I beg to differ: Response to Rupert Choat on the Construction Act

In his column on the government’s amendments to the Construction Act (27 March, page 57) Rupert Choat concluded that we should be addressing mistakes in the act, and the abuses of it, once and for all. He is absolutely right.

Five years ago, Gordon Brown (when chancellor) ordered a review of the act against a background of continuing payment problems in the industry. But the consultation process following the review left much to be desired.

Some changes, roundly supported by consultees, never ended up in part eight of the Local Democracy, Economic Development and Construction Bill. For example, there was overwhelming support for the abolition of the pay-when-paid exemption – where a payer can refuse payment in the event that a third-party payer has become insolvent. Other issues, such as a mandatory adjudication procedure, were never included in the consultation process at all.

Choat also refers to Lord Borrie’s amendments put down on behalf of SEC Group. If the amendments are supported by a sector comprising 60,000 firms – mainly SMEs – one would have thought (by any measure of statistical validity) that they would have the support of most firms in the industry.

Anyhow, back to the review of the act. Two fundamental changes had to be made:

• Payment. There was a need to define the amount to be paid by the final payment date (which was the original aim of the act)
• Adjudication. There was a need to reduce the cost of adjudication, which was being bumped up by jurisdictional challenges and bespoke procedures.

I agree with Choat that having a mandatory adjudication procedure would prevent an array of “adjudication-avoidance devices”. Everybody I have spoken to – adjudicators, lawyers and (more importantly) firms in the industry – is supportive of having one procedure, which is why I can’t understand the business and enterprise department’s reluctance to embrace it. There will be an overhaul of the adjudication procedure in the Scheme for Construction Contracts and if the new procedure receives widespread support, there is simply no excuse for the department to refuse to accept it as mandatory.

But it is the payment provisions that have, of course, caused the greatest angst. To believe that a consensus could be found for amending these provisions is akin to living in cloud-cuckoo-land. How can there be consensus between a party that wants to be paid and the other who is reluctant to pay? But let’s give the enterprise department some brownie points. It has always acknowledged that there should be a crystallised debt at the final date for payment. Unfortunately, its insistence that either the payer or payee should be able to initiate the process has resulted in unfairness and unnecessary complication. For further discussion of this point, see Tony Bingham’s excellent article on 20 March.

Choat’s complaint that the government’s amendments do not take account of the worsening economic conditions is also a valid one. Eight firms are going bust every day. The RICS predicts that at least 300,000 people in the industry will lose their jobs over the next year. Credit insurance has dried up.

However, given all this, I cannot understand Choat’s concerns over Borrie’s amendment requiring payers to provide adequate security for payment if requested. If such security is not forthcoming, the payee would have a right to suspend his contract. Why should the payee have to wait 120 days to find out whether he can suspend? Borrie’s amendments allow a pre-emptive strike. Choat complains about there being significant costs to payers to obtain security, but he ignores the cost to payees of performance bonds, retentions and lengthy credit periods.

Furthermore, I can’t understand his point that the outlawing of conditional payment provisions is not about the outlawing of abuse. He worries about the impact upon management contracting, PFI and the right to issue negative certificates. But any procurement model that depends on the supply chain funding the project without immediate recourse against the payer in respect of outstanding payments is deeply flawed. I doubt whether CMS Cameron McKenna would accept conditional payment provisions when advising on a PFI deal.

Yes, let’s get it right. If we don’t, we will have to answer to thousands of firms who are wondering whether they can survive this economic crisis. They will not be worried about the cost of amending standard forms – they will worry about how they are going to be paying their staff as the cash dries up.