In the 1980s, construction was considered to offer low value for money due to the adversarial nature of contract terms leading to high volume of disputes, coupled with a drive to award contracts on the lowest possible tender price. This created a race to the bottom whereby unsustainable contract prices were issued, high levels of variation were sought and cases of arbitration and litigation occurred with contractual disputes becoming expensive and time consuming for all parties to resolve. As a result, projects were often delayed beyond their original programme of works and contractors, in an effort to cut costs and potential losses, sought to deliver the lowest acceptable level of quality possible.
The perception of the construction industry was that it was failing to deliver projects on time and on budget and the final delivered product was of poor quality. To improve the situation, the UK Government commissioned an investigate report on the industry to tackle these problems. Sir Michael Latham prepared the subsequent 1994 report, titled “Constructing the Team,” which described the industry as ‘ineffective’, ‘adversarial’, ‘fragmented’ and ‘incapable of delivering for its customers’. Among several recommendations, the report stated that the industry required standardisation of contract documents and the avoidance of conflict by way of a quick dispute resolution procedure, adjudication.
In 1996 the Housing, Grants, Construction and Regeneration Act, more commonly known as HGCRA or simply the Construction Act, was drawn up to deal with the problems highlighted in Sir Michael’s report.
Why is it needed, when did it come into force and how is it structured?
In today’s construction industry, a dispute can be referred for adjudication at any time and a decision provided to the parties within twenty-eight days. This is in stark contrast to previous historical practice in which arbitration or litigation could not be launched until project completion was achieved. Notwithstanding this, payment practice included unregulated set off ,meaning that clients could effectively impose charges onto their supply chain through not just one but multiple on-going contracts.
Also, ‘pay when paid’ clauses were commonly deployed, stepped down by main contractors throughout their supply chain subcontracts. This meant that, whilst claims were unresolved between clients and contractors, which would have included subcontract costs, clients were not obligated to respond until completion, and with ‘pay when paid’ clauses in force in subcontracts, contractors did not have to pay the subcontractors until they had been paid by the client. This squeeze on working capital down through the supply chain was highlighted as an issue that was holding up the potential of the industry.
The 1996 HGCRA (amended in 2011) provides that for all contracts for works classified as ‘Construction Operations,’ in accordance with Section 105 of the Act, must contain certain provisions for payment and adjudication that include the following:
- The right to receive regular payments i.e. interim, periodic or stage payments if the contract duration is greater than 45 days; one of these mechanisms will need to be included in the chosen form of contract (Section 109 onwards of the Act refers)
- The right to receive payment notices specifying the amount due (Section 110 onwards of the Act refers). • The right to receive notices whereby an amount is to be withheld (Section 110 onwards of the Act refers)
- The right to suspend operations in the event of non-payment (Section 112 onwards of the Act refers)
- The right to refer disputes to adjudication (Section 108 onwards of the Act refers)
However, there are a number of exclusions in the Act as to what does not constitute ‘construction operations’ such as :
- Drilling for, or extraction of, oil or natural gas
- Extraction (whether by underground or surface working) of minerals
- Tunnelling or boring, or construction of underground works, for this purpose
- Assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery, on a site where the primary activity is:
- nuclear processing, power generation, or water or effluent treatment, or
- the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink;
- Manufacture or delivery to site of:
- Building or engineering components or equipment
- Materials, plant or machinery, or components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or for security or communications systems, except under a contract which also provides for their installation
- The making, installation, and repair of artistic works, being sculptures, murals and other works that are wholly artistic in nature
Following the 1996 Construction Act coming into force on the 1st May 1998 there were inevitably certain loopholes that were exploited and therefore the Act was amended in 2011 to deal with these. The most notable of the 2011 amendments are summarised as follows:
- The 1996 act did not apply to unwritten contracts whereas the 2011 amendments mean the Act now applies to all construction contracts, whether they are in writing, partly in writing, or entirely oral
- Contractors claims for payment are treated as the notified sum
- Clients must issue a payment notice even if no payment is due and this must be issued within five days of the payment being due
- If clients intend to pay less than the notified sum they must issue a payless notice
- If the client fails to issue a payment notice the contractor can issue a default payment notice and following this if the client does not issue a payless notice they are obligated to pay the amount in full
- ‘Pay when certified’ terms and conditions are no longer allowed in construction contracts. If they are entered into contracts the provisions of the HGCRA will apply or the Scheme for Construction Contracts
- If works are suspended by contractors due to non-payment they are now allowed to recover costs and expenses incurred in doing so and are to be granted extensions of time where applicable to cover the programme effects of suspension
Whilst the Act stipulates what must be included in construction contracts, it does not stipulate exact working details i.e. the timing of payment cycles as it assumes this will be dealt with in the chosen form of contract such as NEC, JCT, etc. However, if the form of contract that you are using does not contain such provisions then, by default, the Scheme for Construction Contracts (England and Wales) Regulations 1998, also known as “the scheme,” will apply.
