This article examines Security of Payment (SOP) Act from an adjudicator’s perspective. In two preceding articles relating to SOP Act published on this website, the perspectives of both claimant and respondent were similarly examined to highlight issues that are unique from each contesting party’s perspective. By way of context, the SOP Act aims to facilitate cash flow in construction industry by instituting statutory adjudication regime to swiftly determine payment disputes, albeit on an interim basis. Several key characteristics of this legislation such as its time sensitive adjudication procedures and exclusion of complex damages claims can significantly affect the adjudicator’s jurisdiction. Consequently, adjudicators are expected to strike a balance between observing rules of natural justice by affording parties reasonable opportunities to be heard whilst presiding the adjudication proceedings based on strict time frames. This in turn requires the adjudicator to be adept in navigating payment claims and swiftly identifying key issues that require determinations. As this can be challenging particularly for those from non quantity surveying background, the next section of this article will provide some useful pointers and insights. 

Traditionally, dispute resolution proceedings such as arbitration or litigation incorporate fairly elaborate procedural steps designed to assist the arbitrator or judge to identify key issues for determinations and define the scope of disputes. These steps include amongst others, submission of pleading documents, establishment of terms of reference, discovery of documents that may be relevant to parties’ pleaded positions etc. These steps may take months to complete but are necessary to avoid straying beyond the scope of disputes. Notwithstanding these procedural steps, it is fairly common for disputing parties not only to disagree on the merit of substantive issues but also to differ on the list of issues that require determination. Therefore it can be even more challenging for an adjudicator to navigate these very same dispute terrain without the assistance of the above mentioned procedural steps. This article aims to elaborate further on these procedural challenges from an adjudicator’s perspective. Some may argue that these concerns ought to be balanced with the fact that adjudication determinations are of temporary finality. Notwithstanding the interim nature of adjudication determination, it is not uncommon for dissatisfied party to expend precious resources to pursue legal action in an effort to set aside determinations that are perceived to be in issue.

Immediate Priorities When Deciphering Payment Claims Disputes

Under arbitration or litigation, the claimant’s claims are found in pleading documents such as statement of claims and its statement of reply to defence and counter claim, if any. The claims are typically presented in a written narrative format supported by material facts. By contrast, payment claim which set out the claimant’s positions under adjudication are essentially organised as figures populated in a table or schedule with abbreviated annotations or descriptions. Payment claims are not commonly prepared in a manner intended to be placed before a third party adjudicator under a legal proceeding where disputes have crystallised. Therefore as an adjudicator from non quantity surveying background, there are some best practices and useful pointers that may be considered when identifying the “issues” from a payment claim. 

First and foremost, the primary issues can be distilled by identifying the difference between amount claimed and responded amount, focusing on key areas that contributed to such difference, namely the “big ticket items”. As payment claims are almost identical to pricing schedule in contract document, it is essentially a breakdown of the contract sum divided into various sections. The first section is usually reserved for ‘preliminaries and general’ whilst the remaining sections are the direct costs of the construction works which may be organised by different geographical locations or parts of the construction works. The format of payment response mirrors the breakdown of payment claims. Assuming the claimant was in receipt of a payment response and disputes the responded amount, the payment response document alone should provide a cross comparison between claimed amount and responded amount which in turn usually produce an immediate insight into the key payment issues in dispute. Whilst an adjudicator could rely on parties’ submissions to understand the gist of the payment issues in dispute, each contesting party is likely to only highlight areas that advantageous to their case. Therefore, it is entirely possible that parties may not be able to join issues. Therefore an independent assessment on key reasons why payments are withheld is a useful starting point from an adjudicator’s perspective. It is also worth noting that the adjudicator is expected to render its adjudication typically within 14 days from the commencement of the adjudication proceedings. Therefore it may be more efficient for the adjudicator to first appreciate the key issues based on payment claims and payment response and thereafter request parties to provide their comments on those identified issues where necessary. 

Payment issues typically arise where claimed amount exceeds responded amount significantly. Occasionally this could occur only after taking into consideration set off initiated by the respondent. Assuming set off is not part of the payment issue, the adjudicator ought to identify the key difference between amount claimed and responded amount. Such key difference can generally emanate from the following broad categories: (1) direct costs of construction works, (2) variations, (3) indirect or overhead costs of construction i.e. ‘preliminaries and general’. As regards (1) direct costs of construction works, parties are likely to dispute over two main reasons namely the actual quantity of work done on site or differences in respect of whether work done was in compliant with the contractual specifications. As regards (2) variations, parties are likely to dispute over whether certain works qualify as variations based on definition under the contract, valuation methods of variation works or quantity of varied works. As regards (3) indirect construction costs or preliminaries costs, parties are likely to dispute over whether certain documents that entitles payments were properly submitted (e.g. performance bond, construction insurance, programmes) or payments were claimed based on agreed progressive disbursement mechanism, if any. If set off or cross claim are part of the reasons for withholding payment, the conditions under Section 17(3) of SOP Act can be referred to where there is a requirement of agreement of quantum on such cross claim or certification under the contract. 

