Tag: Construction Act

The Scheme, “Part 2 – Payment”

In the previous post we looked at “Part 1 – Adjudication” of the The Scheme for Construction Contracts which gives a statutory right to the Alternative Dispute Resolution, Adjudication.

In this post we will look at “Part 2 – Payment.”

Entitlement to and amount of stage payments

  1.  Where the parties to a relevant construction contract fail to agree— (a) the amount of any instalment or stage or periodic payment for any work under the contract, or (b) the intervals at which, or circumstances in which, such payments become due under that contract, or

     (c) both of the matters mentioned in sub-paragraphs (a) and (b) above,

    the relevant provisions of paragraphs 2 to 4 below shall apply.

  2.  (1) The amount of any payment by way of instalments or stage or periodic payments in respect of a relevant period shall be the difference between the amount determined in accordance with sub-paragraph (2) and the amount determined in accordance with sub-paragraph (3).(2) The aggregate of the following amounts:

    (a) an amount equal to the value of any work performed in accordance with the relevant construction contract during the period from the commencement of the contract to the end of the relevant period (excluding any amount calculated in accordance with sub-paragraph (b)),

     (b) where the contract provides for payment for materials, an amount equal to the value of any materials manufactured on site or brought onto site for the purposes of the works during the period from the commencement of the contract to the end of the relevant period, and

     (c) any other amount or sum which the contract specifies shall be payable during or in respect of the period from the commencement of the contract to the end of the relevant period.

    (3) The aggregate of any sums which have been paid or are due for payment by way of instalments, stage or periodic payments during the period from the commencement of the contract to the end of the relevant period.

     (4)  An amount calculated in accordance with this paragraph shall not exceed the difference between:

     (a) the contract price, and

     (b) the aggregate of the instalments or stage or periodic payments which have become due.

     Dates for payment

  3. Where the parties to a construction contract fail to provide an adequate mechanism for determining either what payments become due under the contract, or when they become due  for payment, or both, the relevant provisions of paragraphs 4 to 7 shall apply.
  4. Any payment of a kind mentioned in paragraph 2 above shall become due on whichever of the following dates occurs later: (a) the expiry of 7 days following the relevant period mentioned in paragraph 2(1) above, or (b) the making of a claim by the payee.
  5. The final payment payable under a relevant construction contract, namely the payment of an amount equal to the difference (if any) between:(a) the contract price, and

     (b) the aggregate of any instalment or stage or periodic payments which have become due under the contract,

     shall become due on the expiry of:

     (a) 30 days following completion of the work, or

     (b) the making of a claim by the payee,

     whichever is the later.

  6. Payment of the contract price under a construction contract (not being a relevant construction contract) shall become due on (a) the expiry of 30 days following the completion of the work, or

     (b) the making of a claim by the payee,

     whichever is the later.

  7. Any other payment under a construction contract shall become due (a) on the expiry of 7 days following the completion of the work to which the payment relates, or (b) the making of a claim by the payee,

     whichever is the later.

     Final date for payment

  8. (1) Where the parties to a construction contract fail to provide a final date for payment in relation to any sum which becomes due under a construction contract, the provisions of this paragraph shall apply.(2) The final date for the making of any payment of a kind mentioned in paragraphs 2, 5, 6 or 7, shall be 17 days from the date that payment becomes due.Notice specifying amount of payment
  9. A party to a construction contract shall, not later than 5 days after the date on which any payment: (a) becomes due from him, or

     (b) would have become due, if:

    (i) the other party had carried out his obligations under the contract, and

    (ii)no set-off or abatement was permitted by reference to any sum claimed to be due under one or more other contracts,

     give notice to the other party to the contract specifying the amount (if any) of the payment he has made or proposes to make, specifying to what the payment relates and the basis on which that amount is calculated.

    Notice of intention to withhold payment

  10. Any notice of intention to withhold payment mentioned in section 111 of the Act shall be given not later than the prescribed period, which is to say not later than 7 days before the final date for payment determined either in accordance with the construction contract, or where no such provision is made in the contract, in accordance with paragraph 8 above.Prohibition of conditional payment provisions
  11. Where a provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective as mentioned in section 113 of the Act, and the parties have not agreed other terms for payment, the relevant provisions of:(a) paragraphs 2, 4, 5, 7, 8, 9 and 10 shall apply in the case of a relevant construction contract, and

     (b) paragraphs 6, 7, 8, 9 and 10 shall apply in the case of any other construction contract.

    Interpretation

  12. In this Part of the Scheme for Construction Contracts:

    “claim by the payee” means a written notice given by the party carrying out work under a construction contract to the other party specifying the amount of any payment or payments which he considers to be due and the basis on which it is, or they are calculated;

     “contract price” means the entire sum payable under the construction contract in respect of  the work;

     “relevant construction contract” means any construction contract other than one:

     (a) which specifies that the duration of the work is to be less than 45 days, or

     (b) in respect of which the parties agree that the duration of the work is estimated to be less than 45 days;

     “relevant period” means a period which is specified in, or is calculated by reference to the construction contract or where no such period is so specified or is so calculable, a period of 28 days;

     “value of work” means an amount determined in accordance with the construction contract under which the work is performed or where the contract contains no such provision, the cost of any work performed in accordance with that contract together with an amount equal to any overhead or profit included in the contract price;

     “work” means any of the work or services mentioned in section 104 of the Act.

