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The new Construction Act 2009:implications for building surveyors

Steve DonohoeUniversity of Plymouth, Plymouth, UK

Abstract

Purpose This paper aims to discuss forthcoming changes to the Housing Grants Regeneration andConstruction Act 1996 following UK government consultation exercises. The paper seeks to examinefive key areas of construction contract administration which will be affected should the proposedchanges be included in new legislation.

Design/methodology/approach The approach of the paper is to conduct a literature review ofthe proposed changes.

Findings The five key areas are: changes in requirement for contracts to be in writing; changes tointerim payment decisions by third parties; so-called Tolent clauses and matters concerningadjudication costs, cross contracts; and payment notices. The implications of how these changes mightaffect building surveyors are explored. The paper concludes that while some of the proposed changesare likely to be welcomed, other proposed changes throw up potential complex and difficult legalissues.

Originality/value It is hoped that this paper will stimulate discussion between practitioners andacademics about suitable reforms to adjudication and construction law issues in the UK.

Keywords Construction industry, Contracts, Law reform, Surveying

Paper type Literature review

IntroductionIn the summer of 2008, The UK Government issued proposals which will amend partsof the Housing Grants Regeneration and Construction Act 1996 (HGRCA 1996).

This paper summarises the main changes proposed in the legislation and discussesthe likely implications for building surveyors involved in projects either asadministrators or as adjudicators. At this stage it must be stressed that the changesdiscussed below are merely proposals following a period of consultation, however thereare indications that most of the proposals will become law in 2009.

Summary of proposed changes to HGRCA 1996The main changes are set out below:

. Changes to current requirement for contract to be in writing.

. Changes to interim payment decisions by third parties.

. Tolent clauses and other matters concerning adjudication costs.

.

Cross contracts.. Payment notices.

These matters are discussed in turn in the sections below.

1. Changes to the requirement for contract to be in writingAt present, Section 107 of HGRCA 1996 requires a construction contract to be inwriting before a right to adjudicate arises. This seemingly simple requirement of inwriting has caused difficulties for the courts particularly where a contract is made

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partly orally and partly in writing. In RJT Consulting Engineers Ltdv. DM Engineering(Northern Ireland) Ltd (2002) 18 Const LJ 425, the Court of Appeal held that allmaterial terms must be evidenced in writing. What this judgement effectively meansis that there must be a written record that the main terms of the contract were agreed

otherwise the right to adjudicate is lost.The proposed change is that Section 107 be repealed. In place of Section 107 will bea new requirement that where adjudication provisions are not in writing, the Schemefor Construction Contracts will apply. Bingham (2008) criticised this proposal in thefollowing terms:

It would be so easy to make the [proposed] Act an implied term that is automatically impliedinto the contract. Why not simply say (1) the following type of works are constructioncontracts, and (2) all such contracts shall enable a party to adjudicate. . .

The author agrees with Binghams sentiments and does not understand why hissuggestions are not acceptable to the Government.

2. Changes to interim payment decisions made by third partiesThe proposed change means that if a contract incorporates a third party interimpayment decision, then such provisions shall be ineffective i.e. not allowed. Forexample an interim payment decision in this context is one made by a third party as tothe amount of a periodic payment (normally monthly) or the calculation of that amount.As an exception an agreement will be valid if made following the payment decision.

3. Tolent clauses and other matters concerning adjudication costsThe proposed changes also outlaw the use of so called Tolent clauses. The Tolentclause was named after the case of Bridgeway Construction Ltdv. Tolent ConstructionLimited(2000) TCC in which a clause which required a referring party to be liable for allcosts was upheld as being legal. This meant that that while the sub-contractor

(Bridgeway) was successful in its claim against Tolent (main contractor) the victory wasillusory as Bridgeway had to pay its own as well as Tolents costs. The inclusion of aTolent clause is considered by some to be sharp practice and not within the spirit ofadjudication as this clause is thought to act as a deterrent to parties who are consideringadjudication as a speedy way of resolving a dispute. The new Construction Act will notonly ban the use of Tolent clauses but also proposes to allow adjudicators to decidewhether any proposed costs allocation is reasonable. If a cost allocation is found to beunreasonable by the adjudicator then it is ineffective i.e. not binding on the parties.

4. Cross contractsThe proposed change bans any provision that requires payment to be determined byreference to another contract. This will clarify the position of sub-contractors andsub-sub-contractors who often are unaware of when they ought to be paid. The changeshould also benefit consultants who have more than one contract with an employer.

5. Payment noticesIt is proposed that the current arrangements involving the issue of withholding noticesare repealed and replaced by a new system. The new system requires that a contractcontains an express provision whereby a payer or payee must give to the other apayment notice no later than 5 days after the due date for payment. The paymentnotice can also be given by a person on behalf of the payer provided they are named in

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the contract (i.e. consultant). The proposed change has not found favour with everyone.Bingham (2008) acidly commented:

Going out, hurrah, is the old payment and withholding notices system. Instead we haveanother mistake!

It remains to be seen whether the new system will be simpler or more complex than thecurrent position.

Implications for building surveyorsMany of the proposed changes to the HGRCA affect the relationship between maincontractors and their sub-contractors. However, the proposed changes will also havemajor implications for building surveyors working as contract administrators andbuilding surveyors who act as adjudicators.

For building surveyors involved in the administration of contracts, the proposedchanges represent a mixed bag. Most building surveyor contract administrators willwelcome the introduction of the specified person allowing the issue of the payment

notice in place of the employer. This should simplify administration and reduce cost.However, the proposed new system of allowing either the payer or payee the power togive payment notices seems cumbersome and likely to cause confusion in what isalready a controversial area. This proposed change is less likely to be welcomed bybuilding surveyor contract administrators.

In the case of building surveyors acting as adjudicators, the proposed changes seemto recognise that the requirement for contracts to be in writing has caused problems forthe construction industry. While the proposed changes seem to acknowledge that thereis a problem, the proposed solution seems to be overly complicated.

ConclusionThe proposed changes to HGRCA 1996 are likely to become law in 2009. While some ofthe changes discussed above represent progress, in the authors opinion, the overall

effect is that the proposed changes represent a missed opportunity to simplify andclarify a problematic legal area. It is hoped that the UK Government might think againbefore enacting the legislation.

Reference

Bingham, A. (2008), Im amphibious about it, Building, 15 August, available at: www.tonybingham.co.uk/column/2008/20080815.htm (accessed 17 September 2008).

Further reading

BERR (2008), The Draft Construction Contracts Bill, Department for Business, Enterprise andRegulatory Reform, available at: www.berr.gov.uk/files/file47085.pdf (accessed 17September 2008).

Corresponding authorSteve Donohoe can be contacted at: s.donohoe@plymouth.ac.uk

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