Ten years after it became law, the Construction Act is a boisterous, perplexing triumph. Here’s its biography. Overleaf, Rudi Klein and Dominic Helps add their views, and we hear from one man who went through the mill and survived
My, how time flies. The Construction Act, those payment rules, this adjudication thing is 10 years old! I rank this piece of legislation as the most important act of parliament in our world of building and civil engineering. It would get a gold medal in the Olympics for importance. I rank this piece of legislation as the most successful thing to happen in our world of commerce. I rank this piece of legislation as the most remarkable step in the English legal system. More gold medals.
And yet and yet, at 10 years old, I still don’t know truly what it is. This brat at two had tantrums, at four had a mind of its own, at six and eight it was tricky, and at 10 it gives the rest of us tantrums. And I wouldn’t be without it. Flawed? Yes. Must improve? Yes. Could do better? Yes. Come on, what were they saying about you at 10?
The feature that astonishes me most is cash flow. The new payment rules, together with the thought of getting a thick ear from an adjudicator, really does move cash. More than that, it stops dead the bloke who thinks he should be paid for this or that because an adjudicator shows him he is owed nothing.
There was an awful lot of whingeing that this or that payer was screwing his subcontractors. It is true, sometimes. But the subcontractors have been pushed to compile interim accounts, and even final accounts, in a much more detailed and accurate way. Do that and impress the payer; do that and impress the adjudicator; do that and get paid; don’t do that and don’t get paid.
Before the brat, before 1 May 1998, what was to be done about payment disputes? Well, what you could not do was litigate. The courts in 1998 could not decide a dispute without “a deep forensic investigation”. But commerce, particularly building contractors, needed something faster – miles faster. Something within days, even if it was broad-brush; and we were given a system that an awful lot of lawyers thought was daft. The row was stopped, temporarily at least, by an industry wallah, unconnected with the project, deciding in the round whether the money should be paid or not.
Cash flow starvation tactics were tackled immediately and effectively. Start to finish, the process was 28 days … crash, bang, wallop. None of that needed lawyers. And I bet, if you pause here, all that makes sense, doesn’t it? All it needed was an engineer, QS or architect to look, sniff, prod and decide.
I vividly remember, heaven help me, urging these “lookers and sniffers” not to confuse their role with that of an arbitrator. An arbitrator does the work of a judge, requires evidence, legal submissions, witnesses on oath, barrister, solicitors and experts. Tish tosh, said I, none of that’s needed or expected for a 28-day crash bang wallop. All that was needed was a “feel” for if money ought to be paid pro-tem. Ten years on, looking and sniffing is not on.
Snags began to show up when a building firm refused to obey the adjudicator’s decision. How do we “oblige” the naughty party to obey? The dispute was taken to court and a judge was asked to enforce the adjudicator’s decision. It was all new to the court. The system of Construction Act adjudicating had none of the “grinding detail” of normal dispute resolution. Damn it, the act didn’t even call itself a dispute resolution system. Damn it again, the High Court was being asked to enforce some idea from Mars, asked to ignore plain errors of law, ignore the weight of evidence, ignore the fact the adjudicator used a procedure and carried out an inquiry in a way no arbitrator would dream of doing. Some judges found the idea of an adjudicator talking to one side without the other present utterly repugnant. Nobody understood what this brat wanted in 28 days.
To their credit the courts and the adjudicators edged their way to accommodate each other’s worries. The courts would enforce the decision, provided the adjudicator adopted more traditional “due process”. The courts have made adjudication work. Adjudication gets the cash moving … even the threat of adjudication gets things moving.
And after 10 years the system has worked so well adjudication is managing the most complex disputes. And after 10 years the adjudicators have massively improved their skills. True, we’re more likely to apply proven facts to the law of the contract, and while we adjudicators don’t always get gold medals from both winner and loser, everybody wins a prize in the proper 10-year end of term report. Parliament’s a winner, construction too, and the courts as well. Wow!
Tony Bingham is a barrister and arbitrator
When learned friends fall out
Sceptics will no doubt point to the fact that there have been about 300 reported court decisions on the Construction Act as evidence that the legislation has been taken over by the lawyers and even that it has ultimately failed in the objective of reducing conflict in the industry.
