Practical Law

It is almost 30 months since Jonathan wrote about BEIS’s consultation on the 2011 amendments to the Construction Act 1996. As I’m sure everyone knows, the amendments were introduced by Part 8 of the LDEDC Act 2009. A couple of months later, Jonathan followed up on his initial piece and also wrote about BEIS’s consultation on cash retentions, which was running in parallel.

Fast forward to February 2020 and the government has finally published a summary of the responses to the Construction Act 1996 consultation and the cash retentions consultation. As adjudication doesn’t really feature in the context of cash retentions, I thought I’d focus on the comments in relation to adjudication in the Construction Act 1996 consultation.

What was the purpose behind amending the Construction Act 1996?

It has been nine years since the amendments came into force, which is a long time (and even longer since we first started talking about the amendments), so it’s probably worth reminding everyone what the point of the amendments was, namely to:

• Get rid of the “in writing“ requirements for construction contracts, to open up adjudication to parties who previously were precluded from adjudicating their dispute because they didn’t get as far as sorting out the paperwork (or they had agreed oral variations as the project progressed).
• Stop agreements on who paid the costs of the adjudication made prior to the start of the adjudication (so-called Tolent clauses).
• Expand the right to suspend if payment was outstanding.
• Introduce a whole new payment regime, with new payment notices and pay less notices. The idea was to be more transparent in the exchange of payment  information, but I bet no-one anticipated the “smash and grab” adjudication when they were thinking about this one.

What was the consultation’s purpose?

According to the BEIS website, the government committed to undertaking a non-statutory post implementation review (PIR) of the 2011 amendments to the Construction Act. I wasn’t really sure what that meant, but a quick search tells me that a PIR is something that BEIS also has guidance on – it is about being able to:

“… monitor and evaluate whether the regulation has met the intended objectives of the legislation.”

In BEIS’s own words, the consultation on the Construction Act 1996 sought:

“… information to help establish how effective those changes have been in securing their objectives. The consultation also asks some more general questions on the existing construction payment and adjudication framework and a set of questions on the affordability of adjudication, its misuse and its continuing relevance.

The consultation is relevant to any party to a commercial construction contract as defined by the construction contracts legislation. It is also relevant to adjudicators, arbitrators and lawyers. While this consultation concerns construction specific legislation it may also be relevant for those with an interest in prompt payment more generally and to insolvency practitioners. The legislation does not apply to residential occupiers.”

What does the response say?

If you’ve had a chance to look at the response document, it is a bit like wading through treacle. There are no clear answers. In part, I think this is because of how the original questions were asked, and how the summary of responses is divided. As with the consultation document, there are three sections: section A deals with the effectiveness of the changes, section B with the overall effectiveness of the Construction Act 1996 and its ongoing fitness for purpose and section C deals with the affordability of adjudication and whether cost prevents parties from using it.

It is also a bit unclear what the overall outcome is because of the way the response document attributes responses to different groups of respondents. For example, respondents are made up of those that completed the on-line survey via Citizen Space or those that responded as part of “wider stakeholder engagement” from the likes of representative organisations or trade associations. These are referred to as the “contractor and contractor association responses”.

That said, there is some interesting stuff in there and I thought I’d pick out a few comments from each section to highlight, focusing on adjudication-related issues. Payment and payment-related issues (like suspension) are for another day.

Effectiveness of the changes

Tolent clauses were thought to prevent access to justice but it seems we have not seen an end to them, with 34% of respondents on Citizen Space and 53% of respondents from the contractor and contractor association responses saying they had been a party to contracts that included contractual agreements on adjudication costs (with the burden often falling on a sub-contractor).

Trying to prevent contractual agreements on costs did not change the average cost of an adjudication either, with 76% of Citizen Space respondents saying there had been no change.

Getting rid of the need for contracts to be in writing and extending adjudication to oral and partly oral contracts does not seem to have changed the average cost of adjudication, with only 15% of Citizen Space respondents thinking costs had risen as a consequence. Nor does it seem to have changed the number of jurisdictional challenges that parties experience (with 75% of Citizen Space respondents saying there had been such challenges in adjudications they were involved with), although it was acknowledged that it has removed one of the common grounds of challenge. However, not everyone was happy about this change, with some suggesting it was a retrograde step and provided an opportunity for fraudulent claims.

Ongoing fitness for purpose

Is the Construction Act 1996 fit for purpose?

In terms of the adjudication provisions, I think it is, but perhaps I’m biased. Therefore, it was interesting to see what others think. For example, 40% of respondents on Citizen Space said they had used adjudication on more than 20% of their disputes over the last five years, whereas 30% of respondents on Citizen Space said they hadn’t used it at all. 30% were in the middle, using it a bit (between 1-20%). However, whether cost was a factor in using adjudication seemed less clear cut. 40% of respondents on Citizen Space said it didn’t prevent them from adjudicating, but 23% said it had on more than 20% of their disputes. Again, 38% were in the middle.