Are there any situations where the Construction Act does not apply? If so what is in its place?
The concept of the Scheme for Construction Contracts is that it provides for deficiencies in contracts that do not comply with the HGCRA. It does this in two parts; part one of the scheme relates to adjudication and part two relates to payment.
For part one, and where a contract does not contain the provision for referring a dispute to adjudication, the Scheme steps in to provide the right for the parties to refer a dispute to adjudication. The process for dispute resolution under the scheme by way of adjudication is as follows:
Flowchart summary of the adjudication process
It is often a point of discussion as to whether both parties are to agree that a dispute must be crystallised before it can be referred to adjudication. For the purposes of the above, Step 2 is for the referring party to establish that they believe a dispute has formed and they can evidence this in writing. As is often the case, the adjudicator can be asked to extend the period from twenty-eight days by a further fourteen days, but this can only happen if the referring party agrees to it.
Note that in the 2011 HGCRA amendments, contracts can no longer define which party is to bear the costs of the adjudicator. In some forms of contract, it was by default the cost of the referring party who paid the costs of the adjudicator, which was viewed as a disincentive to commence proceedings and not in the spirit of the Act. It is now generally up to the adjudicator who pays their fees.
For part two, payment, the Scheme replaces contract clauses that do not comply with the HGCRA by implying its terms into the contract. Whilst the HGCRA provides that payment terms should be agreed such that interim, periodic or stage payments are made, it does not stipulate a timescale as it assumes the chosen form of contract will deal with this. However, if the chosen form of contract does not, this is where the Scheme implies its terms and provides for a payment cycle e.g.
The Scheme states “Where the parties to a relevant construction contract fail to agree… the amount, the interval or both… the relevant provisions of paragraphs 2 to 4 will apply”. This process, through paragraphs two to four, is described in the Scheme as follows:
- A claim for payment is made seven or more days after the end of the first ‘relevant period’ which is defined as twenty-eight days
- The due date for payment is when the claim is made by the payee or if no claim is made within thirty days of the works being completed
- The amount due is that claimed less the previous amount
- A payment notice must be provided five days after the due date
- The final date for payment is 17 days after the due date
- If the client intends to pay less than the amount due, then a notice must be issued no later than seven days before the final date for payment
The above put into a flowchart summary is as follows:
Payment under the Scheme for Construction Contracts
The Construction Act was a step in the right direction in terms of speeding up money moving between the parties and providing more rights for the supply chain in terms of payment notices and the ability to resolve disputes in a timely fashion. However, due to the relatively short timescale to reach a decision through adjudication, it can be difficult for one party to fully respond to the referrers submission and therefore decisions can be contentious as the other party believes the adjudicator has not taken all information into account, only that which they could provide in time.
However, the courts are adamant that adjudicator’s decisions must be enforced with the only obvious exception being that the adjudicator has exceed their powers under the contract. The decision must be enforced with no right of appeal, however the final decision can be overturned through arbitration or litigation.
The amended payment obligations in the Act have led to several ‘smash and grab’ adjudications whereby the lack of a payment notice, and then payless notice, entitles the payee to be paid the notified sum in full, which they have enforced through adjudication.
However, due to these ‘smash and grab’ adjudications there has been a rise in counter adjudications asking the adjudicator to determine the ‘true’ value of a payment amount. There have been opposing views from the courts on this, Lord Justice Jackson in the case of Grove v S&T essentially stating the Employer had no right to adjudicate on the ‘true’ value as the amount paid was not contestable. However, in the case of Davenport v Greer a second and different adjudicator found there was no sum to pay, following which Mr Justice Stuart-Smith ruled that even though the second adjudication found this ruling, the first ‘smash and grab’ ruling must also be enforced and therefore the employer was obligated to pay.