In my opinion, this statistic is in fact down to a combination of two factors. First, when the legislation was introduced, adjudication was a little-understood method of dispute resolution; it took Lord Ackner to explain its difference from arbitration during the passage of the legislation through the Lords.
Second, and this applies to both the payment and adjudication aspects of the act, the woeful and inadequate drafting of the legislation has meant that the courts have had their work cut out clarifying how the legislation should work. Parties challenging enforcement of adjudication decisions almost invariably have some basis for doing so and the failure of the legislation to address issues such as enforcement and natural justice has given them plenty of scope for creativity.
One thing that has impressed me over the 10 years is how the industry has defied the experts about the appropriate use of adjudication. Rather than using it just as a “quick fix” method of interim resolution of small payment disputes during the life of the project, it has actually been used as a means of finally resolving all sorts of disputes many of which are highly complex and expensive.
Has the introduction of adjudication led to less conflict in the industry? In some ways it has: for instance, the sorting out of disputes that would otherwise have gone to arbitration or litigation. On the other hand, I have to say that I have noticed many smaller disputes escalating to adjudication that 15 years ago would have resolved at site level.
So far as the process is concerned, has it got out of control? It is true that most adjudications seem to involve parties exchanging submissions right down to the wire and that is expensive in terms of the time and money. But often that is down to the complexity of the dispute and, frankly, human nature, by which I mean the inevitable desire to have the last word. Concern on the adjudicator’s part not to be seen as acting unfairly has not helped but is reasonable given the role of natural justice in the process.
Has adjudication been a success? I suppose the yardstick ought to be Sir Michael Latham’s aspirations back in 1994 in Constructing the Team in which he declared that adjudication should become “the key to settling disputes in the construction industry”. If that is the test, I think the truth is that it has been a considerable although not unqualified success.
Dominic Helps is a partner in Shadbolt & Co
The act has provided plenty of points for lawyers and judges to fight about, but how serious are its flaws? Dominic Helps and Rudi Klein present their assessments
Would you prefer to abolish the Construction Act and go back to the position before it was introduced? If we put this question to the industry, I expect that the overwhelming majority of firms (which are, of course, SMEs) would respond with a resounding “no”. Those of us around before Latham’s 1994 report (which recommended the legislation) will recall how the industry was embroiled in internal strife. Many contractors, faced with spurious set-off claims, would be told: “If you don’t like it, go to arbitration”. Commercial intimidation was rife, with the result that thousands of firms – many of them well-established – went to the wall.
Today, if we asked the question: has the Construction Act made a difference, most firms would say, “yes”. But, even after 10 years, some firms are still unaware of the act or do not make sufficient use of its provisions.
The abolition of pay-when-paid clauses (except when a third-party payer, such as a client, has gone into insolvency) was the highlight of the legislation. These days it is unusual to find a contract that has a general pay-when-paid clause, but there were other things in the act that also played a part in curbing payment abuse. These included the statutory right to a notice of withholding (section 111) and, more importantly, the right to suspend work (section 112). The latter was revolutionary. A threat to exercise the right of suspension usually obtains the desired result.
Four years ago Gordon Brown (then chancellor) announced a review of the act with the aim of identifying improvements to help deal with continuing payment problems. The review that followed, together with the government’s consultations, revealed that the act needed to be tightened up to reflect its original intent. What was that original intent? It was summed up by Lord Lucas in the House of Lords debate on the legislation on 26 February 1996: “This legislation requires that payment should be defined in terms of amount and date.”
In other words, the payee should know exactly how much it is getting at the payment date. The act left it to the contracts to provide an “adequate mechanism” for determining what was due and when. On reflection, leaving it to the contracts was a bad idea. Most do not have an adequate mechanism.
Reform of the payment provisions should, at least, include:
• A statutory adequate mechanism that does give the payee certainty of amount and date (essential in the event that it has to exercise its right of suspension)
• A ban on all conditional payment provisions (including pay-when-certified clauses)
• A ban on cross-contract set-off (this was originally recommended by Latham).
Improving the efficacy of the payment provisions will reduce the need to go to adjudication which, unfortunately, is now perceived as an expensive luxury.
The Department for Business, Enterprise & Regulatory Reform is still seeking parliamentary time for introducing changes to the legislation. But unless the changes are effective in restoring the act’s original intent, there is a real risk that this innovative law could wither on the vine.
