Does Uganda need a mandatory statutory adjudication regime in the construction industry?

Introduction

Adjudication is an alternative dispute resolution mechanism where an independent third party, known as an adjudicator, makes a decision on a dispute between parties. The decision is temporarily binding because it can be set aside by other dispute resolution mechanisms like arbitration and litigation. Adjudication has found increased importance and use in the construction industry globally because of its inherent benefits which include speed, continuity of work while resolving disputes using the “pay now, argue later” principle, relatively cheap, privacy and the fact that the parties have a choice of a decision maker who is often an expert in the area.

There are three forms of adjudication, namely statutory, contractual and ad hoc. Statutory adjudication means the form of adjudication where statute applies to the contract between the parties. Contractual adjudication refers to the form of adjudication where a statute does not apply but the parties have agreed a mechanism in their contract by which they can adjudicate disputes. An ad hoc adjudication applies where there is no statute or contractual mechanism in place, so the parties agree to submit an existing dispute to adjudication.

Background to statutory adjudication in the United Kingdom

The United Kingdom is one of the jurisdictions with a mandatory statutory adjudication regime. The origins for the need for a statutory adjudication regime was due to the volatility of the construction industry in the United Kingdom in the 1970s and 1980s. This was due to the uniqueness of the construction industry where projects last for long periods of time, suffer from external shocks like inflation, they consist of multiple parties including financiers and disputes which cost time and money. It was common for there to be complaints about defects and delays as well as the inevitable disputes about variations and extra expense as was held in the case of Pegram Shopfitters Ltd v Tally Wiejl (UK) Ltd [1].

Additionally, following the decision in Modem Engineering Ltd v Gilbert-Ash [2] which overruled the decision in Dawnays v Minter [3], employers were able to advance crossclaims to avoid making payment to the contractors which affected cash flow and caused disputes. This created deep seated crisis in the construction industry. These difficulties in the industry went much wider and were exhibited by higher costs of construction in the United Kingdom and a higher proportion of disputes within the construction industry which in turn took long to be resolved at high cost. The combination of these factors led to many contractors to undergo liquidation and created a threat to the general United Kingdom economy.

Problems in the construction industry mattered because the industry itself comprised such a major part of the United Kingdom economy overall. For instance, in 1993, the value of the output in the whole construction industry was ￡46.3 billion which was about 8% of the Gross Domestic Product (GDP) of the United Kingdom.

In 1993, Sir Michael Latham was commissioned to do a review of Procurement and Contractual Arrangements in the United Kingdom construction industry. In his report which was named “Constructing the Team”, Sir Latham came up with 30 recommendations. The most radical aspects of this report were in recommendation 25 and 26 which concerned a recommendation of particular payment provisions to be implied into building contracts and an unequivocal recommendation of a new type of mandatory dispute resolution mechanism known as adjudication respectively.

Despite the wide range of available standard form contracts, Sir Michael Latham was unimpressed with their applicability to “the reality on a modern construction site”, which included:

a)???? A general duty to trade fairly, with specific requirements related to payment and related issues

b)???? Clearly defined work stages including milestones or other forms of activity schedules

c)???? The pre-pricing of variations

d)???? An adjudication system which was independent of contract administration

This was further also shown by the existence of unfair contract terms such as the “pay when paid” clauses for subcontractors which bore financial burden of the insolvency or failure of a company much higher in the contractual chain.

The adjudication regime which was proposed by Sir Michael Latham was to be used for every size of contract and that there would be no restriction on disputes that could be resolved by adjudicator. The adjudicator’s decision would be temporarily binding in the sense that it could be overturned by litigation or arbitration. Through this, the concept of mandatory adjudication was born, and this was reflected in the Housing Grants, Construction and Regeneration (HGCRA) 1996 as amended by the Local Democracy, Economic Development and Construction Act (LDEDCA) 2009 (herein referred to as “the Act”)

How does the mandatory statutory adjudication regime in the United Kingdom work?

Provisions of the Act only apply to construction contracts within the meaning contained in sections 104, 105 and 106.

