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Pay now, arbitrate later

  • Market Insight 1 December 2019 1 December 2019
  • Africa

  • Infrastructure

Many standard form construction contracts contain multi-tiered dispute resolution provisions which often provide for disputes to be referred to adjudication in the first instance. These adjudication clauses often provide that the Dispute Adjudication Board (DAB) is required to give a decision within a short period of time. The intention being that these decisions are binding and enforceable, although not final, until overturned or revised by way of settlement or arbitration.

Pay now, arbitrate later

Such adjudication provisions are a characteristic of many construction contracts, and have been described as a "speedy mechanism for settling disputes [under] construction contracts ...". The purpose of adjudications is to allow disputes to be resolved in a quick and informal manner. Adjudication has been described as "as essentially a cash flow measure implementing what is colloquially described as a quick and dirty exercise to avoid delays in payment pending definitive determination of litigation".

A party who is aggrieved by a decision of a DAB is not left without a remedy and such party is entitled to submit a notice of dissatisfaction, usually within a certain period of time, and to refer such dispute to arbitration. The notice of dissatisfaction does not however diminish the duty of complying with the DAB's decision. The only difference between the situation where a notice of dissatisfaction is filed and the situation where it is not, is that in the first instance the DAB's decision is binding but of an interim nature, while in the latter it is binding and of a final nature.

In fact, a DAB decision might be wrong in law or fact, and parties are provided with an opportunity to have such decisions overturned at arbitration, however, the effect of a DAB award is that the aggrieved party is to give prompt effect to the decision of the DAB, notwithstanding the delivery of a notice of dissatisfaction.

The positon as described above has long been the accepted positon in South Africa. This positon has been supported by our courts in a number of cases, including:

Radon Projects (Pty) Limited v NV Properties (Pty) Limited and Another, where the court, with reference to the English case of Macob Civil Engineering Ltd, reaffirmed that DAB decisions have "...to be enforced pending the final determination by arbitration, litigation or agreement..."

Tubular Holdings (Pty) Ltd v DBT Technologies (Pty) Ltd, where the contract provided that the decision of the DAB "shall be binding on both parties who shall promptly give effect to it unless and until it shall be revised". The court found that "...the parties are obliged to promptly give effect to a decision by the DAB. The issue of a notice of dissatisfaction does not in any way detract from this obligation".

Ekurhuleni West College v Segal and Another, an unreported judgment, where the court found that a adjudicator's decision "is binding on the parties and enforceable in court proceedings as a contractual obligation, unless and until the determination has been overturned or varied in arbitration proceedings".

In the unreported case of Esor Africa (Pty) Ltd/Franki Africa (Pty) Ltd v Bombela Civils JV (Pty) Ltd where Spilg J stated that "while the DAB decision is not final, the obligation to make payment or otherwise perform under it is." Once the decision is given, it should be given effect without delay.

Stocks & Stocks (Cape) (Pty) Ltd v Gordon and Others NNO 1993 (1) SA 156 (T), where van Dijkhorst J, albeit it in the context of a decision of three mediators, addressed the practicality of this. It was highlighted that these provisions are aimed to "... ensure continuation of work pending arbitration ... and to obviate tactical creation of disputes with a view to postponement of liability".

It is also worth recalling the proposed Construction Industry Development Board's Prompt Payment Regulations and Adjudication Standards, which are aimed, inter alia, at improving the cash flow problems experienced in the construction industry, and in particular that these Regulations proposed statutory adjudication of certain disputes. Amongst others clause 26K (3) of the Regulations, stated that the decision of the adjudicator would be binding and that the parties to a contract must give effect to that decision even though either party intends to request arbitration. Although the advancement of these Regulations came to a standstill, such legislation (which is similar to legislation in the United Kingdom, Australia and Canada), shows the purposes and intention of DAB decisions.

The positon as described in Radon Projects (Pty) Limited, Tubular Holdings (Pty) Ltd, Ekurhulenbi West College, Esor Africa (Pty) Ltd/Franki Africa (Pty) Ltd and Stocks & Stocks (Cape) (Pty) Ltd, is similar to the positon in other jurisdictions such as the United Kingdom, Singapore, Hong Kong, Canada, New Zealand, Australia and Malaysia.

In the English case of Carillion Construction Limited v Devonport Royal Dockyard Limited the court held that adjudication decisions must be enforced even if there are errors of procedure of fact or the law and the decision of the adjudicator shall be binding on the parties and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration or by agreement between the parties

However, there has been a worrying trend in recent judgments delivered by our High Courts, where the courts are reluctant to enforce the binding nature of DAB decisions, ruling that such decisions are not binding, if a notice of dissatisfaction was delivered. In effect finding that DAB decision need not be enforced where a notices of dissatisfaction has been delivered.

These recent decisions are contrary to the well-established precedent and principles referred to above, and appears to arise from a conflation of the concepts "binding and enforceable" and "final and binding".

Some of these decisions are currently pending before the Appeal Courts, and it is hoped that a decision from a higher court will provide certainty on the matter.

In summary, if decisions made by a DAB are considered unenforceable, their intended role would be rendered futile. The very purpose of adjudication would be defeated if a party, armed with a DAB decision obtained within a short period of time, is required to wait for the outcome of an arbitration in order to be able to enforce its rights under such decision.

At a time when the construction industry is at a low ebb and cash flow is generally restricted, it is hoped that the Appeal Courts will bring certainty to the position, and uphold these domestically and internationally accepted principles.

End

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