Can the new Construction Contracts Bill 2010 deliver a solution for the industry ?

Date: April 1st, 2011 | Filed under: Mediation & Company Law Articles | Tags: "ADR", mediation, medical

The provisions of the draft Construction Contracts Bill 2010 seek to address some very difficult issues within the operation of construction contracts, and at first glance appears to be a crucial component towards improving cash flow in the construction industry. The current economic climate has given rise to more conflicts and disputes than ever in this country across all commercial and industry sectors, involving main contractors in dispute with subcontractors, main contractors versus clients, and clients versus their design teams.

There is an increasing awareness that the interests of parties to disputes may be better served by finding alternatives to litigation. “The realisation, in the words of Lord Simon of Glisdale, ….. that Litigation, while certainly preferable to personal violence is not in itself an intricately desirable activity, has encouraged the search for other methods of dispute resolution each of which has attracted its adherents and enthusiasts”. [O’Donnell J in Galway City Council v Samuel Kingston Construction Ltd.]

The adjudication procedure is a summary process where a dispute is decided by a third party adjudicator and the decision is binding on the parties in the interim. It is essentially a stop-gap process which provides a quick cost-effective mechanism to determine the amount of payment in the interim where the parties dispute the amount. The emphasis of adjudication is on speed but not finality. It is the compromise of the need to have a swift procedure but yet binding, albeit only temporarily. “Pay now, argue later”, “Justice for everyone”, “eliminates small parties suffering in silence”

Three very important and worthwhile provisions in the draft Bill are:

(a)    Section 7 provides for notice of intention to withhold payment. It addresses the concept that you can’t withhold money, without giving prior notice and the reasons why money is withheld

(b)   Section 8 provides for the statutory right to adjudication. Adjudication is straight forward, simple & quick mechanism to decide the amount of money that should be paid by one party on an interim basis.

(c)    Section 9 provides for the right to suspend work on 7 days notice, for non-payment

It is important to note that in most (commercial) contracts, if there is an issue of non payment, the parties can seek enforcement of the payment through the courts. However, most construction contracts have alternative dispute resolutions provisions to resolve disputes including conciliation, arbitration or both. While those alternative dispute resolution mechanisms are necessary (having regard to the technical complexity of many disputes), they can be very slow, and in the case of arbitration, very expensive. Consequently payment can be delayed for up to several years in many instances, and such mechanisms can provide an opportunity for a party to frustrate (timely) payment by manufacturing a dispute.

After adjudication the parties remain free to conciliate, arbitrate or litigate the ultimate resolution of dispute. The adjudication is binding in the interim and enforceable and the parties can then go the courts to enforce payment

In the United Kingdom adjudication was given statutory effect under the Housing Grants, Construction and Regeneration Act 1996, and as a result cash flow throughout the construction industry has been dramatically improved. Disputes rarely progress to arbitration and it has been reported that 90% of disputes are settled at adjudication or shortly thereafter. (Source - Specialist Engineering Contractors’ (SEC) Group). Under the UK Act the decision is required to be made within 28 days of the appointment of the adjudicator.

There are four additional elements worthy of consideration, in addition to the provisions in the draft Bill.

(i.)            Introduce a right to payment by instalment (except for a project of less than 45 days (calendar)

(ii.)            Introduce statutory requirement for an adequate mechanism for determining sums due, including default provisions, where the mechanism is not agreed by the parties.

(iii.)            Introduce statutory requirement for agreement on dates on which payment and final date for payment and default provisions such as 5 and 17 days respectively.

(iv.)            Prohibit payment provisions which are conditional on receipt of payment from others (Prohibit “pay when paid”)

The Prompt Payment of Accounts Act 1997 does not provide adequate protection for construction businesses, as it is only beneficial when the debt is not disputed which is a rare occurrence in the construction industry and therefore the relevance of the Act to construction is very limited. In the construction industry, when the debt is disputed, all the dispute resolution procedures must be exhausted before the debt is enforceable. In some instances it may take years to determine the quantum of payment due and many companies cannot survive long enough to await the outcome.

In the construction industry, work is carried out in advance of payment and a company cannot take back the goods after the event since they are incorporated into fixed infrastructure, and unlike most industries payment is in arrears. Parties in the construction industry have no effective remedy to recover non-payment. Construction projects are of long duration and their implementation involves many parties from clients, developers, architects, engineers, quantity surveyors, main contractors, sub-contractors and suppliers. Problems in payment at the higher end of the hierarchy will lead to a serious knock-on cash flow problem down the chain of contracts and will severely affect the timely performance and quality of the project.

In most instances the larger contracting party (e.g. Main Contractor) imposes onerous terms and conditions of contract on the smaller contracting party (e.g. Sub-Contractor) and there is no facility for the smaller party to negotiate terms. It is generally presented as a ‘take it or leave it’ scenario and therefore the argument that construction companies are commercial entities and should be able to protect themselves is defunct, especially in the case of SME’s. It is desirable to ensure that those who commission construction works have the capacity to pay for them and discharge their obligations in a timely manner.

18,000 adjudications have taken place in the UK since the Construction Act was introduced there in 1998. As little as 300 of those have been appealed to the Courts, the vast majority of adjudication decisions are accepted by the parties as conclusive. However the parties are free to refer the dispute to conciliation, arbitration or litigation if they wish.

The Construction Contracts Bill 2010 will have no major implications on organisations that discharge their obligations in a timely manner (e.g. paying companies on time). Under the Act, those who intend to default and do default may face the consequences of their breaches quicker than what the industry has been accustomed to in the past. Valid contractual rights can be enforced more easily and non-performers may be faced with the consequences of their actions/inactions more rapidly leading to the possibility of, healthily, weeding out such non-performers from the industry. In short, better justice for all.

Some countries learnt the consequences of payment default the hard way – slow and sudden insolvencies and minor and major insolvencies. Governments should not under-estimate the potential disastrous consequences of persistent payment default across the industry. In many countries existing contractual arrangements and existing legislation did not prevent the problems and following the introduction of the UK Act, many other common law jurisdictions have enacted similar legislation. Some (New Zealand) have built upon the UK Act and extended its provisions. The UK Act was recently amended to improve its original provisions and stamp out any loopholes which existed.

-         UK Housing Grants, Construction and Regeneration Act 1996 (applies to England, Scotland, Wales and Northern Ireland)

-         New Zealand Construction Contracts Act 2002

-         Malaysia Building and Construction Industry Payments and Adjudication Act (pending)

-         Singapore Building and Construction Industry Security of Payment Act 2004

-         Isle of Man Construction Contracts Act 2004

-         Australia (Northern Territory) Construction Contracts Security of Payment Act 2004

-         Australia (Queensland) Building and Construction Industry Payments Act 2004

-         Australia (New South Wales) Building and Construction Industry Security of Payment Act 1999

-         Australia (Victoria) Building and Construction Industry Security of Payment Act 2002

-         Australia (Western Australia) Construction Contracts Act 2004

Conor Taaffe