Financial distress in the construction industry leads to disputes and often the first frontier is adjudication. Blake Frost, Partner and lead of HopgoodGanim’s Construction practice, reports.
There are strict rules which govern the adjudication process and for respondents (such as project owners) the consequences of even a minor, administrative error can be harsh.
The most common errors we see are failing to include adequate reasons for withholding payment, failing to include any reasons at all, or providing responses which are late.
Whilst errors of this nature may seem minor and innocent to most, these errors can have significant (sometimes disastrous) ramifications for a project owner where a claim is referred to adjudication.
Complicating this further is that often the administration of a contract will be partly outsourced to a superintendent, and that places a great deal of responsibility and trust on this party.
Most of the time, where an error is made in a payment certificate, there is nothing a project owner can do to correct this (at least not in the adjudication process). Claimants are becoming increasingly aware of these errors and in the current environment, are far more willing to take advantage of them.
Where a claimant does take advantage of such an error, this will have two implications.
First, the respondent (often a project owner) will be out of pocket for the relevant amount during the life of the project. Given the cost increases project owners are already facing, that itself can have significant implications for a project’s feasibility.
Second, to eventually recover those overpayments, a respondent party is then required to commence litigation (or arbitration) at the conclusion of the project to recover any overpayments. This is inconvenient and expensive.
Whilst we as lawyers can assist in dealing with the inconvenience and expense, there is third issue which is becoming more prevalent in this economic environment. That is, the financial position of the party who you are recovering the overpayments from. Why this is a heightened risk for project owners is as follows.
In the current economic climate, with an increasing number of builders and subcontractors entering administration and liquidation, the potential consequence of overpaying in adjudication can be critical, as there is no guarantee that the money you pay will be there when you try and recover it later on.
We are seeing more and more instances where, if a project owner has overpaid the contractor (due to adverse adjudication applications), subsequent attempts to recover these amounts are often stifled, abandoned or compromised, due to solvency concerns about the other party.
Obviously, the best way to avoid this is to remain diligent and ensure that no corners are cut when it comes to contract administration (how you respond to EOTs, variations and importantly, progress claims). Getting this right is critical.
Lawyers are, in effect, your second line of defence in this process. Often the die is cast once a payment schedule has been provided, so our role is typically to ensure a claimant has complied with all jurisdictional requirements then in addition to that, best advocate for the reasons which were contained in your payment schedule.
Your first line of defence is contract administration, and in particular, the payment schedule. If errors are made in this stage, they are not always capable of being remedied (as described above).
Training and awareness around adjudication is critical – so if you are a project owner, give some thought to who prepares you payment certificates and how alive they are to these issues, because a minor slip in preparing a payment schedule could very easily become costly for you.
Blake Frost has considerable experience working in the Resources, Energy and Projects, Real Estate, and Government sectors, having worked in back-end matters, ranging from large-scale court proceedings, through to bespoke alternative dispute resolution options for small-sized claims, for both private and government clients.
Reach out to Blake and HopgoodGanim’s Construction team if you would like to know more about what trends and behaviours we are seeing in the current market, as well as strategies on how to best deal with them.