Review will aim to make Construction Act clearer

Last week in Contract Journal I examined the review that has been carried out under the chairmanship of Sir Michael Latham into the adjudication provisions of the Housing Grants Construction and Regeneration Act.
This review will form the basis of a consultation with the industry that the Department of Trade & Industry (DTI) is expected to put in place early next year with a view to amending the legislation where a reasonable consensus can be obtained.
The review also examined the payment provisions of the Act. The points raised within this part of the review will be included within the industry consultation. The working group looking into the payment issues found it more difficult than the adjudication working group to obtain unanimity. Nevertheless, a number of specific recommendations have been made.
First, and perhaps most importantly, the review has recommended the removal of section 110(2) of the Act which requires the paying party to give a notice, not later than five days after the date on which a payment becomes due under the contract, specifying the basis for and the amount of the payment proposed to be made. Removal of section 110(2) would require a redrafting of section 110(1) to define more clearly what is intended by "an adequate mechanism for determining what payments become due and when".
These provisions have caused considerable confusion since they first came into force some six years ago. At the outset some observers concluded that the paying party's failure to issue a payment notice would have the effect that the amount applied for by a contractor or subcontractor became immediately due with no right of enquiry into the correctness of that amount.
Quickly dispelled
That notion was quickly dispelled by the courts with the consequence that a failure to serve a payment notice effectively carries no sanction against the paying party. The result has been that the requirement for a payment notice is frequently ignored within the industry. The aim that lay behind the initial drafting of the provision was that paying parties should set out clearly and in reasonable detail what they intended to pay and what they were refusing to pay, rather than leaving everyone in the dark by applying 'on account' payments. That aim has largely been lost, but it is surprising steps cannot be taken to strengthen the requirement, rather than simply to remove it.
Similarly, the concept of a mechanism to determine when payments become "due" under the contract has created confusion. The "due date" is not the date at which the payment will be made, neither is it necessarily the date at which, or up to which, the payment entitlement is to be ascertained. These difficulties are compounded by the fact that many contracts and subcontracts do not require the contracting party to make an application for payment, although plainly this is what generally happens within the industry. It is clear that much would be gained if these statutory provisions reflected more clearly commercial practice.
Next, the review has recommended that the right to suspend works in the event of non-payment should be supplemented by a right to reimbursement of the costs of suspension and remobilisation. Moreover, the review has recommended that the right to suspend should continue for a reasonable period after the disputed amount has been paid, such that the party effecting the suspension is not disadvantaged by the delay and costs incurred during a period of remobilisation of its site activities.
A further point considered by the review is the question of cross-contract set-off. The conclusion is that that this should be prohibited subject to preserving the common law rights of equitable set-off. Equitable set-off is available when a cross-claim is closely connected to the claim, for example, where a claim for delay damages is set off against a claim for the value of work done.
Contractual set-off provisions often go further than that, by allowing a paying party to set off claims under one contract against payments that are to be made under a different contract. It is provisions such as these that the review has recommended be prohibited.
In addition to these points the review group was unable to reach consensus on a number of equally important topics. For example, the review examined the practice of including "pay when certified" clauses in contracts. These clauses have a similar effect to "pay when paid" clauses which were made unlawful by section 113 of the Act. Finding a workable solution to this problem will be difficult, not least because some forms of procurement, such as management contracting, rely upon a third-party certification process for the payment provisions to work.
Current regime
The group also considered whether the current regime should be retained whereby pay when paid clauses are deemed acceptable in the event of the insolvency of the upstream paying party.
Another area considered by the review was whether the Act should be strengthened under section 111 such a withholding notice should carry a requirement to provide adequate detail of the reasons for withholding payment.
While it is admitted that many withholdings are made without appropriate detail, it seems unlikely that an amendment to the legislation in this area would give rise to anything other than more fertile ground for disputes.
The full text of the report by Sir Michael Latham's review group can be found on the DTI's website.