Adjudication, arbitration, mediation – what is the difference and what should you do?

Conflict is inevitable in the construction industry. Whether it’s an unfinished contract, issues receiving payment, or defective work, there are several avenues for resolution that may be open – without the hassle of going to court. Adjudication, arbitration and mediation, are all forms of ‘Alternative Dispute Resolution’ (ADR), meaning alternative to the traditional litigation pathway of resolving disputes. ADR involves engaging a third party to help to resolve a dispute. Sometimes the process is collaborative but may also involve giving ultimate control over the decision to that third party. This article aims to explain these types of ADR and how the addition of adjudication to the list of available ADR options may be beneficial to contractors in the construction industry.

Adjudication

The ‘Prompt Payment and Construction Lien Act’ (PPCLA), legislated a dispute resolution process called adjudication. Adjudication is intended to be a fast-track process to resolve payment or payment related disputes while a construction project is ongoing – so money can continue to flow down the contractual chain. Once one of the parties involved in the dispute issues a Notice of Adjudication, adjudication becomes mandatory (although there are some exceptions where an adjudicator does not have jurisdiction over a dispute). Parties are encouraged to agree on the appointment of a neutral adjudicator, who must be a Qualified Adjudicator registered with the nominating authority, ARCANA. If the parties cannot agree on an adjudicator, ARCANA will appoint an adjudicator for the adjudication. The advantage of agreeing on an adjudicator is that the appointment fee is halved but more importantly, the parties are able to select who will decide their dispute, rather than having a decision-maker (potentially based out of Ontario) imposed upon them.

The adjudicator determines the relevant facts and law of the dispute and subsequently gives an interim binding decision. In adjudication, ‘interim binding’ means that the parties must abide by the decision unless (or until) there is a decision made by the Court or Arbitrator that relates to the adjudicator’s decision.

For example, where an adjudicator makes a payment decision in favour of a contractor, but in a subsequent trial relating to the whole project (not an isolated payment decision), the Court decides that the contractor has been overpaid for the entire project, the adjudication decision is interim but binding. The contractor initially needs to be paid in accordance with the adjudication decision but will be later required to refund or repay the overpayment in accordance with the Court decision, despite the earlier adjudication decision.

Another illustration of the ‘interim binding’ nature of adjudication decisions is when an adjudicator may order that a contractor be paid for a specific scope of work. However, a later court or arbitration decision may find that the work was deficient and needed to be redone and may require that the contractor pay for the cost of redoing that deficient work.

Adjudicators’ decisions can be registered with the Courts and are also subject to judicial review by a Justice of the Court of King’s Bench. Parties do need to be aware that judicial review of adjudication decisions is limited to a very narrow set of circumstances listed in the PPCLA and attempts to review an adjudication decision solely due to dissatisfaction with the result will typically be unsuccessful.

The main benefit of adjudication is that it is normally quicker than going through the courts or arbitration. The PPCLA and associated regulations mandate timelines for the initiation of adjudication, submission of argument and the release of the adjudicator’s decision. Often, a decision will be released within two months of the adjudicator being appointed, although the adjudicator may extend some of the timelines in the adjudication, on request, but these extensions are limited to 10 calendar days. The adjudicator makes their decision based solely on the written submissions of the parties and there is no oral argument (as is typical in court-based litigation or arbitration). Therefore, the parties’ written advocacy takes on crucial importance in adjudication and should be drafted well in advance of the submission deadline, and reviewed by another person for content, clarity, and tone before submission to the adjudicator.

Adjudication is likely to be less expensive than traditional litigation, primarily as a result of the streamlined procedures, however it can still be quite expensive. Depending on the value of the dispute being adjudicated, adjudicator rates and fees can be capped, with fees capped at $5,000 + GST for disputes under $100,000. If parties are using legal counsel, their counsel’s fees are not included in this cap. While adjudicator fees are more expensive than proceeding through the Alberta Court of Justice (which only requires a $200 filing fee), the simplified procedure in adjudication will likely result in cost-savings if parties have engaged legal counsel for the dispute. For disputes above $500,000, there is no cap on adjudicator fees, but when considering the significantly simplified procedure between adjudication and the Court of King’s Bench (required for disputes over $100,000), there is almost certain to be significant cost savings when proceeding via adjudication rather than litigation.