Rudi Klein is chief executive of the Specialist Engineering Contractors’ Group. He wrote the commentary on the act for Sweet & Maxwell’s Current Law Statutes
The Construction Act’s short, eventful life
May 1998 The act takes effect. Its stated purposes are to improve cash flow and speed up dispute resolution.
February 1999 The first enforcement case comes before the Technology and Construction Court (TCC). Macob vs Morrison establishes that an adjudicator’s decision will be backed by the courts even if it contains errors. Court procedure is geared towards speedy enforcement.
July 1999 First case where an adjudicator’s decision is not enforced. “Jurisdictional” challenges to the adjudicator’s right to hear the case become a standard tactic.
August 1999 Many contracts signed after 1 May 1998 do not provide for adjudication or an “adequate payment mechanism” as the act requires of all construction contracts. A line of cases begins on the act’s arbitrary definition of what is a “construction contract”.
April 2000 The TCC upholds the legality of “Tolent” clauses, which require the referring party to pay all the costs of an adjudication.
June 2000 The TCC strikes down a clause in an NEC contract because it requires the parties to meet before any adjudication.
July 2000 First Court of Appeal case. Bouygues vs Dahl-Jensen confirms Macob and enforces decision that ignored retention.
August 2000 The TCC decides that an adjudicator’s decision given in breach of natural justice may be unenforceable but the Human Rights Act’s right to a fair hearing within a reasonable time doesn’t affect adjudication.
June 2001 SL Timber vs Carillion case determines a payer that gives no withholding notice may sometimes still withhold against a payee’s application for payment.
September 2001 Durabella vs Jarvis case establishes that “pay when certified” clauses are not disallowed by the ban on “pay when paid” clauses.
March 2002 The Court of Appeal in RJT vs DM Engineering holds by a two to one majority that all a contract’s terms must be in writing for the act to apply.
November 2003 Rupert Morgan vs Jervis decides that a payer that gives no withholding notice may not withhold against a payment certificate.
December 2003 The TCC opines that adjudication is ill-suited to large and complex disputes and professional negligence claims. Meanwhile, a Scots court enforces an adjudicator’s professional negligence decision even though it is dubious.
March 2004 Chancellor Gordon Brown initiates a review of the Construction Act.
December 2004 The TCC and the Court of Appeal clarify when a dispute “crystallises”. Adjudicators only have jurisdiction to decide a dispute after that happens. This was an issue that had split the TCC’s judges.
March 2005 First case where an adjudicator’s decision is struck down for being late. DTI’s first consultation paper on amending the act proposes no action on extending the act to cover oral and partly oral contracts and abandoning payment notices. Tolent clauses are to be banned.
June 2005 New suite of JCT contracts drops the JCT’s adjudication rules and opts for the statutory Scheme for Construction Contracts.
November 2005 Midland Expressway raises difficulties for “equivalent project relief” clauses under PFI/PPP subcontracts and suggests that “pay when certified” clauses are invalid after all.
January 2006 DTI’s analysis of the 356 responses to its 2005 consultation paper confirms the divisions within the industry over how the act should be amended, if at all.
January and February 2007 The TCC strikes down standard adjudication rules, including the government’s, as non-compliant with
April 2007 Melville Dundas, the first dispute under the act to reach the House of Lords, upholds an employer’s suspension of payment to an insolvent contractor even though it gave no withholding notice.
June 2007 The DTI’s second consultation paper on amending the act now proposes extending the act to cover oral and partly oral contracts and the beefing up of payment notices.
End of April 2008 Over the past 10 years at least 15,000 adjudications have taken place, with about 5-10% later coming before the courts. Most decisions are accepted, although not finally binding. Some other places have adopted similar legislation.
Our act remains as it was when it took effect 10 years ago. Doubts remain as to whether it has improved cash flow but it has speeded up dispute resolution. The act has yet to be tested by a recession. An amended version is due when parliamentary time allows.
Rupert Choat is a partner and solicitor advocate at CMS Cameron McKenna
Case study: How a headteacher took on an adjudication
Buxton vs Durand primary school marked the high point of courts reviewing the merits of adjudicators’ decisions when pondering whether to enforce them. Like so many hard cases it seemed fair on the facts but, for a time, set a troublesome precedent by making it harder to enforce adjudicators’ decisions.
