Practical Law

The LDEDC Bill 2008 is part way through the four days allocated for debate in Grand Committee. By Thursday morning (29 January) we should be one step closer to knowing what amendments may be made to the Construction Act 1996. Some of the changes currently suggested are entirely inappropriate for the industry.

At the moment, although Viscount Ullswater also spoke out against Part 8 of the Bill on its second reading, only Lord O’Neill of Clackmannan has tabled a set of amendments. Lord O’Neill has an interest in the Bill as President of the Specialist Engineering Contractor’s Group, a trade association with some 60,000 members claiming to represent 300,000 employees. When the Bill had its second reading, he described it as “wishy washy gruel“. His proposed amendments include:

On adjudication:

• Adjudication provisions do not have to be “in writing” in a construction contract.
• The Scheme applies to all adjudications, with no contracting out or amendments permitted.
• A contract provision allocating costs between the parties will be ineffective, regardless of when the agreement was reached.
• The adjudicator is permitted to correct his decision (for clerical or typographical errors) within seven days of communicating the decision to the parties.

Whatever else one might choose to say about these changes, they would introduce a familiar and universal set of adjudication rules.

On payment:

• Extension of the range of prohibited conditional payment clauses.
• A simplified payment process for notices:
  • Payee to give notice to payer of the sum due within five days of the payment due date, with details of how that sum is calculated.
  • Payer to pay the sum before the final date for payment.
  • Payer may withhold sums, but must give notice not later than 14 days after the payment due date. This notice must contain precise reasons for the difference between the two notices.

These changes would, on the face of it, introduce a single set of simple payment rules that could be significantly easier to understand than the LDEDC Bill 2008’s proposals. Some details are unhelpful, such as referring to “precise reasons” for withholding, rather than relying on the case-law associated with the current Construction Act 1996. In addition, employers would no doubt argue that, although simple, the proposed payment rules would always favour the payee over the payer. Sub-contractors would be wise to remember that they are the payer of their sub-sub-contractors!

If the Bill is to change with regard to payment, then should it in fact allow:

• Management contracting (the current Bill and the proposed changes make this procurement route much more difficult – some would argue impossible)?
• Equivalent project relief in PFI construction sub-contracts?

On insolvency protection:

• Remove the right to withhold payment in cases of upstream insolvency.
• Either party to a construction contract may request at any time that the other party provides payment security (bank guarantee or bond).

This first change would, arguably, damage the industry, significantly increasing the risk of a waterfall of insolvencies, one caused by the other down a chain of contracts. Again, would a major sub-contractor want to be the credit insurer to a minor sub-sub-contractor, if a main contractor went bust? (See also “On suspension”, below.)

On suspension:

• A new right for either party to suspend if the other party doesn’t give a bond as payment security, when requested. This right would end if the security was provided.

Of all the changes proposed, this is far and away the least palatable and most left-field. The suggested amendment is drafted without precision and would drive a coach and horses through existing commercial relationships. Clearly, employers would not welcome this change – they would struggle to obtain the sort of payment security that seems to be contemplated in almost any financial market, let alone the current one.

However, its impact on sub-contractors could also be devastating. To illustrate:

• A mechanical and electrical engineering sub-contractor is employed by a main contractor. On a £10 million project, the sub-contract price is £2 million.
• The sub-contractor selects and appoints three specialist sub-sub-contractors to design and carry out specialist works. Each of these sub-sub-contracts has a contract price in excess of £250,000.
• The main contractor could ask the employer for payment security.
• The sub-contractor could ask the main contractor for payment security.
• All three specialist sub-sub-contractors could also ask the sub-contractor for similar security. How would the sub-contractor procure and pay for that security given the cash flow issues that typically affect such companies? (Imagine if the sub-sub-contractors are the first to ask for security, so there is no security “up the chain” to refer to.)
• Finally, even if the employer and the main contractor both provide payment security, if a specialist sub-sub-contractor requests security and the sub-contractor cannot provide that, what will the effect on the project be if the specialist sub-sub-contractor suspends performance? Could the main contractor ask for more time to complete the project (referring to the suspension by another party)? Perhaps not, but who would end up paying the LADs?