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Is the Construction Act necessary?

Construction lawyers and construction companies now seem to take it for granted that construction contracts have to be regulated, without the freedom to contract other industries enjoy.

Should that always be the case?

No freedom to contract

We are getting close to the end of the consultation period on the Scheme, the last step before the new amendments to the Construction Act 1996 may be implemented. There is a fair amount of debate about the detail of the changes, but everyone seems to accept that there is nothing wrong with the government regulating contract terms, in order to stop what is seen as bad practice.

Usually, it seems to be lawyers who try to remind people that the freedom to contract on whatever terms the parties agree is a basic principle of English law (and possibly even has some commercial benefits). As a matter of principle, commercial parties are normally free to contract on what may be unfair terms, and the courts do not help parties who made a bad bargain.

However, some people seem to take the view that if a particular term is unfair, such as a pay-when-paid clause or a Tolent clause, it should simply be outlawed.

Why did we need the Act?

Looking back at why this all started, the Latham Report (“Constructing the Team”, July 1994) was produced against the background of the 1990s recession, when the construction industry’s payment culture was very bad. It created an exceptional problem at the time for one of the major industries in the UK. At that time, litigation or arbitration were ineffective forms of enforcing payment.

As a result, it made sense for the government to decide that the construction industry could not be left to its own devices. It introduced mandatory payment clauses and statutory adjudication.

Almost 20 years later, has the construction industry moved on from what Latham described or is it still stuck in the early 1990s?

Do we still need the Act?

One can argue that the industry is better and has learnt from experience. The payment culture is not perfect, but it is better than it used to be. The Construction Act 1996 played an important role in creating an understanding of the importance of better payment processes. Indeed, all standard forms now contain payment mechanisms as a result.

Is it possible that one day the mandatory payment provisions could be removed but the industry will voluntarily accept the need for such mechanisms? Nobody can tell for certain. An optimist would say the industry has learnt its lessons and will not revert to the bad old days, but a cynic would be more sceptical.

We should keep statutory adjudication

Adjudication has been a great success. It has achieved quick, sometimes rough, justice. Other possible solutions, such as 100 day arbitration, have not taken off.

In the courts, time has moved on and the TCC is now much better at resolving disputes. Even arbitration, with the Arbitration Act 1996, is better than it used to be 20 years ago.

I think the answer must still be that adjudication, with all its flaws, has to stay. I suspect that, even if it was not compulsory, parties would introduce it as a contractual process, wherever negotiating strength permitted.

What next?

Coming back to my original question: are we now, or will we soon be, in a place where the construction industry has improved its conduct and practices so that the Constructon Act 1996 is longer required?

Some might say it does not matter since the Construction Act 1996 is good and the industry is largely happy with it (subject to tweaking).

Nonetheless, it may well be that whoever carries out the next review of the Construction Act 1996 will decide the industry has grown up and, like any other industry, can be trusted to contract on whatever terms it desires. Not very likely perhaps, but is it impossible?

4 thoughts on “Is the Construction Act necessary?

  1. To test whether the Construction industry has “grown up” you need to look at the culture and behaviours today within the Construction industry compared to the 1990s. In my view nothing much has changed. People in the industry have maintained an adversarial nature and instinctively seek to gain advantage – whether fairly or unfairly – over customers, supplies and colleagues. It is endemic, despite most of the major UK constructors having followed the same strategy of broadening their service to embrace support services where collaborative working is more the norm. The old practices still survive when dealing with internal sister divisions; pay-when-paid, post agreement price negotiations (always downwards) etc.

    I think the Construction Act has gone a long way to curbing the worst excesses of the industry, but I think we are still far from Latham’s vision of a industry build on partnership. The Act must stay, at least until the last of the dinosaurs have departed the industry and a new breed of forward thinking construction/project manager have taken over.

  2. Even before the the Construction Act I wonder how “real” the principle of freedom of contract was to most contractors, consultants and clients in the marketplace. Surely the principle can only be said to truly come into play when everyone is in the same market position as everybody else?

  3. A good question posed.

    I am aware of parties that still have the “pay-when-paid” mentality and need to be advised of the HGCGRA II provisions.

    I have also seen contracts, in non-English jurisdictions, where the Employer reserve the right to pay the sub-contractors/suppliers directly should the main contractor fail as they want to take proactive measures for good cashflow.

    I think the answer is that it is not impossible.

  4. As with a lot of the law, the intentions are laudable, the reality is something else. Over the last year or so I have noticed a real hardening of position in terms of payments, not in a positive way, but a relucant acceptance that we as an industry have reverted back to the bad old days. Let’s get real (and I think this is the major point), in today’s climate are contractors, whether principal or sub, really going to kick up a fuss in the knowledge that they will be black balled when it comes to getting more work from whoever they are claiming against.

    The majority of small and medium sized builders seem to be on the edge every month in terms of cash flow. Larger companies who employ them as subbies often only pay after 90 days or worse and even then look for spurious reasons not to pay the due amount, resulting in many contractors going bust or having credit withdrawn from their suppliers. Does this sound like we have moved on since Latham, I think not.

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