Last week the House of Lords debated the changes to the Construction Act at the key committee stage when they are supposed to be subjected to their greatest scrutiny. In fact, to be precise, the Lords debated proposed amendments to the government's planned changes. It all took only 45 minutes.

Labour peer, Lord Borrie, on behalf of the Specialist Engineering Contractors' Group, tabled the amendments. They replicated those advanced and withdrawn by SECG's president, Lord O'Neill. The government resisted all of the amendments, which principally favoured subcontractors and those further down the contractual chain. The main proposed amendments were as follows:

  • Require all payments under construction contracts governed by the Act to be triggered by a payee's notice, in respect of which the payer has an opportunity to say if it intends to pay less with its "precise reasons". If the payer fails (for whatever reason) to give a valid notice within 14 days of the payment due date he must pay the sum stated in the payee's notice
  • Remove the Act's insolvency exception to the ban on pay when paid clauses
  • Empower payees to require the payer to provide in respect of payments "adequate security" at any time after a construction contract is concluded (even if it does not provide for security to be given). Otherwise the payee may suspend (after a seven day warning notice) until the security is given
  • Require all construction contracts to include the adjudication rules in the statutory Scheme that accompanies the Act

There will be further opportunities for amendments to be made during the parliamentary passage of the Bill. However, the government is giving the impression that it intends to stick with the Bill as it stands. It rejected many of the suggested amendments on the bases that:

  • Its proposals are distilled from over three years of consulting the industry
  • While SMEs comprise 99.9% of firms in the construction contracting sector, SECG represents only 60,000 out of 250,000 of them and other SMEs' bodies oppose some of SECG's amendments

If the government maintains this stance, it is hard to envisage amendments being made if the test they must pass is that they were not raised during the consultation process and yet the industry wants them. This is despite (and perhaps strengthened by) the government's apparent acceptance that its changes are an imperfect balance between the wishes of the industry's competing interest groups. To see how the Act would look if the Bill were enacted as it currently stands click here.

Unfortunately though there are difficulties with the Bill as it stands:

  • There remains no sign of any concern in parliament about the adverse impact of the Act and the Bill upon PFI/PPP contractual arrangements, including in banning equivalent project relief provisions which are standard to – and an important aspect of - PFI/PPP subcontracts. One solution would be to exclude such subcontracts from the Act's scope
  • It does not permit a certifier to certify a negative sum requiring a contractor, say, to pay an employer. Unless corrected, this may prove important given the trend for contracts to provide for counterclaims (such as liquidated damages) to be included in the calculation of certified sums (rather than left for the employer to withhold from the certified sum after giving a notice)
  • It permits a range of devices designed to avoid the Act to survive. Lord Borrie's proposed mandatory adjudication scheme should remove all adjudication avoidance devices at a stroke

The Bill reaches report stage in the House of Lords later this month and early next. In due course it will leave the House of Lords for the House of Commons. It is expected to be enacted by the end of this year and to affect only contracts entered into after that date.

Reference: House of Lords committee stage debates on Construction Act changes (clauses 133 and following of the Local Democracy, etc. Bill)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 12/3/2009.