Introduction

On 1 October 2011 the Local Democracy, Economic Development and Construction Act 2009 (the "2009 Act") came into force in England and Wales[1]. The 2009 Act covered a wide range of subjects, but one of its central purposes was to amend certain provisions within Part 2 of the Housing Grants Construction and Regeneration Act 1996 (the "Construction Act").

Five years have now passed since the 2009 Act came into force. In this article we review the changes that were made to Part 2 of the Construction Act, and consider the trends that have appeared across the construction industry as a result.

The Changes to the Construction Act

The 2009 Act made changes in relation to the following provisions within Part 2 of the Construction Act:

Construction contracts do not need to be in writing

The 2009 Act repealed s.107 of the Construction Act to remove the requirement that construction contracts be in writing. The rationale behind this change was to broaden the applicability of adjudication and extend its remit as the primary method of construction dispute resolution.

The abolition of Tolent clauses

Prior to 2011 the situation was unclear as to whether parties to a construction contract could agree that one of them should always pay both parties' legal costs of adjudication, whatever the outcome. Such clauses were upheld in the case of Bridgeway Construction v Tolent Construction [2000] CILL 1662, but were always controversial. In the case of Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC) Edwards-Stuart J gave a judgment which appeared to be in direct conflict with Bridgeway v Tolent, holding that a Tolent clause in the relevant contract conflicted with s.108 of the Construction Act and effectively acted as a fetter on the parties' statutory rights to adjudicate at any time.

The 2009 Act introduced a new s.108A, which prohibits agreements about adjudication costs (both the parties' own costs and the adjudicator's fees) unless these agreements are:

  • in writing, in the construction contract and confer power on the adjudicator to allocate their own fees; or
  • made after the dispute has been referred to adjudication.

New payment provisions

The 2009 Act significantly altered ss.110 and 111 of the Construction Act, although no changes were made to s.109, or ss.113-116.

S.110 of the Construction Act was altered by:

  • the repeal of the existing and largely ineffective Payment Notice provisions within s.110(2);
  • the imposition of further restrictions on conditional payments (within ss.110(1A)-(1D)); and
  • the introduction of a new Payment Notice regime (within ss.110A & 110B).

The new Payment Notice regime requires the issue of a Payment Notice specifying the sum considered to be due and the basis on which that is calculated within five days of each payment due date. Payment Notices can be issued by either the Paying Party, a Specified Person, or the Receiving Party and must specify certain requirements. They must be given, even if the sum due is zero (s.110A(4)).

S.110B entitles the Receiving Party, in situations where a Paying Party or Specified Person fails to issue a Payment Notice, to issue a 'Default' Payment Notice. In addition, and reflecting that a 'usual' payment process may require a Contractor to submit payment applications, s.110B(4) allows the original payment application to take effect as the 'Default' Payment Notice - provided any such applications meet the requirements for a Payment Notice.

S.111 of the Construction Act was repealed and replaced with a new regime which requires the Paying Party to:

  • pay the "notified sum"; and
  • serve a Pay Less Notice if it wants to pay less than the "notified sum".

The Pay Less Notice has replaced the existing Withholding Notice under the Construction Act and requires that the Paying Party to specify the sum it considers to be due and the basis on which that sum is calculated.

Changes to the Contractor's Right to Suspend

Changes to s.112(1) of the Construction Act allow a Receiving Party to suspend "any or all" of its obligations in the event that the Paying Party does not: (i) pay the notified sum by the final date for payment; and (ii) serve a Pay Less Notice.

The Resulting Trends

A greater uptake for adjudication?

A report published by the Adjudication Society in September 2016[2] confirms that:

  • in the three years leading up to the 2009 Act coming into force (May 2008 - April 2011) the annual number of referrals fell by 40% overall, from 1730 in 2008-2009 to 1064 in 2010-2011; and
  • since the 2009 Act came into force in October 2011 the annual number of referrals has risen by 42% overall, from 1064 in 2010-2011 to 1511 in 2015- 2016.

The extent to which the rise in the annual number of referrals is attributable to the repeal of s.107 and/or introduction of s.108A is impossible to determine - particularly as, overall, the number of annual referrals is now returning to the same level that was experienced immediately prior to the "credit crunch" and the economically turbulent years that followed.

Perhaps, as the Adjudication Society comments, this return is more to do with the wider general economic recovery and signs of recovery within the industry. Whatever the real reason, it is difficult to see how the removal of historical blockers to adjudication can have caused anything other than an increase to the number of annual referrals.

The abolition of Tolent clauses?

Much of the commentary concerning the introduction of the new s.108A of the Construction Act concerned the curios wording of the section, and whether it achieved Parliament's objective for the abolition of Tolent clauses.

