Getting adjudication right: Early issues and opportunities for improvement

By Jay Nathwani and John Margie

Special to Ontario Construction News

Statutory adjudication of construction disputes in Ontario is in its early stages. Because of the section 87.3(4) transition provisions of the Construction Act (the Act), adjudication does not apply to most current contracts and subcontracts; but as new projects are bid, adjudication will gradually become the norm in the province. Before that happens, the provincial government and the statutory adjudication authority should take this opportunity to review three aspects of adjudication procedure, two of which are at variance with the statutory adjudication scheme, and the other of which threatens to undermine its purpose.

First, the Authorized Nominating Authority for adjudications, Ontario Dispute Adjudication for Construction Contracts (ODACC), sets out four suggested pre-designed adjudication processes, all of which include a precondition that that parties submit a disputed invoice to the adjudicator, something which is not required under the Act.

Second, ODACC’s suggested adjudication processes all include a requirement that the adjudicator submit a draft determination to ODACC ahead of releasing the final determination to the parties. Nothing in the Act or its regulations gives ODACC a role as a reviewer or repository of adjudication awards.

Third, ODACC has established an administrative fee which results in excessive fees payable by adjudicators to ODACC (which is owned by ADR Chambers Inc.). The fee schedule will have the effect of either increasing fees charged by adjudicators, lessening the availability of adjudicators willing to work, or both.

Suggested ODACC procedures which vary from the Act’s requirements

Requirement to submit a “disputed invoice”

ODACC’s website (odacc.ca) includes a page on “Adjudication Process”. This page sets out four “Pre-designed Adjudication Processes”. If none of these four pre-designed processes are selected, “Adjudication Process 5” provides that “The Adjudicator will convene a teleconference with the Parties to establish the process and rules for the adjudication and set a timeline….” Such an ad-hoc process will almost certainly result in higher costs to the parties, as the adjudicator must spend time discussing the process rather than adjudicating the merits of dispute.

Most parties, particularly those involved in smaller disputes, will not want to pay for an adjudicator’s time to design an ad-hoc process, and will want to choose from among the pre-designed processes. But each of these pre-designed processes requires the submission of “a copy of the construction contract and disputed invoice, both of which must be submitted” (emphasis added). In so doing, these processes establish a procedural requirement which has no support in the language of the Act.

The availability of statutory adjudication is set out in section 13.5 of the Act:

Availability of adjudication

Contract

13.5 (1) Subject to subsection (3), a party to a contract may refer to adjudication a dispute with the other party to the contract respecting any of the following matters:

1. The valuation of services or materials provided under the contract.
2. Payment under the contract, including in respect of a change order, whether approved or not, or a proposed change order.
3. Disputes that are the subject of a notice of non-payment under Part I.1.
4. Amounts retained under section 12 (set-off by trustee) or under subsection 17 (3) (lien set-off).
5. Payment of a holdback under section 26.1 or 26.2.
6. Non-payment of holdback under section 27.1.
7. Any other matter that the parties to the adjudication agree to, or that may be prescribed.

In respect of several of these matters, it would not be necessary for a party to have rendered an invoice before a dispute arose. For instance, a contractor might request or propose a change order before carrying out work which it considers to be a change. The owner might wish to take to adjudication the issue of whether the work is in scope or not. In another scenario, an owner might advise a contractor of a set-off claim, and the contractor might wish to adjudicate that claim prior to delivering a proper invoice and receiving a notice of non-payment from the owner.

It is apparent from the suggested fees set out for each process that ODACC contemplates that only disputes dealing with more than $50,000 would be subject to the ad-hoc process; however, by pre-conditioning participation in the most efficient adjudication processes on the delivery of a document, the disputed invoice, which, by statute, need not exist prior to an adjudication, ODACC risks shunting many disputes which would benefit from the efficient pre-designed processes into a more expensive ad-hoc process.

It also risks confusing less sophisticated parties as to the availability of adjudication. Most laypersons reading the ODACC website would come away with the impression that an invoice needs to exist before a dispute can proceed to adjudication.

As the province’s official Authorized Nominating Authority, it would surely be appropriate for ODACC’s procedure to reflect the clear language of its enabling statute. This issue ought to be a simple one for ODACC to correct in the near future.

Requirement that adjudicator submit a draft determination to ODACC

As part of each of the five adjudication processes set out on its website, ODACC suggests that the “Draft Determination is provided to ODACC” five days before the final determination of the adjudicator is released to the parties. There is no support for such a requirement in either the Act or its regulations.

