When adjudication does not go your way

The basic intent of adjudication under the Construction Contracts Act 2002 (CCA) is to facilitate cash flow during disputes, pending final determination in more traditional forums such as court or arbitration.

In reality, the time and cost of re-litigating the dispute means that parties often do not have the appetite or resources to follow it through to this stage. Additionally, there is no right to appeal an adjudicator’s determination and the courts have repeatedly emphasised that they will rarely intervene with judicial review.

Accordingly, a regime that was only intended to be a temporary, “quick and dirty” process is rapidly becoming the final dispute forum for parties involved in construction projects.

All is not forsaken however when the decision does not go your way. This article explores your options.

Binding determination

Once the adjudicator has issued the determination, any amount payable must be paid within two working days (or within the time period specified by the adjudicator). Failing this, the successful party may recover the determined sum as a debt due in court, suspend its works and/or apply for the determination to be enforced by entry as a judgment.

A determination will be binding and enforceable on the parties whether or not the merits and validity are challenged. Due to the temporary nature of adjudication and the aim of the CCA to facilitate timely payments, there are no formal rights of appeal under the CCA.

The grounds on which entry of judgment in the District Court can be opposed are also strictly limited by the CCA. Those grounds are that the amount has already been paid, the relevant contract is not a construction contract to which the CCA applied, or that a condition imposed by the adjudicator has not been met.

Re-litigate

The course advocated by the CCA is for parties to pursue the contractually prescribed dispute process or re-litigate the issues in the High Court to be finally determined.

If the result of these procedures is in favour of the referring party (i.e. the party unsuccessful in the adjudication), the amount paid by that party pursuant to the adjudicator’s determination is essentially “repaid” to it.

However, re-litigating is time consuming and costly. A common (and increasingly valid) concern is that an amount paid under a determination will not be available once the substantive proceedings have concluded, thereby defeating the “pay now argue later” principle.

Interim Relief

To alleviate this concern, the unsuccessful party may apply for relief to avoid having to pay the determined sum, pending the outcome of a substantive proceeding.

Relief may be applied for in several ways:

  1. An application under s 8 of the Judicature Amendment Act 1972 to prevent the enforcement of an adjudicator’s determination pending the outcome of a judicial review of the determination;
  2. An application for stay of a liquidation application under rule 31.11 of the High Court Rules 2016 where such an application has been made by the party seeking to enforce payment under the determination;
  3. An application to set aside a statutory demand on other grounds under s 290(4)(c) of the Companies Act 1993; or
  4. An application for stay of execution under the District Court Rules 2014 when an adjudication determination is entered as a judgment under section 73 of the CCA.

In order for a party to establish that it is entitled to relief, it must show that there is a high likelihood that the party will not be able to repay if the subsequent proceeding is determined in favour of the referring party; and it has a good arguable case that it will succeed under the subsequent proceeding.

As expressed in Kariiti Limited v Donovan Drainage & Earthmoving Limited, the risk of non-payment must be more than nominal – it is not enough to simply express a concern about the party’s ability to repay.

Where the party is in insolvent liquidation or receivership or administration, this will be sufficient evidence of an inability to repay.

However, if the party is in substantially the same financial position as it was when the applicant party chose to engage it under the construction contract, the applicant party cannot complain about the risk of non-payment because that is a risk that it took on when it entered into the contract (see Kariiti v Donovan at [13]). Similarly, when a party’s weakened financial position is attributable to a significant degree to the applicant party’s failure to pay sums due, that is not a good reason for relieving the party of its obligation to pay.

In relation to the “good arguable case” test, it is not enough for the referring party to assert a claim. In the context of interim relief under s 8 of the Judicature Amendment Act 1972, Courts have described the required level as “a prima facie case”, “a reasonably arguable case” and “a real contest between the parties and a reasonable chance of an applicant succeeding in that contest”.

It is worth noting that the High Court in Kariiti v Donovan recognised that there will be some cases where the payer will be able to establish that only one of the above considerations is so obvious that it alone can justify interim relief. Similarly, if a payee is a company in liquidation and there is no prospect of repayment, the Court may accept a less demanding standard for the strength of the payer’s case.

While certain decisions emphasise the Courts’ reluctance to intervene (see for example Condor International Limited v Steelhaus 2014 Limited [2019] NZHC 296), this discussion illustrates that there are options available to prevent enforcement so long as the specific elements can be met.

Judicial review

The adjudicator’s determination is a statutory power of decision which is susceptible to judicial review. However, the courts have noted the clear statutory intention to limit the scope for challenging an adjudicator’s determination.

Helpfully, the Court of Appeal in Rees v Firth [2012] 1 NZLR 408 held that the CCA does not limit the grounds for judicial review and any normal ground of judicial review may be raised.

This differs from the position in the United Kingdom and New South Wales where courts have held that an adjudicator’s error of fact, law, or procedure can be grounds for judicial review only if the error goes to his jurisdiction.

The onus is on the applicant party to demonstrate that the Court should intervene in the particular circumstances. This will not be easy in light of the purpose and scheme of the CCA.

The High Court has held that it is unlikely that mere errors of fact or law by adjudicators will give rise to successful applications for judicial review without more, given the important purpose of the CCA to enable money to flow.

Indeed, Courts have held that the statutory scheme of the CCA means that a “low-intensity” approach to review is appropriate and that if a party does not accept an adjudicator’s determination, it should litigate, arbitrate or mediate the underlying dispute, rather than seek relief by way of judicial review.

This is understandable when the tight timeframes, the fact that parties are not required to be legally represented and the adjudicator need not be legally qualified, are taken into account. The legislature must have acknowledged the possibility of factual and/or legal errors being made.

Nevertheless judicial review remains available for those cases where an adjudication has been undertaken in a manner where there has been a significant breach of natural justice or significant error of law, and there are examples of successful applications for judicial review (such as Chappell v Swindells).

An adjudicator’s determination as to payment remains in effect despite the issue of judicial review proceedings. If a party wishes to avoid paying the determined amount pending the outcome of judicial review proceedings, it must apply for interim relief (as explained above).

Looking forward

With a wide range of technical and increasingly high value disputes being referred to adjudication, we wonder whether there needs to be legislative intervention to provide for some limited forms of appeal. We see this as being particularly relevant in the wake of the recent high-profile liquidations in the construction industry and a growing concern that money paid under a determination will not be available to be “repaid” if ordered at a later date.

This article was first published in LawNews. Special thanks to Kate Muldrew for assisting with content.

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