General
- For all of those involved in the construction industry the introduction of this Act in May 1998 was expected to be the most important piece of legislation for many years.
- It was predicted to have a fundamental effect on the payment and dispute resolution administration of virtually all engineering and construction contracts.
- Now that the relevant provisions have been with us for a number of years, this guide revisits the central features of the legislation and provides an overview of how theyhave come to be applied.
Does the Act apply?
The four cumulative tests to first apply to a contract and are well known. They are:
There must be involvement in a ‘construction contract’ (section 104)
- Quite apart from the obvious, the Act covers labour only work and those involved in architectural, design, or surveying work, and those providing advice on building, engineering, interior or exterior decoration or in the laying out of landscape. Exceptions are rare.
- If the basic test found in this section of the Act is not satisfied then there will be no need to assess whether the subsequent test (below) is satisfied.
- This is an area that has given rise to extensive arguments concerning an adjudicator's jurisdiction, particularly it seems where contracts may be partly construction and partly not. Case law has provided the, perhaps deceptively, simple answer to such argument that it is only on those parts of the contract which are “construction” that an adjudicator will have jurisdiction.
The contract must involve ‘construction operations’ (section 105)
- The definition in the Act is extremely wide. This is illustrated by the fact that it includes works in the course of construction such as; security, cleaning, landscaping, and decorating.
- It is easier to look at the narrow scope of what is not covered, most notably; supply only contracts, and certain contracts relating to energy, water, chemicals, and food and drink.
- This test has also given rise to extensive argument concerning; an adjudicator’s jurisdiction.
Is the contract with a ‘residential occupier’ (section 106)
- If it is the Act will not apply.
- It is with a 'residential occupier where it relates principally to operations on a dwelling which one party occupies or intends to occupy, as his/her residence.
- The inclusion of the adjudication provisions of the Act in construction contracts with residential occupiers has been found to provide only for contractual adjudication - doing that will not therefore give rise to the statutory rights to adjudication (and developers, etc should beware including contractual adjudication Provisions as there is authority to the effect that doing so many fall foul of the Unfair Terms in Consumer Contracts Regulations 1999.)
Is the 'contract in writing’? (Section 107)
- The contract must be in writing’. The definition includes contracts made partly orally and partly in written form (e.g. a quotation). It is rare for an engineering or construction contract not to be the subject of any writing whatsoever of course.
- Case law has developed, albeit not entirely clearly, what it is that constitutes the agreement in writing for the purposes of the Act. What case law appears to indicate is important is that the terms of the agreement material to the issue(s) giving rise to the reference to adjudication should be clearly recorded in writing.
Payment
The main features are:
- A statutory right to payment by instalments where it is specified or otherwise agreed that the duration of the works is 45 days or more. The parties are free to agree the amount and frequency of payment.
- There must be an 'adequate mechanism in the contract for defining what and when payments become due and for providing a final date for payment (N.B 'pay when paid' provisions are ineffective other than in the case of insolvency)
- Notice must he given, not later than 5 days after a due date for payment, specifying the amount (if any) of the payment made or proposed to be made, and how the amount was calculated
- A payment cannot be withheld after the final due date for payment unless a notice in the correct form has been given before that date. To be effective the notice must specify the reason(s) relied on and the amount attributable to each reason
- Where that notice is the subject of a successful review by adjudication the due date for the payment of that further sum is 7 days from the decision or the date which (apart from the notice) would have become the final due date for payment, which ever is the later.
- Where a sum is not paid by the final due date and a notice has not been given in accordance with the above, the person to whom payment is due has the right to suspend work upon giving at least 7 days notice of his intention to do so, stating the reason for that suspension. That notice will cause an automatic extension of time to be given.
Adjudication
The Act gives the right to have a 'dispute' referred to adjudication. The definition of “dispute” is “any difference” and has come to encompass such matters as the legal construction of clauses.
The basic provisions as to time when referring a dispute to adjudication are:
- Giving notice of intention to refer - at any time;
- Provision of a timetable with the object of securing the appointment of the adjudicator and referral of the dispute to the adjudicator - 7 days;
- Time period within which the adjudicator must reach a decision - 28 days (a 14 day extension by consent is permitted)
The decision of the adjudicator is binding unless determined or varied by subsequent litigation or arbitration, or by agreement
The Scheme for Construction of Contracts
Where the provisions set out above are positive requirements then they must appear in the terms of the contract. To that extent therefore those positive requirements are minimum compliance points because where they are not present the Scheme for Construction Contracts (England & Wales) Regulations 1998 do not apply.
Conclusions
- The scheme of the Act is widely regarded as having; worked, particularly after the courts showed early on that they would fulfil the intention of Parliament that adjudicators decisions would be enforced.
- Indeed two, perhaps surprising, areas have more than most concerned the courts. They are (1) the jurisdiction of the adjudicator to act, and (2) has the adjudicator conducted a fair and unbiased process?
- The Act has, as predicted on its introduction, had a major effect on dealings between the parties to construction contracts. It has become, within what is a relatively short space of time, part of the culture of the construction industry
For further information please contact Russell Davidson at:
Davidson Webber LLP
Royal House
110 Station Parade
Harrogate
HG1 1EP
Telephone: 01423 727272
Facsimile: 01423 727200
You should take professional advice about any particular situations or problems. As this guide is only a very brief outline, intended to alert users to the principal provisions of the legislation, Davidson Webber cannot accept any responsibility for any inaccuracies in or reliance upon this guide.
