The Housing Grants, Construction and Regeneration Act has been around for more than ten years. The Government is now proposing to make some changes to it. Although wholesale changes were mooted, the draft Construction Bill issued last month makes only a moderate number of changes to the adjudication and payment provisions. However, the changes that are being proposed are significant.

The key changes proposed in the draft Bill include:

Removal of the current limitation for construction contracts to be in writing

The Act would apply to all construction contracts, not just those in writing or evidenced in writing. This would include those construction contracts which are wholly in writing, partly in writing or wholly oral. However, if the (largely) procedural requirements of adjudication set out in Section 108 (2)-(4) are not in writing, then the Scheme for Construction Contracts will apply.

This proposed amendment is intended to put an end to the issue of whether or not a party has an entitlement to adjudicate (because of a lack of clarity or certainty over the terms). However, it may result in the parties disputing whether the entitlement is contractual (with all the prescribed information being in writing or evidenced in writing) or under the Scheme.

Allocation of costs of an adjudication 

Any agreement between the parties concerning the allocation of the costs relating to adjudication would be ineffective unless such an agreement is made after the appointment of the adjudicator and is in writing. This covers both the party's own costs and those of the adjudicator.

If the parties make a valid agreement as to the allocation of their own costs after the appointment of the adjudicator, then the adjudicator would have the power to decide whether those costs were unreasonable. If so, the allocation agreement will be ineffective with the result that the costs would remain the responsibility of the party which incurred them. A party does have the right to challenge the adjudicator's decision in the courts. This may lead to another new avenue for challenge in the future.

Prohibition against parties agreeing that decisions of a third party are to be conclusive of the amount of any periodic payment

Any provision in a construction contract that a third party interim payment decision is binding and may not be challenged, would be ineffective. The effect of this would be to give the adjudicator power to consider such payments when reaching his decision. Such a term would however be effective when it is agreed to by the parties after the interim decision has been made and communicated to the parties. In short, the change will not affect settlements agreed on the basis of the third party's decision.

Payment by reference to other contracts

The new provision provides that it is not an "adequate mechanism" for determining what and when payments become due if the determination is dependent upon work carried out in another contract. This will be an important amendment affecting the payment mechanism set out in many sub-contracts and PFI contracts.

Payment notices

The existing provisions for payer notices (commonly referred to as Section 110 notices and widely ignored under the current legislation because there is no sanction for failure to provide one) would be amended. The contract will have to provide either for the giving of a payment notice by the payer or by the payee. The notice must set out the sum due and how it has been calculated. A notice must be served even if there is nothing due to be paid. If the contract provides for the payer to give the payment notice and the payer fails to do so then the Bill provides for the payee to serve the payment notice in default.

The existing Section 111 (relating to the service of a notice of intention to withhold payment) will be repealed. A new Section 111 which requires the payer to pay the "notified sum" set out in a valid payment notice will replace it. There will still be provision contained in the new Section 111 for the payer to serve a counter- notice if it wishes to withhold any part of the notified sum. The requirement to pay the notified sum is intended to facilitate cash-flow by determining what is provisionally payable. The sums ultimately payable as detailed in the contract would be unaffected.

The Bill confirms the principle contained in the House of Lords case of Melville Dundas v George Wimpey [2007]. The requirement to pay the notified sum does not apply where the contract allows the payer to withhold money upon the payee's insolvency, if the insolvency occurs after the expiry of the period for giving notice of the payer's intention to pay less than the notified sum. The provisions seek to ensure that the principle established in that decision is confined to insolvency situations.

If this proposed legislation is introduced in its current form then parties to construction contracts will need to review and amend provisions in their contracts relating to payment and the right to adjudicate. If the provisions do not comply with the Act then the Scheme for Construction Contracts will apply.