 

The effect of “Part 1 – Adjudication” and “Part 2 – Payment”

Part II of the Housing Grants, Construction and Regeneration Act 1996 makes provision in relation to construction contracts where in Section 114 the Secretary of State is empowered to make the Scheme for Construction Contracts. Where a construction contract does not comply with the requirements of sections 108 to 111 (adjudication of disputes and payment provisions), and section 113 (prohibition of conditional payment provisions of the Housing Grants, Construction and Regeneration Act 1996), the relevant provisions of the Scheme for Construction Contracts have effect.

The Scheme in effect in Part I provides for the selection and appointment of an adjudicator, gives powers to the adjudicator to gather and consider information, and makes provisions in respect of his decisions and in Part II makes provision with respect to payments under a construction contract where either the contract fails to make provision or the parties fail to agree:

  • The method for calculating the amount of any instalment, stage or periodic payment
  • The due date and the final date for payments to be made
  • Prescribes the period within which a notice of intention to withhold payment must be given

The last two past are what the current regulatory framework (in February 2017) defines and requires. However we will return to this subject again later as this is a constantly moving as the courts interpret and have effect on how the legislation is to be interpreted.

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The Scheme, “Part 1 – Adjudication”

In recent posts we have seen two pieces of Primary Legislation being referred to, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. Intrinsic to this legislation is The Scheme for Construction Contracts, a Statutory Instrument that has come into force following these acts to regulate key elements of the construction process. In this post we will examine The Scheme and its major points in Part 1 which gives a statutory right to the Alternative Dispute Resolution, Adjudication.

In effect if you read the wording of the Statutory Instrument it sets out the step by step process under which Adjudication is contested and the following text is the text of the Statutory Instrument.

Notice of Intention to seek Adjudication

  1. (1) Any party to a construction contract (the “referring party”) may give written notice (the “notice of adjudication”) of his intention to refer any dispute arising under the contract, to adjudication.

    (2) The notice of adjudication shall be given to every other party to the contract.

    (3) The notice of adjudication shall set out briefly—

           (a) the nature and a brief description of the dispute and of the parties involved,

           (b) details of where and when the dispute has arisen,

           (c) the nature of the redress which is sought, and

    (d) the names and addresses of the parties to the contract (including, where   appropriate, the  addresses which the parties have specified for the giving of notices).

  2.  (1) Following the giving of a notice of adjudication and subject to any agreement between the parties to the dispute as to who shall act as adjudicator: (a) the referring party shall request the person (if any) specified in the contract to act as adjudicator, or

     (b) if no person is named in the contract or the person named has already indicated that he is unwilling or unable to act, and the contract provides for a specified nominating body to select a person, the referring party shall request the nominating body named in the contract to select a person to act as adjudicator, or

     (c) where neither paragraph (a) nor (b) above applies, or where the person referred to in (a) has already indicated that he is unwilling or unable to act and (b) does not apply, the referring party shall request an adjudicator nominating body to select a person to act as adjudicator.

     (2) A person requested to act as adjudicator in accordance with the provisions of paragraph (1) shall indicate whether or not he is willing to act within two days of receiving the request.

    (3) In this paragraph, and in paragraphs 5 and 6 below, an “adjudicator nominating body” shall mean a body (not being a natural person and not being a party to the dispute) which holds itself out publicly as a body which will select an adjudicator when requested to do so by a referring party.

  3. The request referred to in paragraphs 2, 5 and 6 shall be accompanied by a copy of the notice of adjudication.
  4. Any person requested or selected to act as adjudicator in accordance with paragraphs 2, 5 or 6 shall be a natural person acting in his personal capacity. A person requested or selected to act as an adjudicator shall not be an employee of any of the parties to the dispute and shall declare any interest, financial or otherwise, in any matter relating to the dispute.
  5. (1) The nominating body referred to in paragraphs 2(1)(b) and 6(1)(b) or the adjudicator nominating body referred to in paragraphs 2(1)(c), 5(2)(b) and 6(1)(c) must communicate the selection of an adjudicator to the referring party within five days of receiving a request to do so.

    (2) Where the nominating body or the adjudicator nominating body fails to comply with paragraph (1), the referring party may:

     (a) agree with the other party to the dispute to request a specified person to act as adjudicator, or

     (b) request any other adjudicator nominating body to select a person to act as adjudicator.

     (3) The person requested to act as adjudicator in accordance with the provisions of paragraphs (1) or (2) shall indicate whether or not he is willing to act within two days of receiving the request.

  6. (1) Where an adjudicator who is named in the contract indicates to the parties that he is unable or unwilling to act, or where he fails to respond in accordance with paragraph 2(2), the referring party may:

    (a) request another person (if any) specified in the contract to act as adjudicator, or

     (b) request the nominating body (if any) referred to in the contract to select a person to act as adjudicator, or

    (c) request any other adjudicator nominating body to select a person to act as adjudicator.

     (2) The person requested to act in accordance with the provisions of paragraph (1) shall indicate whether or not he is willing to act within two days of receiving the request.

  7.  (1) Where an adjudicator has been selected in accordance with paragraphs 2, 5 or 6, the referring party shall, not later than seven days from the date of the notice of adjudication, refer the dispute in writing (the “referral notice”) to the adjudicator.(2) A referral notice shall be accompanied by copies of, or relevant extracts from, the construction contract and such other documents as the referring party intends to rely upon.

     (3) The referring party shall, at the same time as he sends to the adjudicator the documents referred to in paragraphs (1) and (2), send copies of those documents to every other party to the dispute.

  8. (1) The adjudicator may, with the consent of all the parties to those disputes, adjudicate at the same time on more than one dispute under the same contract.

    (2) The adjudicator may, with the consent of all the parties to those disputes, adjudicate at the same time on related disputes under different contracts, whether or not one or more of those parties is a party to those disputes.

     (3) All the parties in paragraphs (1) and (2) respectively may agree to extend the period within which the adjudicator may reach a decision in relation to all or any of these disputes.