Whilst the above are not exhaustive of the nature of payment issues that could arise between the parties, it provides a useful mental mind map for an adjudicator to navigate payment claims swiftly and proactively seek clarification from the parties. This is crucial to operating within the tight time frame prescribed within the adjudication regime.

Natural Justice And Conduct Of Proceedings Of Adjudication

Adjudicator is often alive to the fact that it is not expected to provide the level of analysis on questions of fact or law as often expected in a full curial hearing. Adjudication has been described as a ‘rough and ready justice’ since the determination is an interim outcome. The aggrieved party is not prevented from having its case fully and finally reviewed under arbitration or litigation as the case may be. Therefore, there may be certain payment disputes with underlying issues that are less likely to be finally determined within the timeline constraints imposed on the adjudication process. Given these realities, adjudication determination are unlikely to be set aside by the court on the basis of the merit of the findings or the reasoning underlying the adjudicator’s determination. Adjudication determination however is likely to be set aside if the determined issues fall outside the adjudicator’s jurisdiction or the conduct of the proceedings was defective. Under full curial hearing such as arbitration or litigation, there are procedural rules that act as guard rail to minimise the likelihood of these occurrences. These very procedural rules however are not suitable under adjudication given the timeline constraints.

Under most arbitration institution rules, disputing parties are firstly given opportunities to establish their claims, defences and counter claims (if any) through exchange of pleading documents. The main purpose is to define the material facts of issues in dispute, and consequently the scope of the tribunal’s jurisdiction. Out of abundance of caution, the tribunal and the disputing parties would jointly agree on the scope of dispute by the formalisation of terms of reference. The subsequent phase of document discovery is strictly done based on relevance to the issues in dispute which then sets the foundation for subsequent production of witness statements and expert reports (if any). The methodical procedural sequences are necessary to provide clarity to the tribunal’s jurisdiction as well as avoidance of any allegation of proceedings being conducted in a defective manner. By contrast, adjudication proceedings commence with the claimant filing its adjudication application based on a prescribed format. The adjudication application primarily consist of the payment claim in dispute with attachments of relevant supporting document such as extracts of relevant contract terms and conditions, payment response received (if any), expert reports, photographs etc. The adjudication response from the respondent follows a similar format. Therefore, the material facts of issues in dispute, factual evidence, expert evidence and legal submissions (if any) are bundled and submitted in an upfront manner all at once, as opposed to sequentially via multiple procedural steps. It is important to note that under this bundled approach, evidence is adduced prior to parties agreeing what exactly are the issues in dispute, apart from the obvious fact that payment is withheld. The identification of issues are often more complex and nuanced as it reveals the primary reason as to why payment is withheld. Such issues can be question of fact (e.g. whether works were done) or question of law (e.g. how should certain conditions or specification be interpreted) or even a blend of both. This will be further elaborated in the next section of this article.

Despite the temporary finality nature of adjudication determinations, most adjudicators are understandably concern if their determinations are vulnerable to being set aside. Therefore, the need for clarity in scope of jurisdiction and ensuring probity in conduct of proceedings remained matters of paramount concern. By way of example, whilst the payment claim in issue had been issued to the respondent reasonably in advance prior to commencement of adjudication proceedings, the claimant’s reliance on relevant contract terms and conditions including its arguments in support of its claims are only disclosed to the respondent in the adjudication application. As mentioned earlier, payment claims are usually schedules or tables with figures populated therein which may include abbreviated annotations or brief explanatory notes. These are usually not prepared with the intention of being placed before an adjudicator within the context of legal proceedings. The respondent is required to submit its adjudication response within 7 days after being served such adjudication application. If the claimant includes an expert report to its application, the respondent may be motivated to issue its own “counter” expert report as well but within the 7 days time frame. The adjudicator has 14 days to render its adjudication regardless of the sum in dispute or the number of issues that may be involved. Whilst the adjudicator is authorised to extend the adjudication period beyond the said 14 days, this is subject to agreement by both contesting parties. Such unanimous agreement is rare particularly when parties are already in an acrimonious relationship. 

In view of the above, it is likely that the respondent may request for a time extension since Code of Conduct For Adjudicators (Rule 5 of 5th Edition dated 15 December 2019) states that the adjudicator shall ensure that the parties have a reasonable opportunity to address all matters. In all fairness, the respondent under this hypothetical scenario is unlikely to be able to commission an expert and to produce a corresponding report within those time constraints. In other words, whilst the adjudicator’s reasoning in its determination is not likely to be the cause of a setting aside application, how time extension applications are handled is at the root of natural justice and probity of conduct of proceedings. This is because the respondent may be able to argue, quite validly that it did not have reasonable opportunity to address all allegations made. On the other hand, a claimant could have commissioned an expert, much earlier to produce a report on certain matters included in its payment claim that is likely to be contentious. It is not uncommon for standard form of construction contract to have provision that prevents either party from commencing arbitration until the works achieved practical completion. Further under Section 17(7) of SOP Act, any future adjudicator must have regard of the value of disputed works determined in previous determinations. Therefore, the financial effects of an adjudication determination is not insignificant especially under a multi year project. Further, any future arbitration may take more than a year or longer to conclude. Therefore, although an adjudication determination is expected to be ‘rough and ready’, its implications can be enduring.

