Construction Industry Update September 2008
Adjudication and Fair Payment for all?
As most in the construction industry will testify, Part II of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) is one of the cornerstone pieces of legislation affecting the construction industry. The Act incorporates provisions on adjudication and payment where previously there had been no such legislation.
The Construction Contracts Bill (“the Draft”) has been drawn up following consultations and will apply to England, Wales and Scotland. Application of the Draft in Scotland however will require the consent of the Scottish Parliament.
So what changes does the Draft propose?
There are several proposed areas of change. The Draft is in places difficult to understand and the language used confusing however the key changes are as follows:
1. Contracts “In Writing”: The Act only applied to construction contracts which were evidenced “in writing”. The Draft will also apply to oral contracts however contractual provisions for adjudication will require to be in writing otherwise the terms of the Act will apply.
2. Adjudicator’s Power to Make Corrections: The Draft allows adjudicators in Scottish matters to correct clerical errors in their decisions (this already exists in England & Wales).
3. Adjudication Costs: For an agreement regarding adjudication costs to be valid it must be made after the appointment of the adjudicator and be in writing. This is to prevent parties making adjudication unattractive by including contract terms to the effect that the referring party has to pay all the costs of the adjudication regardless of the decision. The adjudicator can also make a decision on any agreements regarding apportioning adjudicating costs between parties after he is appointed.
4. Payment by Reference to Other Contracts: Under the Act parties could make payment under the contract conditional on when payments were certified under a superior contract. This is no longer possible thus improving certainty of payment.
5. Requirement to Pay Notified Sum: Rules relating to payment notices have been amended so that both the payer and now the payee can issue payment notices, an attempt to encourage cash flow by determining what, provisionally, is payable. The wording here is rather clumsy and difficult to interpret. Withholding notices have been replaced with “pay less notices” which seem to do the same job.
This amendments looks to account for the decision made by the courts in Melville Dundas Limited (In Receivership) v. George Wimpey UK Limited. If a construction contract makes provision that where the payee becomes insolvent the payer need not pay any sum due under the contract then it will not matter if a “pay less notice” hasn’t been issued.
6. Suspension of Performance for Non-Payment: The right to suspension on 7 days notice due to non-payment existed under the Act. Under the Draft the party in default will now be liable to pay to the contractor the reasonable costs and expenses incurred by stopping the work (such as the cost of removing plant and equipment and re-mobilising if and when work recommences). This bolsters the right to suspension.
Whilst the Draft includes some sensible additions to the legislation (such as the costs of suspension), the redrafting seems in places overly complex and it remains to be seen how the amended act will work if and when implemented. Any comments on the Draft were to be made to Department for Business Enterprise and Regulatory Reform by 12 September 2008 after which time the Draft is to go before Parliament and it seems likely it will become statute some time next year.
A copy of the Draft plus explanatory notes can be found using the link below:
The Draft
Can you choose your adjudicator?
Adjudication is one of the major dispute resolution procedures used in the construction industry. Even where contracts remain silent on adjudication, legislation (Housing Grants, Construction and Regeneration Act 1996) incorporates a right to refer a dispute to adjudication into certain contracts.
If parties can’t agree on an adjudicator then there is a mechanism for referral to an adjudicator nominating body who will then appoint an adjudicator. Where parties are able to provide comprehensive information on the nature of the dispute the nominating body can select an adjudicator with the requisite skills. Unfortunately, sometimes there is little information on the nature of the dispute provided and the subsequently selected adjudicator may lack the experience or the skills to act in the dispute.
The recent case of Makers UK Limited v. The Mayor and Burgesses of the London Borough of Camden looked at what representations parties could make to a nominating body regarding the selection of an adjudicator.
The dispute related to a wrongful determination of employment under a contract and the issues were largely legal in nature. The pursuer decided that any adjudicator acting should be legally qualified and accordingly identified a suitable candidate and when making their application asked the nominating body that he act. He was duly appointed.
Naturally, the defender was suspicious and demanded an explanation for what they deemed to be unconventional requests. The adjudicator confirmed to the parties that he had had a conversation with the pursuers solicitor however other than that his only contact with them had been as an opposing solicitor on a case 15 years previously.
The adjudicator proceeded to act and found against the defender but the defender refused to pay the adjudicators fees. Accordingly, proceedings were commenced against the defender by the pursuer to recover the adjudicator’s fees.
The defender argued to the Court that there should be an implied term whereby neither of the parties to the dispute could influence the nominator’s determination by making representations to the nominator concerning who he should nominate.
