Tag: The Scheme

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.

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.

The Scheme for Construction Contracts

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.

We must first remember that this legislation refers to “construction activities” as defined in 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”.

Which 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 Scheme for Construction Contracts. Firstly we must remember that there are a different set of regulations in place in England & Wales to those in place in Scotland. In this post we will consider the regulations as they apply in England & Wales.

The Scheme for Construction Contracts

The Scheme for Construction Contracts (England and Wales) Regulations to give them their full title apply when construction contracts do not comply with the primary legislation and either supplements the provisions of the contract where it has deficiencies relative to the requirements of the Act or replaces the contract where it is non-compliant. The purpose is to allow the contract capable of being performed (reducing the likelihood of frustration) whilst allowing regulatory control over its provisions.

The Housing Grants, Construction and Regeneration Act applies  to all contracts for “construction operations” and sets out the requirements relating to Adjudication and payment, including:

  • The right to commence Adjudication
  • To be paid in interim, periodic or stage payments.
  • To be informed of the amount due, or any amounts to be withheld.
  • To suspend performance for non-payment.
  • Disallowing pay when paid clauses.

Part 1 of the Scheme makes provision for Adjudication where the contract does not comply with the requirement and Part 2 replaces those provisions in relation to payment that do not comply.

The 2011 amendments to The Housing Grants, Construction and Regeneration Act

The Housing Grants, Construction and Regeneration Act 1996 was amended in October 2011 by the Local Democracy, Economic Development and Construction Act 2009 to close loop holes within the original legislation and as a result The Scheme for Construction Contracts was also amended to reflect the amendments. These amendments and their implication have been outlined in previous posts but can be broadly summarised as follows:

  • The act now applies to all construction contracts, even those not evidenced in writing
  • Adjudication clauses must still be in writing
  • Who will bear the cost of Adjudication can no longer be defined in the contract
  • The Adjudicator has the right to correct errors in contracts within 5 days of delivering a Determination
  • Payment dates must be set out in the contract.
  • A Payment Notice must be issued five days of the date for payment, even if no amount is due, although alternatively, if the contract allows, the Contractor may make an application for payment, which is treated as if it is the Payment Notice
  • A Pay Less Notice (previously a Withholding Notice) must be issued where it is intended to pay less than the amount set out in the Payment Notice, including the basis of calculation of the amount being paid less
  • The notified sum is payable by the final date for payment
  • Where a Payment Notice is not issued, the Contractor (or Sub-Contractor) may issue a Default Payment Notice
  • Pay when certified clauses are no longer allowed and retention release cannot be prevented by conditions within another contract.
  • The provisions around the right to suspend for non-payment have been expanded to allow costs to be claimed as well as the right to an Extension of time as consequences of any statutory suspension

These amendments apply to construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

In the next post we will look at Part 1 (Adjudication) of The Scheme for Construction Contracts and the legal requirements and in the post after that Part 2 (Payment).

Implied Terms in Contracts

With the United Kingdom having shaken up the selling of goods and services with the passing on the Consumer Rights Act [2015], it will be interesting to look at a case that was appealed to the Court of Appeal and see if anything different would or could happen under the new legislation.

The case of Lowe and Another v W Machell Joinery Ltd [2011] EWCA Civ 794 shook up the law with regard to terms implied into contracts.

Backgrounds

Mr and Mrs Lowe converted a barn for residential use and placed a number of orders with W Machell Joinery Limited. Crucially this was done during a conversation with no formal written quotation. The element of this order that led to this case was a bespoke, elaborately designed wooden staircase costing £16,000 (Exclusive of Value Added Tax).

The Lowe’s paid for the staircase on 4th June 2009 and it was delivered to their property on 5th June 2009. However on 12th June 2009 the Lowe’s rejected the staircase by letter and had another staircase supplied by another company. It was claimed by the Lowe’s that they were entitled to reject the staircase because the verbal contract with W Machell Joinery Limited included the installation of the staircase and it should have been installed.

Mr and Mrs Lowe issued proceedings to recover the price of the staircase in July 2009.

Technology and Construction Court (TCC) decision

The trail was heard in July 2010 and by this time the Lowe’s relied on further reasons justifying their rejection of the staircase which included that had the staircase been installed, it would not have complied their Building Regulations.

