UK: Improving Payment Practices In The Construction Industry

Last Updated: 4 November 2007
Article by Stuart MacFarlane

The Construction Industry is one of the UK’s biggest industries and is often referred to as being a pillar of the UK economy. Statistics demonstrate that it accounts for nearly 9% of the National Gross Value Added. Consequently it continues to remain of high importance upon the Government’s legislative agenda. The DTI has recently launched the second joint consultation with the Welsh Assembly Government to amend Part II of the Housing Grants Construction and Regeneration Act 1996 (HGCRA) and Scheme for Construction Contracts (England and Wales) Regulations 1998.

The initial consultation document assembled by the DTI and Welsh Assembly Government was issued on 22nd March 2005. The given proposals were a consequence of a review carried out by Sir Michael Latham who reviewed the operation of Part II of the Act. His review was announced in the midst of the 2004 budget and subsequently his views went on to provide an enormous incentive for the given proposals.

The 2005 proposals focused primarily on adjudication and payment issues. On adjudication, they strived to reduce the disincentives for referring disputes to adjudication, where appropriate. On payment issues they sought to provide greater certainty about what is due under a contract and when. The proposals themselves also indicated a determination to reduce the scope for "getting around" the underlying purpose of the legislation – that is to establish machinery for payment and to provide a means for the enforcement of that machinery.

A great response followed the initial proposals which included recommendations, possible alterations and other areas of concern. Consequently certain proposals have been taken forward, where others have been discarded upon in the publication of the 2nd Consultation Paper.

The 2nd Consultation Paper

The Consultation Paper is again intended to improve upon Part II of the HGCRA. The Act itself came into force back in 1998 and a number of difficulties have since been highlighted with regards to its effectiveness. The consultation document sets out numerous proposals which seek to introduce greater clarity and transparency into the statutory framework in order to enable construction companies to manage cash flow better and encourage parties to resolve disputes by means of adjudication as opposed to other ways.

Outline of the proposals

  • To improve transparency and clarity in the exchange of information relating to payments to enable the better management of cash flow; and
  • To encourage the parties to resolve disputes by adjudication, where it is appropriate, rather than by resorting to more costly and time consuming solutions such as litigation, and improve the right to suspend performance under the contract.

In summary the main aspirations of the 2nd Consultation Paper are as follows:

Adjudication (relates to S.108)

To resolve a greater majority of disputes by means of adjudication. It is intended that this will be achieved by:

  • applying the legislation to oral and partly oral contracts, and
  • preventing the use of agreements that interim payment decision will be conclusive to avoid adjudication on interim payment disputes.

Together it is anticipated that these two recommendations shall extend the application of the legislation allowing more disputes to be referred to adjudication.

Another aspect of the recommendations relate to the introduction of a measure which will centralise upon the costs of adjudication ensuring that such costs are fairly apportioned.

Payment (relates to S.109-113)

In relation to S.109-113 of the Act, amendments are suggested for payment provisions. Primarily they focus upon clarification of the Act itself in relation to:

  • the serving of a S.110(2) payment notice, and
  • the content of payment and withholding notices.

Also proposed is:

  • The prohibition of the use of pay-when certified clauses, and
  • Confirmation that the given payment framework creates a clear interim entitlement to payment.

Suspension (relates to S.112)

The final area the consultation looks at is the right to suspend performance of the contract itself. The recommendations include improving upon this right by allowing the suspending party to claim for the costs and delays that may ensue from such a suspension.

Together these proposals are intended to be proportionate amendments to the existing framework to address specific issues that have arisen since the publication of the Construction Act back in 1998.

The Future

The initial aim of both consultation papers has been to improve upon the existing framework prevalent within the 1996 Act itself. It is clear that the Act itself has made a valuable contribution to fairness in the way construction contracts are agreed and operated. The legislation continues to succeed as intended due to the effective implementation by adjudicators and the courts. However it has to be said that the willingness of the construction industry and its clients to develop culturally in the light of a changed legal framework is at the heart of this and is not to be forgotten. It is hoped that prompt and fair payment practices throughout the construction industry supply chains will result in the construction industry adopting an integrated working environment as the norm.

The 2nd Consultation was published on the 20th June 2007 and the deadline for responses to the proposals is 17th September. It is anticipated that the legislation to implement the proposals that have emerged from the consultation will be introduced as soon as Parliamentary time allows. Rt. Hon Margaret Hodge MP MBE, Minister of State for Industry and the Regions highlighted that the proposals are to be adopted using primary legislation.

The proposals outlined above are directly for the English and Welsh construction industries, yet it is likely, based on past performance, that any changes to the English and Welsh regime will be replicated in Scotland and Northern Ireland.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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