Construction Act review

01 May 2008

One of the unique features of the construction and engineering industry in the UK is that it has specific laws relating to payment and dispute resolution in the construction and engineering industry alone. The Housing Grants, Construction and Regeneration Act 1996 was introduced to improve cash flow in the industry and to introduce a unique statutory right to resolve payment and other disputes very quickly, by way of adjudication.

The Act applies to almost all contracts in the construction and engineering industry, including main contracts, sub-contracts and professional appointments, although there are some important exceptions, and its success in the UK has led to similar provisions being introduced in Australia and New Zealand.

The UK Government is now looking at how to improve the Construction Act further by means of a consultation paper. It looks at the key areas of agreeing on payment, managing cash flow and managing the supply chain. It also seeks to find ways of allowing parties to refer disputes to adjudication without discouragement. Comments are sought on how payment mechanisms may be made fairer but not on how risks and rewards may be transferred to other parts of the supply chain.

Proposals

The consultation proposes that all contracts should be required to include an ‘adequate mechanism’ for payment. This would include provisions setting out what amounts comprise the payment, the final date for payment and the information to be provided.

It is important to remember that the Construction Act works by prescribing a framework for the contract, allowing flexibility on the precise terms governing the relationship within that framework. The proposal to give greater definition to the concept of an ‘adequate mechanism’ is in keeping with this broad approach. At the same time it would prescribe a key element of the contractual payment mechanism within the legislation itself. This would remove flexibility and this may not be appropriate for all projects or methods of procurement.

At present the Act does not require that a withholding notice – giving details of a set off or ‘contra charge’ against any payments – gives details of the amount which remains to be paid after the amount in the notice is withheld. It is proposed that the legislation be changed so that a withholding notice must set this out, so as to inform the payee of the amount it will receive.

The review raised concerns that ‘pay-when-certified’ clauses could cause confusion and were unsuitable where a sub-contract includes certification as part of the payment mechanism. It is proposed that ‘pay-when-certified’ clauses are only possible where certain criteria are satisfied. The criteria could be that the timing of payment to sub-contractors should be linked to payment in the main contract.

Work off-site is perceived to be on the increase with more components being pre-fabricated then moved to site. In view of this, it is proposed that stage payments should be made for off-site work. It is suggested that this would result in improved cash-flow and clarify ownership.

Adjudication

It is recommended that in most cases adjudicator's decisions should have immediate effect. As part of this, the placing of any sums awarded by adjudicators into a ‘trustee stakeholder’ account until they are resolved by litigation or arbitration should be prevented.

No clear consensus emerged from the review on the complex issue of whether an adjudicator has power to rule on aspects of his jurisdiction. However, the consultation proposes a compromise which would give adjudicators power to decide certain limited jurisdiction issues, that is: n if there is a construction contract for the purposes of the Act n whether there is a dispute; and whether he was appointed correctly.

The adjudicator's decision would be final on these issues (even if wrong) but the decision would still be open to review in subsequent proceedings.

The consultation proposes to amend the Act so that the adjudicator has the power to review “any decision taken or any certificate given by any person referred to in the contract”. The exceptions to this are where the contract stipulates that the decision or certificate is final, and where the adjudicator believes that the decision relates to a non-interim payment.

This is quite a radical proposal. An adjudicator could open up any decision on an interim certificate even if the parties had agreed that such decisions are final and conclusive.

Conclusion

The consultation has been praised in some parts of the UK industry as a courageous step, but other groups (e.g. sub-contractors) have expressed disappointment that it has not gone further. The responses to the consultation are required by 21 June and will be very interesting.

It will also be interesting to see whether, as a result of the publicity from the review, other EU legislatures follow the example of Australia. Similar laws could be introduced to improve payment practices and dispute resolution procedures in the construction and engineering industries in the other EU jurisdictions.

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