At the TCC hearing in Leeds, Yorkshire the judge held that the original reasons for rejecting the goods were unjustified.  However, he further held that W Machell Joinery Limited were in breach of contract as the staircase did not comply with Building Regulations. However this breach was not sufficient justification for the Lowe’s to reject the staircase as he reasoned it would have been easy to modify the staircase in a number of ways to ensure compliance with Building Regulations.

The judge therefore dismissed the claim and you would expect this to be the end of the matter.

Court of Appeal

Mr and Mrs Lowe appealed against the decision to the Court of Appeal.

Here they raised an argument on appeal that was not fully relied upon in the original trial. This being that Section 14 of The Sale of Goods Act [1979] implied terms into the contract between the parties which W Machell Joinery Limited subsequently breached entitling the Lowes to reject the staircase.

Section 14(2) of the Act provided that where goods are sold by a seller in the course of a business transaction there is an implied term that the goods are of satisfactory quality.

Section 14(3) provided that when goods are sold by a seller in the course of a business transaction where the buyer makes the seller aware that the goods have a particular purpose, a term is implied that the goods are fit for the purpose for which they have been supplied.

Therefore the Lowe’s also argued the term should be implied into the contract between the parties that the staircase would comply with the relevant Building Regulations and British Standards.

Court of Appeal Decision

The Court of Appeal found that there was a breach of contract and overturned the decision handed down in the TCC where he found this breach entitled the Lowes to reject the staircase.

The Judge found that the breach of the contract was of the implied terms that the staircase had to be of satisfactory quality and, because J Machell Joinery Limited was aware that the barn was to be converted to residential use, it needed to be fit for purpose as required by the Act.

The Court found “fit for purpose” included compliance with Building Regulations and therefore there was an implied term that the staircase would comply with the relevant Building Regulations and British Standards, albeit under cover of “fit for purpose”.

While the only way to see if this would hold true under the Consumer Rights Act [2015] as the legislation still requires these tests, it is highly likely a similar case would result in the same outcome.

Is this fair?

W Machell Joinery Limited contracted with the Lowes to supply a staircase that did not comply with Building Regulations. Further W Machell Joinery was not responsible for obtaining Building Regulation approval for the staircase.  Yet to show how obtuse the law can be, if W Machell Joinery Limited changed the specification of the staircase to be compliant with Building Regulations, this would not be compliant with the design requested by the Lowes. Therefore either way, J Machell Joinery Limited would be in breach of contract.

The solution to this anomaly from the Court of Appeal to avoid this situation was that W Machell Joinery Limited should have made the Lowe’s aware the staircase was not compliant with Building Regulations before it had been manufactured.  The Lowe’s would have had the choice to continue with the design and risk the staircase not complying with Building Regulations, or to alter the design to make it compliant.

Implied terms generally

From a construction industry perspective both The Housing Grants, Construction and Regeneration Act [1996] as amended by The Local Democracy, Economic Development and Construction Act [2009] and The Supply of Goods and Services Act [1982] as superseded by the Consumer Rights Act [2015] imply terms into construction contracts.

Housing Grants, Construction and Regeneration Act 1996

This Act implied terms which included:

  • Entitlement to stage payments
  • Limit to right to withhold payment
  • The right to refer disputes to adjudication
  • Mechanism for payment, including payment date and notice of amount
  • Prohibiting conditional payment provisions
  • Right to suspend for non-performance

If the above provisions were not included in a construction contract, the Scheme for Construction Contracts applies, in effect being the implied terms.

 Supply of Goods and Services Act 1982 
This Act implied terms that:

  • Service will be carried out with reasonable care and skill
  • Supplier will carry out the service within a reasonable time
  • Supplier will be paid a reasonable charge

These are still required under the Consumer Rights Act [2015].

Further the courts are empowered to also imply terms into contracts, and these fall into two categories:

  1. Where a contract has been entered into between the parties, to make the contract work successfully a term needs to be implied into the contract.  For example, the language may be ambiguous and require clarifying; and
  2. In construction contracts there are certain usual terms that are implied unless the parties wish to exclude or change these implied terms.  An examples of these implied terms for would be that the parties will co-operate with each other, and that the parties will not prevent completion from taking place.