     (4) Where an adjudicator ceases to act because a dispute is to be adjudicated on by another person in terms of this paragraph, that adjudicator’s fees and expenses shall be determined in accordance with paragraph 25.

  9. (1) An adjudicator may resign at any time on giving notice in writing to the parties to the dispute.

    (2) An adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to adjudication, and a decision has been taken in that adjudication.

    (3) Where an adjudicator ceases to act under paragraph 9(1)—

     (a) the referring party may serve a fresh notice under paragraph 1 and shall request an adjudicator to act in accordance with paragraphs 2 to 7; and

    (b) if requested by the new adjudicator and insofar as it is reasonably practicable, the parties shall supply him with copies of all documents which they had made available to the previous adjudicator.

    (4) Where an adjudicator resigns in the circumstances referred to in paragraph (2), or where a dispute varies significantly from the dispute referred to him in the referral notice and for that reason he is not competent to decide it, the adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.

  10. Where any party to the dispute objects to the appointment of a particular person as adjudicator, that objection shall not invalidate the adjudicator’s appointment nor any decision he may reach in accordance with paragraph 20.
  11. (1) The parties to a dispute may at any time agree to revoke the appointment of the adjudicator. The adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.

     (2) Where the revocation of the appointment of the adjudicator is due to the default or misconduct of the adjudicator, the parties shall not be liable to pay the adjudicator’s fees and expenses.

     Powers of the adjudicator

  12. The adjudicator shall:

     (a) act impartially in carrying out his duties and shall do so in accordance with any relevant terms of the contract and shall reach his decision in accordance with the applicable law in relation to the contract; and

    (b) avoid incurring unnecessary expense.

  13. The adjudicator may take the initiative in ascertaining the facts and the law necessary to determine the dispute, and shall decide on the procedure to be followed in the adjudication. In particular he may:

     (a) request any party to the contract to supply him with such documents as he may reasonably require including, if he so directs, any written statement from any party to the contract supporting or supplementing the referral notice and any other documents given under paragraph 7(2),

     (b) decide the language or languages to be used in the adjudication and whether a translation of any document is to be provided and if so by whom,

    (c) meet and question any of the parties to the contract and their representatives,

    (d) subject to obtaining any necessary consent from a third party or parties, make such site visits and inspections as he considers appropriate, whether accompanied by the parties or not,

    (e) subject to obtaining any necessary consent from a third party or parties, carry out any tests or experiments,

    (f) obtain and consider such representations and submissions as he requires, and, provided he has notified the parties of his intention, appoint experts, assessors or legal advisers,

     (g) give directions as to the timetable for the adjudication, any deadlines, or limits as to the length of written documents or oral representations to be complied with, and

     (h) issue other directions relating to the conduct of the adjudication.

  14. The parties shall comply with any request or direction of the adjudicator in relation to the adjudication.
  15. If, without showing sufficient cause, a party fails to comply with any request, direction or timetable of the adjudicator made in accordance with his powers, fails to produce any document or written statement requested by the adjudicator, or in any other way fails to comply with a requirement under these provisions relating to the adjudication, the adjudicator may:

     (a )continue the adjudication in the absence of that party or of the document or written statement requested,

    (b) draw such inferences from that failure to comply as circumstances may, in the adjudicator’s opinion, be justified, and

     (c )make a decision on the basis of the information before him attaching such weight as he thinks fit to any evidence submitted to him outside any period he may have requested or directed.

  16. (1) Subject to any agreement between the parties to the contrary, and to the terms of paragraph (2) below, any party to the dispute may be assisted by, or represented by, such advisers or representatives (whether legally qualified or not) as he considers appropriate.

     (2) Where the adjudicator is considering oral evidence or representations, a party to the dispute may not be represented by more than one person, unless the adjudicator gives directions to the contrary.

  17. The adjudicator shall consider any relevant information submitted to him by any of the parties to the dispute and shall make available to them any information to be taken into account in reaching his decision.
  18. The adjudicator and any party to the dispute shall not disclose to any other person any information or document provided to him in connection with the adjudication which the party supplying it has indicated is to be treated as confidential, except to the extent that it is necessary for the purposes of, or in connection with, the adjudication.
  19. (1) The adjudicator shall reach his decision not later than:

     (a) twenty eight days after the date of the referral notice mentioned in paragraph 7(1), or

     (b) forty two days after the date of the referral notice if the referring party so consents, or

    (c) such period exceeding twenty eight days after the referral notice as the parties to the dispute may, after the giving of that notice, agree.

     (2) Where the adjudicator fails, for any reason, to reach his decision in accordance with paragraph (1)

     (a) any of the parties to the dispute may serve a fresh notice under paragraph 1 and shall request an adjudicator to act in accordance with paragraphs 2 to 7; and

    (b) if requested by the new adjudicator and insofar as it is reasonably practicable, the parties shall supply him with copies of all documents which they had made available to the previous adjudicator.

    3) As soon as possible after he has reached a decision, the adjudicator shall deliver a copy of that decision to each of the parties to the contract.

     Adjudicator’s decision

  20. The adjudicator shall decide the matters in dispute. He may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute. In particular, he may:

    (a) open up, revise and review any decision taken or any certificate given by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive,

     (b) decide that any of the parties to the dispute is liable to make a payment under the contract (whether in sterling or some other currency) and, subject to section 111(4) of the Act, when that payment is due and the final date for payment,

     (c) having regard to any term of the contract relating to the payment of interest decide the circumstances in which, and the rates at which, and the periods for which simple or compound rates of interest shall be paid.