Although Section 17(3) of SOP Act excludes complex damages related claims from adjudication regime, there are certain claims associated with work done that may be complex as well. This could arise if parties dispute over whether certain works were done in accordance with specifications resulting in payments being withheld. These disputes may involve interpretation of technical specifications that could entail expert evidence such as on the subject of geology, civil foundation works, curtain wall facade works etc. Occasionally these expert reports may involve extraction of sample for laboratory testing. Clearly whilst these issues are claims relating to payment for work done, the relevant arguments from both parties can hardly be ventilated within the 14 days time frame, which is inclusive of the duration for the adjudicator to render its determination. Therefore the adjudicator could metaphorically be walking on thin ice in balancing rules of natural justice and complying with timeline constraints. 

Crystallisation of Issues And Scope of Adjudicator’s Jurisdiction

When respondent disputes amount claimed by the claimant for certain scope of works, the ‘responses’ or reasons behind withholding of payment are usually brief and abbreviated. This is primarily because payment response and payment claim are typically structured in a table or schedule format rather than a written submission meant for legal proceedings. Examples of such abbreviated reasons include ‘work not done’, ‘work rejected’, ‘difference in quantity’, ‘defects’ etc. Therefore it is unclear at least from a legal perspective what specifically is the issue or issues between the parties. When navigating disputes there is a need to distinguish cause and effect. Withholding of payment is usually the consequence or effect of certain causes which formed the underlying issue. By way of illustration, one of the possible issue could be that the parties differ on the quantity of work actually executed on site which relates to a question of fact. Alternatively, the parties may well differ on what constitute ‘work done’ i.e. how should the specification be construed or interpreted, which in turn is a question of law. Either case, the outcome is the same i.e. parties differ whether compliant work is actually performed on site. The crystallisation of issue however is of paramount importance for an adjudicator because under Section 17(2) of SOP Act, an adjudicator must in relation to an adjudication application determine, amongst others reasons in its determination. The adjudicator’s reasoning is primarily influenced by his ability to effectively identify the underlying issues. If the adjudicator fails to appreciate the real issue in contention, its reasons will be particularly revealing. In this regard, the adjudicator may be alleged to be acting outside its jurisdiction by failing to determine actual issues in dispute. This could result in the determination being set aside. 

Unfortunately, even the disputing parties may take some time to crystallise the actual issues in dispute. Through exchange of pleading documents between the disputing parties, they may subsequently be able join issues. With reference to the earlier example of differing reasons for withholding payment, let us assume that payments were withheld for building facade curtain wall works. Abbreviated reasons were included in payment response that understandably lacks the particularity necessary for legal proceedings. Suppose the claimant initiates an adjudication application and include in its submission relevant progress reports as well as photographs of curtain wall completed on site. The adjudication response that ensue included allegation that the curtain wall installed on site were not in compliance with the specifications prescribed. Upon commencement of the 14-day adjudication proceedings, the adjudicator may be confronted with a conundrum. On one hand, the adjudicator could make a determination in favour of the claimant based on finding of fact that the curtain wall panels were indeed installed on site by relying on progress report submitted. On the other hand, the adjudicator may determined that since the claimant did not challenge the respondent’s allegation of works done being non compliant with specification, he may arrive at a finding in favour of the respondent. In either case, whether the adjudicator rules in favour of the claimant or respondent it runs a real risk of not affording the other party reasonable opportunity to be heard. This is because issues may not have been sufficiently crystallised prior to commencement of adjudication but parties are expected to bundle all its issues and evidence at the very beginning of the proceedings.

In reality if not for the time constraints confronting the adjudicator, the adjudicator would ordinarily grant additional time for parties to respond or address allegations made in order to crystallise the issues in dispute. The claimant could be given time to address whether it had duly complied with the specifications in issue and if so what is its interpretation of the specifications concerned. If the parties actually differ on the interpretation of specifications and such differences are technical in nature, parties may be at liberty to adduce expert reports based on a defined set of expert issues. These procedural steps are necessary in ensuring rules of natural justice are observed but may be challenging given the procedural time constraints. In this regard, the procedural time constraints may have a tangible impact on the jurisdiction of the adjudicator. Therefore whether a determination lacks the necessary reasoning and substantive analysis or whether rules of natural justice were observed in the process leading to the rendering of the determination, these different outcomes may have emanated from the very same root cause.

Conclusion

Whilst it is true that a rough and ready justice may not warrant an in depth analysis of issues in dispute, such lack of analysis could be a symptom that issues in dispute have not fully crystallised. If either contesting parties had not have been afforded reasonable opportunities to be heard it may well cause the reasoning included in adjudication determination to be brief and cursory. In other words, whilst there is usually a natural distinction between defects in conduct of proceedings as compared to content of adjudication determination, these different factors could be two opposite sides of the very same coin.




Koon Tak Hong Consulting Private Limited