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HGCRA Review Consultation – Have your say!

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The review of the Housing Grants, Regeneration and Construction Act 1996 

The UK Government has published two consultations, currently open, which are highly relevant to the construction industry.  The consultations focus on the changes made in 2011 to the Housing Grants, Regeneration and Construction Act 1996 (“the Act”), (Click here) on the one hand, and the use of retention in the construction industry on the other (Click here).  According to the consultations, they are intended to run in parallel with each other.  

Both consultations are open until 19 January 2017, and are geared towards receiving the views of parties to construction contracts, so we recommend you take an opportunity to have a say and influence how the industry is regulated.   

Quigg Golden has outlined its thoughts below for your consideration and maybe, hopefully, to serve as the inspiration for your response to the consultation.  Furthermore, any member of the Quigg Golden team would be happy to talk you through the issues. 

2011 Amendments  

The consultation on the 2011 amendments to the Act is a post implementation review, which the government had previously undertaken to carry out 5 years from the implementation of the amendments.  The consultation is therefore, from the government’s perspective, an opportunity to review how successful the amendments have been in achieving their aims and potentially inform the direction of any further, future legislation.  

There is a particular slant taken in relation to how the amendments have impacted upon adjudication costs, with the consultation document setting out that the government is “particularly interested in the cost of the adjudication process”.  This slant is clear from the consultations set out in relation to each amendment.  

The consultation document helpfully sets out a brief overview of the 2011 amendments in the consultation, jogging memories where need be and ensuring participants do not necessarily need to be lawyers and consultants.  The summary sets out that: 

Specifically, the changes were intended to: 

  • remove the restriction on who could issue a payment notice; 
  • improve the clarity of payment and withholding notices; 
  • introduce a fall back” provision – allowing a payee to submit a valid payment notice 
  • where a payer has failed to issue one; 
  • prohibit payment by reference to other contracts; 
  • introduce a statutory framework for the costs of adjudication; 
  • remove the requirement for contracts to be in writing for the Act to apply; and 
  • improve the right of suspension. 

The consultation, therefore, focuses on these items and on the costs of adjudication, the payment framework, including the potential rise of “smash and grab” adjudications, and the right of suspension. 

Practically, the Consultation is split into three sections: 

1) Specific questions on the 2011 changes; 

2) General questions about the whole framework set out under the Act, as amended; and 

3) Questions on the affordability of adjudication, its potential misuse and its continuing relevance.

You are warned that completing the consultation appears like it will require a decent investment in time and is not a simple five-minute job.  The total number of questions is 51, however, given that many of the questions are split up into several elements and aspects, this underrepresented the actual total number of questions.  You are not required to answer each and every question and it is hoped our thoughts below might provide some inspiration as to both the content of any response to the consultation, but also some direction on the areas to pay particular attention to.  

Adjudication Costs 

The 2011 amendment regarding adjudication costs sought to prevent parties making provisions in the construction contract regarding adjudications costs, including the adjudicators fees and the other party’s costs.  For instance, a typical clause would require the referring party to bear these costs as the costs of adjudication.  

Furthermore, it was thought at the time that this might reduce the costs of adjudication, as it was thought if both parties bore their own costs there would be no incentive to widen the dispute and instead incentivize parties to keep the adjudication relatively self-contained.  

The questions, therefore, centre around whether the price of adjudications have increased or decreased, with one question even requesting an estimate of the percentage increase or decrease in costs.  

On the point regarding the costs and length of time of the adjudication process, Section C of the consultation concerns itself solely with this.  It is our view that adjudication costs have increased since 2011.  

However, is this the result of this amendment or any of the particular 2011 amendments?  It is more likely to do with the “lawyerification” of the adjudication process, and so parties wanting amendments aimed at reducing adjudication costs might wish to suggest in their answers to questions in Section 3, amendments aimed at stripping the adjudication process back to something closer to what it was originally intended to be, or perhaps seek more government promotion of dispute resolution boards.  On the other hand, would adjudication costs be higher without this amendment?  Potentially, if a referring party was contractually required to bear the costs, it would incentivize the responding party to make the process as expensive as possible, as long as possible and potentially generate unneeded fees as a means of set off.  

The current judicial view of the amendment is that it prevents the adjudicator awarding any parties costs as in litigation.  Ultimately though, if parties to adjudication want the prospect of recovering their fees from the other side, they need to be prepared for the adjudication process to become longer and more expensive to accommodate.  