  21. In the absence of any directions by the adjudicator relating to the time for performance of his decision, the parties shall be required to comply with any decision of the adjudicator immediately on delivery of the decision to the parties in accordance with this paragraph.
  22. If requested by one of the parties to the dispute, the adjudicator shall provide reasons for his decision.

    Effects of the decision

  23. (1) In his decision, the adjudicator may, if he thinks fit, order any of the parties to comply peremptorily with his decision or any part of it.

     (2) The decision of the adjudicator shall be binding on the parties, and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement between the parties.

  24. Section 42 of the Arbitration Act 1996 shall apply to this Scheme subject to the following modifications:

    (a) in subsection (2) for the word “tribunal” wherever it appears there shall be substituted the word “adjudicator”,

     (b) in subparagraph (b) of subsection (2) for the words “arbitral proceedings” there shall be substituted the word “adjudication”,

    (c) subparagraph (c) of subsection (2) shall be deleted, and

    (d) subsection (3) shall be deleted.

  25. The adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.
  26. The adjudicator shall not be liable for anything done or omitted in the discharge or purported discharge of his functions as adjudicator unless the act or omission is in bad faith, and any employee or agent of the adjudicator shall be similarly protected from liability.

 

In effect these 26 clauses define the process of Adjudication and are relatively unambiguous, although this does not translate into Adjudication being a simple and straight forward process. We will return to this subject and look at the 4 stages that the Statutory Instrument defines.

The reality is the process is complex and requires a specialist to be employed in order to obtain the successful outcome sought by a referring party. Ansell Murray Limited have represented as both referring and responding parties and are well placed to provide strategic advice on whether or not Adjudication should be undertaken as well as representation.

Termination & Suspension clauses in construction contracts

Legally speaking in a contract there is very small differences between Termination clauses and Suspension clauses. Although there is now a Statutory Right to suspend works in construction contracts for non-payment.

It is therefore imperative when agreeing a contract, particularly for the supply of goods and services a termination and suspension clause should be included, if for nothing else to ensure the reasons for suspension cannot be regarded as termination. As this would usually come about when there is some dispute and / or claim between the parties, this only seeks to reinforce the requirement for clearly defined suspension clauses, that may lead to termination, but not when first triggered.

Termination clauses in construction contracts

Standard form of contract will contain express provisions on the rights of either party to terminate the contract in defined circumstances. By way of an example, if the contract is in effect a Sub Contract and therefore a further party is the employer, an insolvency event of the employer would allow the contractor to terminate the contract with the sub contract.

Non-contractual rights to terminate

The contract is entered into and usually implies that the parties will diligently carry out the works being contracted for within prescribed timeframes and then the obligation on the other party would be to make regular payment on a fair and reasonable basis. Usually under the services being contracted for the party providing the services would be required to “carry out and complete” the services, The definition of complete will usually even be defined in its own right, so there is no ambiguity in this that can lead to dispute.

Even with these terms there can still be reasons why the contract would end up being terminated, such as the following:

Frustration

Frustration can occur when neither party has defaulted on the contract but circumstances have intervened to prevent the contract from being performed as originally intended making further performance of the contract is impossible, illegal or significantly different to the circumstances and understanding when the parties entered into the contract.

Where frustration occurs the contract automatically terminates and the parties are excused from their future obligations, although any accrued liabilities remain.

It is therefore vitally important to ensure (and in effect for both parties to agree) that frustration has occurred, justifying the termination. This would be to avoid by consequence of terminating for frustration to being in breach of contract, where frustration has not actually occurred.

By way of examples, where a contract becomes more expensive to perform through any number of issues which should have been considered as part of the negotiation of the value of the contract, this will not be a frustration event or where an event is set out as being possible and how it is dealt with is set out as an effective potential variation (change) to the contract this will not be a frustration event.   Case law gives some examples of events that are not frustrating events. The parties need to be wary of Force Majeure clauses and their potential overlap. This will be investigated further in a later post.

An event that could be regarded as frustration would be where an employer instructs an architect to design a house to be built by a Contractor on a piece of land that the employer is in the process of purchasing. If the sale of the land falls through, the contract would be frustrated as the design for will no longer be required.

Repudiation

Repudiation occurs when a party commits a breach of contract sufficiently serious that it entitles the injured party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract. If this is a material or anticipatory breach will depend upon the severity and effect of the breach, and whether it goes to the root of the contract.

Certain extreme types of breach will amount to a clear repudiation of a construction contract, such as:

  • Refusal to carry out work;
  • Abandonment of the site
  • Removal of plant by the contractor;
  • Employing other contractors to carry out the same work;
  • Failure by an employer to give access to the site.

These examples above are clear and unambiguous and grounds for repudiation. However other breaches may not be clear-cut and like frustration need to be clearly grounds to ensure that where the injured party treats the contract as repudiated as a consequence of the breach, which is not repudiatory; this will be wrongful termination and be a breach in its own right.

Whilst damages for repudiation may be higher than for other for other breaches, the parties should ensure they have that all important right to terminate for repudiation before doing so and where possible should try to utilise a more clear cut contractual right to terminate if available.

Further repudiation by one party will not by itself bring an end to further contractual obligations, the repudiation has to be accepted by the injured party. While there is no prescribed form of acceptance, it must be unequivocal acceptance by both parties. Where both parties accept the contract is repudiated, each side is released from performance of their respective unperformed obligations and damages are assessed under the normal rules and payable by the party at fault. The principle of these damages is to put the injured party in the same position they would have been in had the contract been properly completed.

However if the injured party does not accept the repudiation it “affirms” the contract is to continue, it is still entitled to claim damages for the breach but the contract will continue.

