The long-awaited second consultation on the Housing Grants, Construction and Regeneration Act has now been published.
The Housing Grants, Construction and Regeneration Act (the Act) came into force nearly ten years ago and it introduced to the construction industry the concepts of both adjudication and withholding notices.
It seems to be agreed within the industry that the Act has been a “good thing” but there are areas where it could be improved.
The purpose of the consultation process has been to determine what areas need improvement, and the key proposals of the second consultation fall into four categories: adjudication, notices, suspension and the paid when certified clause.
There are three major changes proposed to adjudication:
1) First, it is proposed that there should no longer be a requirement that a construction contract must be in writing in order for the right to adjudicate to apply.
At the moment, only construction contracts where at least the fundamental terms (ie, price, parties, scope of works) are in writing give a right to adjudicate.
Not only does this exclude a substantial number of construction contracts, but it also inevitably leads to costly arguments about whether a contract is in writing or not and therefore whether the adjudicator has jurisdiction.
Far more construction contracts will be subject to the relatively cheap, quick process of adjudication if this proposal is taken on board. This change is very welcome, although it should be borne in mind that there is concern that some adjudications may be more expensive, where the adjudicator has to determine (because there is nothing in writing) what the actual terms of the contract are.
2) The second proposal relates to the costs of adjudication. At the moment the Act is silent as to who pays the costs of adjudication. The intention seems to have been that each party should pay their own costs and in the majority of cases that is what happens.
However the parties can agree in the contract that one party will pay the costs of adjudication come what may. The proposal is that these agreements will no longer be valid.
It is proposed that it will only be possible to agree that one party is to pay the costs of the adjudication after an adjudicator has been appointed. If such an agreement is entered into then the parties can either agree on the amount of the costs to be paid, or alternatively they can ask the adjudicator to decide what is a reasonable amount to pay. The adjudicator’s decision on costs would be final and binding (save in relation to the amount of his own fees).
3) The last proposed change to adjudication is to seek to ensure that it should always be available for disputes relating to interim payments. There is concern that in some contracts the right to adjudicate on interim payments is being legally excluded. While there do seem to be a small proportion of contracts which do seek to exclude the right to adjudicate on interim payments, the vast majority do not provide for this. This proposal is therefore likely to be of limited effect.
There has been much confusion about the notices required under the Act.
The Act presently requires a paying party to serve what is known as a section 110 notice. This notice, which must be served within five days after the date on which payment becomes due, must specify the amount of the payment to be made and the basis on which it has been calculated.
In practice, section 110 notices are rarely served, primarily because there seems to be no penalty for failure to serve such a notice.
The important notice is a section 111 notice, commonly known as a withholding notice.
The proposals are intended to clarify the section 110 notice position and to ensure that the sum due is crystallised as soon as possible. It is proposed that this will happen in one of three ways:
1) service of a third party certificate (ie, an architect’s certificate) stating the amount due; or
2) service of a section 110 notice; or
3) in default of either 1 or 2 above, the amount claimed by the claiming party will be the amount due.
These proposals are not intended to affect the paying party’s rights to serve a section 111 or withholding notice within the appropriate timeframe. A withholding notice will still need to be served if payment is to be withheld.
There has been much criticism of this proposal and it may therefore change but this is the present proposal. It would therefore be prudent for a paying party in a construction contract to get into the habit of always serving a section 110 notice if there is no third party certification process.
The intention of the proposal is to widen the suspension provisions in the Act.
Under the Act as it stands at present, if a sum is not paid in full by the final date for payment and no withholding notice is served, then the contractor has the right to suspend the works (subject to certain requirements). When the suspension finishes, then the Act provides that the period of suspension itself cannot be taken into account in calculating how long the works would take to complete. This still leaves the contractor with certain costs of suspension such as clearing site, storage changes, retaining sub-contract labour, etc. The proposals provide that the contractor should be able to claim for these costs.
Paid when certified clause
It is proposed that paid when certified clauses should be made illegal.
At the moment these are simply proposals. It may be many months, if not years, before such proposals are implemented but in the meantime it is important to be aware of them and to adopt them where it is practical to do so.