In 2009 Parliament enacted changes to Part II of the Housing
Grants, Construction and Regeneration Act 1996 ("the
Construction Act"). They will apply to construction
contracts (as defined) entered into from 1 October 2011 (insofar as
England and Wales are concerned) and 1 November 2011
(Scotland). The Construction Act, in requiring certain
minimum provisions for payment and adjudication, does not (in its
current and amended forms) apply as well as it might to the
diversity of construction contracts it covers. The problems
arising from the Act's "one size fits all" approach
are particularly apparent in the case of PFI and PPP
arrangements.
The 2009 changes insert a new section 110(1A) into the Construction
Act. That section seeks to ban, amongst other things, terms
in construction contracts that make payment conditional on
obligations being performed under another contract. Examples
would be "pay-when-certified" and
"pay-what-certified" (collectively, "PWC")
provisions which make a subcontractor's right to be paid
conditional on a corresponding payment being certified to the
contractor under the main contract. The principal aim of the
Construction Act's payment regime is to help cash flow, in this
example the subcontractor's cash flow.
Different concerns generally arise where the subcontractor is a
first tier subcontractor in a PFI or PPP arrangement and in
contract with a ProjCo (a special purpose vehicle that has
contracted under a project agreement with a public
authority). First tier subcontractors (that construct the
asset or operate and maintain it) often themselves or through their
parent or sister companies have an interest in ProjCo. It
suits them (and even more so the lenders who provide project
finance) to limit the cash flow exposure of ProjCo. As
ProjCo's only income is that which it receives under the
project agreement, it is necessary to minimise or avoid ProjCo
having to pay any sums to first tier subcontractors until ProjCo
receives a corresponding sum. Often the subcontractors'
entitlements, not just for payments, are made co-extensive with
ProjCo's corresponding entitlements under the project agreement
by way of an Equivalent Project Relief ("EPR")
provision.
Unfortunately, the Construction Act (in its current and amended
forms) fails to see that PFI and PPP arrangements benefit from this
approach to cash flow, rather than suffer from it.
When the Construction Act came into force in 1998, government
acknowledged the special nature of PFI arrangements by providing
that PFI project agreements did not have to achieve the Act's
minimum standards for payment and adjudication. This Exclusion
Order particularly benefited public authorities while ProjCos still
had to meet those standards in first tier subcontracts.
Early on in the consultation for changes to the Construction Act
(in 2004) government rejected taking any further specific action in
respect of PFI and PPP arrangements. However, after much
lobbying, very late in the parliamentary passage of the Act's
changes, a power was inserted allowing yet to be specified
construction contracts to be excluded from the Act's provisions
in part rather than wholesale (as per the original
Act).
The draft Exclusion Order for England published earlier this month
(and now before Parliament for its approval) will disapply section
110(1A) from first tier PFI and PPP subcontracts. That is, it
seeks to permit EPR provisions. (Similar Exclusion Orders for
Wales and Scotland have been published in draft and are expected to
come into force by 1 October and 1 November 2011
respectively.)
Curiously, however, the draft Exclusion Order does not also
disapply section 113 of the Construction Act (which an explanatory
note says is intentional). Section 113 bans clauses that make
payment to, say, a subcontractor conditional on the main contractor
first receiving payment itself (unless its payer is insolvent);
that is "pay-when-paid" ("PWP") clauses
– which have the same aims as PWC clauses. There is
no good reason not also to disapply section 113 to first tier PFI
and PPP subcontracts and it would be far better if the Exclusion
Order did so. That is because, as previously reported in
Law-Now (click
here) Mr Justice Jackson (now Lord Justice Jackson) said in
Midland Expressway Ltd v Carillion Construction Ltd (No.2) that
section 113 cannot be avoided by "by the use of
circumlocution". That is, he held that section 113
should be applied with its purpose in mind such that it renders
invalid not just PWP but also PWC clauses, an example of which was
in the EPR clause in that case and was not applied.
The same concern may not survive the Exclusion Order, as it is
potentially persuasive authority on the meaning of section 113,
such that after 1 October 2011 it only strikes down PWP (and not
PWC) clauses in PFI and PPP first tier subcontracts. On the
other hand, though, the courts may interpret the Exclusion Order as
maintaining how section 113 was applied in Midland Expressway, such
that PWC as well as PWP clauses would be rendered invalid in PFI
and PPP first tier subcontracts (i.e. EPR provisions, as far as
deferring payment is concerned, retain the same risk of not working
as they do now). Unfortunately this is another example of
less than clear drafting in the changes to the Construction
Act. At best, the Exclusion Order is a missed opportunity; at
worst it will have no effect. It is hoped that the government
will act and as part of our continuing involvement in the Act's
changes, we are lobbying the government to that effect.
Reference: The Construction Contracts (England) Exclusion Order 2011.
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
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 14/07/2011.