Can you prevent the Lowe v W Machell Joinery Limited happening?

The primary issue that allowed the dispute to reach the conclusion it did was that no written contract or terms of agreement existed between the parties, setting out the contract terms and what was to be delivered.

Where there is supply or manufacture and supply of high value items you should always draft a contract which details the obligations and liabilities of each party.

This will enable both parties to understanding their duties and obligations and hopefully avoid disputes arising in the future.

Further this will prevent terms being implied into contracts which were not the parties’ intentions at the time the contract was made. In reality the material fact there was no written document allowed the Lowe’s to have the court rule in their favour on matters that were unforeseen at the time of agreement to supply the staircase.

Ansell Murray Limited has experience of drafting bespoke contracts as well as ensuring standard forms are correctly assembled.

The Construction Act (The amendments) Part II

In the previous post we reviewed the changes in the Construction Act as many companies still do not abide by them in their entirety. In this post we will consider these key changes in more detail.

 Contracts in writing

The most significant and far reaching effect of the 2009 Act is the removal of the requirement for construction contracts to be in writing and the Act applies to all contracts, be they wholly in writing, partly in writing and partly oral or wholly oral. This  will particularly affect Adjudication, although for Adjudicators Costs and the “slip rule” will need to be in writing to be relied on, if they are not then the Scheme will apply.

This makes it even more important that agreements (even where part standard conditions and part negotiated (oral) amendments are fully recorded in writing, even as a contract appendix. For the protection of both parties an “Entire Agreement Clause” where it is clear that the written document constitutes the whole agreement, should be included. This clause will not prevent disagreements,  but will significantly improve the position of a party arguing against an oral agreement.

Payment Issues

The amendment at Part 8 of the 2009 Act affect all Construction Contracts in England, Wales & Scotland when they came into force on 1 October 2011 in England & Wales and 1 November 2011 in Scotland. The primary aims of the amendments were to:

  • To make Adjudication more accessible to resolve disputes
  • To introduce clarity and certainty in relation to payment
  • To introduce a fair payment mechanism
  • To improve the right of Contractors to suspend their works for non-payment

The fundamental changes to the payment mechanism are:

  • Conditional Payment clauses are abolished
  • Changes to the Payment Notice regime, including a requirement for the Payee to pay the notified sum
  • Introducing new rules on Payless Notices
  • New rights for Contractors who suspend their services for non-payment
  • Allowing clauses to be included in Construction Contracts allowing the Employer to Withhold Payment without notice in the event of a contractors insolvency

We will now examine these fundamental changes and look at what the 1996 Act required and how this has been amended.

The Payment Notice

Previous position

In the 1996 Act an “adequate mechanism” for determining the sum due for payment and its payment date (known as the “Due Date”) was required. Further the payee had to give notice, not later than 5 days after the due date, detailing:

  • The amount of the payment made or proposed to be made
  • The basis on calculation of the amount

There was no effective sanction for failure to comply with the notice requirement and the Act was ambiguous if no payment notice was issued as there was no certainty to what sum was due under the contract.

2009 Act

 Construction contracts require a payment notice to be given for every payment provided for by the contract, not later than five days after the payment due date. The 2009 Act further defines the due date as “the date provided for by the contract as the date on which the payment is due”.

The contract must provide for the payment notice to be given by the payer, a “specified person” specified in or determined in accordance with the contract or by the payee itself. The notice must specify:

  • The sum considered to be due or to have been due at the payment due date in respect of the payment; and
  • The basis on which that sum is calculated.

Even if the sum considered due is zero, a payment notice must still be given in the required form.

Whilst not a sea change from the previous position they key changes that need to be considered are:

  • The payment notice no longer need to be issued by the Employer and  can be issued by specified persons such as the architect or engineer, or the payee may be required to issue the notice
  • The notice must simply state the sum which is “considered” due and the basis of calculation. This prevents duplication and takes into account any set off, abatement or any other deductions which may be withheld; and
  • A sanction has been introduced where there is a failure to issue a payment notice and a significant greater risk faced by parties that fail to issue payment notices. This risk is that the payee may now issue a notice in default stating the amount considered to be due and the basis for calculation.

