08.Jan.2018

Consultation on the 2011 changes to the Construction Act

As part of its commitment to better regulation, the UK Government has released a consultation to support a review  of the changes to the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), which were introduced by the Local Democracy, Economic Development and Construction Act 2009. The consultation is split into three sections – Section A considers the effectiveness of the 2011 changes to the Construction Act; Section B deals with the overall effectiveness of the Act itself; and Section C focuses on the affordability of adjudication, and to what extent the costs of adjudication are preventing its use as a dispute resolution mechanism in construction contracts. 

The consultation provides an interesting insight into the issues that the Government are currently live to in the construction industry. This consultation was published on 24 October 2017, and closes on 19 January 2018. 

Section A – the effectiveness of the 2011 changes 
This section focuses on measures introduced by the 2011 changes to address the costs of adjudication, to improve the clarity and transparency of the payment framework, and to improve the right of suspension. 

In terms of the costs of adjudication, the 2011 changes, in particular the introduction of section 108A, prevent parties from making a contractual agreement on adjudication costs (and therefore preventing so-called ‘Tolent clauses’), unless it provides for the adjudicator to allocate his own fees. The general assumption is that parties carry their own costs. The aim of this measure was to reduce the cost of adjudication, since parties might be less inclined to escalate costs than they would be if expenses were pre-allocated or if they followed success, as they usually do in court actions. The consultation seeks to determine whether this aim has been achieved. 

Recovering the costs of adjudication is a topic which has received some attention in recent months in light of the case of Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd [2017] EWHC 2159 (TCC). This case clarified the position on costs following the case of Lulu Construction Ltd v Mulalley & Co Ltd [2016] EWHC 1852 (TCC), and it now seems settled that parties cannot use the Late Payment of Commercial Debts (Interest) Act 1998 to recover their adjudication costs. However, surprisingly, the consultation document assumes the meaning of section 108A, which was added to the Construction Act via the 2011 changes, to be clear. This is despite the fact that the drafting of this addition has been much criticised

The aim of clarifying the payment framework in the Construction Act was to allow construction companies to manage their cash flow more effectively, and to reduce the cost of adjudication (since this would in theory reduce ambiguities in the payment process and therefore reduce disputes or reduce the cost of those disputes). The Consultation seeks to determine whether the provisions introduced by the 2011 changes have been effective in achieving this aim. Experience suggests that they have not, given the high number of ‘smash and grab’ payment adjudications that have resulted.

Section A concludes by attempting to establish whether the right to suspend performance for non-payment is being exercised more frequently, and if this, in turn, is leading to fewer disputes. The consultation states that evidence collected in the lead-up to the 2011 changes indicated this sanction “was not as effective as it might be”, and so the Government is trying to determine whether this is still the case. Experience suggests this is still the case; suspensions remain rare, possibly due to their impact on continuing commercial relationships.

Section B – the effectiveness of the Act as a whole
As well as the changes introduced in 2011, the consultation aims to get a feel for how effective the Construction Act has been as a whole. The questions focus on the payment framework and the use of adjudication to resolve disputes. The questions in this Section are more general than in Section A, and aim to assess the “fitness for purpose” of the Construction Act.

Experience suggests that despite the raft of disputes around the payment framework, the Construction Act has generally been successful in achieving clearer payment mechanisms and assisting contractor cash flow and the earlier resolution of disputes, particularly through the use of adjudication. This is further evident from the fact that similar legislation has been adopted in many other countries. However, the consultation presents an opportunity for the construction industry to present its opinions on the effectiveness of the Act and to seek any changes that would lead to improvements. 

Section C – the affordability of adjudication 
The final section of the consultation raises some more general questions around adjudication, such as the value of disputes referred to adjudication, the costs involved, and whether the process has been subject to “abuse”. 

This issue has been the subject of litigation in recent months. In the case of Jacobs UK Ltd v Skanska Construction UK Ltd [2017] EWHC 2395 (TCC), Skanska argued that the concept of ‘abuse of process’ does not apply to adjudication. A party is therefore entitled to obtain whatever tactical advantage it can, and has an unrestricted right to start, abandon and pursue serial adjudications in respect of the same dispute. The court agreed that the principle of ‘abuse of process’ does not apply to adjudication, but said that it does not follow that courts will never intervene - the courts will intervene if the behaviour of a party is both unreasonable and oppressive. However, in this case, the court decided that although Skanska’s behaviour was unreasonable, it was not oppressive. 

Commentators have noted that this highlights the rough and ready approach to adjudication - the benefit is “speed and efficiency in obtaining a decision”, but this brings with it an element of "rough justice". The Government has included questions in the consultation which focus on these aspects, particularly around so-called "ambush" tactics in adjudication. This is when a Referring Party takes a long time to put together a large case, with the Respondent having only around 7 to 14 days to respond. It remains to be seen whether the industry feels this and other aspects are a justifiable advantage or an "abuse". 

Conclusion 
This consultation shows that the Government is taking a keen interest in the operation of the Construction Act, and in particular, the provisions relating to payment and adjudication. Both of these issues are contentious in the construction industry, and so it is important for all areas of the industry to respond, so that a balanced range of views is reflected in the outcome. The deadline to respond is currently Friday 19 January 2018.

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