U.S. Project Disputes: Has the Time to Consider Adjudication Finally Arrived? This Article First Appeared Inaaa Handbook on Construction Arbitration and ADR, May 2010

U.S. Project Disputes: Has the Time to Consider Adjudication Finally Arrived? This article first appeared inAAA Handbook on Construction Arbitration and ADR, May 2010. by Michael Evan Jaffe and Ronan J. McHugh

Looking for more efficient dispute the Atlantic. The closest thing to it is resolution procedures, the authors the dispute review board (DRB), suggest adapting England’s Adjudica- which uses a panel approach instead tion scheme for U.S. use. They contend of a single adjudicator. DRB deci- that, like dispute review boards, an sions are usually non-binding and adjudicator’s decision would be they are a creation of contract rather enforceable by U.S. courts. than legislation.

Michael Evan Jaffe Contractors and lawyers in the This paper considers whether a Litigation United States have been at the contractual form of adjudication +1.202.663.8068 vanguard of the alternative dispute might be workable within existing [email protected] resolution (ADR) movement. Their U.S. legal structure. efforts have led to today’s general 2 acceptance of arbitration, mediation What is Adjudication? and creative med-arbitration Adjudication was born out of the arrangements to resolve the most recognition that the UK construc- complex and difficult project tion industry needed a way to disputes. As these ADR processes resolve disputes promptly and, become more sophisticated and where appropriate, allow money to costly, there is a growing recognition flow from one party to another as of the need for a simple and less quickly as possible. The HGCRA costly ADR mechanism—one more does not define the term “adjudica- Ronan J. McHugh in tune with the general project tion,” but it is generally understood Litigation model that contemplates a prompt, to be a process in which the parties +1.202.663.8134 | DC cooperative and even-handed agree that a third party will make a +44.20.7847.9500 | LDN disposition of issues while the potentially binding decision on the [email protected] construction process is ongoing. The issue of entitlement or liability. That Michael Jaffe is a litigation partner at concept of “adjudication,” a fast- sounds similar to arbitration. Pillsbury’s Washington, DC office. Ronan track dispute resolution process Under the approach taken in the UK, McHugh is a litigation counsel at Pillsbury. introduced into the lexicon by the the process is rooted in legislation. He works out of the firm’s Washington, DC United Kingdom’s Housing, Grants, In short, while the parties can adapt and London offices. Construction and Regeneration Act it to their particular situation, an of 1996 (the HGCRA)1, may be the agreement to use the process is not nucleus for an approach that would needed in the UK. The HGCRA find favor with the construction provides that all construction industry in the United States. contracts entered into after May 1, However, adjudication as under- 1998 must allow the parties to refer stood in the UK has not yet crossed

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any dispute under the contract to the respondent within seven days of set aside as erroneous is not suffi- adjudication. The parties’ contract the publication of the Adjudication cient to preclude enforcement,7 nor can make certain specific provisions Notice to the adjudicator. is it sufficient to show that immedi- as to procedure; but if they do not, ate payment will cause financial The HGCRA does not establish a the HGCRA’s adjudication scheme is hardship.8 date for the respondent to furnish a read into the contract.3 response to the Referral Notice. The If the contract contains an arbitra- The Statutory Adjudication generally used construction contract tion clause, enforcement of the Procedure form in the UK provides seven days adjudicator’s award must be chan- for a response,5 but as a matter of neled through the arbitration The HGCRA provides that the practice, adjudicators frequently process, as an arbitration clause adjudication process begins with the allow 14 days. mandates a stay of court proceed- referring party issuing an Adjud- ings.9 The arbitrator is subject to the ication Notice to the respondent. Adjudicators are required to decide same restraints and has no greater The Adjudication Notice identifies cases within 28 days from receipt of powers than a court to act on an and defines the dispute. It is to set the referring party’s Referral Notice. adjudicator’s award. out: However, the adjudicator can take up to 42 days if the referring party • the nature and a brief descrip- Track Record of Adjudication in agrees, or more if the parties jointly tion of the dispute and parties the UK agree. Otherwise, the 28 days is involved; While there are undoubtedly some mandatory.6 UK construction industry partici- • the details of where and when the In the absence of a detailed adjudi- pants who take a dim view of dispute arose; cation procedure agreed to by the adjudication, the consensus appears • the nature of the redress sought; parties, the adjudicator will set the to be that it is a beneficial process. and procedure. Thus, the adjudicator As the Chartered Institute’s John may hold meetings, question the Wright recently observed in The • the names and contact details of parties, visit the site, request further Resolver, a publication of the the parties. documents or information, appoint Chartered Institute of Arbitrators: In addition, if the parties have experts or legal advisors, or conduct “Adjudication has proved effectivein named an adjudicator in their a “mini-trial” at which witnesses helping construction parties to contract, the party initiating the provide evidence and are subject to resolve their disputes swiftly and process will advise that person that cross-examination. cost-effectively, which has allowed his/her services will be required. If projects to be completed without An adjudicator’s award is binding on no one is specifically named or the wasted cost and time in litigation.”10 the parties unless and until over- named person is unavailable, the turned by litigation, arbitration or referring party submits the The Case for Adjudication in agreement. The prevailing party may Adjudication Notice to a nominating the U.S. demand prompt payment, and, if not body for the selection of an adjudi- The UK adjudication process is not received, can seek enforcement of cator.4 The nominating body is to bogged down with delays that too the adjudicator’s decision in court by communicate the name of the often affect the ADR process in the an application for summary judg- selected adjudicator to the parties United States. Because the UK ment followed by execution on that within five days of the request. process moves to a decision expedi- judgment. While there are grounds tiously, it provides a vehicle that The referring party then submits a upon which a court may refuse to prevents the sort of disruption of the “Referral Notice” to the adjudicator grant summary judgment on an revenue and cost streams that occur setting out its full case, along with adjudicator’s decision, the grounds when the dispute process is slow, copies of all relevant documents. A are narrowly cabined. A showing cumbersome, costly or indecisive. copy of the Referral Notice is sent to that the decision may ultimately be

