UK: Construction Act

Radical reforms to construction law came into effect on 1 May 1998 as Part II of the Housing Grants, Construction and Regeneration Act 1996 (known as the Construction Act) ("the Act") comes into force. It aims to speed up the flow of payments and information about payments in construction contracts, and also introduces a new dispute resolution procedure of "adjudication".

Contracts for most types of building work are covered by the Act, but it excludes (amongst others) contracts : with residential owner occupiers; for mining; for oil or gas drilling; for artistic works; and those not in writing. Further exclusions will be made by Order under the Act, particularly excluding some types of PFI and finance agreements.

The Act provides parties with an entitlement to periodic payments throughout the contract works, where the work is to last 45 days or more. If the contract does not provide an adequate mechanism for calculation of the amount of and timing of payments then a scheme imposed by the Act will apply, further details of which appear below.

Other payment provisions include:

• Pay when Paid clauses will be ineffective except where any paying party in the payment chain becomes insolvent
• an unpaid party may suspend performance if payment remains outstanding after the due date for payment (subject to serving 7 days prior to notice)
• there can be no set off or deduction from payments without prior notice

All contracts to which the Act applies must provide that any party may refer any dispute under the contract for determination by adjudication. This will entail:

• notice of intention to refer to adjudication may be given at any time
• appointment of an adjudicator within 7 days of the notice
• the adjudicator’s decision to be given within 28 days of appointment (this can be extended by 14 days or longer by agreement between the parties)
• the adjudicator’s decision will be binding until the dispute is resolved by litigation or arbitration. The parties may agree to accept the decision as finally determining the dispute.

Unless covered in the contract, then a scheme imposed by the Act will apply.

The Secretary of State has the power under the Act to make a scheme which sets out payment and adjudication provisions that will apply in the absence of other contractual mechanisms. A scheme is set out in a draft Statutory Instrument which has been laid before parliament and is likely to come into force at the same time. Other bodies are producing their own schemes which can be used as an alternative to the statutory scheme.

The scheme in the draft Statutory Instrument makes various provisions in relation to adjudication, including the following:

• the adjudicator cannot be an employee of either of the parties and must act impartially
• the adjudicator can adjudicate on related disputes on other contracts and on other issues, with the parties’ consent
• gives the adjudicator wide powers to order directions and fix timetables
• the adjudicator may open up or review certificates and decisions made or given under the contract and order payments (including interest)
• the parties are jointly liable for the adjudicator’s fees

The scheme in the draft Statutory Instrument provides a mechanism for calculating stage payments and the timing of payments.

The provisions of the Act and of the scheme represent fundamental changes in the way construction contracts are administered. There are bound to be arguments over the interpretation of the Act’s provisions and it remains to be seen how far the desired objectives of the Act will be achieved.