10 years after the Housing Grants, Construction and Regeneration Act 1996 (the so-called “Construction Act”) came into force the Government’s proposal for its ‘reform’ have now been announced. Reform will be lead by the Community, Empowerment, Housing and Economic Regeneration Bill. But what will change? And what do the proposed changes mean for employers, developers, contractors and the supply chain? What do he proposed changes mean for the established body of case law? Hamish Lal considers the situation.
WAS ‘REFORM’ NEEDED?
The Construction Act has been a significant success. In the recent and first Construction Act case to reach the House of Lords, Melville Dundas Limited (in receivership) v George Wimpey UK Limited [2007] UKHL 18 Lord Hoffman said the Construction Act was enacted to:
“give effect to certain of the recommendations of Sir Michael Latham’s report Constructing the Team (1994). Broadly speaking, they deal with three topics: summary adjudication to enable the parties to obtain a provisional but enforceable ruling on any matter in dispute; entitlement to stage payments and the prohibition of conditional payment provisions….”
The Courts have been instrumental in ensuring that the Construction Act has made an indelible mark on the construction industry. A number of Court of Appeal decisions have upheld the ‘pay now, argue later’ policy underpinning statutory adjudication, the payment provisions and the prohibition of ‘pay when paid’ terms. The latter issue was addressed in Midland Expressway Ltd v Carillion Construction Limited [2005] EWHC 2963. Given the judicial support for the Construction Act and the common understanding in the industry of the operation of the Construction Act it is very tempting to question the need for reform.
Two key issues appear to have driven the desire for change to the Construction Act. Firstly, the issue of whether Project Agreements and other agreements related to PFI should be included in the Construction Act or put another way whether Design and Build Contracts in the PFI sector should be excluded? The second (more high profile) concern was that about the ‘rule’ that only contracts in writing should be covered by the Construction Act. The cornerstone of the argument is that Section 107 has “wasted money, wasted adjudicator and court time” and has lead to “jurisdictional attacks on adjudicators that have nothing to do with the merits of the referring party’s case”. The Government also appears to place much emphasis on the frequency of so-called “technical arguments” aimed at challenging jurisdiction. It has founded much of its conclusions on academic research. The findings of Glasgow Caledonian University’s August 2005 Report on adjudication are cited in support of the argument that the ‘contracts in writing rule’ leads to challenges to decisions – in fact, according to the Report, 10% of all challenges to adjudicator’s appointments relate to the aforementioned rule. Some may say that 10% is not a big number (especially when this aspect of the study looked at only 105 challenges and failed to include challenges at enforcement stage).
The high point in this issue concerns RJT Consulting Engineers Ltd v DM Engineering (Northern Ireland) Ltd [2002] EWCA Civ 270 where the Court of Appeal decided that all the terms of a construction contract had to be in writing in order for the Construction Act to apply. This meant that agreements which had some terms, even minor terms that had not been agreed, could not be referable to statutory adjudication and oral contracts were clearly not covered by the Construction Act.
WHAT WILL CHANGE?
The Government’s view is that the Construction Act “has delivered some improvements but recent industry surveys say that poor payment practices continue to be a key issue for many in the industry. We must change that.” (Industry & Regions Minister 20 June 2007). Not surprisingly, the proposed changes essentially centre on ensuring cash flow and payment for the supply chain.
The Government’s Draft Legislative Programme says very little about the precise changes to be made to the Construction Act. It states that the Bill will improve ‘cash flow through construction supply chains and, where appropriate, encourage parties to resolve disputes by adjudication rather than by litigation.’ This underlying aim is not a fundamental shift from the aim as articulated by the above mentioned Latham review and the changes now proposed are equally non-fundamental. Reform is likely to follow the proposals discussed in Improving Payment Practices in the Construction Industry – 2nd Consultation.
ORAL CONTRACTS
The Construction Act will now apply to construction contracts which are agreed wholly in writing, only partly in writing, entirely orally or varied by oral agreement. This is perhaps the most significant reform – both in legal and practical terms. This is likely to lead to a far greater number of ‘contracts’ being referred to adjudication. The view that “disputes as to the terms, express and implied, of oral construction greements are surprisingly common and are not readily susceptible of resolution by a summary procedure such as adjudication” (per HHJ Bowsher QC in Grovedeck v Capital Demolition Ltd [2000] EWHC 139) will now be routinely tested.
Further, Ward LJ comments in RJT Consulting Engineers Ltd DM Engineering [2002] BLR 217 that “writing is important because it provides certainty. Certainty is all the more important when adjudication is envisaged to have to take place under a demanding timetable” will come under practical review. Ward LJ additional comment on the need for terms to be in writing is compelling: “The written record of the agreement is the foundation from which a dispute may spring but the least the adjudicator has to be certain about is the terms of the agreement which is giving rise to the dispute”. It may have been better if the reform had suggested that only all the key terms on cost, time, and scope of work had to be in writing to allow recourse to statutory adjudication.