Section 104(1) defines a “construction contract” as being in an agreement with a person for:

a)???? The carrying out of construction operations

b)???? Arranging for the carrying out of construction operations by others, whether under subcontract to him, or not.

c)???? Providing his own labour, or labour of others for the carrying out of construction operations.

For the purposes of interpretation, a person includes a body of persons corporate or unincorporated.

Section 104(2) broadens the categories of construction contract to include professional service contracts for example architectural design, surveying work, providing advice on a structure, engineering, interior/exterior decoration and landscaping design. Therefore, pursuant to section 104(2), a professional may seek adjudication for outstanding fees and professional negligence allegations can also be submitted to adjudication as was held in the case of Gillies Ramsey Diamond v RJW Enterprises Ltd (2002) [4].

Exclusions to the definition of a construction contract for example residential occupiers are described in section 105(2). Furthermore, whereas the section 107 originally provided that the contracts have to be in writing, this requirement has been removed by the 2009 Act. This fits within the general common law view about what is required for a contract to exist at common law that was held in Lewis v Brass [5].

If a construction contract does not have a provision for adjudication, secondary legislation in the form of The Scheme for Construction Contracts (herein referred to as “the Scheme”) applies. In these cases, the terms of the Scheme have effect as implied terms of the contract. The Scheme can apply where parties have chosen it to be the applicable adjudication procedure or if there is no agreed adjudication procedure in a construction contract. It should be noted that even where an adjudication scheme included in a construction contract conflicts with or fails to comply with the minimum requirements contained in section 108(1)-(4) of the Act, then section 108(5) of the Act provides that the entire adjudication scheme is replaced with the statutory scheme for construction contracts as was held in the case of David McLean Housing Contractors Ltd v Swansea Housing Association Ltd (2001)[6].

Efficiency of the Statutory Adjudication Regime in the United Kingdom

In a report on adjudication trends in the United Kingdom construction industry, it was noted that the typical length of adjudication proceedings in 2023 lasted between 29 and 42 days with less than less than 10% of practitioners in the United Kingdom construction industry saying that it goes beyond that (Nazzini & Kalisz, 2023). This corresponds directly to the 28 days in which an adjudicator has to make a decision and the additional extension of 14 days that can be granted to the adjudicator by the parties.

The same report noted that the common value of disputes was between ￡125,000 to ￡500,000 which are significant sums for disputes. Out of 2058 referrals to adjudication which were handled by different Adjudicator Nominating Bodies, only 22 complaints were received. It was also noted that it was rare for adjudicated disputes to be referred to litigation or arbitration?(Nazzini & Kalisz, 2023).

This report showed that the statutory adjudication regime had made gains in resolving some of the outstanding issues that the construction industry in the United Kingdom had faced regarding the time and cost spent on resolving disputes.

Adjudication: The Ugandan Context

Adjudication in Uganda is mainly in contractual and ad hoc form since there is no statutory adjudication regime. The construction industry in Uganda, just like that one in the United Kingdom, has an overall impact on the economy given that it contributes over 12% of Uganda’s Gross Domestic Product (GDP) [7]. It has also witnessed steady growth for the last 20 years and despite the recent upsurge in inflation, the sector has remained on a steady path of growth and development and employs a wide range of players in both the private and public sectors.

However, the construction industry in Uganda still faces deep seated challenges which include lack of a regulatory framework, lack of access to work, difficulty in accessing capital, delayed payments for contractors mostly on public projects, dominance of the construction industry by foreigners, disputes which lead to litigation in the commercial court and external shocks like inflation. For instance, the annual inflation as measured by the construction sector index for the 12 months to February 2022 for inputs of the construction sector (covering material prices, wage rates and equipment hire rates) increased to 2.3 percent up from 1.7 percent increase registered in January 2022 (UBOS, 2022). Additionally, to portray the challenge of delayed payments, the annual performance report by the Uganda National Roads Authority (UNRA) [8] for the 2022/2023 Financial Year showed that the debt to contractors carried forward from the 2021/2022 Financial Year to the 2022/2023 Financial Year was 471.84 billion Uganda Shillings (127,249,803 USD).