A further difficulty can be where the injured party instead of accepting repudiation, inadvertently “affirms” by their actions that contradicts acceptance or is equivocal in some way. This in itself could lead to the injured party being in breach of contract if it stops performing its obligations in the mistaken belief repudiatory breach has been accepted.

Just to confuse matters in this complex and complicated area of contract law, in some cases a breach may give the injured party the right to terminate for repudiation and a defined right under the contract.

In these circumstances the injured party does not necessarily have to elect to use one right or the other. However where exercising the contractual right is inconsistent with acceptance of repudiation, where the consequences of terminating under the contractual right are different or the response to the breach is less than unequivocal the injured party will be taken to have “affirmed” the contract and will have to rely on the contractual right rather than repudiation. As stated previously this could have consequences in relation to the level of damages for the breach.

Contractual rights to terminate

Termination clauses in contracts give parties right to terminate in certain circumstances and usually are in relation to breaches of specified contractual obligations as well as Force Majeure events which will be investigated separately.

Termination for convenience

Termination “at will” or “for convenience” wording can be inserted into a contract allowing one party to terminate without having to establish that some event has occurred or breach has been committed by the other party.

By way of an example, where an employer reconsiders the use to which land where they cannot secure financing for the whole of the project or cannot secure anchor tenants’ the contractor finds the project will be unprofitable or too risky, or the project has been suspended for a significant period with no prospect of it being recommenced could be grounds to terminate “at will” or “for convenience”. This could in effect reduce the possibility of dispute or claim later and the termination would be in the long term interests of the parties.

Traditionally this form of provision has been less common than those permitting termination for default in some of the un-amended standard forms. Employers in New Engineering Contract (NEC) 3 and the majority of Public / Private Partnerships (Private Finance Initiative and Private Finance Initiative 2) (PFI & PFI2) do have these rights usually. However, contractors and consultants are rarely given the right to terminate for convenience.

 Precedent and Compensation with terminate “at will” clauses

In these matters the only way to fully determine if the termination was legal and lawful is by having it determined by the courts. The matter could be subject to Adjudication, however the losing party would in all likelihood not accept the finding if they were to suffer financial loss.

As Public / Private Partnerships are a concept that originated in Australia, historically the English courts have looked to the Australia system for guidance around  termination “at will” or “for convenience.” It has been established through case law that in the absence of sufficient wording, it will be a breach of contract to exercise a termination for convenience clause simply for the employer to obtain a better price to complete the works from another contractor. This would be consistent as in effect it’s a higher form of “subby bashing” if we take the view the Employer and Contractor as effective in a Sub Contract arrangement. Further it has been established that a contract may provide no express limitation on when, or in what circumstances, a termination for convenience clause can be operated.

To be effective, termination for convenience clauses need to provide for contractor compensation. Standard forms do contain these clauses and there is a precedent that where compensation is provided for in the contract in clear, unambiguous terms it will usually be enforceable.

The key phrase there is “clear wording” as this will be required before a termination for convenience clause can be fully effective. Unreasonable provisions, such as allowing the employer to pass work on to a third party, must be stated in clear, unambiguous terms otherwise they will be unenforceable.

The courts have also determined that the use of omissions clauses to tackle bad bargains cannot be used as an omissions clause to get out of what it now considers to be a bad bargain. It is further doubtful (although not tested) if this type of clause could be relied on exclusively by an employer to switch contractors in the event of dissatisfaction with the current contractor’s work.

Case law precedent warns us that even if the contract does contain an express provision dealing with termination for convenience trivial breaches may preclude termination and harsh objectives need clear wording otherwise termination will be seen as an intrusion on the contractor’s right to finish the work. It has further established that work transferred between contractors is questionable and an employer cannot use an omissions provision to get out of a bad bargain, and it is also doubtful it can be used if the employer is dissatisfied with a contractor’s performance a termination clause should provide for compensation to avoid being treated as unenforceable because it is unfair.

Suspension clauses

As stated at the outset there is a very close relationship between suspension and termination. Dependent on how the clause is drafted the end result of a suspension clause may be much the same as a termination clause in that either party will have the right to terminate the contract at the end of the agreed suspension period where the reason for suspension has not been removed

The issue is that when negotiating terms and conditions of a contract in an effect to ensure the termination clauses are consistent and adequately protect both parties, defined suspension terms tend to be overlooked.

Just as with termination clauses, suspension can take many forms and the onus is on what is agreed between the parties. It should be stated that the terms and mechanism for suspension should be well defined to ensure that this in itself does not result in a dispute.

One of the key reasons to suspend previously was for non-payment; this is now a statutory right with the changes in the Local Democracy, Economic Development and Construction Act [2009].

Broadly speaking the justification for suspension clauses will be similar to termination. Suspension could be a sensible mechanism for example to be used by one party where the scope and proposed outcome of a project has changed significantly but without the constraint to allow it to be developed. A suspension here for a mutually agreed timeframe would benefit both parties, if kept within certain boundaries. There could for example be agreement on a demobilisation and remobilisation cost during the suspension. This would be on the basis all parties have the desire to complete what was started, but just to a different scope. An example would be where historical artefacts are discovered that mean a proposed development has to have a significant re-design to allow for this. It would be far more sensible to suspend the works while the optioneering takes place that to let design to continue where it may only be subject to further re-design.

However it must be considered that conventional wisdom is that in the absence of an express contractual term it is difficult to argue that a general right to suspend exists in law as the courts have consistently refused to recognise such a right, save for the statutory provisions. This makes a defined suspension clause a sensible inclusion to benefit both parties.

