4 May 2021 by and Dispute Resolution Alert

“Pay now, argue later”

What is adjudication and why is it commonly used in the construction industry as a form of dispute resolution? The case of Framatome v Eskom Holdings SOC Ltd 2021 (2) SA 494 (GJ) dealt with a contractual construction dispute which was to be resolved through adjudication. In so doing, the court confirmed certain principles and made certain observations in regard to adjudication clauses. We consider these below, together with our own observations.

The parties had concluded a NEC3 Engineering and Construction Contract (June 2005), which is a standard-form contract in the construction industry. The dispute resolution clause (that the parties had selected) provided that an adjudicator’s decision is binding unless and until it is revised by an arbitration tribunal, and that it is final and binding if neither party has objected to it within the time required by the contract.

Adjudication and arbitration are two distinct alternative dispute resolution (ADR) mechanisms, i.e. procedures to resolve disputes outside of the court process.

Arbitrations are similar in their procedure to court proceedings, but instead of a judge an arbitrator is appointed (normally a lawyer), who fulfils a role analogous to a judge. The arbitrator will hear oral evidence and argument, or written evidence, and will make a decision known as an ‘award’. If there is an arbitration agreement it will be governed by the Arbitration Act 42 of 1995 and the award may then be made into an order of court. Absent certain limited grounds to review or set aside an arbitral award (e.g. gross irregularity in the proceedings), the courts will enforce arbitration awards, adhering to the principle of party autonomy, i.e. the fact that the parties agreed to submit to the arbitral process. Although normally more truncated than a court process, arbitrations take significantly longer to finalise than adjudications.

Adjudication normally includes the following characteristics:

  1. The process is fairly simple and the goal is to achieve a swift and cost effective decision;
  2. The adjudicator is an independent third party (often an expert); and
  3. The adjudicator’s decision is normally binding immediately but can be challenged by subsequent arbitration or litigation.

Similarly to arbitrations, courts will normally give effect to adjudication awards if they are approached. In this case, the court emphasised that a court should enforce an adjudicators decision unless the question which the adjudicator decided was not the question that was referred to them (a jurisdiction point).

Adjudication is a very useful mechanism in construction contracts to ensure that a dispute is dealt with swiftly so that the construction project is not held up or delayed, as it may be if such dispute had to first be resolved by way of arbitration. The adjudication process, and status of an adjudication award, is dependent on the wording of the adjudication clause. It normally allows for an interim but binding award to be made, which is effective immediately, and which becomes final unless challenged within a specified time frame. This is the so called “pay now, argue later” principle.

Adjudication is a particularly useful process to deal with interim payment disputes (allowing the construction project not be delayed by such issues). A further benefit of this process is that, if the underlying issues are technical, the parties can appoint an adjudicator with the appropriate technical expertise, such as an engineer, rather than a lawyer (since the legal process is less involved than in an arbitration).

On the other hand, an adjudication is a much less rigorous process than an arbitration. For example, there is not normally oral evidence or cross examination, or discovery of all relevant documents in the matter. For this reason, it is not ideal where there is a substantial or complex dispute between the parties. It is therefore important that the contract clearly prescribe and limit which disputes go to adjudication (with all other disputes going directly to arbitration).   

In conclusion, it is important for parties to understand the adjudication process, and how it differs from and interfaces with arbitration. In particular, to ensure the appropriate clauses are included in their contract and that such clauses are correctly applied in the event of a dispute.

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