Changing the mechanism

Following a review into the Construction Act in March 2004, Sir Michael Latham set up working groups to examine payment and adjudication practices. The DTI then issued a consultation paper in 2005 identifying proposed changes, which were made available to the industry for comment.

After the feedback was received in January this year, the DTI issued its proposals. It certainly seems in favour of some good old conversation before making any final decisions over how the Act should be updated. In an industry like ours with so many conflicting groups and interests, you might well agree that dialogue is a good thing. Surely it has to be positive to consider all views before changing industry payment mechanisms? This is all well and good in principle, but what if views are so polarised that making radical changes would steamroller interests of one group whereas taking the middle ground would please no one and change little?

This is the dilemma facing the DTI after it was tasked with reviewing how payment is made and, when it is not, how parties can go about getting it through adjudication.The main payment proposals are:

To remove ambiguity in the payment process, a contractual payment mechanism will only be valid if it requires a statement of what is due in a certificate to be issued by the payer, the payee or a third party named in the contract. If such a certificate is not issued, then the payee will have the right to issue an application stating the sum due. The advantage of this for the applicant is that the date of this application will also serve as the due date. The intention is to encourage all parties to state how much is due and why.

The current requirement to serve a payment notice under section 110 (2) of the Construction Act serves little purpose in practice, because there is no sanction within the existing regime for failure to serve. The DTI has therefore proposed the requirement be scrapped.

The DTI certainly seems in favour of some good old conversation before making any final decisions over how the Act should be updated

The DTI agrees that suspending works should be made a more realistic option for a party that has not been paid. To allow this, the DTI proposes that the costs of suspension and subsequent remobilisation should be claimed back from the defaulting party. In addition to actual costs, suspension would also give an entitlement to an extension of time. If this proposal does come into force then the threat of suspending works for non-payment will carry with it a far greater threat than it currently does; nothing quite focuses the mind like the risk of incurring cost.

There was also lengthy discussion over the validity of "pay what certified" and "pay when certified" clauses. Despite the conversation, no clear proposal was made. Concerns were expressed over the use of "pay when certified" provisions - where the issue of a certificate under a different contract is needed before payment can be made under the contract in question. But no concrete proposal was made as to how to deal with the problem.

Many, especially those at the bottom of the chain, will be disappointed that some of the more hard-hitting proposals were not adopted. There is, for example, no proposal to restrict cross contract set-off or avoid non-payment in the event of up-stream insolvency.

While some of the suggested changes might help that all-important cash to flow, the lack of any real consensus means that, despite the talk, the actual changes could be limited. Further consultation will be carried out before the final proposals are put to parliament in the 2006/7 session.