Changes to the Construction Act: Payment certainty ... Intl CIOB slides.pdf · • New S108(3A) –Slip rule ... The decision of the Adjudicator shall be binding on both parties until

Changes to the

Construction Act: Payment

certainty…uncertain terms

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Craig J Enderbury BSc DipArb MACostE FCIArb

Director – Hill International (UK) Ltd

Objectives

To understand the amendments to

Housing Grants Construction and Regeneration Act

1996

by virtue of the


by virtue of the

The Local Democracy, Economic Development and

Construction Act 2009

Latham Report 1994 “Constructing the Team”

identified;

• Poor Payment Practices

• Disputes – extensive, expensive and time consuming


consuming

• HGCRA 1996 came into force on May 1st 1998 together with the Scheme for Construction Contracts (E&W) Regulations 1998.

Housing Grants, Construction and Regeneration Act 1996

s104 Definition of Construction Contract

s105 Meaning of Construction Operations

s106 Residential occupiers

s107 Construction Contract to be in writing

s108 Right to Adjudicate

s109 Entitlement to stage payments


s109 Entitlement to stage payments

s110 Payment notices

s111 Withholding

s112 Right to suspend works for non-payment

s113 ‘Pay when Paid’ became ineffective

LDEDCA Part 8 Construction Contracts

The LDEDCA contains the construction provisions to

amend Part 2 of the HGCRA 1996 ('the Construction

Act').


These will seek to improve the existing legislation by

improving:

• cash flow and

• access to adjudication for construction companies

SECTION 107

CONTRACTS IN


CONTRACTS IN

WRITING

HGCRA Contracts in Writing provisions

107(2) Contracts are in considered to be in writing if

a) whether signed or not

b) exchange of communications

c) evidenced in writing

107(3) Terms – by reference


107(3) Terms – by reference

107(4) Terms recorded by a third person

107(5) Exchange in Adjudication/Arbitration – ‘Doctrine

of Election’

HGCRA – s.107 contracts in writing problems

• The provisions only apply to contracts evidenced

in writing.

• Not all contracts are evidenced in writing

- by design or by circumstance

• Only contracts in writing can be adjudicated

• Consequently parties prevented from using


• Consequently parties prevented from using

adjudication to enforce payment

RJT Consulting v DM Engineering - “What has to be

evidenced in writing is literally, the agreement, which

means all of it, not part of it”.

HGCRA – s.107 problems LDEDCA - solution

• only applies to contracts

evidenced in writing

• Not all contracts are

evidenced in writing –

by design or circumstance

• parties prevented from

• s107 repealed in full

• Contracts will no longer

required to be evidenced

in writing – may be;

1. Wholly in writing

2. Part writing, part oral


• parties prevented from

using adjudication to

enforce payment


3. Wholly oral

LDEDCA – s.107 solution Potential issues/benefits

• s107 repealed in full

• Contracts will no longer

required to be evidenced

in writing – may be;

1. Wholly in writing


• Widens scope of

adjudication to include

oral contracts

• Oral agreements will rely

on oral evidence / witness

statements.



3. Wholly oral

statements.

• Potentially another

adjudication stage

introduced

• Cross examination

potentially required

SECTION 108

ADJUDICATION


ADJUDICATION

PROVISIONS

HGCRA Provisions

108(1) Right to refer disputes to Adjudication

108(2) The contract shall provide:

(a) Right to refer a dispute at anytime

(b) 7 day timetable for the appointment of Adjudicator

(c) 28 days for Adjudicator to decide (longer if agreed)

(d) 14 day extension if agreed to by referring party

(e) Adjudicator to act impartially


(e) Adjudicator to act impartially

(f) Adjudicator to take initiative in ascertaining Facts &

Law

108(3) Decision binding on the parties until Arbitration /

litigation

108(4) Adjudicator not liable

108(5) Scheme is the default provision for non-compliance

Adjudication Timetable – No change

• Day 1

• Before Day 7

• Day 7

• Days 8 – 34

• Notice of Adjudication

• Appointment of adjudicator

• Referral Notice

• Response to the Referral, Reply to

Response and any other submissions


• Day 35

Response and any other submissions

• Adjudicator’s decision issued

• +14 days at consent of referring party

• +?? days at consent of both parties

LDEDCA Amendments to Adjudication

Three changes to the HGCRA regime:

• Section 107 repealed – contracts in writing

• New S108(3A) – Slip rule

• New Section 108A (1) & (2) – allocation of


• New Section 108A (1) & (2) – allocation of

adjudicators costs


• Adjudicator clerical error in

his decision

• Reliant on parties arguing

on basis of common law

• New section 108(3A)

• Adjudicator’s power to

correct decision

•‘Slip Rule’

“The contract shall include

provision in writing permitting the


provision in writing permitting the

adjudicator to correct his decision

so as to remove a clerical or

typographical error arising by

accident or omission.”

HGCRA – s.108 adjudication problems

Clauses that require the referring party to pay:

• the other parties costs and/or

• the adjudicators costs

Irrespective of the decision of the adjudicator


Often referred to as Tolent Clauses

‘Tolent’ Clauses

Bridgeway Construction v Tolent Construction :

Notwithstanding Clause 15(a) either party may refer any dispute or

difference arising under or out of the contract to Adjudication in which each

party shall be responsible for their individual costs in referring or responding

to the Adjudication, however, should the Sub-Contractor refer a dispute to

Adjudication which is later rejected in whole or in part by the Adjudicator

then the Sub-Contractor shall meet all the costs of the Adjudication

including all costs sustained by the Company in responding to the claim.


including all costs sustained by the Company in responding to the claim.

The decision of the Adjudicator shall be binding on both parties until a final

decision is reached by Arbitration or until the parties agree that the decision

of the Adjudicator is final regarding the dispute or difference.

Judge held – There should be no interference with the Contract. The mere

fact that Bridgeway were disgruntled did not entitle Judge Mackay to say

"Well these clauses are a bit unfair. Let's change them".

However this was changed by the case of:

Yuanda (UK) Co Ltd vs. WW Gear Construction Ltd

“If the effect of the contract drafting is to "clearly discourage a party

from exercising its right to refer disputes to adjudication", then it must

be for consideration whether a provision so drafted is contrary to the

requirements of HGCRA”

“For these reasons, I consider that clause 9A would in practice limit


“For these reasons, I consider that clause 9A would in practice limit

Yuanda's freedom to refer a dispute to adjudication at any time and, in

some circumstances – such as in a dispute involving a relatively small

amount of money – to deprive it of a remedy altogether. I must

therefore respectfully disagree with the conclusion… in the Tolent case,

at least on the basis of the wording of clause 9A in this particular

contract”


• Tolent clauses

• Payment of other party’s

costs

• Often irrespective of

outcome

• New section 108A (1) & (2)

• Intention to only allow the

Adjudicator to allocate his

costs, or

• Parties to agree cost

allocation after the notice



of adjudication issued


• New section 108A (1) & (2)

• Intention to only allow the

Adjudicator to allocate his

costs, or

• Parties to agree cost


• Aim is to remove

remaining barriers to

adjudication

• LDEDCA drafting not

‘water tight’

• Expect some cases to test



of adjudication issued

• Expect some cases to test

the new legislation

• Expected that Yuanda will

prevail in the end

LDEDCA Section 108 (A)

Adjudication costs: effectiveness of provision

(1) This section applies in relation to any contractual provision made

between the parties to a construction contract which concerns the

allocation as between those parties of costs relating to the

adjudication of a dispute arising under the construction contract.

(2) The contractual provision referred to in subsection (1) is

ineffective unless—


ineffective unless—

(a) it is made in writing, is contained in the construction contract and

confers power on the adjudicator to allocate his fees and expenses as

between the parties, or

(b) it is made in writing after the giving of notice of intention to refer

the dispute to adjudication.

LDEDCA Section 108 (A)

Does it work?