The new s.108A of the Construction Act states:

"(1) This section applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract.

(2) The contractual provision referred to in subsection (1) is ineffective unless [emphasis added]-

(a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties, or

(b) it is made in writing after the giving of notice of intention to refer the dispute to adjudication."

One reading of sub-section (2)(a) is that as long as a contractual provision concerning the allocation of the parties' adjudication costs is: (i) in writing; (ii) contained in the construction contract; and (iii) includes a power for the adjudicator to allocate his fees and expenses, then it is enforceable.

Whilst this ambiguity has not proven to be a ripe area for a potential dispute, it is something of a surprise that the Court has not been asked to provide a definitive ruling. Perhaps this is due to the clarification in compelling judgment in Yuanda, or the explanatory notes to the 2009 Act, which state [emphasis added]:

"any contractual provision by the parties to a construction contract concerning the allocation between them of costs relating to an adjudication is ineffective except in two cases. The first such case is where the contractual provision is in writing, is a provision of the parties' construction contract, and is one which allows the adjudicator to allocate his own fees and expenses between the parties".

Payment - the rise of the 'smash and grab'

In 2014/2015 the new Payment Notice regime introduced within ss.110A & 110B emerged as the 'hot topic' for adjudications concerning the changes introduced by the 2009 Act. Indeed, a report published by the Adjudication Society in April 2016[3] confirmed that 49% of referrals in 2014-15 related to:

  • payment (29.3%); and
  • withholding/Pay Less (19.7%).

Adjudicators' descriptions for the 'Withholding/Pay Less' category confirm that these disputes related to either the failure to issue a valid or compliant payment notice or pay less notice. The spate of 2014/2015 TCC decisions[4] confirmed that, in the absence of a valid Pay-Less Notice, an Employer was required to pay the "notified sum" in a Payment Notice or a Default Payment Notice in full. The seminal judgment within this spate of decisions was ISG Construction Ltd v Seevic College, in which Edwards-Stuart J held [emphasis added]:

"...if the employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong"

However, later TCC decisions placed reciprocal and strict obligations upon Contractors, and have confirmed that a valid, clear, and unambiguous application for payment is a prerequisite to a Contractor succeeding in a 'smash and grab' adjudication. In this regard the TCC has held [emphasis added]:

"if contractors want the benefit of these provisions, they are obliged, in return, to set out their interim payment claims with proper clarity" (Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855 (TCC));

"the document relied upon as an Interim Application under [the Contract] must be in substance, form and intent an Interim Application stating the sum considered by the Contractor as due at the relevant due date and it must be free from ambiguity. In this context, the Interim Application should be considered in the same light as a certificate. If there are to be potentially serious consequences flowing from it being an Interim Application, it must be clear that it is what it purports to be so that the parties know what to do about it and when." (Henia Investments Inc v Beck Interiors Limited [2015] EWHC 2433 (TCC))

and

"If a contractor wishes to have the benefit of the interim payment regime such as that contained in the Contract, then its application for interim payment must be in substance, form and intent an interim application stating the sum considered by the contractor as due at the relevant due date and it must be free from ambiguity." (Jawaby Property Investment Ltd v The Interiors Group Ltd and another [2016] EWHC 557 (TCC))

Whilst the above run of decisions confirm the 'basic' requirements for Employer and Contractor conduct, 'smash and grab' adjudications have also addressed ancillary issues such as:

  • the application of the new Payment notice regime to 'hybrid' contracts - in Severfield (UK) Ltd v Duro Felguera UK Ltd [2015] EWHC 3352 (TCC) Coulson J held that:

"...it was imperative that the claimant spell out the fact that... [the December notice] was a payment notice... in respect of the claim for construction operations."

  • the variation of construction contracts by conduct - in Leeds City Council v Waco UK Ltd[5] Edwards-Stuart J held that the Employer's Agent's certification and Employer's payment of all of the contractor's late applications amounted to a waiver by conduct, which the Employer could not resile from.

Conclusion

The 2009 Act has certainly had a significant impact on the construction industry. The broadening of the base for potential adjudication disputes and abolition of Tolent clauses has undoubtedly improved accessibility to adjudication, but the actual effects of these changes is impossible to determine.

The testing of the new Payment Notice regime in the TCC was almost an inevitability as the practical effects of the changes were put into practice by Employers and Contractors alike. Hence in 2014/15 it became the key trend arising out of the 2009 Act. The TCC's decisions have served to make it very clear that this regime is the most critical of changes, and although parties to construction contracts are becoming more aligned to its requirements, the potential for further disputes to arise on this regime still exists, and means that it will remain a 'hot topic' within the industry and TCC in the years to come.