These challenges have led to crisis within the Uganda construction industry. This can be seen with the liquidation of the biggest players like Abubakar Technical Services which had to get a government buy in of 26 billion Uganda Shillings (7,006,069.20 USD) for a 7% equity share in March 2023 and Roko Construction Company which required a government bailout of 203 billion Uganda Shillings (55,509,625.20 USD).

The Government of Uganda has rung out preferential efforts for local players in the construction industry. These efforts include ringfencing 30% of the contract works for local content, reserving contracts of up to 45 billion Uganda Shillings for local contractors. There are also types of projects which are a reserve of the local players, namely:

a)???? Mechanized maintenance of unpaved and paved roads

b)???? Periodic maintenance of paved and unpaved national roads

c)???? Low value sealed roads

d)???? Swamp improvements

e)???? Labour based maintenance of national roads

Because of these preferential schemes, the annual performance report by the Uganda National Roads Authority (UNRA) for the 2022/2023 Financial Year showed that for the Financial Year 2022/2023, contracts totaling to 1.9 trillion Uganda Shillings (511,981,980.00 USD) equivalent to 32.84% by value awarded to local providers.

Whereas these preferential schemes have pushed to address the challenge of access to work, they do not address the issues that precipitate claims and disputes on construction projects. A report by HKA [9] on causes of claims and disputes in Africa shows that the common causes of disputes include access to site, change in scope, cash flow and payment issues, incomplete design, contract interpretation issues, contract administration failure and poor management of suppliers or subcontractors. The same issues are major causes of disputes in Uganda. Additionally, the preferential schemes do not address the aspect of unfair contract terms which are precipitated by the power dynamic created by domination of the industry by foreign players. As such, “pay when paid” clauses are common which put immense financial pressure on the local players that causes cash flow problems.

There are a number of standard form contracts used in Uganda for instance FIDIC, PPDA and EAIA forms of contract that provide for contractual adjudication however they are still blighted by a series of problems which make contractual adjudication ineffective. PPDA forms of contract have an ambiguously drafted adjudication clause which has led to a number of contract interpretation disputes at the Center of Arbitration and Dispute Resolution (CADER). Whereas FIDIC has provided for Dispute Adjudication Boards, it has failed to be applicable to small size contracts and disputes and also has failed to find application in the private industry which has affected the efficiency of this contractual adjudication regime. The EAIA form of contract completely does not provide for an adjudication scheme with disputes being referred to arbitration directly. This could be problematic in application for small claims. From this, it can be deduced that the standard form contracts currently being used in Uganda do not address the realities of a modern construction contract. The industry will still be plagued with disputes which consume time and money.

Making the case for a mandatory statutory adjudication regime

There is a need for radical reform and change to create a statutory mandatory adjudication regime which cannot be contracted out of. This mandatory adjudication regime will have to provide a definition of a construction contract to include works and services and thereafter provide the minimum requirements for a construction contract to comply with adjudication provisions of the statute.

To re-echo the words of Sir Michael Latham in his report in 1994:

“There are several ways to approach the concerns expressed by all sides of the construction

process about contracts. They are—

a)???? To do nothing.

b)???? To amend existing Standard Forms to meet some of the concerns.

c)???? To try to define what a modern construction contract ought to contain. If this can be achieved, there are then two further alternatives, which are to change existing contract forms to take account of such requirements and/ or to introduce a new contract which will deliver them.

It is no longer possible to do nothing. That option can be discarded at once.”

In the Uganda context, even the option of amending existing standard forms would not create the substantial change needed in the construction industry. Therefore, implementation of a regime whereby disputing parties could have an interim binding decision will be a revolution that will transform the landscape of construction disputes.

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[1] [2003] EWCA Civ 1750.

[2] [1974] AC 689.

[3] [1971] 1 WLR

[4] [2003] BLR 48.

[5] (1877) LR 3 QBD.

[6] [2002] BLR 125.

[7] https://hdl.handle.net/20.500.12281/15165

[8] www.gcic.go.ug/unra-performance-report-fy-2022-2023/

[9] www.hka.com/crux/