Ian Yule suggests three improvements that the new government should make to the Construction Act
Boris Johnson’s lengthy to-do list is unlikely to contain the task “must amend the Construction Act”. Yet the 1996 act has only been modified once, by legislation of 2009. Since then, it has become clear that further improvements could be made. At the start of 2020, here are three in particular that I would like to see.
The first improvement is straightforward. It is to bring the power and process plant industries within the Construction Act. In 1996 parliament considered those sectors less dispute‑prone than the traditional building industry and not in need of adjudication. That view has been shown to be wrong, not least by the number of reported cases involving process plants. Worse, the legislation, which only excludes some types of work in this area (broadly, installation of large items of kit) has led to many disputes about whether the works in question are indeed excluded. There is even the absurdity of the “hybrid” contract, where work under a single contract can be partly inside, and partly outside, the act.
The second area relates to that of “notified sum” adjudications (sometimes called “smash and grab”). In 2009, parliament toughened up the notice requirements, so that if a payer (employer or main contractor) did not serve its notices correctly, it had to pay up on a payment application, regardless of the merits of that application. The law took a wrong turn in 2014 with a case that meant that a payer who had not sent the proper notices could not get its money back without going to court. The Grove Developments (2018) case has now largely put the law back on the correct path.
What happens when adjudications of both types are running at the same time, or close in time, to each other?
However, that case still leaves unresolved issues. A key problem concerns the relationship between adjudications based on lack of notices (on the one hand) and “true value” adjudications, where what is being decided are the merits of an application for payment (on the other). What happens when adjudications of both types are running at the same time, or close in time, to each other?
The purpose of the 2009 amendments was to improve cash flow for payees, not to give them unmerited windfalls. Any amendments to the legislation should provide that if there is an ongoing adjudication about the merits, no payments based on lack of notices need be made until that adjudication is concluded. Some safeguards might then be needed to ensure that payers do not play for time. For example, where a “value” adjudication has been started following a “notice” adjudication, the payee could be given control of the timetable, so as to speed things along.
The final area for possible amendment relates to insolvency. The legislators of 1996 did not take into account the fact that, while adjudication decisions are supposed to be only temporary, insolvency is often permanent. Money received by an insolvent company following an adjudication decision may never emerge from the clutches of the liquidator. It will thus not be available to the other party if that party succeeds in later proceedings in court, or in a further adjudication.
Fortunately, the courts themselves have made some progress. In Wimbledon vs Vago, the judge stated guidelines as to when a party that had lost an adjudication might avoid being forced to pay money over to an insolvent company, pending a final decision on the merits. However, further issues remain.
If the claiming company is merely in a CVA, or in administration, the position may be different
If a party is faced with an adjudication by a company in liquidation, it may ask the court to stop the adjudication, and the court will often agree. If the claiming company is merely in a CVA (company voluntary arrangement), or in administration, the position may be different, since such companies sometimes trade out of their debts.
However, in Meadowside last year the court would have considered allowing even a company in liquidation to bring a claim, if it could provide sufficient security (for example, by a bond or an insurance policy) to cover the legal costs of the other side, should the claim fail.
The law needs clarifying. Amendments to the legislation will not be straightforward and evidence about insolvency in practice would assist. For example, the leeway given to companies that are in a CVA or administration may be misguided, if such companies usually collapse anyway.
None of the above points are likely to attract MPs as potential vote winners. However, they should be considered along with other possible improvements, when the time eventually comes for giving the Construction Act its next overhaul.
Ian Yule is construction and engineering partner at Shoosmiths