Adjudication is generally designed for resolution of construction disputes while the project is ongoing. A party can no longer impose adjudication on a dispute when 31 days have passed following ‘final payment’ which is defined in the PPCLA as the day on which the last payment due pursuant to the contract (or subcontract) is due and does not include payment of holdback. This means that parties may need to decide whether to file a Notice of Adjudication prior to the expiry of their lien rights, which typically expire 60 days after a contractor’s last day of work (not including deficiency work) on site. Importantly, issuing a Notice of Adjudication does not prevent a contractor from registering a Construction Lien against a project. Conversely, registration of a Construction Lien against a project does not prevent a contractor from pursuing adjudication (although there are statutory requirements for perfecting a lien that may prevent adjudication if it is not started promptly after submission of the lien for registration).

Arbitration

Arbitration is a court-like private ADR option where the decision-maker is a single arbitrator or a panel of arbitrators. Arbitration can be initiated by agreement but more commonly, including in CCDC contracts, arbitration is mandated or can be triggered in an arbitration clause or ADR clause found within the contract. Yet, even though arbitration can be mandatory in some contracts, it does not eliminate the availability of adjudication. Since adjudication is a process mandated by law in the PPCLA, no contract can eliminate a party’s right to access adjudication in the event of a payment dispute during the life of a contract (because you generally cannot contract out of following legislation). However, since an adjudicator’s decision is ‘interim but binding’, an arbitration clause means that any final decision relating to a legal dispute on the project would need to be resolved via arbitration, and any resulting arbitration award would trump the adjudicator’s decision.

Unlike adjudication, there is usually no limitation on who can be appointed as an arbitrator. While many arbitrators have a Chartered Arbitrator (C. Arb.) designation, a C. Arb is not required. The flexibility over who can be appointed as an arbitrator is a distinct advantage of arbitration, as it allows the parties to appoint a subject-matter expert. In construction, this allows the parties to appoint an arbitrator with construction industry (and construction law) experience. This leads to less time needed to explain construction terminology, industry norms, and construction law to the decision-maker, and more certainty that the decision-maker understands the evidence and arguments. When contrasted with the Courts, this is a clear advantage as Justices are usually appointed to an action based on their availability, not subject knowledge.

Like adjudication, arbitration is less formal and often more abridged than litigation through the Courts. However, arbitration often involves much more procedure than adjudication, including the submission of sworn witness statements, cross-examination of witnesses and oral argument. While the parties often agree on a simplified procedure (as compared to the Courts) to facilitate submission of evidence and reduce the length of arbitration, much of the cost savings from this simplified procedure is offset by the cost of hiring an experienced lawyer or industry professional as an arbitrator. Arbitrator fees are shared while the arbitration is ongoing, but the winning party may be able to recover their portion of the arbitrator’s fees in a costs award.

Due to the abridged process in arbitration, it is invariably much quicker than proceeding through the Courts. With arbitration, the parties book an arbitration hearing at the start and tailor all of the submission deadlines for witness statements, experts and so on, to meet that hearing date, which is often booked 12-18 months from the appointment of the arbitrator. Meanwhile, litigation through the Court of King’s Bench will generally only allow a trial date to be booked after the parties have completed Questioning for Discovery and exchanged expert reports which will usually take 12 to 18 months (on a fast-moving file), and depending on the length needed for the trial, the earliest possible dates may be 12-24 months from when the trial date is requested. The result is that arbitration will typically be completed at least twice as quickly as litigation through the Courts.

Since arbitration is generally mandated in commercial agreements, the right to appeal arbitration decisions can also be limited in those agreements. Often, agreements will specifically limit the ability to appeal an arbitrator’s decision, resulting in more finality to the decision. Where a commercial contract or arbitration agreement limits the right of appeal, parties will usually need to seek permission to appeal an arbitrator’s decision, the appeal needs to be based on an error of law, and the appellate courts will provide a significant degree of deference to the arbitrator’s decision such that the decision will only be questioned where it is clearly unreasonable (outside the reasonable range of outcomes that the arbitrator could make). Based on that standard, arbitration decisions are more ‘final’ than Court decisions, as there is less of an ability to appeal arbitrator’s awards.

Mediation

Mediations are overseen by an independent, neutral mediator whose role is to aid the parties in reaching common ground. The process is generally voluntary but may be required by contract (such as in CCDC and CCA contracts) and is non-binding. Mediation is most beneficial where parties are still actively trying to work toward a solution to an issue but require some assistance to reach an agreement. As with arbitrators, mediators do not need any specific qualifications to be appointed as a mediator but often have a Chartered Mediator (C. Med.) designation. The only real quality that a mediator requires is the ability to stay neutral and impartial. However, in construction disputes it is often helpful to have a subject-matter expert so that the parties do not need to explain construction terminology and industry norms to the mediator helping them resolve their dispute.