If the deadline has passed and a payment notice has not been given, the payee may give the payer a payment notice – known as a ‘payee’s notice in default’ – at any time, stating the amount it considers due and the basis for calculation. If the contract provides for an application for payment and the application is made, that will automatically be regarded as a payee’s notice in default.

If a payee’s notice in default is issued, the final date for payment will be postponed by the length of time between when the payer or specified person should have given the payment notice and the date the payee gave its notice in default.

These changes are important because there is a positive obligation to pay the notified sum, which may be the value of an application under the contract

 Requirement to pay notified sum or less

 Previous position

A party to a construction contract could not withhold payment after the final date for payment of a sum due unless it has given an effective notice of intention to withhold payment (the “’withholding notice”).

To be effective the withholding notice needed to specify:

  • the amount to be withheld and the ground for withholding payment; or
  • Where there is more than one ground, each ground and the amount attributable to it.

The withholding notice had to given not later than the ‘prescribed period’ before the final date for payment, as agreed by the parties. Where a date had need been agreed then the default would be the requirement of The Scheme for Construction Contracts, making the period seven days.

Crucially a payment notice could act as a withholding notice, as long as it meets the requirements detailed above.

2009 Act

 The amendment in the 2009 Act creates a positive obligation on the payer to pay the ‘notified sum’, to the extent not already paid, on or before the final date for payment.

The previous regime of withholding notices has been abolished and the “notified sum” is now a key concept. This sum is the sum stated in the payment notice, which can be issued by the paying party, the specified third party or the payee. This notice can also be the notice in default and in almost all cases this will be the application for payment. If no payment notice is issued, there is a positive requirement to pay the sums set out in the application if the contract allows or requires the making of an application.

This change allows the paying party (or a specified person) to issue a notice of intention to pay less, known as the “Payless Notice” before the final date for payment or where specified in the contract the final date to issue a “Payless Notice. The “Payless Notice” must specify:

  • The sum that the person giving the notice considers to be due on the date the notice is served; and
  • The basis on how the sum is calculated.

However as with the “withholding notice” it must be given not later than the prescribed period before the final date for payment.

Another further change is in insolvency situations where the notified sum need not be made if:

  • The contract allows withholding of sums due in cases of insolvency: and
  • The insolvency occurs after the expiry of the time for giving the counter notice.

However this is not a statutory right and the contract must contain an appropriate clause to benefit from this provision.

 Suspension for non-payment

 Previous position

 Previously a party who is entitled to payment the right to suspend performance of its obligations under the contract if:

  • The sum due is not paid in full by the final date for payment; and
  • No effective notice to withhold payment has been given.

The party wishing to use this right has to give the other party at least seven days’ notice of its intention to suspend stating the ground or grounds for suspension. The right to suspend comes to an end when the other party pays the amount due in full. However there was no entitlement in the Act itself to recover your loss and expense where you suspended for non-payment. To have this right the contract needed to be amended to give effect to this entitlement.

Crucially any period of suspension under this right was disregarded when calculating the amount of time taken to complete the contract for the purposes of delay damages, so in effect could have the double whammy effect of putting you in breach of your obligation to complete by a particular dat or suffer Liquidated and Ascertained Damages.

2009 Act

 The right of suspension now arises where there is a requirement to pay the notified sum and that requirement has not been complied with.

The party wishing to suspend will now be able to suspend performance of any or all of its contractual obligations. This new entitlement to partial suspension of contractual obligations means that suspension is not limited to the actual construction obligations, but could go beyond and suspend the right to insure the works or suspension of works on only crucial areas or with certain sub-contractors, thereby negating programme delays if possible.

Where the right to suspend is exercised, the other party will be liable to pay a reasonable amount in respect of the costs and expenses reasonably incurred by the suspending party as a result of exercising this right and this is a Statutory Right enshrined in the Act.

Further, crucially the time period during which performance is suspended in pursuance of or in consequence of exercising the right of statutory suspension is disregarded when computing the time to complete work is any period.

 Conditional payment clauses

Previous position

 Under the 1996 Act provisions which make payment conditional upon receipt of payment from a third party (‘pay when paid’ clauses) are not prohibited and allowed payment to be conditional on other events, such as ‘pay when certified’ clauses, where payment is conditional on a certificate being issued under another contract.

