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Not often does an industry have an act to itself, but after much debate
we now have the construction industry legislation (officially, the Housing
Grants, Construction and Regeneration Act 1996).
The act purports to put into effect some recommendations of Constructing
the Team, the Latham report into the construction industry. Unfortunately,
it seems unlikely to do anything towards achieving one of the report’s
primary objectives - reducing adversarialism and creating a spirit of
co-operation.
Sir Michael Latham identified four areas which he recommended should be
the subject of statutory control:
Unfair contract terms
The outlawing of what he considered to be unfair contract terms, which
include:
- extended period for payment and no right of interest on delayed payments;
- the denial of the immediate right of either party or a sub-contractor
to adjudication;
- the right to set off - except, he felt, under strict conditions -
and the set-off of one contract against another;
- “pay-when-paid” clauses.
Right to dispute
The right to have disputes settled by adjudication that would be binding
during the course of the contract, with immediate right of appeal after
completion.
Trust funds
The establishment of secure trust funds for the payment of contractors
and sub-contractors.
Liability of contractors
The liability of contractors, sub-contractors and professionals to be
amended so as to:
- remove joint and several liability;
- provide a statutory period of limitation of 10 years from the practical
completion of the project, covering liability both in contract and in
the tort of negligence;
- limited transferability of the client’s rights in respect of
defects in the building, to subsequent owners or to a tenant under a
full repairing and insuring lease.
It was always government policy to legislate only if the industry was
agreed on the changes it wanted. In the event, either the various factions
in the industry failed to show agreement, or the government felt the changes
were too significant in law to be applied to only one industry. As a result,
instead of being a comprehensive measure, the act is a pale shadow of
what Sir Michael intended. It deals with four topics:
- the definition of construction contracts;
- the right to adjudication;
- terms of payment, the entitlement to stage payments, and the right
to suspend performance for non-payment;
- a limited prohibition of “pay-when-paid” clauses.
Definition of contracts
Since the act changed the law only for construction contracts, it had
to distinguish them from others. (Sir Michael had not addressed this issue
directly). The legislation defines construction contracts broadly to cover
building and civil engineering work of any type, except for mining and
private dwelling houses.
However, the act makes exceptions that are hard to justify. For instance,
it excludes some - but not all installations of structural steelwork and
machinery in power-generation plants, sewage works and certain other factories
and industrial plants. A more inclusive definition is needed to avoid
costly disputes.
Supply-only contracts are also excluded. This means that the provisions
for compulsory adjudication take effect only when the supplier is also
responsible for installation. This may lead to separate contracts for
supply and installation, creating the potential for further contractual
problems. The act also includes professional services of, for example,
architects, to which its payment provisions seem to have little application.
It is also doubtful whether adjudication is the right way to settle professional
negligence disputes that are likely to arise only after the work has been
completed.
Right to adjudication
There is no dissension within the industry on the usefulness of adjudication
as a means of obtaining a “rough-and-ready” decision on issues
as they arise during a contract so work can proceed, provided there is
a right of appeal to arbitration or the courts once the contract is complete.
Here the act gets three things wrong:
- adjudication applies to any dispute whatever its complications;
- the right to refer to adjudication is “at any time”, i.e.,
not limited to the contract period;
- the right to appeal to arbitration or the courts seems to follow immediately
upon the decision of the adjudicator. If there is an immediate right
of appeal, why bother first with rough-and-ready adjudication, especially
if the dispute involves tricky problems of law?
There is no express provision for the enforcement of the adjudicator’s
decision; it is simply stated to be “binding”. Presumably, enforcement
is by legal action for decision - since an adjudicator’s decision
is not an “award” in the same way an arbitrator’s is. If
the decision was for the payment of a substantial sum to a party in a
precarious financial position, one can imagine the loser refusing to pay
and lodging an immediate appeal.
There are other problems with the way this section of the legislation
is drafted. The act refers, for example, to “a dispute under the
contract”. This is much narrower than the wording usually used such
as “a dispute arising out of, or connected with, the contract”.
There is no express right to open up, review and revise an engineer’s
or architect’s decision or certificate, and it is unlikely any such
power will be construed. If so, the usefulness of the adjudication procedure
will be reduced further.
Payments
The act’s provisions on payment - other than granting the right to
suspend work after notice for non-payment - are of minor significance.
In particular, the opportunity has not been taken to limit effectively
the right of set-off which is so frequently abused.
Adjudication provisions
If the terms of the construction contract do not conform to the provisions
of the act relating, for example, to adjudication or pay-when-paid clauses,
the contract is deemed to imply the terms contained in the scheme. What
is not clear is whether a failure of one term of the contract relating
to adjudication provisions in the scheme become implied terms of the contract.
Unfortunately, the scheme had yet to be finalised and clearly the act
cannot come into effect until it has been issued, following consultation
and parliamentary approval. This is not expected before the spring of
next year.
Too little bite
This is a mouse of an act when a lion was needed; too many Latham recommendations
have been omitted. Its principle provision, relating to adjudication,
is flawed and its other provisions are of little practical help. Nothing
in it aims at achieving the Latham objectives of fairness and reducing
confrontation. On the contrary, the only beneficiaries of the act are
likely to be the lawyers.
But clients should remember that while the act is disappointing it is
not their first port of call. They can achieve many more of Sir Michael’s
objectives - and much improved value for money - by concentrating instead
on developing the best supply-chain strategies for their projects.
SM
Peter Marsh and Frank Griffiths are associates at project strategy and
contract management consultancy FGA Ltd (0116 279 3383)
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