REUTERS | Denis Balibouse

2011 amendments to Construction Act 1996 are under review

On 1 May 2018 it will be 20 years since the Construction Act 1996 came into force. I think it is fair to say that, despite initial reservations by some about its introduction, most people would agree that, overall, the statutory adjudication and payment provisions have been successful. That said, like any adolescent, its teenage years have been somewhat difficult, which is mainly down to the 2011 amendments (introduced by Part 8 of the LDEDC Act 2009) to both the Act and the Scheme for Construction Contracts 1998.

Therefore, I was delighted to receive an email from a friend a couple of weeks ago letting me know that the Department for Business, Energy & Industrial Strategy (BEIS) had published a consultation on the 2011 amendments. The consultation can be accessed here and you have until 19 January 2018 to submit your thoughts.

Not only that, but the government has also published a consultation on the practice of cash retention under construction contracts (with the same January deadline). Although it is a very relevant and worthwhile consultation, it is the consultation on the 2011 amendments that I want to focus on today.

The 2011 amendments

Let’s cast our mind back to the budget of March 2004. Peter Andre had just topped the charts with Mysterious girl and we all thought that no mobile phone would improve on the Blackberry. Gordon Brown was still Chancellor of the Exchequer (much to his own displeasure as we now know), and he announced a review of the Construction Act. I don’t know why the review of this legislation needed to be announced in a budget but cue reports and consultations on what should be changed, all published by the various BEIS predecessors (DTI, BERR and BIS).

The resulting 2011 amendments came into force in England and Wales on 1 October 2011. The government says that their objective was to:

“… increase transparency in the exchange of information relating to payments; encourage parties to resolve disputes by adjudication, where appropriate; and strengthen the right to suspend performance under the contract.”

While the adjudication amendments were interesting, it was the amendments to the payment provisions that were predicted to have a more significant impact on the industry, as I wrote about at the time (twice).

Judicial consideration of those amendments took some time, and when I reviewed how the amendments were faring in October 2012, I noted that there were no reported judgments. However, fast forward a couple of years and the flood gates were forced open by cases such as Harding v Paice, ISG v Seevic and Galliford Try v Estura, and there have been many other cases concerning payment notices, default payment notices and pay less notices. In my view, we’ve seen far more cases since the 2011 amendments than we saw about the payment provisions of the pre-amended Construction Act.

The 2017 consultation

The 2017 consultation hasn’t been prompted by the raft of cases that we’ve seen. Rather, the government says that it made a commitment to undertake a review five years after the changes were introduced in order to establish their effectiveness in practice.

The consultation concerning the 2011 amendments is divided into three main parts:

  • Measures intended to address the costs of adjudication.
  • Measures intended to improve the payment framework.
  • Measures intended to improve the right of suspension.

There are also questions about the framework to the Construction Act, and the affordability of adjudication, its misuse and its continuing relevance. Overall there are 80 questions (counting all the sub-questions), and all of them are worded as if the respondent is a party to a construction contract. However, don’t let that put you off answering them as the consultation document states that it is “also relevant to adjudicators, arbitrators and lawyers”, and you can just skip those questions that aren’t relevant.

Costs of adjudication

The preamble to the questions about the costs of adjudication refers to the problems of Tolent clauses under the pre-amended Construction Act, and how they were a disincentive to a party wanting to refer a dispute to adjudication. Interestingly, it then goes on to state:

“The 2011 changes prevented parties from making a contractual agreement on adjudication costs unless it related to the adjudicator’s ability to allocate his own fees and expenses, or was made in writing at the time of referring a dispute to adjudication. The assumption, generally, was that costs would lie where they fell.”

That is not quite what section 108A of the Construction Act says, but I think it supports the drum I have been banging for some time (for example, see part 1 and part 2 of the debate), namely that section 108A should be construed narrowly so that it banishes Tolent clauses, but permits clauses allowing adjudicators to allocate their fees and expenses. I won’t be leaving this to chance though, and will be making my feelings clear in my response.

One point that the consultation does not address concerning adjudication costs is the potential conflict with section 5A(2A) of the Late Payment Act 1998. Although it is arguable that this point has been put to bed by O’Farrell J in Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (as Matt discussed recently) some statutory clarity on this would be welcome.

I won’t bore you by reciting the individual questions, but the consultation document states that they are aimed at helping the government to understand whether the cost of adjudication has been reduced. My guess is that it won’t have been, but let’s wait and see.

Payment framework

There are a significant number of questions concerning the changes to the payment framework, but I don’t think that they necessarily address some of the issues that have arisen from the case law concerning payment and pay less notices. There are also certain points that I have seen in issue on a number of occasions, but which have not been dealt with by the courts. For example, in circumstances where the Scheme’s payment provisions are implied into a construction contract, is the payee permitted to submit an application for payment for the purposes of the default payment notice provisions of section 110B(4) of the Construction Act?

Therefore, respondents will need to address these types of points separately, although the government may consider that these are issues of interpretation that should be left to the courts and do not justify further amendments to the Construction Act. After all, the government has a few other pressing issues to deal with in its Brexit legislative programme!

Suspension

The preamble to this section states that:

“The right to suspend performance can provide an important ‘sanction’ for payees in instances where payment is not forthcoming.”

However, in my view, exercising this right is still relatively rare regardless of the 2011 amendments. Contractors and sub-contractors appear to prefer to adjudicate, rather than having to demobilise and remobilise their workforces. It will be interesting to see whether the responses indicate an increase in suspensions and, if not, why not.

Further questions

There are further questions concerning the effectiveness of the Construction Act and its ongoing fitness for purpose, as well as the affordability of adjudication. I’m sure that these questions will prompt some interesting responses, particularly from those who consider that adjudication has morphed into a dispute resolution procedure that is far more costly and complicated than was ever anticipated when the Act came into force on 1 May 1998.

My own view is that it has morphed into what the users of adjudication want, and it is their views that really matter.

To sum up

The consultation is our opportunity to provide the government with our feedback on the 2011 amendments, and we should all take the time to complete it. We certainly can’t complain about it if we don’t take this opportunity to have our say.

MCMS Ltd Jonathan Cope

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