The Housing Grants, Construction and Regeneration Act 1996 (HGCR Act) has been in force for over 10 years. It is an unusual piece of legislation as it implies terms into (nearly) all written contracts for construction work unless those contracts contain Act-compliant provisions. It gives the parties to relevant construction contracts the right to refer any dispute to a "quick and dirty" dispute resolution procedure called adjudication. The HGCR Act also provides a contractual payment mechanism for making payments for construction work and services. The Local Democracy, Economic Development and Construction Act 2009 (LDEDC Act)[1] which is expected to come into force in October this year will make several changes to the original Act, of which anyone dealing with construction contracts will need to be aware.

Background to the HGCR Act

In brief, the HGCR Act brought in the right to adjudicate and also introduced a contractual payment mechanism. This mechanism entitles the payee to stage payments for work done, and provides for calculating the sums due and the final date for payment. It also provides that if a payer does not serve a "withholding notice", he cannot withhold monies from the payee. If no such notice is served, the payee can suspend work until paid and refer any dispute to adjudication.

Adjudication is a dispute resolution procedure peculiar to the construction industry. It allows a party to a construction contract to unilaterally refer a dispute to an adjudicator at any time. The process from referral of the dispute to a decision only takes 28 days (unless a short extension is agreed). The decision of the adjudicator is binding until the decision is finally determined in court or arbitration, or by agreement between the parties. The courts will rarely overturn an adjudicator's decision unless it can be shown that there is a valid jurisdictional challenge (that is, the adjudicator acted without or in excess of his jurisdiction). The objective being that construction disputes are decided quickly, without having to wait until the contract has been performed, and without the parties having to engage in expensive and lengthy legal proceedings.

Parties to a construction contract can agree their own adjudication and payment terms within the limits of the HGCR Act, but if they do not comply with its basic requirements, then the provisions of the "Scheme" for payments under the Act automatically apply and imply terms into the contract.

The HGCR Act has a wide-ranging effect as it applies to all construction contracts (including those relating to architectural design and engineering) unless the contract is with a residential occupier or it falls into one of the exclusions. The Act does not apply to contracts for drilling and extraction of natural gas, oil and minerals, or to nuclear processing, power generation, or water or effluent treatment, or to the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink, nor does it apply to the making and installation of artistic works. If the contract is for the manufacture and supply of components, the contract must also provide for their installation to be caught by the Act.

Changes in the LDEDC Act

The courts and the construction industry have had over a decade to familiarise themselves with the HGCR Act and to iron out various issues that have arisen from it over time. The introduction of the LDEDC Act is set to raise new issues for the courts, legal practitioners and those working in the construction industry alike. The right to adjudicate and an implied contractual mechanism for payment are here to stay, but the LDEDC Act will make various changes to the HGCR Act. The key changes are as follows:-

  • The requirement for the construction contract to be in writing is repealed thus allowing the parties to an oral or partly oral contract to rely on the Act (which could cause some practical difficulties for adjudicators going forward).
  • Construction contracts shall include a written provision allowing the adjudicator to correct typographical or clerical errors (such as miscalculations) in his decision (the 'slip rule' which had previously been confirmed by the courts).
  • 'Pay when certified' clauses will be prohibited in most contracts. The main contractor cannot make payment to his sub-contractors conditional on his own payment by the employer being certified. This could have a significant impact on those working in the PFI industry.
  • The payment and withholding notices provisions are to be overhauled. For example, either party (rather than only the payer) may now issue a payment notice stating how much is due, and payment notices must be given even if the amount due is zero. If no notice to pay less is given then this notified sum becomes due.
  • The right to suspend if not paid will be stronger. The suspending party can claim the costs from the exercise of the right and can claim an extension of time to complete his work for the delays resulting from the exercise of the right.
  • Any contractual provision between the parties which deals with allocation of the costs of any adjudication must be made in writing in the contract and confer power on the adjudicator to allocate his fees and expenses between the parties (or can be agreed in writing after notice to adjudicate has been given).

Comment

The LDEDC Act will apply to all construction contracts that are entered into after the Act is brought into effect, which is expected to be some time in October 2011. If you are entering into a construction contract around that date it is important to consider whether there are any sub-contracts further down the chain. If there are, it is advisable to ensure that all contracts, whether in writing or partly or wholly oral (as, after the LDEDC Act comes into force, even parties to a partly or wholly oral contract can rely on the protection of the LDEDC Act) in the contractual chain are consistent to avoid a situation where, for example, the main contract is governed by the provisions of the HGCR Act but the sub-contracts (entered into a few weeks later perhaps) are governed by the LDEDC Act.

Practically speaking, if you have standard terms already in place that apply to construction works using the terminology of the HGCR Act, these will need to change and will need to be amended to be brought in line with the new payment procedure. Of course, the people actually administering payments under construction contracts will also need to be aware of the changes.