Keeping the law in order

The DTI published its proposals on payment practices on 16 January 2006. This followed the lengthy consultation initiated in March last year, which apparently elicited 356 responses. The paper, Proposals for Better Payment Practices in the Construction Industry, covers the provisions contained in Part II of the Construction Act and the adjudication procedures.

The proposals to be pursued by the DTI in respect of adjudication are limited: it disallows the use of "trustee stakeholder accounts" to suspend payment of an adjudicator's award, prohibits the use of "final and conclusive" clauses in respect of interim decisions and the introduction of provisions for the payment of the adjudicator's fees if they stand down. But the consensus seems to be that adjudication is working effectively and most of the proposals are not structural changes, but are intended to pick up a few of the anomalies and abuses that have developed since 1998.

Instead, the bulk of the changes proposed relate to the payment provisions of the 1996 act. Some of them are complex and will be difficult to draft to cover the whole range of "construction contracts" (consultancy agreements, building contracts, subcontracts and so on). But it appears that the DTI is proposing to introduce a statutory requirement for the certification of the sum due, either by one of the contracting parties or by a third party, to give a statutory right to payees to make an application for payment and to prohibit "pay-when-certified" clauses. This would in effect dispense with section 110(2) notices. In addition, the right of a supplier to suspend is to be beefed up with a statutory entitlement to loss and expenses arising from the suspension.

For those examining the legislation, it is striking how much judicial consideration has been given to the adjudication provisions in the act and the scheme and how little to the payment provisions. For the most part, the Technology and Construction Court has taken a lead from the first decision of judge John Dyson in Macob Civil Engineering Ltd vs Morrison Construction Ltd.

Most of the payment cases have been related to the service of "withholding" notices in relation to set-offs. Only at the end of last year did the TCC really start to explore the application of the 1996 act to many clauses commonly inserted in contracts. In the case of Midland Expressway Limited vs Carrilion Construction Limited & Others ("Mr Jackson's justice" www.building.co.uk/archive) the employer relied on clauses it had inserted into the contract that said it had no obligation to pay its subcontractor unless money became due under the project agreement between the employer and the secretary of state for transport.

It is striking how much judicial consideration has been given to the adjudication provisions in the act and the scheme

The employer also relied on clauses that said the amount due could not exceed what was due to it from the secretary of state, and that there could be no payment or recovery from the employer until the secretary of state had paid.

The court found that these are just the sort of "pay when paid" clauses that section 113 of the 1996 act was designed to prevent. In other words, it took a fairly robust view of the purpose of the statute.

I think it is likely that further cases will follow and, as with adjudication, a body of law will build up clarifying and reinforcing the legislation. The advantage of an incremental approach through case law is that the decisions reached relate specifically to the facts of each individual case. This should be contrasted with the legislative approach, which requires that the legislation be framed to anticipate all factual circumstances that can arise.

The DTI has taken on a huge drafting challenge if it legislates to implement the proposals published last month. Assuming that it does so, and gets it right, the approach of the TCC demonstrates that it would then be best to leave the legislation alone for a decade or so to see how the courts develop it.