It may understandably not be at the forefront of people’s minds as the industry responds and reacts to the COVID-19 pandemic, but in February 2020 the government finally published a summary of responses to its Construction Act 1996 consultation. Matt Molloy has previously blogged on the responses from an adjudication-perspective so I thought it would be interesting to have a look at the responses to some of the other questions.
One point to be aware of when reading the summary is that the government only received 54 responses to the consultation. Of these respondents, the majority appear to come from a contractor/sub-contractor or dispute resolution professional background rather than developers or funders, which perhaps explains some of the more (at least from my perspective as someone who acts primarily for those parties) contractor-focused responses.
Non-compliance with the Construction Act 1996
As an external legal advisor, I was slightly surprised/horrified to hear that some respondents are still seeing a significant minority of construction contracts that are not compliant with the Construction Act 1996. The most common reasons given for this were:
- Inclusion of “pay when paid” provisions – particularly in relation to the release of retentions.
- Lack of clarity around the content and timing of payment notices.
- Adjudication costs to be paid by sub-contractors.
In our experience it is generally unusual to see these issues appear in main contracts. However, it is perhaps not surprising that this could be more prevalent the further down the supply chain you go, as main contractors try to ensure that their position with their sub-contractors is back-to-back with their position opposite the employer. Nevertheless, it is important for parties to remember that, where a provision in a construction contract is not Act-compliant, it will automatically be struck out and replaced by the relevant statutory provision.
Another interesting point raised by the respondents was that non-compliance sometimes arose where parties entered in amended forms of industry standard form contracts. I hope it is not controversial to say that most developers (and funders) would generally consider that an unamended standard form contract does not provide them with sufficient protection. However, the responses highlight the importance of making sure that any amendments to standard form contracts do not inadvertently cause the contract to become non Act-compliant. In particular, we often see parties re-using schedules of amendments from previous projects in order to save on negotiation time and costs. This is fine in theory, but where parties do want to re-use a previously agreed set of amendments, we always recommend to clients that they should review these in the context of the new project before the contract is signed. This is not purely motivated by self-interest! While clients are obviously keen to keep legal fees to a minimum, the cost of carrying out a quick sense check before the contract is entered into will always be less than the costs of an adjudication or court proceedings in the future.
In addition, while contracts may comply with the strict requirements of the Construction Act 1996, there was a general feeling from the respondents that compliance with the “spirit” of the Act was being lost. Examples given included linking payment provisions to events that the payer controls or provision of VAT invoices, or including “flexes” such as longer payment periods further down the supply chain. In our experience it is not unusual to see such provisions in building contracts and the easy riposte is that it is open to the parties to agree whatever commercial terms they choose, provided they are Act-compliant. Certainly some examples, such as a requirement for the payee to provide a VAT invoice, do not seem that unreasonable from the payer’s perspective. However, parties should be mindful that optically it may not reflect well on them if they come before an adjudicator or court and are considered to have forced provisions that do not comply with the spirit of the Construction Act 1996 on their suppliers.
Right to suspend
The 2011 changes to the Construction Act 1996 gave a payee the right to claim a “reasonable amount” for the costs and expenses, including remobilisation costs, of suspending performance of its obligations for non-payment. The Construction Act 1996 (as enacted) was silent on who bore the costs of suspending and restarting the performance of obligations under a construction contract. In practice, it was the payee that bore these costs. However, interestingly, the majority of respondents confirmed that they had noted no difference in terms of the frequency of suspending performance due to non-payment in the five years following introduction of the 2011 changes than in the five years before. Where the right to suspend was exercised, it was generally in anticipation that the payer entity was about to go insolvent.
However, respondents also commented that the threat of a suspension was often used more effectively than a suspension itself, which is consistent with what we see in the market. It was recognised by the respondents that actually suspending performance is a remedy of last resort, but the threat of suspension was often sufficient to facilitate a payment and resolve potential disputes under a contract. In addition, it was also noted by respondents that the consequences of suspending incorrectly could be significant and ultimately could be viewed as a repudiation of the contract by the suspending party. It seems that the ability to recover the cost and expense incurred in exercising a statutory right to suspend for non-payment has been welcomed by contractors, even if “suspension” is primarily used as a negotiating tactic and full enforcement of such a right is still relatively uncommon.
One area that the majority of respondents considered to be particularly unclear was the payment framework introduced by the 2011 changes. This reflects our experience too. While many employers and contractors are careful to administer the payment procedures in accordance with the terms of their contracts, some contracting parties often end up not following the contractual process in practice. This is not an issue while relations between the parties are good and projects are progressing harmoniously. However, if things start to go wrong, parties can find themselves on the receiving end of a “smash and grab” adjudication as a result of not strictly following the contractual process. This is even more of a risk where contracts are unclearly drafted or are drafted in a way that is not Act-compliant. It is important that parties carefully consider the payment procedure in their contracts and ensure it is compliant with the Construction Act 1996. Further, parties must be careful to follow the contractual process once projects are underway.
What will happen next?
It is unclear what, if any, changes the government will make to the Construction Act 1996 as a result of the consultation. On the whole the changes introduced by Part 8 of the LDEDC Act 2009 were viewed positively by the respondents, but there was a general feeling that any problems are not caused by the Construction Act 1996 itself but by the failure of a number of industry participants to adhere to the spirit of the Act and their tendency to look for loopholes wherever possible. Some of the respondents also warned that revising the legislation could lead to more confusion as, for better or worse, the 2011 changes are now embedded in the industry. However, others highlighted certain areas, such as simplifying payment provisions and including more prescribed detail around payment notices, that could be clarified.
Given that the respondents have not focused on one area in particular that requires changing, the length of time it has taken to get to this stage and in light of current circumstances, it seems unlikely that the government will be keen to introduce sweeping changes any time soon. The most we can probably expect to see in the short to medium-term is legislation clarifying certain specific elements of the Act, but even then it is likely to be quite some time before this comes into force. However, the responses do provide an interesting window into how the Construction Act 1996 and the 2011 changes are viewed by certain sections of the industry.