When this clause is drafted however care needs to be taken to ensure that lifting the suspension is dealt with as well as the practical consequences of suspension and how long a contract can be suspended for before termination may occur

 

In conclusion as this is a complex and subjective area on contract law, where using these clauses you must proceed with caution. Where these clauses are going to be invoked you need to be absolutely clear that you strictly follow the contract’s notice and procedural requirements.

The Construction Act (The amendments)

Previous postings of Heina v Beck & Enforcement of Adjudication Decisions as a result of Brown v Complete Building Solutions have primarily revolved around two pieces of Primary Legislation, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. In effect the 2009 act has been primarily an updating of the previous legislation to clarify where over time the law has been seen to be deficient. We should therefore look at the material changes that took place.

 As these two pieces of legislation, where they apply to construction activities first define what would be a Construction Contract in accordance with the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations.

This leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider the major changes of the 2009 Act

The major changes took effect with after amendments were made to The Scheme for Construction Contracts in 2011 and apply to contracts entered into after this.

The table below explains the key changes that were made to the 1996 Act:

CHANGE POINTS TO NOTE

 

 

Contracts in writing no longer required

Section 107 of the 1996 Act will be repealed.

The payment and adjudication provisions of the 1996 Act will now apply to all construction contracts, whether written, oral or a mixture of both.

The parties will still have to have a written adjudication clause in their contract that complies with section 108 of the 1996 Act. If they do not, the Scheme will apply.

Adjudication may be used more widely but it is likely that more time will be taken up in future adjudications arguing about what the terms of the contract are.

Ability to award costs restricted

Parties will not be able to agree in advance who will pay the costs of Adjudication.

The adjudicator also cannot be given the power to award legal costs.

 

 

 

Under the new section 108A, only two types of costs agreement will be effective:

1) An agreement in writing in the construction contract which gives the adjudicator power to split liability for the adjudicator’s own fees and expenses between the parties; and

2) An agreement on costs made in writing between the parties after the notice of adjudication is served.

 

New slip rule

Under new section 108(3A), construction contracts will have to contain a provision in writing allowing the adjudicator to correct clerical or typographical errors in his decision, arising by accident or omission.

 

The Act is silent on how long an adjudicator will have to make corrections. Parties would be wise to agree a timescale in their contract.

Notably, the Adjudicator will be permitted but not compelled to make corrections and his ability to do so will be limited. He is unlikely to be able to correct factual or reasoning errors or errors of judgement.

Pay when certified clauses banned

‘Pay when certified’ clauses will be banned under new section 110(1A), except where the construction contract is an agreement for someone else to carry out construction operations and payment is conditional on that other person performing their obligations.

 

 

 

 

The exception to section 110(1A) will mean that management contracts will not be outlawed.

Equivalent project relief clauses in Public / Private Partnership contracts, which normally contain conditional payment arrangements, may have to be redrafted.

Payers may try to find other mechanisms to minimise the effect of this, such as by inserting a longer payment period into the subcontract than the period in the main contract.

‘Pay when paid’ provisions will still be ineffective under section 113, except where there is an upstream insolvency.

Due date can’t be determined by notice

Under new section 110(1D), making the due date dependent on the payer giving a payment notice will be banned.

This is not an adequate mechanism for determining when payments become due.

If there is such a clause in the contract, it will be ineffective and the Scheme will apply.

New payment notices

The payment notice provisions of the 1996 Act will be replaced.

Under new section 110A, a payment notice will have to be given not later than five days after the payment due date.

The construction contract may provide for the payer (person paying), the payee (person receiving payment) or another specified person to give this notice.

The payment notice must be issued, even where the amount due is thought to be zero.

To be valid, the notice must state the sum that the person giving the notice considers to be due (or to have been due at the payment date) and the basis on which that sum is calculated.

Where a specified person gives the notice, it may state the sum that either the specified person or the payer considers to be due.

If the payer fails to serve a valid payment notice but the payee has already submitted an application for payment, the amount set out in the application will become due. Payers should therefore be careful to serve their payment notices on time.

New payment default notices

Under section 110B, where the payer (or a specified person) is supposed to but has failed to issue a valid payment notice, the payee may serve a ‘payment default notice’.

Where a valid payment default notice is given, the final date for payment of the notified sum will be postponed by the number of days that it took the payee to issue the payment default notice after the payer failed to issue the payment notice.

The payment default notice must state the sum that the payee considers to be due and the basis on which it is calculated.

Payment default notices should be served promptly, to minimise any delay to the final date for payment and to ensure that suspension rights can be exercised if payment is not made.

A payment default notice cannot be served if the contract provides for the payee to serve the payment notice.

Withholding notices replaced by “pay less” notices

The withholding notice provisions of the 1996 Act are to be replaced.

Under new section 111, the notified sum (the amount specified in a valid payment notice or payment default notice) must be paid on or before the final date for payment, unless the payer (or a specified person) serves a valid ‘pay less notice’.

Money can still be withheld without a ‘pay less notice’, if the payee becomes insolvent after the period for issuing the notice has expired.

A “Pay Less otice” must state the payer’s intention to pay less than the notified sum. It must be served not later than the prescribed period before the final date for payment.

It must specify the sum that the payer considers to be due on the date the notice is served (even if that is zero) and the basis on which that is calculated.

A ‘pay less notice’ cannot be served before a payment notice or a payment default notice has been served.

 

Enhanced rights on suspension

Where the payee is entitled to suspend performance under section 112 of the 1996 Act, their rights will be enhanced.

The payee will:

1) be able to suspend their obligations in whole or in part;

2) be entitled to be paid the reasonable costs and expenses associated with the suspension; and

3) be entitled to an extension of time which includes time required to remobilise.

