Practical Law

Some of you may recall that in November last year I blogged about the government’s consultation on the 2011 amendments to the Construction Act 1996. Not the most exciting topic I admit, but important nevertheless. The consultation closed last Friday (19 January), and I hope as many of you as possible had your say.

I was recently a member of a panel at an event concerning the consultation, which was organised by Gowling WLG and Practical Law, and expertly chaired by Paul Darling OBE QC.

Therefore, this week I am going to discuss some of the issues raised at the event about the 2011 amendments. However, before doing so, many of you will be aware that the government ran a parallel consultation on the practice of cash retentions under construction contracts and, as this was also discussed by the panel, I thought it would be a useful place to start.

Cash retentions 

My involvement with retention is now mainly limited to deciding whether or not it is due for release, and I therefore don’t get to see or hear about many of the problems that construction firms complain of.  I was therefore not particularly vocal during the discussion on retention, instead leaving that to Rudi Klein, the CEO of the Specialist Engineering Contractors’ Group, who was able to give the views of those firms who have cash retained on projects, and Martin Potter, Group Legal Counsel at Canary Wharf Group plc, who came at it from the perspective of a main contractor and developer.

Both Rudi and Martin made some very valid points. The question of whether the government should legislate in respect of retention and, if so, in what regard, is not an easy one to answer.

I find the idea of an independently run retention deposit scheme, similar to the tenancy deposit scheme (which anyone involved with residential lettings will be aware of), quite attractive. A Private Members’ Bill for such a scheme had its first reading in Parliament earlier in the month, and it will be very interesting to see whether a momentum of support builds behind it following Carillion’s sad demise last week. There is no doubt that many of Carillion’s suppliers will lose significant sums of money, which would otherwise have been ring fenced if it had been in a retention deposit scheme. Some might therefore say that the introduction of such a scheme is a “no-brainer”.

Payment

Given the content of the 2011 amendments it was always the case that they would impact on the payment provisions in the Construction Act 1996 to a greater extent than the adjudication provisions, and therefore the panel spent much of the time discussing payment.

The panel was asked whether the payment process is now clear and transparent or whether are there unnecessary complexities and/or uncertainties. It was interesting to hear the panel members’ views, particularly those of Ruth Griffin of Gowling WLG who is on the non-contentious side of their construction team. Ruth explained some of the issues that can arise with the payment provisions when drafting and amending contracts, such as providing for the recovery of money following a negative payment notice. Other interesting points were raised about the need for further detail to be provided on the requirements for payment and pay less notices.

Rudi expressed his view that the payment process should be simplified to reflect what the Irish have adopted in their Construction Contracts Act 2013. While I don’t disagree that, if we could start again, most people would adopt a much simpler process (for example, with an application, payment notice, payment), I think we need to take a step back and recognise that the chances of the government undertaking a wholesale overhaul of the payment provisions are remote, to say the least. Therefore, I think we need to concentrate on the tweaks that can be made to the payment provisions in the Construction Act 1996 and the Scheme for Construction Contracts 1998 in order to iron out some of the issues that have arisen since 2011.

However, even without any tweaks I consider that the payment process is generally clear and transparent. I acknowledge that it is complex, but if time is taken to read and absorb the provisions they can be easily followed, and most of the case law concerning payment and pay less notices has arisen due to issues with the operation of the payment provisions, and not the provisions themselves.

Adjudication

The panel was asked as to whether “smash and grab” adjudications are still as frequent as they used to be, or whether they are tailing-off. In my experience the rate of such adjudications has not dropped off, which is probably due to a number of factors:

• Despite the consequences, payers and their representatives still fail to issue payment and pay less notices when required. I know surveyors at big practices who still don’t have a full grasp of the payment framework and the importance of these notices.
• A considerable number of disputes concern whether the default payment notice relied on by the payee is valid. This is not helped by the fact that, although there is now a growing body of case law concerning payment notices (as well as pay less notices), not all of it is entirely consistent.
• Provided the process of obtaining payment in reliance on default payment notices remains quick, easy and relatively cheap, payees will continue to use it. There was a suggestion that “smash and grab” adjudications could be considered a misuse of the adjudication process, but I would disagree. The rights are provided to payees under the Construction Act 1996 and they are entitled to exercise them, so I don’t see how it can be considered a misuse of the process. However, payees should always bear in mind that, even if they are successful in a “smash and grab” adjudication, the payer is likely to pursue recovery of their money with vigour (as Mr Harding discovered in the Harding v Paice and Springall saga), and therefore referring the merits of the value of the works in the first instance may be a more prudent option overall, particularly if the works have been completed.

The panel was also asked about the rising costs of adjudication, and one of the panellists made the point that some construction firms won’t refer disputes below £50,000, or even £100,000, to adjudication due to the costs involved.

I appreciate that on most occasions I don’t get to see the costs that the parties have incurred but, in my view, adjudication remains suitable for lower value disputes, and there is no need to employ representatives in all instances. I do though acknowledge that adjudicators must take responsibility for ensuring that their fees are proportionate to the amounts in dispute.

One of the other panellists made the point that adjudication is not being used for the cash-flow disputes for which it was originally intended, and that a 28-day process is not suitable for resolving final account type disputes. However, I would disagree because:

• Regardless of what the original intention might have been, Parliament included nothing in the Construction Act 1996 or the Scheme for Construction Contracts 1998 that limits the type of disputes that can be referred to adjudication.
• Much of the construction industry is happy to use adjudication to resolve larger disputes for a variety of reasons. For example, they know that the adjudicator’s decision will only be temporarily binding so they can have a “second bite of the cherry” if needs be, they will not have to pay the other sides costs, it remains relatively cheap, there are no lengthy disclosure processes, and so on. These are advantages that are not available in arbitration or litigation.
• The process can and is often extended beyond 28 days. There was a suggestion by one of the other panelists that the Construction Act 1996 should be amended so that the time for adjudication is 42 days with no provision for the parties to extend the timetable. However, I fail to see how this would work in practice, and it does not take into account a whole range of issues. For example, towards the end of the 42-day period the adjudicator may consider that an additional submission from a party would assist him in reaching his decision, but the parties would be unable to extend time to enable the adjudicator to properly consider this submission.

What next for the consultations?

The Department for Business, Energy & Industrial Strategy will now review the results of the consultations, and it will be very interesting to see the views of the industry. Whether they result in any amendments to the Construction Act 1996 or the Scheme for Construction Contracts 1998 remains to be seen though. There is the rather pressing issue of Brexit occupying the government and Parliament for the foreseeable future, so I don’t think we should hold our breaths.