This had the implication of effectively causing a Sub Contractor to become exposed where a dispute (that he was not party to) existed between the Employer and Contractor.

2009 Act

 Conditional Payment clauses are now invalid where they are conditional upon:

  • Performance of obligations under another contract; or
  • A decision by any person as to whether obligations under another contract have been performed.

This is to prevent a party up the line from relying on circumstances relating to its own contract to delay payment under a separate contract. By way of an example; if the Employer has not complied with its certification obligations to the Contractor, this cannot be used by the Contractor to deny payment to a Sub Contractor.

 There is however an exceptions in relation to management contracting or equivalent project relief arrangements, where the Contractor simply acts as a conduit. An example would be Public / Private Partnerships where a Special Purpose Vehicle (SPV) company is created with the sole purpose of procuring the project. This SPV has no assets and is not intended to have any liability unless it is first paid.

Due to concerns that the 2009 amendments would outlaw equivalent project relief provisions in subcontracts in Public / Private Partnerships, orders have been made which protect certain of these arrangements in respect of contracts entered into after the act came into force.

The Orders means that provisions in Tier 1 first tier PFI Public / Private Partnerships Sub Contracts which make payments in such contracts conditional upon obligations being performed in other contracts (such as providing certificates and ‘pay when paid’ clauses) will be effective.

Although in reality this is a loophole that will have to re-visited in the future. We will also examine Public / Private Partnerships in greater detail at a later stage.

 

At a practical level in day to day operation of contracts the fundamental changes are:

  • Notices are crucial, bearing in mind that if there is no payment notice the other party can serve a notice of default or rely on its own application for payment;
  • The paying party will then have to pay whatever has been notified unless a valid notice of the intention to pay less has been served; and
  • Payment clauses have had to be redrafted to reflect the changes

Sadly in far too many cases the changes that have been effected have not been communicated effectively in large organisations and while the necessary clauses have been changed to make compliant contracts, for fear of strike down clauses, on a day to day basis many do not provide the necessary documentation.

Yet even more concerning is despite this, many still do not enforce their rights.

Enforcement of Adjudication decisions

Adjudication, as a form of Alternative Dispute Resolution (ADR) is a faster form of resolving a dispute between parties to a contract. However there is a golden rule when Adjudicating on the same dispute.

The current position is quite straightforward.

If a dispute referred to Adjudicator is the same or substantially the same as a previous Adjudication, an Adjudicator cannot decide on this second dispute. He will not have jurisdiction.

In a recent Court of Appeal case this was put to the test.

In Brown v Complete Buildings Solutions Ltd [2016],  the judge was required to rule on whether an Adjudicator had jurisdiction to decide on a dispute referred to him. As the matter of the dispute had been argued in a previous Adjudication, it was argued that the Adjudicator did not have jurisdiction.

Timeline of events

A Joint Contract Tribunal (JCT) Minor Works Building Contract (2011) was entered into between the parties to demolish a residential house in Ashtead, Surrey and build a new house. The Contract Sum was £496,578.

The Architect certified Practical Completion on 9th April 2013 and then issued a Certificate of Making Good Defects on 25th October 2013. On 31st October the Architect issued a Final Certificate for the sum of £115,450.50. This sum remained unpaid and on 20th December 2013 the Contractor sent a letter to the Employer stating this Final Payment of £115,450.50 was due.

The sum remained unpaid and a Notice of Adjudication (the First Adjudication Notice) was issued on 7th February 2014 in accordance with Clause 7.2 of the Contract.

Mr. C Calcroft was named as the Adjudicator by the Adjudication Nominating Body (ANB). In this Adjudication is was accepted that the Architect’s Final Certificate was in breach of contract as it was not issued in accordance with Clause 4.8.1 of the Contract, but rather relied on clause 4.8.4 which provided:

If the final certificate is not issued in accordance with clause 4.8.1,

4.8.4.1  the Contractor may give a payment notice to the Employer with a copy to the Architect/Contract Administrator stating what the Contractor considers to be the amount of the final payment due to him under this Contract and the basis on which the sum has been calculated and, subject to any notice under clause 4.8.4.3, the final payment shall be the final amount.

