoked under the Civil Procedure Rules. This is in order to guide the parties on how they should conduct their proceedings prior to commencing litigation.

The Civil Procedure Rules provide that under the 'overriding objective', and regardless of the type of dispute, where there exists no justifiable reason not to do so, parties should attempt to resolve their dispute first by alternative dispute resolution. In the majority of cases this equates to the parties attempting to resolve their dispute via mediation before recourse to litigation. This is the why the JCT 2016 suite of contracts has included express reference to mediation.

It can, however, be argued that, if the Construction and Engineering Protocol is followed correctly and amicably by both parties, then there should be no need for recourse to mediation as the overriding objective will have been fulfilled in the pre-action steps promoted by the Protocol.