In this report we outline the proposed legislative changes. At the time of writing (early April 2009), it is anticipated that Part 8 of the Bill will be accepted unamended by the House of Lords before it is introduced in the House of Commons.

Although not suggested in the Draft Bill, clause 136 also specifies how the parties to a construction contract may satisfy the requirement in section 110 (1) (a) of the Act that their contract contain an adequate mechanism to determine when payments become due. It does so by rendering ineffective any clause which makes payment due only where a notice for that amount has been provided to the contractor. This is designed to prevent the application of the Act’s payment mechanism being thwarted by an employer’s failure to issue that initial notice.

Regrettably, these minimal changes will not resolve the current ambiguities concerning the Act’s application to the PFI procurement model. As our previous Correspondents’ Report noted, participants in the PFI marketplace have attempted to circumvent the prohibition on “pay when paid” arrangements through the use of “equivalent relief” clauses in PFI subcon-tracts which distinguish a project company’s entitlement to payment from the public sector party with the actual receipt of that payment by the subcontractor. While the Act’s payment protections may be beneficial for small subcontractors in non-PFI situations, the nature of the parties involved in PFI projects and the complexity of the resulting contractual arrangements mean that such protections are unnecessary when the PFI procurement model is applied. This was originally recognised by the Government’s decision to exclude PFI project agreements from the scope of the Act’s scheme for payment protection.6 However, despite the Government’s commitment to the PFI procurement model and the fact that the financing structure depends on risks being transferred from the PFI special purpose vehicle, the Government has not excluded from the Act’s application contracts between PFI special-purpose vehicles and construction contractors and facilities management contractors and lower-tier PFI sub-contracts. It is regrettable that the Government has not corrected this illogical framework, particularly given the Bill’s objective of stimulating economic development. As a result, construction lawyers are likely to continue their efforts to devise innovative PFI payment arrangements to circumvent the Act’s payment protections, with the ensuing uncertainty such bespoke arrangements normally entail.

Since the provision of a payer’s notice or a payee’s notice initiates the contractual payment mechanism, it is essential from a contractor’s or subcontractor’s perspective that the necessary notices are issued promptly. If a payer fails to issue a payer’s notice by the required date, the Bill then permits a payee to issue a default notice specifying the amount the payee considers due and the basis upon which it has been calculated (clause 137). A surprising result is that the final date for payment of the sum identified in the default notice (less any amounts appropriately identified in the payer’s counter-notice) will be postponed by the period in which the payer failed to issue its payer notice before the payee issued its default notice. The resulting delay in payment effectively confers an unmerited benefit on the payer which may have severe consequences for the payee’s cash flow. Accordingly, it may be prudent for payees to prepare contingency notices which can be issued promptly if the payer fails to issue its payer notice.

Clause 138 addresses the implications of the House of Lords’ decision in Melville Dundas Ltd v. George Wimpey UK Ltd.9 In that case, the employer was held to be entitled to withhold further payments from an insolvent contractor despite the employer not having issued a withholding notice within the prescribed period. The Bill confirms that a counter-notice may be issued so an employer may exercise its contractual right to withhold further payments once the contractor becomes insolvent. To avoid any doubt concerning the application of Melville Dundas, the Bill also confirms that the only circumstances in which a counter-notice may be issued after the prescribed period are those in which a contractor becomes insolvent after that prescribed period.

A notable omission from the Bill is the Draft Bill’s proposed amendment to section 109 of the Act which would have made ineffective any provision in a construction contract purporting to make an interim payment decision binding so as to prevent its subsequent review by an adjudicator. This proposal was widely criticised on the basis that it could make an interim payment certificate unenforceable. Alternative drafting was suggested in the course of BERR’s consultations with the construction industry (for example, replacing “binding” with “final and conclusive and incapable of review”). Since this amendment has not been pursued, where the Scheme for Construction Contracts (England and Wales) Regulations 1998 apply, adjudicators remain empowered to “open up, revise and review” any decision made or certificate issued pursuant to a construction contract “unless the [construction] contract states that the decision or certificate is final and conclusive”.10

However, although there was never any suggestion of impropriety, since Lord O’Neill had disclosed his position as president of the Specialist Engineering Contractors Group—an umbrella body for various trade associations in the construction industry with approximately 60,000 members employing approximately 300,000 people—the amendments were withdrawn as he considered it “inappropriate in the current climate to pursue them”.12 The amendments were instead proposed by Lord Borrie although they were again withdrawn as the Government declined to adopt them on the basis that the Bill was the result of extensive industry consultations and that, although the amendments were endorsed by the Specialist Engineering Contractors Group, they were not supported by other large representative bodies in the construction industry.13 Lords O’Neill and Borrie appear to have tacitly conceded this lack of consensus and, although it is presently unclear whether further attempts will be made to secure these amendments in the House of Commons, this is thought to be unlikely.