 4.8.1.3 If the Employer intends to pay less than the sum specified in the Contractor’s payment notice, he shall not later than 5 days before the final date for payment give the Contractor notice of that intention in accordance with 4.8.3 and the payment to be made on or before the final date for payment shall not be less than the amount stated as due in the Employer’s notice.

Further Clause 4.8.5 of the Contract established that where the Employer did not give a counter notice under clause 4.8.4.3 it was obliged to pay the Contractor the sum stated as due in the Contractor’s notice.

The Adjudicator, Mr. Calcroft issued his Decision on 1st April 2014 where he concluded that the Final Certificate (CBSL) issued on 30th October was ineffective and further found that CBSL’s letter of 20th December 2013 was not a valid Payment Notice in accordance with Clause 4.8.4.1 of the Contract on the following two grounds:

  1. It was based on the ‘Final Certificate’ being issued late, whereas it was in fact invalid
  2. The terms of the 20 December 2013 letter did not comply with clause 4.8.4.1 in view of the way it was expressed as it did not make clear that it was:
  • a notice
  • Issued pursuant to clause 4.8.4.1

The Adjudicator ruled that since no Payment Notice had been served, no sum was payable.

On the same day as Mr. Calcroft issued his Decision, 1st April 2014, CBSL sent a letter which was detailed as a “‘notice pursuant to Clause 4.8.4.1 of the Contract.” This was followed on 24 April 2014 with a further Notice of Adjudication (the Second Adjudication Notice).

The ANB appointed Mr. C Hough as Adjudicator on 29th April 2014. Brown disputed Mr. Hough’s jurisdiction on the basis that he was being asked to decide the same, or substantially the same, dispute as had been decided by Mr. Calcroft in the First Adjudication. They therefore declined to participate in the Adjudication and further did not serve a notice under Clause 4.8.4.3 of the Contract. In layman terms the Employer did not issue a Payless Notice.

Mr. Hough issued his Decision on 27th May 2014.

He ruled that the dispute he was being required to determine was not the same or substantially the same as the Adjudication determined by Mr. Calcroft. He further found that Mr. Calcroft had determined that no certificate had been issued in accordance with Clause 4.8.1 (Final Certificate) and this decision was binding on both the parties and him. However, he determined that the 1st April 2014 notice was an effective notice under Clause 4.8.4.1 (Payment Notice from the Contractor to the Employer) and Brown’s refusal to pay had created this dispute, which was not the same or substantially the same as the one previously dispute.

As Brown had not issued CBSL with a Payless Notice, the sum fell due for payment. Brown was required to pay:

  • £115,440.46 to CBSL within 7 days
  • Interest of £817.70 up to the payment date, increasing at a rate of £17.90 per day until paid
  • The Adjudicator’s fees of £1,944.

Brown did not pay and on 11th June 2014 CBSL initiated proceedings in the Technology and Construction Court (TCC) Manchester District Registry. They were granted permission to issue an application for Summary Judgment. Brown applied for an adjournment and an application to transfer the proceedings from Manchester to London. They did not however pay the required fee for the request to transfer.

Judge Raynor QC refused the application to Adjourn and ruled in CBSL’s favour on 10th July 2014. He found that the sum of £118,500 was due, with costs summarily assessed at £6,000. However he stayed execution of the judgment until 8th August 2014. Brown had to make application to set aside by 8th August 2014.

Brown applied on 31st July 2014 for the order to be set aside and have the hearing transferred to London. Judge Raynor QC dismissed the application in a fully reasoned judgment and Brown was further ordered to pay costs, summarily assessed at £5,750.

It is from this judgment Brown made an appeal to the Court of Appeal.

The issue and the argument

A number of case law precedents were cited by both parties. The applicable principles are summarised as follows:

  1. The parties are bound by the decision of an Adjudicator on a dispute or difference until it is finally determined by court or arbitration proceedings or by an agreement made subsequently by the parties.
  2. The parties cannot seek a further decision by an adjudicator on a dispute or difference if that dispute or difference has already been the subject of a decision by an adjudicator.
  3. The extent to which a decision or a dispute is binding will depend on an analysis of the terms, scope and extent of the dispute or difference referred to adjudication and the terms, scope and extent of the decision made by the adjudicator. In order to do this the approach has to be to ask whether the dispute or difference is the same or substantially the same as the relevant dispute or difference and whether the adjudicator has decided a dispute or difference which is the same or fundamentally the same as the relevant dispute or difference.
  4. The approach must involve not only the same but also substantially the same dispute or difference. This is because disputes or differences encompass a wide range of factual and legal issues. If there had to be complete identity of factual and legal issues then the ability to re-adjudicate what was in substance the same dispute or difference would deprive clause 9.2 of The Scheme for Construction Contracts (England and Wales) Regulations 1998 (The Scheme) of its intended purpose.
  5. Whether one dispute is substantially the same as another dispute is a question of fact and degree.