“Either party may refer any dispute or difference arising under or out

of the contract to Adjudication in which each party shall be

responsible for their individual costs in referring or responding to the

Adjudication, however, should the Sub-Contractor refer a dispute to

Adjudication which is later rejected in whole or in part by the

Adjudicator then the Sub-Contractor shall meet all the representation


Adjudicator then the Sub-Contractor shall meet all the representation

costs legal or otherwise of the Contractor in responding to the claim.

The Adjudicator shall have the power to apportion his reasonable fees

and expenses between the Parties at his discretion. The decision of

the Adjudicator shall be binding on both parties until a final decision

is reached by Arbitration or until the parties agree that the decision

of the Adjudicator is final regarding the dispute or difference”.

SECTION 110

PAYMENT PROVISIONS


PAYMENT PROVISIONS

Notice of intended suspension if a notice to withhold payment not givenPeriod as statedAssessment IntervalDue Due Due Due DateDateDateDate

S.110 S.110 S.110 S.110 Payment NoticePayment NoticePayment NoticePayment Notice Final Date Final Date Final Date Final Date

for Paymentfor Paymentfor Paymentfor Payment

e.g. 30 days minimum 7 daysApplication Application Application Application for paymentfor paymentfor paymentfor payment Date by which “Notice of payment to be made” (5 days max) Employer pays on or before

Right to suspend Right to suspend Right to suspend Right to suspend performanceperformanceperformanceperformance(until payment made)Performance may be suspended if payment in full has not been made

S.111 S.111 S.111 S.111 Withholding NoticeWithholding NoticeWithholding NoticeWithholding Notice

Suspension period

HGCRA 1996: S110 Payments Overview


7 daysS111(3) (Y2.3) minimum 7 days“Notice to withhold payment” given not latetrthan Employer paysSuspension period

Key

Time period fixed by Construction Act

Time period defined in contract or by

Scheme/Act in default

HGCRA – s.S110 Payment Problems

1. Payment Notice - may only be given by employer

2. Sanction for failing to provide notice - none

3. Absence of notice – unclear what payment is due



1. Payment Notice –

only given by employer

2. Sanction for failing to provide

notice - none

3. Absence of notice – what

payment is due?

1. Notice of Payment may be issued

by Payer or by a specified person

- S110A (1a)

2. If after 5 days no Notice of

Payment is issued, Payee may

issue a Notice in Default stating

what is due - S110B (2).

3. If an application has been made


3. If an application has been made

in accordance with the Contract,

the application is considered the

payee’s ‘Notice in Default’- S110B

(4).

4. The amount contained in the

Notice in Default may be

considered as the amount DUE.

Notice of intended suspension if a notice to withhold payment not givenPeriod as statedAssessment IntervalDue Due Due Due DateDateDateDate

S.110 S.110 S.110 S.110 NoticeNoticeNoticeNotice

Final Date Final Date Final Date Final Date for Paymentfor Paymentfor Paymentfor Payment

e.g. 30 days or 30+ days ‘Payee Notice in ‘Default’ minimum 7 daysApplication Application Application Application for paymentfor paymentfor paymentfor payment Date by which “Notice of payment to be made” (5 days max) Employer pays on or before

Right to suspend Right to suspend Right to suspend Right to suspend performanceperformanceperformanceperformance(until payment made)Performance may be suspended if payment in full has not been made

S.111 S.111 S.111 S.111 NoticeNoticeNoticeNotice

Suspension period

LDEDCA 2009: S110 Payments Overview


7 daysS111(3) (Y2.3) minimum 7 days“Notice of intention to pay less payment”not later thanS110(B) On failure to give Notice Payee application may become ‘Payee Notice in Default’ or Payee may issue NID (5+ days)

Employer paysSuspension periodImportantly Loss and Expense is now recoverable for period in pursuance/consequence of suspension

Key

Time period fixed by Construction Act

Time period defined in contract or by

Scheme/Act in default


1. May be issued by Payer or by a

representative - S110A (1a)

2. If no Notice after 5 days Payee

may issue a Notice stating what

is due - S110B (2).

2. Application may be considered

the payee’s ‘Notice in Default’

• What is due to be paid is

certain

• Main contractors likely to be

busy at certification periods

• 2 bites of the cherry means

that MC may allow payments

to go through ‘self-cert’ process


the payee’s ‘Notice in Default’

- S110B (4).

