On 24 October 2017, two consultations were launched by the Department for Business, Energy and Industrial Strategy (BEIS), with replies and comments to be submitted by 19 January 2018.

The first consultation forms part of a review of the changes to the Housing Grants, Construction and Regeneration Act 1996 that took effect in 2011, and the second seeks information on the practice of cash retention under construction contracts.

Overview

The BEIS has intentionally issued these two consultations "in parallel", with responses on both due by 19 January 2018. The BEIS has stated that the information gathered will be assessed with a view to deciding what "further intervention" is needed, if any. The analysis of the results "will help inform the Government's next steps".

The consultations are interlinked - one key focus point referred to in the introduction section of both is the cost of adjudication, particularly in low value disputes, such as those relating to retentions.

With the stated intention (in both consultations) of guiding Government policy going forward, the focus of the questions is of considerable interest.

Consultation on the Construction Act

The Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) was amended several years ago, with changes taking effect from 1 October 2011 (the 2011 Changes). The current consultation is being undertaken in order to ascertain how effective the 2011 Changes have been in relation to three specified objectives:

  1. Increasing transparency in the exchange of information relating to payments;
  2. Encouraging the use of adjudication, where appropriate; and
  3. Strengthening the right to suspend performance.

As would be anticipated, the questions, centred on the 2011 Changes, are detailed and specific.

Principal areas that emerge from the consultation document:

  • around half of the Construction Act consultation questions relate to adjudication - frequency, costs and effectiveness
  • the payment framework:
    • is it being properly implemented? E.g. are payment notices always issued?
    • Is it sufficiently clear?

The questions also reflect the concern identified by the Pye Tait research on retentions (referenced further below) that some parts of the construction industry are not complying with the requirements of the Construction Act, for example, continuing to include "pay-when-paid" clauses in contracts. Such clauses were rendered ineffective by the 2011 Changes but if businesses are not aware of this change, they may not be acting to protect their position.

Depending on the outcome of this consultation, further changes to the Construction Act may be on the way, particularly relating to the clarity (or not) of the current payment framework.

One particular point to keep an eye on relates to the 2011 repeal of the original s107 of the Construction Act which provided that the adjudication provisions only applied to contracts in writing. The 2011 Changes removed that requirement. The repeal of s107 has attracted some criticism on the basis that adjudications relating to oral contracts are proving very time consuming and costly.

In the case of RCS Contractors Ltd v Conway [2017] in April, Mr Justice Fraser was forthright in his views:

"I regret very much the time and cost that has been wasted on this process, which I consider to be due to the amendments to the 1996 Act. As originally enacted, the 1996 Act would not have permitted this dispute to have been progressed in this way, because Section 107 ensured that it was only when the contract was in writing that adjudication provisions were incorporated. That provision was designed to promote certainty. Section 107 was, in my view, unthinkingly repealed, meaning that (as here) adjudicators have now to grapple with entirely oral contracts, with all the uncertainty and contention that such a situation can engender. …. in this case, the result of the repeal of section 107 has been a process lasting 16 months and the incurring of large sums by way of costs. That is the opposite of the quick, cheap dispute resolution service that adjudication was intended to provide."

The Construction Act consultation includes two questions on the repeal of s107 and the effect on the costs of adjudication so it is clear that this point is under consideration.

Consultation on retentions

This consultation (the retentions consultation) follows on from independent research on retentions in the construction industry commissioned by BEIS and carried out by Pye Tait.

The key conclusions of that research as reported in the consultation document include the following points:

  • Contractor insolvency has a consistently negative impact on the return of retentions.
  • Although prohibited by the Construction Act, in practice, "pay when paid" provisions are still being used.
  • Unjustified late and non-payment of retentions remain prevalent.
  • A retention deposit scheme would address most (or all) of these issues.

The questions again are detailed and specific seeking feedback on the current industry practice on retentions

One of the stated aims of the retentions consultation is to investigate alternatives to the retention mechanism - and, in particular, to consult on the costs and benefits of a "retention deposit scheme…..a proposal for retention monies to be held in trust in a separate, ring-fenced account".

The retentions consultation explicitly envisages a statutory scheme with default provisions in the Scheme for Construction Contracts, where relevant construction contracts are non-compliant.

It does seem therefore that the statutory implementation of a retention deposit scheme is a real possibility going forward. This would certainly ease some of the issues relating to the timely release of retentions and insolvency in particular, but would raise other concerns, such as the administration costs relating to such a scheme.

Key Links: consultation documents and replies

Both consultations invite views and responses, either independently, or by way of reply to the specific questions posed. Respondents can pick and choose which questions to respond to, and the level of detail they wish to provide.

Here are the key links.

BEIS 2017 Consultation on retentions in the construction industry

Respond online to the Retentions Consultation 2017

BEIS 2017 Consultation on the 2011 Changes to the Construction Act 1996

Respond online to the Construction Act Consultation 2017