I’m not sure what conclusions you can draw from this, and the response document doesn’t attempt to do so.

Interestingly, the response also provides us with details of a number of the comments that were made, which include:

• Time, quality and monetary issues within the industry remain. Adjudication is a
  fast track and effective means to address disputes.
• Adjudication works. It is an excellent forum for dispute resolution that can be cost and time effective, provided the parties accept the adjudicator’s decision.
• The fact that relatively few adjudications go on to court is a measure of its success.
• It is a speedy mechanism to resolve payment disputes during the duration of a construction project, which enables parties to maintain cash flow.
• It applies to every dispute under a construction contract and isn’t limited to payment notice disputes. Some respondents suggested that the more complicated disputes cannot be dealt with effectively in the short timeframe and it creates difficulties for parties to respond. However, others felt it was a very effective means of quickly
  resolving a significant number of high value disputes (such as technical matters, final accounts and professional negligence).
• The temporary binding nature of an adjudicator’s decision was often more attractive than expensive arbitration or court proceedings, although some felt some disputes were shoehorned into a process that could not adequately consider the issues in the time allowed.
• Adjudication provides a better approach overall for small businesses, who previously would have had to use arbitration or go to court. However, rising costs and the complexity of the legislative framework has made it harder for firms to understand and use the system. This can disincentivise parties from using it. It was described by some as onerous and time consuming, and no longer provides a cost-effective
  process, typically where the value of claim is less than approximately £30,000.
• The increased use of professional representation in adjudication may have added to the costs of adjudication.
• Some “payers” are willing to gamble on avoiding the dispute reaching adjudication due to the potential costs for the “payee”, coupled with the threat of further enforcement in court. The best defence is to make the other party unable to afford it.

Affordability of adjudication

Cost crops up in other parts of the response, but this section is devoted to whether adjudication is affordable. I wasn’t surprised to see that almost 80% of respondents said they would decline to take a matter to adjudication if the value was under £30,000. That also chimes with the current push towards alternative, lower value adjudication schemes (such as TeCSA and the CIC ones).

It was also nice to see that all parties (including adjudicators) want to achieve a fair decision and so will normally agree to extend the 28 days time frame, which the response describes as the “starting point”, recognising that flexibility is required to deal with every type of dispute (and 42 days is the most common).

The average cost of adjudication (in 2017 prices) was £28,000, but the range was much greater than that (from £5,000 to £75,000). I’m sure some of the larger disputes easily exceed those sums, but perhaps those parties were not respondents to the survey!

Some respondents in Citizen Space thought that the changes in terms of clarifying the amount and timing of payment had increased adjudication costs, while others thought there had been no change. Of those who thought costs were higher, 67% said adjudication costs had risen by 10 to 25%, while 22% believed costs had risen by 26 to 50% and 11% believed costs had risen by over 75%. Conversely, those who felt there had been little change in the average cost of adjudication outlined that any improvements to clarity on time and amount in dispute had been overtaken by arguments on the payment provisions and validity of notices. Insofar as I follow what that means, it seems we’ve just swapped one set of arguments for another and costs have stayed the same as a consequence.

Where it was felt costs had increased, most suggested this was due to greater use of
party representation such as claims consultants and professional legal advisors,
including barristers, as well as adjudicators’ fees. I would agree that I have definitely seen an increase in representation, although I’m not sure I could say it was limited to the last five years – it has been a more gradual process as the underlying payment provisions and jurisdictional challenges have generated a wealth of case law, adding layers of complexity to the process.

Parties do seem to spend time preparing for an adjudication and ambush tactics are still used with 28% of Citizen Space respondents saying they had experienced them in all or 75% of the adjudications. As the response notes:

“… most disputes will have been alive for some time so both parties will generally be aware of the issues and likelihood of an adjudication notice. In addition, the adjudication process gives an inherent advantage to the referring party in that they have more time to prepare and test arguments, whilst the respondent has a matter of days. Generally, adjudicators are alert to the practice and will endeavour to ensure the respondent is given a fair opportunity to respond.”

We all know about the Christmas and Easter holiday “ambush” referrals, but the use of long and complex submissions and including irrelevant documents are also cited as a problem. Smash and grabs are also described as an ambush tactic although I would have thought that if a party didn’t serve its notices (at all or correctly), there isn’t much of an ambush there. Just saying…

What do I take from this?

We all have opinions on the Construction Act 1996 changes, for better or worse, and there isn’t a consensus on whether they have improved things or not. However, adjudication isn’t like Marmite and there are positives to take away, such as the changes have levelled the playing field, and have helped to crystallise the amount due at the final date of payment, payees have been empowered to press for timely payment and the default payment provisions are a positive disincentive to non-payment. Finally, including oral contracts is positive and gives more users access to adjudication, which is a good dispute resolution process.