Regulatory changes have not been as disruptive as the construction industry first feared
Q What has been the main impact of the 2011 amendments to the Housing Grants, Construction and Regeneration Act 1996?
Robert Horne, partner, Trowers & Hamlins: At operational, practical and site levels the changes have been minimal. The key changes were all about payment and trying to tighten up the notification regime on explaining what was going to be paid and why. Much of this was in reaction to attempts to avoid the requirements of the original act. While there have been some interesting changes to adjudication provisions, most problems had already found a practical solution.
This amendment has been in discussion for a long time and has slowly become less of an amendment and more of a tinkering around the edges. This may be because the original system is seen to work, but it is more likely that the often diametrically opposed requirements of a diverse industry make the introduction of legislation by consensus difficult – and while what you have works, after a fashion and better than what you had before, why rock the boat?
Jane Jenkins, partner, Freshfields Bruckhaus Deringer: The amendments have largely improved life for contractors by ruling out pay-when-certified provisions, permitting the partial suspension of obligations for non-payment that limit risk of a repudiatory breach for wholesale suspension and allowing a payee to serve a payment notice so as to trigger the payment due date.
Second tier PFI contracts are now exempt from the act as well as top tier ones, so the consortium-to-construction contractor arrangements can continue to include pay-when-paid or pay-when-certified provisions to facilitate flowdown arrangements.
Steven Williams, partner, Nabarro:
From a dispute resolution perspective there has been very little impact following the amendments. Certainly, compared with the raft of litigation brought about by the 1998 introduction of the original act, the impact has been negligible.
The general feeling is there is a possibility of disputes arising in future in respect of payment provisions, largely due to contractors’ lack of understanding of the new mechanism. However, we would have expected to see some smaller disputes of this nature by now if this were the case. It may be that a lack of knowledge about the payment provisions is stopping parties bringing disputes against those not complying with the new act.
From a commercial perspective, no real changes have followed aside from the front-end tasks of updating precedent documents and bringing ongoing projects into line with the 2011 amendments. Clients and consultants are still using the old terminology in a way that makes you wonder whether they have really taken on board the updates.
John Morris, partner, Clyde & Co: There have been two main impacts. First, there are now sanctions for paying parties who fail to comply with notice provisions and this seems to be affecting behaviour.
Second, the act applies not only to written contracts, but also to those that are partly or wholly oral.
There has yet to be a judicial decision about an oral contract referred to adjudication. Given that such a dispute could only be decided on oral evidence, parties may feel it is better for this to be dealt with by the court in the first instance.
Q Has adjudication in construction disputes become more popular?
Horne: The process of adjudication for construction contracts has had a roller coaster ride. Initially, it was extremely popular as an outlet for the frustrations of an industry that had always been locked into formal dispute resolution over what could often be fairly small sums.
However, the use of adjudication came at the price of a reduction in dialogue between parties, leading to a spiral of disputes suitable for adjudication. The downturn has reduced the number of adjudications I have seen, as parties have wanted to be more engaged and gone back to old-fashioned, but often effective, strategies – such as speaking to each other.
Adjudication, in pure volume, will always be popular because it can resolve a problem reasonably quickly and cheaply. There continues to be more interest in innovation around dispute resolution, whether in the form of mediation once problems have arisen, or in proactive risk management, which is a core part of progressive contracts.
Jenkins: Commentators expected the inclusion of oral contracts in the act to increase adjudications, but the number has been in decline. Conversely, there has been an increase in high-value disputes including terminations of contracts with associated calls on bonds and guarantees.
On international projects there is little enthusiasm for standing dispute review boards due to cost. Parties are looking to escalate disputes through tiers of management and possibly then a referral to ad hoc adjudication, with CEDR appointments on the up, but the preference for final tier remains overwhelmingly international arbitration.
Williams: We have seen no real increase in adjudication disputes. For many clients it is simply not an appropriate forum. It may be technical in nature and require witnesses of fact as well as experts. To run this procedure over 28 days comes at huge cost, potentially to both parties, and this is unlikely to be recovered further down the line when litigation almost inevitably ensues.
The main uptake with adjudication is still with contractors seeking to release cashflow on a short-term basis. Parties occasionally bring adjudication proceedings tactically, to obtain access to documents.
Morris: The amount of adjudications has reached a plateau. In the early days there were claims of every conceivable construction character. These days, the class of claim adjudicated is more restricted.
Given that costs cannot be claimed in adjudication, the more complex and intricate the claim, the more likely it is that claimants will head straight to court.
Recent court decisions confirm that legal professional privilege only applies to work done by lawyers. If a claimant needs to ensure privilege by engaging solicitors, there is an advantage in bringing the claim in court so costs can be claimed from the other side.
Q What other trends are you seeing in the construction sector? Is there any sign of a pick-up in activity following the financial crisis?