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Construction disputes in the United That process—which is often This scenario, which is all too States often begin with a contractor arbitration before a panel of three common, is out of kilter with the raising an issue after it has com- arbitrators—is, at its core, an adver- business model associated with menced work, for example, a design sarial process. When it occurs while successful enterprises. Delayed issue that requires a design supple- the project work is on-going, it has resolution of business disputes is not ment or clarification and could well the potential to become heated, a viable strategy for a business have a cost and/or time impact. The making communication on the job project. For an owner, delay retards contractor brings the issue to the site and collegial problem solving the ability to operate, sell or rent a attention of the owner or designer difficult. Most often, however, property, and it increases the burden (i.e., the architect or engineer), often arbitration takes place after work on of financing, even in a low interest- by submitting a request for informa- the project has ended, i.e., after rate environment. For a contractor, tion (RFI). The owner/designer then substantial completion and punch delay is equally unpalatable. It provides direction to the contrac- list items have been addressed; final generates extended general condi- tor—a response to the RFI may take completion usually is withheld tions costs, eats into already slim the form of an ASI (Architect’s pending the outcome of the dispute. profit margins and disrupts Supplemental Instruction), an OSI This means that for a year or more workflows. (Owner’s Supplemental Instruction) after the job, the parties’ attention is Resolving disputes long after they or a “clarification”—as to how to diverted to arbitration. have arisen can have disastrous resolve the issue. Therefore, under the usual dispute consequences for construction Typically the contractor will resolution paradigm, the contractor parties. The contractor and its respond in one of three ways: and its subcontractors are forced to subcontractors remain uncompen- proceed with work for which they sated, possibly for years after they • it will implement the direction, will not be paid at least until there is performed the work; thus, they end recognizing that it will not have a a decision in the arbitration, which up having to finance aspects of the cost or time effect; may well take a year or more. The project for a long period. Many • it will require further informa- reason is that the owner and contractors (especially subcontrac- tion because the direction will not designer have decided that the work tors) cannot afford to do this. When work with the building’s current is not a change for which additional the project is large and the number design, or compensation is required. This of issues substantial, being the situation imposes an enormous contractor (or subcontractor) on a • it will advise the owner and/or financial strain on the construction project can impose a crippling the designer that the direction is team. All too often, where substan- burden. a change in scope for which the tial sums are at stake, the subcon- contractor is entitled to additional A possible solution to this situation tractors cannot carry the financial compensation and/or an extension is adjudication because it has the load, which leads to mechanic lien of the contract time potential to make construction filings, suits to enforce the liens and dispute resolution happen in a time If, as often happens, the owner/ in some instances subcontractor frame that is less disruptive of designer denies the “change bankruptcy and default. None of this project relations, the parties’ request,” the owner will issue a is in the interest of having the business expectations and the unilateral directive to the contractor members of the project team—own- project itself. Adjudication would to proceed with the work, typically a ers. designers, contractors and also require less expenditure for no time or cost directive.11 This subcontractors—working collegially counsel fees and other legal costs, leaves the parties to the disputes to bring the project to a successful would create a foundation for mechanism in the contract. conclusion. owner/contractor partnering and the preservation of their relationship, and sustain employee morale.12