At the very least, further amendment might be made to absolutely confirm that an adjudicator may allocate his own costs.  

Contracts in writing  

This 2011 amendment ensured that construction contracts were no longer required to be in writing.  It was hoped, amongst other things, this would reduce jurisdictional arguments in adjudications.  It has been successful in this regard as jurisdictional arguments regarding the format of the contract are simply no longer made.  

This is not a universally popular amendment however, per Mr Justice Fraser in RSC Contracts v Conway. 

“I regret very much the time and cost that has been wasted on this process, which I consider to be due to the amendments to the 1996 Act. As originally enacted, the 1996 Act would not have permitted this dispute to have been progressed in this way, because Section 107 ensured that it was only when the contract was in writing that adjudication provisions were incorporated. That provision was designed to promote certainty. Section 107 was, in my view, unthinkingly repealed, meaning that (as here) adjudicators have now to grapple with entirely oral contracts, with all the uncertainty and contention that such a situation can engender. . in this case, the result of the repeal of section 107 has been a process lasting 16 months and the incurring of large sums by way of costs. That is the opposite of the quick, cheap dispute resolution service that adjudication was intended to provide.” 

In terms of the benefit to the industry overall, it could be argued that in fact this amendment promoted certainty, allowing oral contracts or contracts with unclear written terms to fall within the scope of the Act and thus benefit from clear payment terms and adjudication provisions implied under the Scheme for Construction Contract Regulations.  This has ensured certainty for smaller contracts and sub-contractors without the benefit of standard terms, and ensured clarity where administrative failures have prevented execution of the written contract or where a letter of intent expires. 

 

Payment provisions 

The amendments to the payment provisions are undoubtedly the dramatic amendments which have made a seemingly indelible imprint on the industry within a relatively short period of time.  

The headline here is the amendment that brought in the potential for so called “smash and grab” adjudications.  Thoughts on these amendments will likely relate to the number of times the client has been stung or saved by a smash and grab.  

Certainly, the result of these amendments is a significant increase in adjudications.  However, it is suggested there are the same number of payment disputes likely (or less); instead the amendments just give an outlet for what might not otherwise be taken, given there is now a clearer outcome.  

The consultation does addresses this issue by asking whether the amendment has resulted in more or less disputes.  Otherwise the consultation asks questions regarding contract payment terms complying with the amendments, how often participants have issued default payment notices and how often payment notices or pay less notices are not issued as they should be.  

Suspension  

In Quigg Golden’s opinion, the right to suspension works and operates as advertised.  The consultation just queries whether suspensions have increased or decreased as a result of the amendment, and whether it has helped avoid adjudications.  Generally, we would find parties are more likely to adjudicate first, rather than suspend first and escalate to adjudication, but this is not necessarily a complaint of a suspension more than an advantage of adjudication, that a dispute can be resolved while work continues.  

Retention  

The consultation on retention follows independent research commissioned by the Government.  This research suggested that in particular: 

  1. The loss of retention monies due to contractor insolvency is a large and prevalent issue throughout the construction industry; and 
  2. Late and non-payment of retention monies without justification is a large issue throughout the construction industry.  

Many of the questions address the methodology used in the independent research in order to reach its conclusions, including the two set out above.

The key theme to take away from this consultation is the government assessing thoughts on the uptake of the various alternatives retention, namely the following: 

  • Project Bank Accounts (PBAs); 
  • Retention bonds; 
  • Performance bonds; 
  • Escrow stakeholder accounts; 
  • Parent company guarantees; and 
  • Retentions held in trust.  

These aside, the headline item is the government assessing the potential for establishing a statutory retention deposit scheme.  Particularly intriguing around this, is the potential for this to operate as a statutory obligation to utilise the deposit scheme, rather than have it operate on a voluntary basis, on a similar basis to the Tenancy Deposit Scheme.

Amendment to retention, therefore, appears like it might have serious ramifications for the industry and we accordingly stress the importance of taking the opportunity to have your say.  

Conclusion  

Of the two consultations, the one regarding the 2011 amendments is likely the most eye-catching.  That said, it seems as if the consultation regarding retention is likelier to have a more immediate outcome and impact.  In any event, all are urged to have their say.  Certainly, we can’t complain about regulation of the industry in the future if we don’t take the opportunity to speak when we have it.  

Both consultations may be accessed at the links below.  

Changes to Part 2 of HGCRA

Retention Payments in Construction Industry

 

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