Mediation is often much less expensive than other forms of ADR since much less preparation work is needed. Since it is a more collaborative process than adjudication or arbitration, the written materials are generally more informative than argumentative, mediators will often limit the length of mediation briefs and briefs are often exchanged at the same time. The result is that instead of responding to each other’s briefs, the parties are tasked with explaining the basis of the dispute and their position (rather than why the other side is wrong). This can lead to finding points of agreement that the parties can build on during mediation. Similar to other forms of ADR, the parties will need to pay the mediator, who is typically a more experienced lawyer or industry professional, but since the mediator only needs to review short briefs and attend the mediation without needing to author any decision, mediation is less expensive than litigation through the Courts or Arbitration.

The main downside to mediation is that it is non-binding, and if no agreement is reached, the parties will still likely need to proceed with litigation through the Courts or Arbitration. However, even when the mediation does not result in a settlement, it often leads to a narrowing of the issues between the parties and can often be a springboard for settlement later on during the litigation or arbitration process. Also, Rule 5.14 of the Alberta Rules of Court now requires that parties engage in some form of ADR before being permitted to book a trial date (subject to some exceptions beyond the scope of this article), and mediation is the most common form of ADR used by parties in order to certify that they have completed all steps required to book a trial date. So, despite being non-binding, mediation has many advantages, and when it results in a settlement, parties are sure to save a significant amount on legal fees.

Overview

	Mediation	Arbitration	Adjudication
Optional or Mandatory?	Depends on contract terms	Depends on contract terms May be mandatory and required service of a Notice of Arbitration	Mandatory once a party has issued a notice of adjudication within the legislated timelines
Timeline	At any point before trial/arbitration and required to book a trial	Takes the place of a trial and significantly shortens the time for a decision	Must be initiated within 30 days of the date that ‘final payment’ is due
Cost	One day of a senior lawyer’s fees	Typically about the same cost as trial through the Courts	Depends on value of dispute Adjudicator fees capped at $5,000 + GST for disputes under $100,000 and rates capped at $400/hr for disputes valued less than $500,000
What Can be Resolved	No restrictions	No restrictions, but arbitrator’s jurisdiction may be limited by contract or agreement	Various construction disputes as set out in the PPCLA or matters related to a construction contract as agreed by the parties
Binding or Non-Binding?	Non-binding	Binding and subject to limited right of appeal	Binding subject to judicial review. Later court or arbitration decisions on a construction project may fully or partially reverse interim adjudication decision

Conclusion

The addition of adjudication to the list of ADR options available gives construction contractors a more cost-effective option to resolve disputes on construction projects. Adjudication will be particularly helpful for contractors disputing payment decisions made on active construction projects in a cost-effective and timely manner. Where previously, disputes about payment may persist for the duration of a project, adjudication allows for these disputes to be resolved on an interim basis, mid-project, while preserving the ability to reconcile these issues through litigation or arbitration at a later date.

Adjudication cannot fully replace, nor is it intended to fully replace arbitration, litigation, or mediation for construction projects. Any of these ADR options (and litigation) may be appropriate for a given construction dispute. Adjudication is just another tool available for construction contractors and will be particularly useful to contractors in resolving payment disputes mid-project. It will hopefully limit situations in which contractors feel that their only available option in the face of a payment dispute is to cease work on a project.

To learn more about ADR and determine the right path forward for you, please contact the author, Russell Patterson at rpatterson@gfslaw.ca or (587) 349-8119.

Article co written by Kyla Appel.

*More information on the pricing structure of adjudication, look at the ARCANA website.

**This article generalizes contract terms.

***It is important to understand your contract fully; legal counsel is recommended. This article is not intended to constitute legal advice.

Email Abstract Version

Non-payment? Unfinished work? Adjudication, the newest option available for the resolution of (some) construction disputes may be what your company needs to resolve a payment dispute quickly and less expensively.

Adjudication joins a list of Alternative Dispute Resolution (ADR) options available to construction companies to resolve their disputes outside of a courtroom. Each ADR option has its distinct advantages and disadvantages, but adjudication may be the most suitable ADR option to your company’s current (or future) construction dispute.

Read the full article here for a review of the range of ADR options available, their advantages, and whether adjudication, or another ADR option might be best for your construction dispute.