The Housing Grants, Construction and regeneration Act 1996
Part II, Sections 104-117
In July last year this legislation received Royal Assent. Although
it is not expected to have legal force until later this year,
it is important to all involved in the Construction Industry to
consider its implications now.
Part II of the Act translates into legislation two of Sir Michael
Latham's recommendations in his report "Constructing The
Team" issued in July 1994. These are the recommendations
for fairer and more effective payment provisions in construction
contracts and provision for a quicker and cheaper means of resolving
disputes.
The Act will be supplemented by a separate document called the
"Scheme For Construction Contracts". The second version
of this document was recently put out for consultation and the
Act will not become law until the scheme is approved by Parliament.
It seems unlikely that this will occur until this summer.
The Scope of the Act (Sections 104-107)
Part II of the Act will apply to any construction contract that
is in writing. The expression construction contract is defined
as any agreement for the carrying out of construction operations
which is in turn defined by a long list of operations.
Agreements with a residential occupier, as defined in section
106(2), are expressly excluded from the scope of the Act as are
all agreements that relate to oil or gas drilling or extraction,
extraction of minerals and other underground or tunnelling works,
power or process engineering contracts and agreements that provide
simply for the manufacture and supply of plant, materials and
building, engineering and services components.
The types of agreement that will be caught by the Act include
the following:-
- civil engineering and building contracts;
- all forms of consultancy appointments whether made by letter
or formal appointment document;
- agreements for lease, development and funding agreements that
include obligations on any part to perform construction operations;
- most forms of warranty agreement provided by contracts or
consultants; and
- some forms of bond and guarantee provided in connection with
the performance of construction operations.
To be caught, the agreement must be in writing but this has a
considerably wider meaning than one might expect. The Act will
also apply where an agreement is made by exchange of correspondence
or is evidenced in writing. An agreement will be evidenced in
writing for these purposes where it is recorded in a written form,
such as minutes of a meeting or memorandum, with the authority
of the contracting parties. An agreement in writing will also
be deemed to exist if one party alleges in any legal proceedings
that there was such an agreement and this is not expressly denied
by the other party.
The Right to Adjudication
(Section 108)
Any party to a construction contract, once the Act becomes operative,
has the right to refer any dispute that arises under the contract
to adjudication. That adjudication must follow procedures that
comply with the requirements of Section 108 or, alternatively,
where there are no such procedures, the so-called default procedures
in the "Scheme for Construction Contracts" will automatically
apply.
Importantly, adjudication under the Act will apply to all disputes
arising under the contract of whatever nature or magnitude, not
only to payment and set off disputes but also to complex and detailed
claims for extension of time and loss and expense and to defect
and professional negligence claims as well.
Arguably, the Act does not require that claims for breach of contract,
as opposed to claims brought under the contract, should be referable
to adjudication. No doubt this anomaly will itself give rise to
further disputes in due course. Almost certainly, claims brought
in the absence of a contract, such as quantum meruit claims, and
claims relating to misrepresentation and negligent misstatement,
are not covered by the Act.
To comply with Section 108, the construction contract must contain
an adjudication procedure that satisfies the following criteria.
The contract must:-
- provide for either party to refer a matter to adjudication
at any time;
- contain a timetable for appointment of an adjudicator and
referral of the dispute to him within 7 days;
- require the adjudicator to reach a decision within 28 days
of referral or such longer period as may be agreed by both parties;
- allow the adjudicator to extend that period by up to 14 days
with the consent of the party who referred the dispute to him;
- require the adjudicator to act impartially;
- permit the adjudicator to take the initiative in establishing
the facts and the law;
- provide that the adjudicator's decision is binding until final
determination of the dispute through litigation, arbitration or
by agreement between the parties although the parties may make
his decision final and binding; and
- provide contractual immunity from claims against the adjudicator
in the absence of bad faith.
Where the contract falls down on any one of these points, and
despite any statement to the contrary, the relevant provisions
will become irrelevant. They will automatically be replaced by
the provisions of the Scheme for Construction Contracts which
are apparently cast in iron and cannot be amended.
The scheme is currently under its second consultation and there
remains a couple of wrinkles that must be ironed out in the document.
Unless the adjudicator's decision is given equivalent status to
an arbitrator's award, albeit on an interim "pay now argue
later basis", the parties will really be in no better position
legally than they were before.
Improving the Payment Position
(Sections 109-113)
The payment provisions in the Act work on the same "unless"
basis as those covering adjudication. If the contract terms agreed
between the parties do not meet the minimum criteria laid down
in the Act, that part of the contract effectively goes out of
the window and the detailed payment provisions in the Scheme will
apply.
In summary, the minimum criteria set out in section 110 are that
the contract must provide:-
- an adequate mechanism for determining what payments become
due and when; and
- a final date by which payments that become due must be paid.
The latter requirement may actually mean in practice that payment
is made later than would otherwise have been the case. The Act
then goes on to provide procedures for legitimate set offs to
be made against interim payments, involving the service of the
appropriate notice not later than the final date for payment,
on the lines of DOM/1.
Where the Act makes a radical departure from existing standard
forms is the statutory right to suspend work if payment has not
been made in full by the final date for payment on seven days
notice. Quite what the practical implications of Section 112(4),
which deals with the effect of suspensions upon existing completion
dates, are is pretty much anyone's guess. What if the suspension
was unjustified? And, does it mean that if a sub-contractor suspends
for whatever reason, the main contractor is automatically entitled
to an extension of time under the main contract? Answers on a
postcard please
Finally, Section 113 outlaws the infamous "pay when paid"
clause. Or does it? It is probably correct that the astute draftsman
can get round the Act simply by the device of making payment conditional
upon the certificate being issued by the contract administrator
rather than upon payment being made by the employer. Furthermore,
the Act does not affect the position where the employer has become
insolvent which is precisely the situation where the existence
of this sort of clause causes the biggest headaches for sub-contractors.
Dominic Helps is a Partner of Shadbolt & Co, Solicitors
