UK: One Step Closer: The Current Status Of The Adjudication Reforms

Last Updated: 28 October 2009
Article by Claire King

On 13 October 2009 the Local Democracy, Economic Development and Construction Bill 2008 (the "Bill"), which amends the Housing Grants, Construction and Regeneration Act 1996 (the "Housing Grants Act") passed its third reading in the House of Commons. The Bill has now returned to the House of Lords, where it originated, so that the amendments made by the House of Commons can be approved. If no further amendments are made to the Bill by the Lords it can then become law on receiving Royal Assent. It still remains unclear as to exactly when this is likely to occur.

So what amendments were proposed by the House of Commons and what made it through to the House of Lords? The key amendments proposed were set out in an Amendment Paper, which was also published on Parliament's website on 13 October 2009, and included:

  • The introduction of a right for a payee to request adequate payment security (for example a bond) from a payer for the contract price (including variations) and suspend performance of its obligations under the Construction Contract if such security is not provided;
  • A proposal for the reduction of the "verbiage in clauses 139 and 140 by more than 50 per cent"1 so that only a payee can issue a payment notice rather than the payee, payer or a specified third party as provided for in the Government's proposals. The payer must then serve a counter-notice within 14 days of the due date for payment (i.e. within a fixed period). It was also proposed that the level of detail required in the counter-notice would be higher with a requirement that "precise reasons" are given to justify the difference between the contractor's notice and the sum the payer considers due being provided;
  • The deletion of the insolvency exception for conditional payment provisions and the enhancement of Section 110 (1a) and (1b) provisions making it clear that an "adequate mechanism" for payment must be for the making of payments not just assessing when they are due and can not be by reference to any third party contract;
  • That adjudication be conducted solely in accordance with the Scheme;
  • Clarification of the adjudication of costs provisions so that the parties can now give the adjudicator jurisdiction to allocate his fees and expenses between them and restrictions on the parties right to allocate legal costs in adjudication and can not prevent the adjudicator claiming his own fees and expenses.
  • Enhancing the Secretary of State's power to create an exclusion order providing that part or all of the Housing Grants Act as amended may apply to any particular Construction Contract rather than all or nothing.

The only two amendments supported by the Government were the latter two and both of these were passed by the House of Commons. They are both uncontroversial and inherently sensible.

The only other amendment that even reached a vote, rather than being withdrawn, was the controversial proposal that a contractor and/or subcontractor be given the ability to ask for adequate security in respect of payments of the contract price including for variations.

The Government opposed the insolvency protection proposals pointing out that if a main contractor were to fail its other creditors, which were quite possibly not construction firms, would be in a much weaker position then constructions firms who have been able to demand security. Therefore the "ability to demand security would put the construction subcontractor in an unjustifiably strong position."2

The proposals on the provision of security are in any event ill thought through. The ability to demand security arises at "any time" and the right would therefore exist even if payments have been made regularly and on time throughout the currency of the Contract. The contract could be signed and security requested the next day - a clear infringement on the right to contract freely and price in accordance with the terms agreed. The proposal would also be extremely costly for an employer and/or contractor especially in the current market where security can be difficult to obtain. Finally what is "adequate" would undoubtedly generate much case law. Is this to be judged by the contractor/subcontractor or the employer/contractor? No doubt those requesting security would insist that it covers the entire amount and perhaps use this as a bargaining chip against any claims made by the employer.

Not surprisingly the amendment was voted on and rejected by 265 to 195 but it is thought that the idea may raise its head again in the House of Lords.

The removal of the insolvency exception to conditional payment provisions was also abandoned with the Government using the same justification i.e. that it would treat creditors from the construction industry preferentially when compared to other trade creditors. There were also concerns that removing the exception may lead to a waterfall effect of insolvency down the supply chain creating more damage not less. The proposed simplification of the payment provisions was also abandoned with the Government supporting the flexibility allowed by their proposals albeit with a risk of confusion attached.

Finally, the idea that there should only be one Scheme was, once again, rejected by the Government. The Minister for Region and Economic Development & Co-ordination, Ms Winterton commented that:

"what we introduce must work in a broad range of commercial relationships...we continue to believe that the flexibility for adjudication procedures inherent in the 1996 Act represents the right approach"3.

This represents, in the author's opinion, another missed opportunity to implement "best practice" uniformly, in the form of an amended Scheme, and prevent unnecessary case law being generated as to the meaning of extracts from the wide variety of rules currently in use. It may be that there is still an opportunity to push for this amendment in the House of Lords but it seems increasingly unlikely that a single Scheme will be provided for in the final Bill.

On the bright side, assurances were given by the Government that it will now turn its attention to amending the current Scheme. Ms Winston promised that it will be "reviewed in light of the responses to consultation"4 most likely early next year. Whether the new Scheme is finalised before the Bill becomes law remains to be seen.

Footnotes

1. Julia Goldsworthy, (MP for Falmouth and Cambourne), Hansard, 13 October 2009, Column 177

2. Ms Winterton, The Minister for Regional Economic Development and Co-ordination, Hansard, 13 October 2009, Column 185

3. Ms Winterton, The Minister for Regional Economic Development and Co-ordination, Hansard, 13 October 2009, Column 173

4. Ms Winterton, The Minister for Regional Economic Development and Co-ordination, Hansard, 13 October 2009, Column 185

To see further articles on matters relating to construction, engineering and energy projects, please visit www.fenwickelliott.co.uk.

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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