The Construction Act is set to be overhauled by a government bill to ensure that payments in the supply chain flow more smoothly. Hamish Lal looks behind the covers
Ten 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. This will be led by the Community Empowerment, Housing and Economic Regeneration Bill. What, though, will change and how will the proposed changes affect employers, developers, contractors and the supply chain?
Was reform needed?
The Construction Act has been a significant success. In Melville Dundas Ltd (in receivership) v George Wimpey UK Ltd [2007] UKHL 18; [2007] 1 WLR 1136, the first Construction Act case to reach the House of Lords, Lord Hoffmann said that the 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 Ltd (No 2) [2005] EWHC 2963 (TCC); 106 Con LR 154. Given the judicial support for the Construction Act and the industry’s understanding of its operation, it is tempting to question the need for reform.
Two key issues appear to have driven the desire for change. First is whether project agreements and other agreements relating to PFI projects 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) issue concerns the rule that only contracts in writing should be covered by the Construction Act.
The high point in this issue concerns RJT Consulting Engineers Ltd v DM Engineering (Northern Ireland) Ltd [2002] EWCA Civ 270; [2002] 1 WLR 2344. Here, the Court of Appeal held that, in order for the Construction Act to apply, all the terms of a construction contract had to be in writing. This meant that agreements that contained some, even minor, terms that had not been agreed could not be referable to statutory adjudication, and oral contracts were clearly not covered by the Act.
What will change?
In June 2007, Margaret Hodge, the industry and regions minister, stated 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.” Not surprisingly, the proposed changes essentially centre around payment for the supply chain.
The government’s draft legislative programme says very little about the proposed changes 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 that articulated by the Latham review, and the changes now proposed are equally non-fundamental. Reform is likely to follow the proposals discussed in the Department for Business Enterprise & Regulatory Reform’s Improving Payment Practices in the Construction Industry (2nd consultation).
? Oral contracts
The Construction Act will now apply to construction contracts that 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. It 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 agreements are surprisingly common and are not readily susceptible of resolution to a summary procedure such as adjudication” – per HH Judge Bowsher QC in Grovedeck v Capital Demolition Ltd [2000] BLR 181 – will now be routinely tested.
? 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 wants to change this so that agreements made by the parties as to the conclusiveness of the amount of such payments will be effective only if the agreement is made after the adjudicator’s decision is handed down (not at the time of entry into the contract).
Also being reformed are cover payment notices (section 110 notices) and withholding notices (section 111 notices). The former will now always be required even if there is no obligation to make a payment (for example, because of an abatement). This new section 110 notice, when issued, will set the amount that isdue subject to any subsequent withholding notice. If no section 110 notice is issued, the sum due will be the amount sought by the receiving party. The changes in respect of section 111 notices will be minimal, requiring that they follow the format of the new section 110 notices.
? Adjudication costs
In some contracts, the parties agree that the “loser” will pay the costs of the adjudication or 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 may encourage one party to escalate costs.
It is proposed that any agreement concerning the costs of adjudication will be valid only if made in writing after the adjudicator’s appointment. Where such agreements are made (unless otherwise agreed), only reasonable 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 generally be 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 that chain to make payment conditional upon the payment or issue of a certificate higher up are not valid. The government proposes that pay-when-certified clauses in construction contracts will be banned.
? Suspending performance
Under the Construction Act, a contractor can suspend performance if it is not paid by its employer. However, the current regime “involves suspension of all the contractor’s obligations” and fails to make clear what compensation the contractor will receive if and when performance is resumed.
It is proposed that the contractor will only have to suspend a key obligation. Also, the suspending party will be compensated for reasonable losses arising from the suspension and an extension of time will be provided for any delay. Again, the government aims to ensure that the contractor is not prejudiced by the payment mechanism in the Construction Act.
? Insolvency
In Melville Dundas, the House of Lords considered the interface between the applicability of withholding notices and insolvency. The government’s view is that withholding notices should not apply where the receiving party is insolvent, but should do so in all other cases.
New body of case law
Since coming into force on 1 May 1998, the Construction Act has had a significant effect upon the construction supply chain, both in terms of disputes and payment terms. Its policy has been consistently upheld by the courts and a large body of case law has developed around it. The latest government proposals result from two consultations and, absent the issue of oral contracts allowing recourse to statutory adjudication, are uncontroversial and maintain the underlying premise of the Act.
The reform could have been broader and addressed other issues such as PFI contracts, the validity of agreements that postpone the payment of an adjudicator’s decision and even the question of when such decisions are received or delivered. However, the foregoing omissions are not fatal and the common law has provided answers to such questions.
The government’s proposals are unlikely to change, especially as the majority in the industry welcome the abolition of the “contracts in writing” rule. It is likely that a new body of case law will emerge around the adjudicator’s role, jurisdiction and behaviour when assessing the evidence to establish the express and implied terms of oral contracts.
Hamish Lal is a partner in the construction group at Dundas & Wilson
