10 years of the Construction Act

My, how time flies. The Construction Act, those payment rules, this adjudication thing is 10 years old! I rank this piece of legislation as the most important act of parliament in our world of building and civil engineering. It would get a gold medal in the Olympics for importance. I rank this piece of legislation as the most successful thing to happen in our world of commerce. I rank this piece of legislation as the most remarkable step in the English legal system. More gold medals.

And yet and yet, at 10 years old, I still don’t know truly what it is. This brat at two had tantrums, at four had a mind of its own, at six and eight it was tricky, and at 10 it gives the rest of us tantrums. And I wouldn’t be without it. Flawed? Yes. Must improve? Yes. Could do better? Yes. Come on, what were they saying about you at 10?

The feature that astonishes me most is cash flow. The new payment rules, together with the thought of getting a thick ear from an adjudicator, really does move cash. More than that, it stops dead the bloke who thinks he should be paid for this or that because an adjudicator shows him he is owed nothing.

There was an awful lot of whingeing that this or that payer was screwing his subcontractors. It is true, sometimes. But the subcontractors have been pushed to compile interim accounts, and even final accounts, in a much more detailed and accurate way. Do that and impress the payer; do that and impress the adjudicator; do that and get paid; don’t do that and don’t get paid.

Before the brat, before 1 May 1998, what was to be done about payment disputes? Well, what you could not do was litigate. The courts in 1998 could not decide a dispute without “a deep forensic investigation”. But commerce, particularly building contractors, needed something faster – miles faster. Something within days, even if it was broad-brush; and we were given a system that an awful lot of lawyers thought was daft. The row was stopped, temporarily at least, by an industry wallah, unconnected with the project, deciding in the round whether the money should be paid or not.

Cash flow starvation tactics were tackled immediately and effectively. Start to finish, the process was 28 days … crash, bang, wallop. None of that needed lawyers. And I bet, if you pause here, all that makes sense, doesn’t it? All it needed was an engineer, QS or architect to look, sniff, prod and decide.

I vividly remember, heaven help me, urging these “lookers and sniffers” not to confuse their role with that of an arbitrator. An arbitrator does the work of a judge, requires evidence, legal submissions, witnesses on oath, barrister, solicitors and experts. Tish tosh, said I, none of that’s needed or expected for a 28-day crash bang wallop. All that was needed was a “feel” for if money ought to be paid pro-tem. Ten years on, looking and sniffing is not on.

Snags began to show up when a building firm refused to obey the adjudicator’s decision. How do we “oblige” the naughty party to obey? The dispute was taken to court and a judge was asked to enforce the adjudicator’s decision. It was all new to the court. The system of Construction Act adjudicating had none of the “grinding detail” of normal dispute resolution. Damn it, the act didn’t even call itself a dispute resolution system. Damn it again, the High Court was being asked to enforce some idea from Mars, asked to ignore plain errors of law, ignore the weight of evidence, ignore the fact the adjudicator used a procedure and carried out an inquiry in a way no arbitrator would dream of doing. Some judges found the idea of an adjudicator talking to one side without the other present utterly repugnant. Nobody understood what this brat wanted in 28 days.

To their credit the courts and the adjudicators edged their way to accommodate each other’s worries. The courts would enforce the decision, provided the adjudicator adopted more traditional “due process”. The courts have made adjudication work. Adjudication gets the cash moving … even the threat of adjudication gets things moving.

And after 10 years the system has worked so well adjudication is managing the most complex disputes. And after 10 years the adjudicators have massively improved their skills. True, we’re more likely to apply proven facts to the law of the contract, and while we adjudicators don’t always get gold medals from both winner and loser, everybody wins a prize in the proper 10-year end of term report. Parliament’s a winner, construction too, and the courts as well. Wow!

Tony Bingham is a barrister and arbitrator

When learned friends fall out

Sceptics will no doubt point to the fact that there have been about 300 reported court decisions on the Construction Act as evidence that the legislation has been taken over by the lawyers and even that it has ultimately failed in the objective of reducing conflict in the industry.

In my opinion, this statistic is in fact down to a combination of two factors. First, when the legislation was introduced, adjudication was a little-understood method of dispute resolution; it took Lord Ackner to explain its difference from arbitration during the passage of the legislation through the Lords.