The reference above to “fact and degree” are interpreted from further case law precedent from a 2006 Court of Appeal case, Quietfield Limited v. Vascroft Construction Limited [2006] EWCA Civ 1737 where the matter of an Extension of Time (EoT) was referred to Adjudication and Determined. The matter was subsequently referred to Adjudication again, however the Adjudicator determined he did not have jurisdiction as this was the same dispute. At the Court of Appeal it was found:

  1. Clause 9.2 of The Scheme provides that an Adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to Adjudication with a decision reached. It must that the parties may not refer a dispute to Adjudication in these circumstances.
  2. This mechanism being adopted to protect respondents from having to face the expense and trouble of successive Adjudications on the same or substantially the same dispute. There is an imperfect analogy here with the rules developed by the common law to prevent successive litigation over the same matter
  3. If the first Adjudication is substantially the same as the second Adjudication is a question of fact and degree. If the contractor identifies the same Relevant Event in successive applications for EoT, but gives different particulars to its expected effects, the differences may or may not be sufficient to lead to the conclusion that the two disputes are not substantially the same. Particularly if the particulars of expected effects are the same, but the evidence by which the contractor seeks to prove them is different.
  4. Where the only difference between disputes arising from the rejection of two successive applications for an extension of time is that the later application makes good shortcomings of the earlier application, an Adjudicator will usually have little difficulty in deciding that the two disputes are substantially the same.

The central claim made by Brown was that Mr. Hough was being asked to determine the same or substantially the same dispute as Mr. Calcroft had been asked to determine. This was further reinforced as it was for the same sum of money, with the only material difference being no valid Final Certificate in the first Adjudication

Decision

  1. A further case was quoted, this being Matthew Harding (trading as M J Harding Contractors) v. Paice and Springhall [2015] EWCA Civ 1281 where it was stated in the text of the Judgment:

It is quite clear from the authorities that one does not look at the dispute or dispute referred to the first adjudicator in isolation. One must look at what the first adjudicator actually decided. Ultimately it is what the first adjudicator decided which determines how much or how little remains for consideration by the second adjudicator.

It was found in a unanimous decision that in the second Adjudication, the Adjudicator was both entitled and correct to conclude that he was not considering the same or substantially the same dispute as the first Adjudication. Mr. Hough had recognised that both parties were bound by the Decision in the First Adjudication that the Final Certificate was ineffective and that the letter of 20th December 2013 was not a valid notice under the Contract. Mr. Hough was being asked to determine if a different notice served 4 months later had different consequences.

While both Adjudications relied on the ineffectiveness of the ‘Final Certificate’ and claimed the same sum, the Relevant Event was CBSL’s notice of 1st April 2013. Neither this notice nor the consequence of it (CBSL’s entitlement to be paid if no Payless Notice was issued served) gave rise to dispute referred in the first Adjudication. Crucially CBSL were not making good a shortcoming in the earlier letter by bring a new claim via a new and different route as it relied on a letter issued after the Decision of the first Adjudication and therefore raised a different dispute. This had been dealt with by Judge Raynor QC in his judgment, “what was decided in the First Adjudication was the ineffectiveness of the notice given in December 2013. That was not raised at all as an issue in the Second Adjudication.”

The appeal was therefore dismissed.

 

What is the lesson here?

It the same lesson as in Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), follow the contract and stick to its strict timetables particularly around the Payment Mechanism

In this case Brown could have protected themselves by issuing a Payless Notice, but did not. There would still have been a dispute, that is clear, but as the second Adjudication was found to be a different dispute, so too would a second Adjudication where a valid Payless Notice was in place.