Buxton adjudicated against Durand school, represented by the headteacher, Greg Martin, to recover the second half of its retention fund. The school had always said it was not payable because of defects in Buxton’s work. It gave a withholding notice, on the supervising officer’s advice, before the latter issued an interim (rather than a final) certificate releasing the last retention.
The adjudicator awarded Buxton the full sum. He did not investigate the material provided by Durand, mistakenly assumed that the supervising officer had taken the withholding notice into account when certifying and did not consider the certificate’s contractual validity.
Judge Thornton at the TCC declined to enforce the adjudicator’s decision because it was made without the adjudicator considering the school’s side of the case.
Another case now tells us that the Buxton case was incorrect in suggesting that an adjudicator’s decision is unenforceable if he wrongly analyses the facts or the law and as a result does not consider a party’s evidence. If the adjudicator answers the right question in the broad sense (is the retention payable?) it does not matter if he answers it wrongly.
However, confusingly, another case (Domsalla vs Dyason) says it is still possible for the courts to review the merits of adjudicators’ decisions reached under contracts not governed by the act when deciding to enforce them.
Also, it is clear that adjudicators should not go off and do their own thing without giving the parties the opportunity of being heard. Distinctions such as these show how adjudication has not ended up as the lawyer-free zone that some of its forefathers seemed to envisage.
The headteacher’s account
I wouldn’t feel particularly confident in going through another adjudication again. We represented ourselves at the court case because we couldn’t afford lawyers.
As far as I was concerned it was not a complicated case. I thought we just had to present the facts, but then we got this ridiculous decision. We couldn’t accept that it was binding when it was so plainly unfair and so the dispute went to court. Fortunately the judge agreed with us.”
The written evidence we sent to the adjudicator was just ignored. It was said that we had not submitted it in time.
This is the only adjudication I’ve been involved with. The notion of an adjudication being binding should mean it is transparent, clear and fair – but this was clearly irrational.
It did take up a significant amount of my time, but I didn’t find it stressful. As a headteacher I’d say half my working life has been spent dealing with various disputes.
The secret to representing yourself is to be sure you are right and don’t be bullied by threats of lots of lawyers. As long as you have evidence and keep good paperwork you have a good chance of winning.”
Greg Martin, headteacher, Durand Primary School, Stockwell, London
What we said in ‘98
Rudi Klein It’s not the best-drafted piece of legislation, but it has set benchmarks the industry should welcome. There is consensus, for example, that adjudication is a good thing for the industry. I am sure the act will lead to change – but it’s the extent of that change that’s not yet known.
Tony Bingham The enthusiasm for adjudication has astonished me. The overwhelming majority – main contractors, subcontractors, suppliers – are delighted that it exists. The message coming through from main contractors is that they are fed up with the claims game – going in on minus figures, with no profit margin, then spending their time pursuing claims. Adjudication will instantly spot bluffers and duffers’ claims.
Jennie Price It’s valid to ask whether projects will get bogged down in multiple adjudications. A lot of contractors are worried that they will be bombarded by 15 adjudications from a subcontractor.
Ann Minogue If you have a rapid disputes procedure you have more disputes. If you have more disputes, people are more likely to take them to arbitration or litigation. There must be an argument that adjudication will generate more disputes.
Nick Raynsford The legislation will address the problem of the costs and delays currently involved in settling even the most straightforward construction disputes. The legislation offers a quick means of resolving disputes so work can continue on site without delay and disruption.
Tony Bingham (again) It’s absolutely absurd to suggest that 28 days is adequate to carry out a forensic investigation to resolve complex disputes. The right way to approach this is to tackle disputes as they unfold. We have introduced on to the football pitch something we’ve never had before – a referee. It might be that many disputes are sorted out by the parties just because there’s a referee on the pitch.
Rudi Klein I think main contractors are fed up with all their games over payment. But the fact is that it’s possible to get round the act by having long payment periods.
Ann Minogue One of the problems before was that you never knew when you would get paid. Now you will.
Jennie Price One of the good things about this is that it will make small contractors and subcontractors think seriously for the first time about cash flow and when payments should be made.
Nick Raynsford I receive a steady stream of mail from firms facing unnecessary hardship and even insolvency because they have not been paid for work carried out in good faith. This legislation will help to protect such firms from this sort of bad practice.