The Court held that there should be no such implied term as (1) the form of contract used contained no exclusion on making representations; and (2) the nominating body involved was independent and well respected and able to make their own assessment of any representations. It did however suggest that all enquiries regarding potential adjudicators should be made in writing and that the nominating bodies should review their rules as to whether they will accept such representations and if they do, whether or not notice of that representation should be intimated to the other party to the dispute.
Superior soil management can help your bottom line
Soil is undoubtedly one of our most valuable and perhaps overlooked natural resources. With ever increasing focus on sustainable construction and renewable energy it is sometimes taken for granted that in soil we have a finite and non-renewable resource.
The Department of Environment, Food and Rural Affairs (DEFRA) has recently stated that more effective management of this resource on construction sites could ultimately lead to savings for the construction industry. But how?
DEFRA points out that soil contamination, either by way of accidental spillage or by treating the soil, as well as the sealing of soil, ultimately affects its ability to both store and filter water. These problems can result in sites having poor drainage which would in turn cause flooding (which may well result in increased cost by way of clearing the water and loss of time).
In addressing this problem DEFRA are championing the need for a Code of Practice (albeit a voluntary one) on soil management which could include:
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the undertaking of a soil resource survey prior to any construction work being undertaken;
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incorporating those results into the site working strategy;
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preparing a Soil Management Plan showing which types of soil are located throughout the site;
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the location and type of each soil stockpile; and
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the need to confine traffic movements on site to certain predetermined routes.
For further information on the proposed code or even to add your own thoughts on the proposed code go to the DEFRA website.
CIS of Life for Industry Professionals
In April 2007 the Government substantially changed the rules of the Construction Industry Scheme (CIS), with a view to reducing the regulatory burden on businesses within the sector. The changes to the CIS included the introduction of “monthly returns” and penalties to improve tax compliance, and ensured that sub-contractors registered for gross payment no longer have to receive vouchers or receipts in order to be paid.
However the new provisions were flouted by 30,000 Contractors between November 2007 and May 2008.
Those Contractors failed to meet the Scheme’s transparency requirements by neglecting to submit the (now requisite) monthly returns detailing payments to sub-contractors. Approximately 80,000 penalty notices of £100 – potential fines of £80million – were issued.
The gravity attached by the Government to breaches of the new CIS provisions is therefore clear, and industry professionals should be in no doubt as to the Scheme’s importance.
Failure to timeously report supply chain details could result in contractors being stripped of their “gross payment status” – that is, their ability to receive such payments and the associated advantages of that procedure.
The good news is that Contractors are improving – 85% of monthly returns are now received on time. However, parties must continue to ensure that their payments are well regulated and transparent in order to avoid future financial distress.
The following potential penalties can apply for CIS Breach:
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Any monthly return not received by HMRC by the specified due date could incur a fixed penalty of £100, and further penalties for every additional month the return remains outstanding;
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Failure to produce additional CIS records for HMRC when requested to do so, or failing to provide a sub-contractor with a ‘payslip’, will result in a penalty of up to £300, with an additional £60 per day for additional failure;
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Making a false statement in order to register for gross payment will result in a fine of up to £3,000.
“Construction Matters”
The House of Commons Business and Enterprise Select Committee has recently submitted a Report highlighting a number of areas on which the Construction Industry can improve.
The Report, entitled Construction Matters, submits to the Government a number of innovative recommendations, including the introduction of a Chief Construction Officer to provide a single point of contact between the industry and the public sector.
It is hoped that the Officer’s appointment will lead to an increase in continuity between the sectors. While the Construction Minister can change frequently, the less fragile role of Chief Construction Officer will ensure that the industry is not overly affected by political card-shuffling or volatility.
Construction Matters devotes much of its focus to Teamwork, and the prevalent concern that the effectiveness of the Industry continues to be negatively affected by a lack of it. It is proposed that the Chief Officer, through experience and frequent liaison with construction professionals, will play an important role in improving collaboration within the sector.
The Report proposes that contracts entered into by governmental clients should be collaborative. If accepted, this will see an increase in use of contracts such as the NEC (New Engineering Contract), and a drop in use of the potentially adversarial JCT suite.
The Report is also strongly in favour of Project Bank Accounts and the Fair Payment Charter and again recommends that the Chief Construction Officer drive these forward. Indeed, the Committee recommends that the Charter is implemented by all central governmental clients by the end of 2009 and by local authorities before January 2011. Industry professionals likely to be entering into governmental projects in the near future should therefore ensure that they are comfortable with its terms and requirements.
Construction Matters recommends that the Government stops using the practice of retentions “as soon as possible”, and it will be interesting to consider the Ministerial response. If accepted, the industry will be expected to follow suit – there have been calls for the abolition of retentions for some time.
The Construction Minister has until late October to respond to the to the Report’s recommendations.
For further information please contact: Kirsteen Milne