Case Law analysis: Construction Act amendments

Faithful followers of this column will instantly have a sense of déja vu upon seeing the topic for this week’s article. Not for the first time have proposed changes to the Construction Act found their way on to these pages. Over the past few years, various consultation processes have been launched, yet none has resulted in any amendments reaching the statute books.

In June 2007, the DTI and the Welsh Assembly Government issued its second consultation on proposed changes to Part II of the Construction Act. The specific proposals found within this consultation document had their origins in Sir Michael Latham’s review of the Construction Act in 2004. Sir Michael’s report said that, while the Act was working well, there remained concern over poor payment practices within the industry.

In submitting these proposals for public consultation, the DTI and the Welsh Assembly Government say that it is their overall objective “to improve transparency and clarity in the exchange of information relating to payments; and to encourage parties to resolve disputes by adjudication”.

The consultation document states that the proposed amendments to the Act will be introduced via primary legislation as it has not proved possible to do so via the relatively new mechanism of a Legislative Reform Order. In all likelihood, because of the difficulty in finding sufficient time in the legislative calendar, any amendments to the Act will have to be piggy-backed on to a piece of unrelated legislation in much the same way as the original Act was introduced in 1996. There are of course dangers in binding the introduction of these proposed amendments to the fate of another piece of (possibly unsuccessful or much delayed) legislation.

Proposed amendments

The proposals seek to effect changes to the provisions of the Act on (a) adjudication (b) payment and (c) suspension of performance. It is not possible to cover all of the proposed amendments in detail in such a short article as this. I therefore intend to deal solely with the proposed amendments affecting adjudication and to leave changes concerning payment and suspension of performance to a future article.

The most significant proposed amendment in relation to adjudication relates to extending the scope of the Act to cover oral contracts or contracts partly in writing. Currently, the Courts’ interpretation of Section 107 of the Act (following the Court of Appeal decision in RJT Consulting Engineers -v- DM Engineering) is that all non-trivial terms of a construction contract are required to be in writing or evidenced in writing. Such a position is probably contrary to the original intentions of Parliament. It is a commercial reality, however, that many construction contracts are oral in nature or may be partly in writing and are subsequently varied orally.

By not allowing oral contracts or contracts where all non-trivial terms are not in writing (or evidenced in writing) to fall within the ambit of the Act, a significant proportion of all construction contracts cannot benefit from the provisions of the Act, including the right to refer a dispute to adjudication. In addition, there is evidence that a considerable number of challenges to an adjudicator’s jurisdiction (and in turn, challenges in court at enforcement stage) arise from disputes between parties as to whether or not all of the terms of a construction contract are in writing. While this proposed amendment would obviate these difficulties, it may also bring fresh challenges to the poor adjudicator in regard to evidential problems and plugging gaps in parties’ contracts.

Contract provisions

The consultation document also proposes to prohibit any agreements which state that interim or stage payment decisions will be “final and conclusive”. Such provisions within construction contracts effectively prevent these decisions being referred to adjudication. Currently, paragraph 20(a) of the Scheme for Construction Contracts endorses that unhelpful position. The government proposes that the parties may agree that a payment decision is “conclusive” of the amount of an interim payment after the decision has been taken and notified to the payee (thus creating what is termed “an effective agreement”).

The consultation document does not seek to change provisions currently found in construction contracts which state that final payments will be “final and conclusive” after a stipulated period of time. Retaining such a provision does however create a two-tier approach to the opening up and revision of the composition of payments and could lead to instances where certifiers may be tempted to issue final payments prematurely in order to make them final and conclusive, thereby making them ineligible for subsequent review by an adjudicator.

Finally, the consultation document contains a proposal to the effect that agreements as to who should bear the costs of the adjudication process (in whole or in part) are valid only if the agreements are made after the appointment of the adjudicator.

Cost liability

Currently, so-called ‘Tolent clauses’, which make the referring party liable for the costs of the adjudication, are lawful. Similarly, as matters currently stand, clauses stating that the losing party will be liable for the costs of the adjudication process (including the legal and other costs of the parties as well as the fees of the adjudicator), are valid. Such clauses, however, provide a disincentive to a party wishing to refer a dispute to adjudication.

Further proposals include amendments to the Construction Act to the effect that parties shall be jointly and severally liable for the adjudicator’s reasonable fees and expenses. Such a provision is intended to give comfort to an adjudicator that his fees will be paid, although in my experience such a provision does not in itself guarantee payment by a recalcitrant payer.