Consultations on payment issues in the construction industry
It is as much the case today that “cashflow is the life blood of the building industry” as it was when Lord Denning coined the phrase over 50 years ago in the Court of Appeal judgment of Dawnays vs Minter (1971). Slow and uncertain cashflow is a significant contributory factor to a high incidence of insolvencies in the construction industry, and ultimately adds to the overall cost of construction.
The position has much improved since Part II of the Housing Grants, Construction and Regeneration Act (“the Construction Act”) came into force in 1998. As currently in effect with modifications introduced in 2011, the Construction Act requires every construction contract to include obligations on the paying party to give notice of payments which it intends to make (“the notified sum”), and the right for the parties to refer a dispute to adjudication at any time, in accordance with a process which requires the adjudicator to provide a decision within 28 days of referral, a period which can only be extended in limited circumstances. However, slow and uncertain payment continues to be a feature of much of the construction industry.
The Government remains determined to tackle this culture. On 24 October 2017, two parallel consultations were launched by the Department for Business, Energy and Industrial Strategy (BEIS). The first consultation was initiated as part of a review of the changes to the Construction Act which took effect in 2011, while the second seeks information on the practice of cash retention under construction contracts. Responses to both consultations are due by 19 January 2018.
The Government sees the practice of retention and the operation of the Construction Act as closely related insofar as the commitment of time and expense to adjudication can deter a party from pursuing recovery of retention payments, particularly where these are of a comparatively low value.
Consultation on the Construction Act
The current consultation is being undertaken in order to ascertain how effective the changes introduced in 2011 have been in relation to three specified objectives:
- Increasing transparency in the exchange of information relating to payments;
- Encouraging the use of adjudication, where appropriate; and
- Strengthening the right to suspend performance.
The respondents are invited to respond to a range of detailed questions, which can be broadly summarised as follows:
- Adjudication – how frequently has the respondent engaged in an adjudication process; and have they found it a useful and cost-effective mechanism for resolving disputes on an interim basis? A special case is contracts which were not made in writing, i.e. oral contracts. Before 2011 these were excluded from the operation of the Construction Act by Section 107. This Section was repealed as part of the modifications which came into force in 2011. In the case of RCS Contractors Ltd v Conway , which concerned the enforcement of an adjudicator’s decision in relation to an oral contract, Mr Justice Fraser made it plain that he did not consider that statutory adjudication is an appropriate forum for deciding disputes under oral contracts, given the uncertainty and contention that they can engender. In that case, there was a protracted and expensive dispute resolution process lasting 16 months, which he described as the opposite of the quick, cheap dispute resolution service that adjudication was intended to provide.
- How helpful/effective has the statutory right to suspend performance been in in circumstances where the paying party has failed to pay the “notified sum”?
- Payment regime – in the respondent’s experience, what level of compliance has there been with the requirements for payment notices, and has this resulted in clarity and certainty of payment expectations? Have the provisions of the Construction Act which make “pay when paid” and “pay when certified” provisions ineffective been reflected in contract drafting and practice?
Consultation on retentions
The Construction Supply Chain Payment Charter, which was launched by the last Government and continues to be sponsored by BEIS, sets the bold ambition of the abolition of retentions by 2025. The consultation on retentions can be seen as the next step on this road. The consultation adduces independent research on retentions commissioned by BEIS and carried out by Pye Tait, which identifies a number of adverse impacts, including the following:
- unjustified late and non-payment of retentions remain prevalent;
- contractor insolvency has a consistently negative impact on the return of retentions to downstream subcontractors;
- “pay when paid/ certified” provisions are still being used, notwithstanding that they are prohibited by the Construction Act; and
- the uncertainty and additional administration associated with recovering retentions result in higher business overheads which feed through into higher overall construction costs.
The Pye Tait research highlights that many overseas jurisdictions, including the USA, Canada, New Zealand and Australia, have experienced similar issues and have introduced various legislative safeguards, for example a requirement to hold retention monies on trust in a separate, ring-fenced account. This is one of the main options the Government is considering introducing in the UK.
The current consultations demonstrate that the Government remains determined to tackle the issues which remain endemic in the construction industry, including late payment and the unjustified withholding of retentions. It is seeking to obtain feedback from all parties to the construction industry before deciding next steps. If you are interested is finding out more, please contact the author of this article.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.