Enhanced compensation rights may encourage parties to use this remedy.

Suspension may now be seen as an even more effective way of securing payment.

 

 

 

 

 

 

In the next post we will have a look at these changes in more detail and what should be included to ensure compliance with and protection from changes from that seek to dilute the effectiveness of the changes.

 

Ansell Murray Limited Commercial Support

In the previous post we reviewed the outline of how the construction industry in the United Kingdom treats Sub Contractors and Sub-Sub Contractors. In this post we will examine how the little guy can strike back by just using the available rules, regulations and legislation together with their own Sub contracted commercial support.

Ansell Murray Limited as a boutique Consultancy is able to offer commercial advice and support at any time of the life cycle of the works as well as, as much or little support as is required. A new company may need robust systems to capture what they are doing and more mature business may be expanding on taking on works where not only the contract to be entered into is more complex and onerous but may require more compliance.

In the following sections we will set out typical functions that can be undertaken.

Pre Contract Advice / Support

As the title implies these are activities that take place prior to a contract being awarded and can even be in support of a tender and include:

  • Build up of “Actual Cost” rates for Labour, Plant and Materials
  • Preliminaries Build up and Requirements
  • Estimating
  • Review of proposed form and contract and schedule of amendments
  • Design implications (Professional Indemnity & Warranty requirements)
  • Condition Precedents and their potential Implications
  • Main Contract programme requirements and support
  • Notice Service requirements
  • Specific recurring requirements of the contract

Of course nothing is going to stop “subby bashing,” however the risk of payment problems can also be reduced by ensuring that a fair contract and contract procedures are in place.

Ideally, you should incorporate your own Terms & Conditions of business into any order which can be done by careful submission prior to commencing work, making the last document on file the contract.  If this is achieved it can only be trumped by the later signing of a formal contract, which does not have to be done before payment is to be made, such malpractice is outlawed by the Construction Acts.

Ansell Murray Limited are well placed to assist in this key pre contract activity to ensure many of the terms in the contract cannot be turned into disastrous “subby bashing” tools.

Contract period Advice / Support

During the period of construction works the works can either run smoothly with little or no real change in what has been contracted for and at the other extreme can be delayed and disrupted, subject to dispute. Ansell Murray Limited to provide commercial and project management support at both ends of the spectrum as well as the eventualities in between.

  • Application for Payment support, including dealing with all contractual reporting requirements
  • Management of Change Control, be these Variations or Compensation Events
  • Payless Notice support
  • Robust support of Variation / Compensation Event entitlements
  • Robust support against Contra Charges for additional contractor labour
  • Claim of Compensation and associated interest for Late Payment
  • Invoicing and Payroll (Employee’s and Sub Contractors)
  • Management of supply chain commercially, including ensuring back to back contract provisions and reporting to the supply chain
  • Notice service requirements
  • Insurance liability
  • Programme management, including period updates

In the event Ansell Murray Limited had been utilised during the Pre-Contract phase our primary objectives are to ensure the following are as favourable as possible to the Sub Contractor:

  • Onerous payment periods and lengthy due dates are removed and are at worst in line with legislation defaults
  • Retention, Liquidated and Ascertained Damages, Main Contractor Discount advice and support
  • Letters of intent where issued and being subject to Contract
  • Condition precedents (Extension of Time, Loss & Expense entitlements and Practical Completion)
  • Unrealistic programmes, time requirements & time essence clauses
  • Ensure “Pay when paid” or “Pay when certified” clauses are removed and are in line with current legislation
  • Termination and Suspension rights
  • Set off clauses are removed
  • Onerous adjudication clauses are removed and are in line with The Scheme for Construction Contracts.
  • Insolvency of the Employer and or Contractor advise and support

During the construction phase there is often a false belief that there is nothing that can be done about Contractors entering into contracts and then ignoring them, to the detriment of the Sub Contractor undertaking the work.

Because in large organisations people effectively learn how to mechanically undertake their day to day job, many do not understand their duties and obligations under the contract that they are effectively administrating. In effect the rules that protects a Sub Contractor from bad practices

Often the paying parties do not understand the Payment Notice requirements and that their timing and content are critical. As well as this they fail to recognise the power of payment applications becoming the sum due where the rules of assessment and certification are not followed. In effect your payment application becomes the sum due. If the paying party wants to contest this it must prove its case in later proceedings, which if made up and is not supported by contemporaneous evidence will be impossible.

Post Contract Advice / Support

Often a Sub Contractor may provide the works in accordance with the contract, yet the Contractor regularly and consistently under values your works. This is often a precursor to a robust Final Account negotiation where the Contractors seeks to maintain his margin on the project by using your monies. The larger the amount due as a Final Account settlement and the more chance the Contractor will use delay tactics to try and struck the best deal for the Contractor, often to the detriment of the Sub Contractor.

And what can you do? Your works are complete, often you will have made all the payments due to your supply chain, but you need the cash flow to fund the next project.

Contractors know this and will then use this to drive down the agreed final value.

But it does not need to be like this. Ansell Murray Limited can be engaged at Final Account stage purely to ensure that you are paid what you are owed together with any agreement on the amounts of effective free money you want to give the contractor.

This should only be necessary where the objectives are clear that the Contractor is seeking a significant reduction in the final cost he will pay. For the sake of the industry as a whole these companies should be challenged to stop their behaviour for the greater good of all Tier 2 / 3 contractors.

By engaging Ansell Murray Limited during the construction phase our clear objectives are to ensure the value that has been earned by your efforts on site are paid in that period and in effect to make the final account negotiation about the final 5% of the contract value.