The duties and powers of ODACC are set out a section 13.3 of the Act. In addition, O. Reg. 306/18 makes provision for “Other Duties and Powers” at sections 6-15.1, and sets rules in respect of determinations at section 22. Nothing in the Act or the regulations requires an adjudicator to provide ODACC with either a draft or final determination; neither does the Act nor the regulations give ODACC the power to require an adjudicator to do so. An adjudication, while provided for by public statute, is a private process between the parties and the adjudicator. It is not ODACC’s proper role to retain copies of awards made as part of a private adjudication.

It is important to note that ODACC’s five adjudication processes are explicitly not mandatory. ODACC’s website notes, “the Adjudicator has the discretion to conduct the adjudication in the manner he or she determines appropriate in the circumstances (s. 13.12(4) of the Act).” However, as above, ODACC’s website is likely to leave laypersons with a confusing impression of adjudication procedure.

Perhaps more importantly, as a creature of statute, ODACC should not be assuming a role – as reviewer or repository of private adjudication decisions – that it has not been granted by the Act or its regulations.

This issue has the potential to cast into doubt the integrity of the adjudication process. One of the grounds for setting aside an adjudication award under section 13.18(5) of the Act is that “The adjudication was conducted by someone other than an adjudicator.” If adjudicators provide their decisions to ODACC before they are final, the decisions are potentially open to challenge on the basis that someone other than the adjudicator played a role in drafting the award. At the very least, in the context of an application for judicial review, ODACC’s requirement opens both it and the adjudicator to a demand for production of the correspondence passing between them.

This is an important issue and, again, one that seems relatively easy for ODACC to correct.

ODACC’s administrative fee

The third issue with the adjudicative scheme established by ODACC is commercial, and therefore perhaps less likely to be corrected in the near future. Simply put, ODACC’s administrative fee – the percentage payable by an adjudicator to ODACC – is so high that it will discourage the provision of cost-effective adjudication services.

Pursuant to section 13.10(2) of the Act, fees charged by an adjudicator are to be agreed between the adjudicator and the parties. If they cannot agree on a fee, then the adjudicator has the option to request that the Authorized Nominating Authority (ODACC) set the fee pursuant to a schedule of fees listed on the “Fees For Adjudications” page of ODACC’s website.

Importantly, the fee that an adjudicator is prepared to accept will naturally depend on the administrative fee that the adjudicator must remit to ODACC.  The “Fees For Adjudications” page on the ODACC website sets out the percentage administrative fee payable to ODACC by the adjudicator:

The fee is payable by an Adjudicator to ODACC for each adjudication (the “Administrative Fee”) and is based on the Adjudication Fee.

• Where the Adjudication Fee is $3,000 or less (not including HST), the Administrative Fee will be 50 per cent of the amount paid by the Parties;
• Where the Adjudication Fee is over $3,000 (not including HST), the Administrative Fee will be 40 per cent of the amount paid by the Parties; … Emphasis added.

Forty to 50 per cent is an extremely high fee for an adjudicator to pay to an organization that plays no role throughout most of an adjudication process. Not to put too fine a point on it, but that level of overhead cost is akin to an office in which an adjudicator pays rents and has administrative support, whereas ODACC provides no such facilities or services to adjudicators, who maintain their own professional practices.

This level of administrative fee creates two incentives, neither of which is positive for parties to an adjudication.

First, it incentivizes adjudicators to set relatively high hourly rates, in line with what they might charge if they were required to pay office overhead out of their billings. This is precisely what most construction disputes in Ontario do not need. Cost has been a major access to justice issue for years, and the efficiency and appeal of adjudication is much-reduced if the high hourly rates familiar to participants in the civil justice system find their way into the system of statutory adjudication.

Second, it disincentivizes adjudicators to agree to work under the set fee regime established by ODACC. As noted above, the presumption is that the adjudicator’s fees will be agreed between the parties and the adjudicator, failing which an adjudicator may request that ODACC set the fee in accordance with its fee schedule. The practical problem is that ODACC’s fee schedule is quite restrictive, starting at only $800 for a dispute of less than $10,000. Disputes of $35,000 up to $50,000 attract a fee of only $3,000. As 50 per cent of this fee must be paid to ODACC, adjudicators will have little incentive to take on disputes of this quantum on a fixed-fee basis – or at least on the basis of the fees fixed by ODACC. Parties to disputes may find that they can only retain an adjudicator for a higher fixed fee or at a relatively high hourly rate.

Section 13.3(2)(a) of the Act allows the province to regulate ODACC’s ability to set administrative fees. The province may wish to explore the regulatory options available to it, or adjudication risks turning from an initiative in efficient dispute resolution on construction projects, into another aspect of an overly costly justice system burdened by high overheads and consequently unaffordable fees.

Jay Nathwani is senior legal counsel, Crosslinx Transit Solutions Constructors and John Margie is a partner at Glaholt LLP. This story was originally published on the Ontario Bar Association’s website. Republished with permission of the authors.