Despite the Bill’s stated objectives, doubts remain as to the appropriateness of the proposed amendments to the Act’s payment provisions in the midst of a severe credit crunch. The drafting adopted in the Bill is complex and replete with cross-references. Contractors and subcontractors will undoubtedly require legal assistance as they grapple with the meaning of these amendments, the consequential changes to their standard form documentation and the implications for their business practices. As with the Act itself, the amendments proposed in the Bill may become the subject of considerable litigation. Additionally, the economic benefit of the Bill will most likely be limited since the Act applies only to “construction contracts”.14 The definition of this term excludes significant sections of the construction industry such as contracts for the performance of architectural or design work,15 contracts for the manufacture and delivery of materials, plant and equipment16 and, perhaps most significantly, construction work concerning dwellings which a party to the contract occupies or intends to occupy.17 Pertinently, the construction industry did not request that the Act’s application be extended. As a consequence, questions will remain for some time as to whether the Bill satisfies the economic test established for it.

The Draft Bill had proposed a new section defining exactly what is to constitute “in writing”. The omission of this provision from the Bill suggests that the definition of “writing” provided in the Interpretation Act 1978 is to apply.18

Despite the presumed objective of clause 133 being to avoid challenges to an adjudicator’s jurisdiction by enabling disputes arising from partly written contracts to be subjected to the Act’s adjudication procedure, it seems strange that a contract may be entirely oral save for a discrete list of matters relating to the conduct of that adjudication. Lord Borrie regarded this amendment as inadequate to protect subcontractors who may be presented with “bespoke adjudication procedures, devised no doubt by major contractors on a take-it-or-leave-it basis”.19 In presenting his amendment to remove the requirement that a construction contract must make written provision for certain matters concerning the conduct of an adjudication, he suggested that “greater fairness and clarity would be achieved” by the application of a standard adjudication procedure.20 Speaking on behalf of the Government, Lord Brett regarded such a procedure as “a legislative sledgehammer to crack a nut”, although he did recognise that there is a degree of support in the construction industry for a single adjudication scheme. Accordingly, a review of the secondary legislation comprising the current adjudication scheme may occur following the Bill’s enactment.21

The Bill also proposes to amend section 108 of the Act so that a construction contract authorises an adjudicator to correct his decision to remove clerical or typographical errors “arising by accident or omission” (clause 134). This provision is necessary for a Scottish law contract and desirable for a English law contract as there is only one decision stating that an adjudicator has such a power.22 It is questionable, however, whether a mandatory contractual provision is the most appropriate means of addressing this issue. The requirement that a construction contract include a “slip rule” before a dispute arising pursuant to it may be the subject of the Act’s adjudication procedure also appears inconsistent with the objective in clause 134 of limiting the matters that a construction contract must address in writing.

The Government has, however, decided not to pursue the amendments suggested in the Draft Bill regarding the liability for costs the parties incur during an adjudication. The Draft Bill suggested the inclusion of a new section 108B in the Act so that, if the parties were to reach an agreement concerning the allocation of the costs associated with that adjudication, the adjudicator could make a determination if he considered an aspect of that agreement to be unreasonable. That determination would make the agreement ineffective to the extent that one party was to pay in excess of a reasonable amount ascertained by the adjudicator (although the Draft Bill did not actually authorise the adjudicator to determine that reasonable amount or provide any guidance as to how it should be calculated). Additionally, the Draft Bill proposed the inclusion of a new section 108C in the Act which provided that, unless otherwise agreed, the parties to the adjudication were to be jointly and severally liable for the adjudicator’s fee. Although the Government has not provided any reasons for its decision not to include this amendment in the Bill, it has presumably been discarded as adjudicators generally already regard themselves as having suitable means at their disposal to enforce the payment of their invoices.

Given the technical nature of the amendments proposed in the Bill, it would also undoubtedly be of considerable assistance to the construction industry, particularly the subcontractors the Bill seeks to assist, if BERR were to issue guidelines explaining in simple language and with flow charts the new mandatory payment procedures.

The amendments to the Act, if enacted substantially in their current form, will only apply to construction contracts agreed following a date to be appointed by the Secretary of State (clause 143). Much work will be necessary to ensure that the construction industry is adequately prepared. The industry should also bear in mind that the Bill may constitute only the first round of amendments as the Government has indicated that the regulations and other statutory instruments associated with the Act may also be reviewed in light of the new legislative framework. The construction industry has been left wondering whether a second, more comprehensive, wave of amendments to the Act is in the legislative pipeline.