3. The amount contained in the

Notice in Default may be

considered as the amount DUE.


and correct using 2nd S111

notice provision

• Still may have uncertainty until

late in the process

SECTION 111

WITHHOLDING


WITHHOLDING

PAYMENT

HGCRA – s.111 Withholding Payment problems

1. Confusion as to number of Notices to be issued.

2. Failing to issue a S111 notice still allows Payer to

defend to a claim via abatement defence



1. Confusion as to number of

Notices to be issued.

2. Abatement defence

1. Clarity – requirement to pay the

‘notified sum’ in s.110A notice

2. Payer may amend ‘notified sum’

via a ‘notice of intention to pay

less‘ - s.111(3)

3. No abatement defence as

obligation to pay the ‘notified



sum’


1. Clarity – requirement to pay

the ‘notified sum’ in s.110A

notice

2. Payer may amend ‘notified

sum’ via a ‘notice of intention

to pay less‘ - s.111(3)


• 2 bites of the cherry means

that MC may allow payments


and correct using 2nd notice

provision

• Uncertainty until late into the

payment cycle




sum’

payment cycle

SECTION 112

RIGHT TO SUSPEND


RIGHT TO SUSPEND

PERFORMANCE

HGCRA – s.112 Suspension problems

1. Extension of time for suspension period only

2. No right to loss and/or expense

3. Must suspend all obligations



1. Extension of time for

suspension period only

2. No right to loss and/or

expense

3. Must suspend all obligations

1. Right to suspend ‘any or all of’

his obligations – s112(1)

2. Right to recover ‘reasonable

costs and expenses’ - s112(3A).

3. Right to claim an extension of

time for any period “in


time for any period “in

pursuance of or in consequence

of“ the right to suspend

S112(4).

SECTION 113

PAY WHEN PAID


PAY WHEN PAID

HGCRA – s.113(1) ‘Pay when Paid’ problems

1. The introduction of ‘Pay when Certified’ clauses.

2. Sub-Contractors not privy to certification process,

therefore:

• did not know when due, and


• did not know when due, and

• could not enforce payment


1. Pay when certified

2. Not notified of certification

dates

• s113 unchanged

• Amendment s110(1A)

• Payment may not be conditional

on:

• Performance of obligations

under another contract, or


under another contract, or

• Decision as to whether

obligations under another

contract have been

performed

• Does not apply to ‘management’

type contracts – s110(1C)

SECTION 113

PAYMENT ON INSOLVENCY


PAYMENT ON INSOLVENCY

HGCRA – s.113 payment on insolvency problems

1. Unclear in cases of payee insolvency whether

payment is to be made in absence of s111

withholding notice

Amendment confirms House of Lords decision in…


Amendment confirms House of Lords decision in…

Melville Dundas (in receivership) v George Wimpey UK


1. Payment on Payee

insolvency

• S111(10) Payer not obliged to pay

notified sum if:

• The Contract stipulates non-

payment in the event of

Payee insolvency, and

• Payee has become insolvent

after the prescribed period in


after the prescribed period in

section 111(5)(a) - date of

notice of intention to pay less

In summary

Key Changes

1. Adjudication costs

2. Slip Rule

3. Payment notices


3. Payment notices

4. Insolvency

What now?

• The new Act came into effect 1st October 2011

• Applies only to contracts entered into after

this date – contracts before this date subject

to old HGCRA


• May lead to confusion/litigation

• Amended suite of Contracts for JCT and NEC

Hill International (UK) Ltd

6160 Knights Court

Solihull Parkway

Birmingham Business Park

Birmingham

B37 7WY

Tel: 0121 717 5770


Tel: 0121 717 5770

[email protected]

Craig J Enderbury BSc DipArb MACostE FCIArb

Director

Documents

Changes to the Construction Act: Payment certainty ... Intl CIOB slides.pdf · • New S108(3A) –Slip rule ... The decision of the Adjudicator shall be binding on both parties until