PAYMENTS
Construction contracts often provide that decisions on interim or stage payments will be conclusive such that adjudicators have no jurisdiction to open up, revise or review the decision. The Government want to change this so that such agreements made by the parties as to conclusiveness of the amount of an interim or stage payment will only be effective if the agreement is made after the relevant adjudicator’s decision is handed down (and not at the time of entry into the contract). Reform will also cover payment notices (“section 110 notices”) and withholding notices (“Section 111 notices”). The former will now be always required even if there is no obligation to make a payment (e.g. because of an abatement). This new section 110 notice when issued will set the amount that is due subject to any subsequent withholding notice. If no section 110 notice is issued then the sum due would be the amount sought by the receiving party. As far as section 111 notices are concerned the changes require that they follow the format of the new section 110 notices but will now allow withholding in respect of any amount (i.e. including abatement) and not just withholding “of a sum due” as the present Construction Act allows. The primary problem is that the present position is thought to only allow withholding in relation to setoffs.
ADJUDICATION COSTS
In some contracts the parties actually agree that the ‘loser’ will pay the costs of the adjudication or even that the referring party will pay (regardless of whether it wins or losses). Considered wisdom tells us that such clauses can operate as a practical disincentive to adjudicate or can even encourage one party to escalate costs.
The proposal is that any agreement about who pays the costs of the adjudication will only be valid if made in writing after the adjudicator’s appointment. Where such agreements are made (unless otherwise agreed) only reasonably incurred costs will be recoverable and the parties will be jointly and severally liable for the adjudicator’s costs and expenses. Importantly, the adjudicator’s decision on costs will be generally final and binding
PAY-WHEN-CERTIFIED CLAUSES
The Construction Act is primarily concerned with improving cash-flow in the supply chain and attempts by one party in the supply chain to make payment conditional upon payment or issue of a certificate upstream are not valid. The Government proposal is that pay-when-certified clauses in construction contracts will be banned and be ineffective.
In Midland Expressway Ltd v Carillion Construction Ltd & Ors (No. 2) [2005] EWHC 2963 Jackson J considered the following clause:
... the employer shall bear no risk or liabilities whatsoever arising from a department’s change, and accordingly, the employer shall have no liability to make payment in connection with or arising from a department’s change... and concluded that such pay-when paid clauses were ineffective. There was some debate whether pay-when certified clauses should be treated in the same way. The Government has now said yes.
SUSPENDING PERFORMANCE
Under the Construction Act contractors are allowed to suspend performance where there is nonpayment by the Employer. The problem is that the current regime ‘involves suspension of all the contractor’s obligations and does not make clear what compensation the contractor receives if and when performance is resumed.
The proposal is that the contractor does not need to suspend all his obligations so that a key obligation could be suspended. Another tweak is that the suspending party will be compensated for reasonable losses caused by the suspension and that an extension of time will be provided for any delay caused by the suspension. Again, the Government’s emphasis is on ensuring that the Contractor is not prejudiced by the payment mechanics in the Construction Act.
INSOLVENCY
The first House of Lords case, Melville Dundas Limited (in receivership) v George Wimpey UK Limited [2007] UKHL18 considered the interface between the applicability of withholding notices and insolvency. Their Lordships held that Section 111(1) of the Construction Act, which provided that a party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he had given an effective notice of intention to withhold payment, did not apply to a lawful ground for withholding payment, such as the contractor’s insolvency, when it was not possible in the circumstances for notice to have been given within the statutory time frame. In order to remove any inconsistency between the Construction Act and the above case the Government’s view is that withholding notices are not now needed when the receiving party is insolvent but should continue to apply in all other cases.
CONCLUSION
Since coming into force on 1 May 1998 the Construction Act has had a significant impact on the construction supply chain both in terms of disputes and payment terms. The policy of the Construction Act has been consistently upheld by the Courts and a large body of case law has been developed around the Construction Act. The latest Government proposals are the result of two consultations (the latter closed on 17 September 2007) and, absent the issue of oral contracts allowing recourse to statutory adjudication, are not controversial and do not alter the underlying premise of the Construction Act.
The reform could have been much broader and could have addressed other issues such as PFI contracts and the validity of agreements that postpone payment of an adjudicator decision and even the question of when adjudicators’ decisions are received or delivered. However, the forgoing omissions are not fatal and indeed the common law has provided answer to such questions.
The Government’s proposals are unlikely to change with the passage of the Bill and with the majority of the industry ostensibly happy about the abolition of the ‘contracts in writing’ rule. My view is that a new body of case law will now emerge around the adjudicator’s role/ jurisdiction/behaviour when assessing the evidence to establish the express and implied terms of oral contracts. The changes to the payment procedures will be welcomed and readily assimilated into the various standard forms.
Hamish Lal is a Partner at Dundas & Wilson LLP’s Construction & Engineering Team, London. (email: hamish.lal@dundas-wilson.com)