Horne: The return of the market has been slow. Public spending is still squeezedand housing, transport, social infrastructure and power all need significant investment, but they are on tickover.
The re-release of the PFI model may be a missed opportunity to bring vigour back to the market more quickly as it lacks the buy-in and enthusiasm from the private sector that can be seen in numerous international locations, Australia and Canada being good examples.
That said, there are signs of recovery in the UK and the private sector is slowly coming back.
However, with announcements of major contractors extending their payment terms to 120 days, the market still has a long way to go.
Payment times are a continuing issue. Government is pushing for prompt payment and there’s the updated interest on late payment legislation, but contractors still extend their payment cycles where they can. This will continue on projects where contracting authorities are not involved.
This may lead to an increase in supply chain insolvencies – especially among smaller businesses where finances are stretched and they still have to pay wages and so on every month.
The changes to the way services are structured to fit with government requirements for building information modelling (BIM) will be a challenge for the industry. BIM is talked about a lot in the press, but the way of working this requires, with early contractor involvement and more integrated teamworking, is a development the industry will need to get to grips with. It’s not necessarily a new thing as it’s been happening in some sectors already, so perhaps it’s a revamped trend.
The construction market internationally looks much stronger. While the UK market is relatively flat, UK businesses are good at exporting their abilities, on both the professional services and contracting.
Jenkins: International infrastructure, energy and mining projects are continuing strongly, in particular in Brazil, the former Soviet Union and Asia. In the UK conditions remain weak, with limited infrastructure and energy development. New nuclear has stalled and the ‘Private Finance 2’ initiative (PF2) has yet to take off, with the recent Budget criticised as a missed opportunity to boost investment. Just £3bn was set aside for infrastructure projects and there was little detail as to priorities for delayed road and rail investment.
Real estate development outside prime sites in London remains depressed, while high-value mixed-use residential and office developments in Central London are being boosted by foreign investors, particularly from Qatar and China.
Williams: The market showed a resurgence of activity in early 2012, but has been more cautious since autumn 2012, with continuing uncertainty over the eurozone.
Activity has been almost entirely limited to London and various pockets around key locations in the South East. The developers who are still developing are doing so because their balance sheets permit it.
There is still very little development finance available, so it is the established property companies that are able to buy in construction work at reasonable prices because of the fierce competition between contractors. A lack of business confidence is still preventing companies signing up to pre-lets of new premises, so even developers that have their own finance are reluctant to commence speculative developments. This can be seen from all the towers that are stalled pending tenants signing up.
We are seeing a slight increase in disputes work, particularly where developments have been on hold for some time and contractors need to clear projects off their books.
Morris: In London the cranes are in full swing again. Outside London the situation is more complex. The main issue has been funding, or the absence of it. Foreign investment has offset this, although that may be London-centric.
There has also been a modest increase in the number of foreign ‘cashed-up’ players looking to enter the market in the UK during a period of depression for sterling, thereby getting a discount.
This suggests an underlying sentiment that spring will soon be here, despite present temperatures. The Government is continuing to look for new infrastructure projects and ways to stimulate growth. Caution is still the watchword, but there is definitely increased confidence.
The barrister’s view: Paul Darling QC, head of chambers, Keating Chambers
Twenty years ago, mentioning the words ‘construction industry’ and ‘law’ in the same sentence would have conjured up an image of dispute.
Now that has changed, and one of the reasons for this is the intervention of statute. The 1996 act has had a big impact.
The twin track of statute on the one hand changing building contracts terms and on the other providing a system of dispute resolution by adjudication has been highly influential.
The regulation of contract terms has been successful – in some respects, surprisingly so. Statutory rules that provoked consternation when introduced, such as the limited prohibition of pay-when-paid provisions, have not in fact caused chaos and are now widely accepted.
Adjudication too has worked well. A corps of adjudication specialists and practitioners has grown up, bringing real benefits.
As a barrister, I never cease to be surprised by how many roles I can now play in the adjudication system – adviser, draughtsman, advocate, a participant in the adjudication itself or in the court proceedings. And, in each adjudication, part of a case-specific team instructed by different disciplines or direct.
Nor should one underestimate the enormous contribution made by the revamped and world-leading Technology and Construction Court, whose judges are practitioners of the highest quality and experience, with High Court status.
Paradoxically, the availability of such high-quality dispute resolution has reduced the need for it. It is no coincidence that the court has supported the adjudication process.
The fact that the Government found the legislative time to introduce amendments to the 1996 act is significant. As is the fact that those amendments have hardly caused a ripple of controversy, let alone a torrent.
And so, throughout this period of austerity and restructuring, the industry has had the support of the law.
I have always said that a constructive relationship between the legal industry – or the disputes industry as I would have called it in the old days – and the construction industry was essential, and that it would bring real and substantial benefits.
It appears I may finally be proved right. Long may it continue.