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The Big Dig and DRBs Enforceability of Adjudication The Court tends to agree with Support for the use of adjudication Decisions [Perini’s] observation that summary in this country just requires a If adjudication is to work in the U.S., judgment motions are not really the commitment to the process. An adjudication decisions must be correct vehicle [sic] for what is now example of project participants enforceable in some way.15 The DRB before the Court. Rather, under both committing to another form of early process on the Big Dig provided for the Federal and Massachusetts dispute resolution is the Big Dig in “final findings” from the DRB to be Arbitration Acts, at this stage of a Boston. approved or rejected in a decision by proceeding like that before the the Project Director. The process Second DRB, the Court really must This project involved connecting allowed for appeals to a Board of confirm the award, vacate it or send two interstate highways and Logan Contract Appeals or to a court it back for further proceedings. Airport with a series of tunnels and within a 90-day time period. Beyond Whatever the titles of the motions, it bridges while keeping traffic moving this period the decision became final is the duty of this Court to insure through the center of Boston. In part and binding. In practice, the Project that any final judgment “shall grant because of the size of the project, Director generally accepted the the relief to which the party in and to avoid the Massachusetts DRB’s decision and the contractor whose favor it is rendered is courts being swamped by lawsuits accepted the Project Director’s entitled.” arising out of the project, the project decision. In addition, the case documents called for DRBs to The Massachusetts Supreme Court law—albeit relatively limited resolve “disputes” while the project ultimately affirmed this decision and —established that the DRB decisions is ongoing.13 A “claim” became a dismissal of the owner’s would be enforceable in court. That 17 “dispute” that could be submitted to complaints. precedent serves as a model for a DRB when the contractor dis- enforcement of adjudicator The fact that DRBs do not have all of agreed with a “final determination” decisions. the procedural and due process by the owner’s “Authorized trappings of arbitration is not likely Representative.” After an issue was Two cases involving the contractor to be an impediment to enforcement. presented to the DRB, the contractor Perini Corp. arose out of the Big Dig. The District of Columbia Court of could anticipate an initial decision in In both cases, the courts ruled that Appeals, in Washington Automotive roughly five months. While that DRB decisions could be confirmed v. 1828 L Street Associates,18 enforced 16 initial decision was subject to a on an expedited basis. They did so a decision by a panel of appraisers number of additional processes, it by equating DRB decisions to establishing the value of a parcel of provided an early “reality” check. arbitration awards. land for the purpose of fixing the And, even if the process was pursued In Perini 1, the court said, “The ground rent under a long-term lease. through the remaining steps, the disputes resolution procedures, The court adopted the view DRB process allowed a decision to whether binding or not, are a form expressed by the United States be made reasonably promptly after a of contractually accepted arbitration Court of Appeals for the Second contractor’s filing. and must be treated by the Court as Circuit that any agreement in The Big Dig illustrates that when the such.” In Perini 2, the court writing that “clearly manifests an project participants are committed observed, “What is before the Court intention of the parties to submit to resolving disputes promptly, they is an arbitration proceeding.” In that certain disputes to a specified third can make it happen.14 There is no case, the court granted summary party for binding resolution” is to be reason why U.S. construction judgment in favor of Perini on its enforced as an agreement to 19 participants cannot be equally motion to enforce and confirm a arbitrate. committed to an adjudication DRB award. The court noted in a process. footnote:

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Conclusions comprises a highly complex set of facts and issues cess can create an “ambush” situation, that itself relating to the performance of a contract carried has an impact on the parties’ relationship. The lesson of Perini 2 indicates that out over many months. It may well be doubted 13 The first DRB in the U.S. was in 1975 for the there is a legal framework in the whether adjudication was intended for such a second bore of the Eisenhower Tunnel Project in United States for enforcing decisions situation. Colorado. See Avoiding and Resolving Disputes made in a proceeding modeled on 2 This article is not intended to provide a detailed During Construction, Technical Committee on Con- UK-style adjudication. We suspect analysis or critique of the HGCRA or of English tracting Practices of the Underground Technology that organizations such as the law relating to adjudication. For information on Research Council, p. 16 (ASCE 1991). Indeed DRBs American Arbitration Association the law of adjudication in the UK see, e.g., www. have been used on more than 100 U.S. projects and JAMS, to mention only two pinsentmasons.com. valued at more than $6 billion. Over 70% of tunnel projects bid in the U.S. in 1990 had DRBs. On well-known ADR providers, would 3 HGCRA § 108. projects tracked by the American Society of Civil be willing to take on the role played 4 Several UK construction related institutions (Ad- Engineers, 63 disputes were referred to DRBs and 20 by Adjudicator Nominating Bodies judicator Nominating Bodies) provide adjudicator all were settled without litigation. DRBs have been in the UK. nomination services. E.g., The Royal Institution of used by the U.S. Army Corps. of Engineers and by Chartered Surveyors; The Royal Institute of British more than 16 U.S. state or local government own- All that is missing is a commitment Architects; Institution of Chartered Engineers and ers. DRBs have been used most frequently on tun- from project participants to adopt an The Chartered Institute of Arbitrators. nel, highway and bridge projects, but infrequently on projects such as high-rise buildings, industrial adjudication process modeled on the 5 The Joint Contracts Tribunal construction contract plants and commercial projects. Id. UK process in their contract docu- form. ments. Perhaps the place to press for 14 DRBs are also gaining support internationally. In 6 this commitment is with the organi- See e.g., Ritchie Bros. (PWC) Ltd. v. Daniel Philip 2004, the International Chamber of Commerce (Commercials) Ltd., March 20, 2005, Scottish Court zations that promulgate form promulgated Dispute Board Rules. Similarly, inter- of Appeal. national contracting forms such as those of FIDIC construction documents, e.g., the 7 now include DRB provisions. American Institute of Architects or See, Herschel Engrg. Ltd. v. Breen Properties Ltd., July 28, 2000 TCC, London; Judge Humphrey Lloyd, 15 the Associated General Contractors. In U.S. courts, summary judgment can be granted Q.C. only where there are no issues of genuine material To be sure, it would well serve all fact and the court finds that the moving party is 8 See, Total M&E Services Ltd. v. ABB Technologies project participants to have a entitled to judgment as a matter of law. The burden Ltd., Feb. 26, 2002, Judge Wilcox Q.C. dispute resolution framework that is on the moving party to demonstrate that there is matches the project participants’ 9 UK Arbitration Act 1996, § 9. no triable issue of fact. aspiration for completion of the 10 S. Carey, “Adjudication is Working” (Masons 16 Massachusetts Highway Dept. v. Perini Corp., 13 project without delays or unresolved December 2000). Mass. L. Rep. 564 (Mass. Super. 2001); 2001 Mass. disputes. Super. Lexis 412 (Perini 1); Massachusetts Highway 11 E.g., American Institute of Architect Contract Form Dept. v. Perini Corp., 14 Mass L. Rep. 452 (Mass. A.201-1997 Clause 4.3.3: “Pending final resolution Endnotes Super. 2002); 2002 Mass. Super. Lexis 110 (Perini 1 of a claim, except as otherwise agreed in writing Though the Housing, Grants, Construction and 2); Massachusetts Highway Dept. v. Perini Corp., or as provided in Subparagraph 9.7.1 and Article Regeneration Act of 1996 (HGCRA) allows a party 828 N.E. 2d34 (Mass. 2005). to initiate adjudication at any time, English courts 14, the Contractor shall proceed diligently with 17 have suggested that its use is more appropriate performance of the Contract and the Owner shall 828 N.E. 2d 34 (Mass.2005). during the project, rather than after its comple- continue to make payments in accordance with the 18 906 A.2d 869 (DC 2006). tion. E.g., see Balfour Beatty Construction Ltd. v. Contract Documents.” Subparagraph 9.7.1. deals Lambeth LBC, where Judge Lloyd Q.C., stated: with failure of payment by the owner entitling the 19 McDonnell Douglas Fin. Corp. v. Pennsylvania contractor to stop work, and Article 14 concerns Power & Light Co., 858 F.2d 825 (2d Cir. 1988). This is yet another case in which adjudication has termination and suspension of the contract. 20 See n. 4 supra. been launched after completion of the works and in 12 However, an important perceived defect of the UK which the dispute attracts a simple description but adjudication process is that the speed of the pro-