To arbitrate or adjudicate — that is the question

Rob Harris (left) and Shaun Watt.
Rob Harris (left) and Shaun Watt.

Whatever the cause of a dispute, the only two ways for it to be resolved are by agreement of the parties (ie settlement) or a binding determination. Agreement can be reached in a number of ways, including direct negotiations or facilitated negotiation, such as mediation. Rob Harris (principal) and Shaun Watt (lawyer) of Auckland legal firm Greenwood Roche focus on two common determination processes — arbitration and adjudication.

Lawyers specialising in construction disputes are seldom quiet — which speaks to the steady flow of construction disputes from projects in New Zealand.

Disputes arise for many reasons. Respondents to a 2020 survey reported around 90% of disputes arose from either poor-quality documentation, delay, quality, and/or financial issues.

What is arbitration?

The arbitration process is akin to court litigation, but is private, faster and more flexible.

Parties often pre-agree arbitration by virtue of standard “arbitration clauses” included in many widely used construction contracts (such as clause 13 in the NZS 391X suite and Master Builders Subcontract).

An arbitrator will be engaged at the outset of a proceeding and remain involved throughout to progress and determine the dispute.

This contrasts with court litigation, where the trial judge may be different to the judges involved in deciding preliminary issues, and where progress can be delayed due to the high level of demand on the court’s services and time.

Standard arbitration clauses typically provide that the parties are to agree on an arbitrator, or set out rules for one to be appointed if one cannot be agreed.

Standard clauses may prescribe other matters, such as the scope of the arbitrator’s powers, and whether the decision is final and binding or can be subject to appeal.

Once appointed, an arbitrator has powers to determine the process of the proceeding, including time frames. Arbitrators are typically senior lawyers or former judges.

Choosing an arbitrator is important and can bear on strategy. Selecting someone interested and available to take on the case is a good start.

Some disputes may be confined or involve specialist topics that lend themselves to an arbitrator with particular experience.

Arbitration agreements preclude parties bringing the same claims in the courts. There are limited grounds for interference by the courts if arbitration is the agreed process.

The right of appeal is governed by the specific clause or agreement. The usual positions are for the decision to be either final and binding or, alternatively, subject to appeals on points of law.

What is adjudication?

Adjudication is available as a statutory right under the Construction Contracts Act 2002 (CCA) to resolve disputes in construction contracts.

Importantly, arbitration agreements between New Zealand entities do not override the parties’ statutory rights under the CCA to adjudicate disputes — this means adjudication remains available to parties even if there is an arbitration clause.

While adjudications are usually focused on claims for the payment of money, adjudicators are able to determine the rights and obligations of parties to a construction contract.

The default adjudication time frames are fast, and reflect Parliament’s intention to speed up decisions and cash flow through the industry.

Once an adjudication claim is served, a respondent has only five working days to reply.

The entire process is “on the papers”, and there is no in-person hearing. An entire adjudication can be completed in two to three months from commencement to decision.

Adjudicators are typically senior lawyers or senior construction industry professionals and can be appointed by agreement, or failing which, can be nominated in accordance with the CCA.

Adjudication determinations are legally interim decisions subject to a final process, such as arbitration or court action (ie where there is no arbitration clause or agreement).

However, in practice, parties frequently treat adjudication decisions as being final.

In our view this reflects the quality of many adjudication decisions, litigation fatigue (ie time and cost of pursuing further determinations on the same matter), and the limited grounds to challenge adjudication decisions under the CCA.

Speed, cost and risks

By comparison to court proceedings, adjudication or arbitration is speedy and provides an accessible pathway to resolve disputes in a more efficient manner.

Arbitration has the hallmarks of court litigation (including costs) but is compressed into a shorter time frame. From our experience, major arbitrations can be completed in 9 to 18 months, whereas major court litigation can take up to three to four years (or more).

Adjudication is fast, and parties do not have the time to incur the same level of cost to prepare. The risks of adjudications happening quickly include that parties do not have time to prepare.

For that reason, brewing disputes should not be left to drift, and project teams should be supported to identify and resolve matters and disputes at an early stage in order to avoid being caught unprepared.

Adjudications often result in parties bearing their own legal costs and sharing the costs of the adjudicator, unless there is some very good reason for a disproportionate cost split (ie if one party 

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