Second, and this applies to both the payment and adjudication aspects of the act, the woeful and inadequate drafting of the legislation has meant that the courts have had their work cut out clarifying how the legislation should work. Parties challenging enforcement of adjudication decisions almost invariably have some basis for doing so and the failure of the legislation to address issues such as enforcement and natural justice has given them plenty of scope for creativity.

One thing that has impressed me over the 10 years is how the industry has defied the experts about the appropriate use of adjudication. Rather than using it just as a “quick fix” method of interim resolution of small payment disputes during the life of the project, it has actually been used as a means of finally resolving all sorts of disputes many of which are highly complex and expensive.

Has the introduction of adjudication led to less conflict in the industry? In some ways it has: for instance, the sorting out of disputes that would otherwise have gone to arbitration or litigation. On the other hand, I have to say that I have noticed many smaller disputes escalating to adjudication that 15 years ago would have resolved at site level.

So far as the process is concerned, has it got out of control? It is true that most adjudications seem to involve parties exchanging submissions right down to the wire and that is expensive in terms of the time and money. But often that is down to the complexity of the dispute and, frankly, human nature, by which I mean the inevitable desire to have the last word. Concern on the adjudicator’s part not to be seen as acting unfairly has not helped but is reasonable given the role of natural justice in the process.

Has adjudication been a success? I suppose the yardstick ought to be Sir Michael Latham’s aspirations back in 1994 in Constructing the Team in which he declared that adjudication should become “the key to settling disputes in the construction industry”. If that is the test, I think the truth is that it has been a considerable although not unqualified success.

Dominic Helps is a partner in Shadbolt & Co

The act has provided plenty of points for lawyers and judges to fight about, but how serious are its flaws? Dominic Helps and Rudi Klein present their assessments

Would you prefer to abolish the Construction Act and go back to the position before it was introduced? If we put this question to the industry, I expect that the overwhelming majority of firms (which are, of course, SMEs) would respond with a resounding “no”. Those of us around before Latham’s 1994 report (which recommended the legislation) will recall how the industry was embroiled in internal strife. Many contractors, faced with spurious set-off claims, would be told: “If you don’t like it, go to arbitration”. Commercial intimidation was rife, with the result that thousands of firms – many of them well-established – went to the wall.

Today, if we asked the question: has the Construction Act made a difference, most firms would say, “yes”. But, even after 10 years, some firms are still unaware of the act or do not make sufficient use of its provisions.

The abolition of pay-when-paid clauses (except when a third-party payer, such as a client, has gone into insolvency) was the highlight of the legislation. These days it is unusual to find a contract that has a general pay-when-paid clause, but there were other things in the act that also played a part in curbing payment abuse. These included the statutory right to a notice of withholding (section 111) and, more importantly, the right to suspend work (section 112). The latter was revolutionary. A threat to exercise the right of suspension usually obtains the desired result.

Four years ago Gordon Brown (then chancellor) announced a review of the act with the aim of identifying improvements to help deal with continuing payment problems. The review that followed, together with the government’s consultations, revealed that the act needed to be tightened up to reflect its original intent. What was that original intent? It was summed up by Lord Lucas in the House of Lords debate on the legislation on 26 February 1996: “This legislation requires that payment should be defined in terms of amount and date.”

In other words, the payee should know exactly how much it is getting at the payment date. The act left it to the contracts to provide an “adequate mechanism” for determining what was due and when. On reflection, leaving it to the contracts was a bad idea. Most do not have an adequate mechanism.

Reform of the payment provisions should, at least, include:

• A statutory adequate mechanism that does give the payee certainty of amount and date (essential in the event that it has to exercise its right of suspension)

• A ban on all conditional payment provisions (including pay-when-certified clauses)

• A ban on cross-contract set-off (this was originally recommended by Latham).

Improving the efficacy of the payment provisions will reduce the need to go to adjudication which, unfortunately, is now perceived as an expensive luxury.

The Department for Business, Enterprise & Regulatory Reform is still seeking parliamentary time for introducing changes to the legislation. But unless the changes are effective in restoring the act’s original intent, there is a real risk that this innovative law could wither on the vine.

Rudi Klein is chief executive of the Specialist Engineering Contractors’ Group. He wrote the commentary on the act for Sweet & Maxwell’s Current Law Statutes