Claims & Dispute Advice / Support

Sometimes contracts simply do not happen as planned and if you are the innocent party and have suffered loss the contract between the parties will allow you to be compensated for this. Ansell Murray Limited can provide assistance in setting out contractual claims generally around Loss & Expense and Extension of Time claims.

The United Kingdom construction industry offers its customers great flexibility. Many construction project are not fully designed when they commence and can progress with the design continuing in the background. This means changes in scope are inevitable and change means a revision in price being charged to the Employer and usually the programme. In this environment disputes are ordinary and common place, so too is a settlement that both parties can accept. However this is often dependent on robustness of the change and associated detail in the pricing and impact on the programme that is put forward. If this is not efficiently managed it reduces itself and the project to conflict which can affect overall quality, time and health & safety. Ansell Murray Limited can manage and handle these claim processes to ensure they do not result in a larger dispute. This is not limited to large scale industrial and commercial construction and civil engineering but can be something as small as a fit out of a local shop.

However sometimes the claim ends up as a dispute where both parties believe their stance is correct and the only method to resolve the claim will be through Alternative Dispute Resolution (ADR) as usually the legal option in the Technology and Construction Court (TCC) is prohibitively expensive.

On 1st May 1998 the construction industry took a great stride into the future with the introduction of a statutory right to have a dispute determined by Adjudication. In the subsequent 19 years this process has become entrenched as a relatively cost effective way of having a dispute determined in 28 days. It is a decision which is further binding and can only be overturned, revised or confirmed in Arbitration (if the contract contains an Arbitration clause) or in litigation. Please see previous posts in relation to the mechanism of Adjudication at this link: https://ansellmurray.wordpress.com/tag/adjudication/

Ansell Murray Limited offers support in Adjudication whether you are the party commencing Adjudication [The Referring Party) or to assist in defending where you have been referred to Adjudication (The Responding Party).

Can a party commence its own Adjudication without using a company such as Ansell Murray Limited? The short answer is “Yes” and the slightly longer answer is “It’s not advisable.”

An Adjudication is an argument giving each party a reasonable opportunity of putting his case forward and rebutting the case put by the other party to the contract, with the watchword being fairness.

Why is “It’s not advisable?”

The Adjudicator does not make a case for either party or find the evidence to undermine a party’s case. The role is purely to make a Determination based on facts, evidence, rights and duties in the contract and at law. If an adjudicator investigates at all, it will be to clarify points of fact or law in the party’s case. Therefore it is vital that in preparation of a Referral Notice as the party commencing an Adjudication or in the Response where contesting that the facts are laid out clearly and concisely for the Adjudicator, even where appropriate using legal precedent as a justification of an argument. In reality where there are no legal complexities to be considered the Adjudicator will have little time to do much more than simply make his Determination based on the written arguments of each side.

Of course this entire process is not one-sided and only requires a specialist consultancy such as Ansell Murray Limited. As the real strength (or weakness) of a case for a simple claim or even Adjudication is based on the golden rule or “Records, Records, Records.” These records are your evidence to prove your claim or to disprove a claim made against you. For a claim to be successful it demands good evidence.

Systematic keeping of all site correspondence, instructions, meeting minutes, record photographs (which with modern technology are date stamped), correspondence in writing and electronic mails, site diaries and site resource record sheets. This is also easily verified by the use of technology such as biometric scanners. These are the types of records that help back up a successful claim.

As stated at the start of this post, as a boutique consultancy, Ansell Murray Limited can be your Estimator, Surveyor, Programme Manager, Project Manager, Commercial Manager or Commercial Director. The name on the badge may be slightly different to your organisations name, but we are there to integrate as much or as little into your organisation as you want.

Go to www.ansellmurray.com to view our website and make contact.

The Payment Mechanism

In an earlier post we examined Late Payment and the remedies that are available when a Payment is made after the Final Date upon which it was due to be paid.

In some contracts this is straight forward as it can be clearly stated, such as 14 days from the date of invoice etc.

Construction Contracts and indeed any contract that made regular payments based on progress made or value earned and applied for through an Interim Application for Payment (AfP) can be more complex as they need to be in accordance with a number of documents in ensuring the Payment Mechanism is in accordance with current legislation, regulation and statutory instrument. Further where a standard form of contract is used, the terms and conditions in this contract need to be considered, to ensure they are not in conflict with the Acts and Statutory Instruments.

You can at times end up having tyo ensure that you are in accordance with the requirements of 5 separate Documents. These being:

  • The Housing Grants, Construction and Regeneration Act [1996]
  • Local Democracy, Economic Development and Construction Act [2009]
  • The Scheme for Construction Contracts (England and Wales) [1998]
  • The Scheme for Construction Contracts (Amendment) (England) [2011]
  • The contract that is going to be used e.g. Joint Contract Tribunal (JCT), New Engineering Contract (NEC)

In Scotland both The Housing Grants, Construction and Regeneration Act [1996] and Local Democracy, Economic Development and Construction Act [2009] applied. However Scotland had their own Statutory Instrument, The Scheme for Construction Contracts (Scotland) [1998]. Initially the proposed amendments  were laid before the Scottish Parliament for approval. However the amendments subsequently become law through the 2011 amendments coming into force as a United Kingdom Statutory Instrument. The draft regulation in relation to Scotland can be viewed at this link,  http://www.legislation.gov.uk/sdsi/2011/9780111014431/pdfs/sdsi_9780111014431_en.pdf

As can therefore be seen ensuring a Payment Mechanism is legal and workable can be something of a minefield, particularly when the contracts begins to run late invoking Liquidated & Ascertained Damages (LAD’s) or Extension of Time (EoT).

Next time we will examine the Payment Certificate and Payless Notice.