Construction Act changes may not take effect for 18 months

On Wednesday the Local Democracy, Economic Development and Construction Bill left the House of Lords for the House of Commons. The Bill’s proposed changes to the Construction Act have been passed by the Lords in precisely the same terms as they were when they started their parliamentary passage in December 2008. There have, however, recently been two key developments:

1. The government has indicated that there will be an 18-month consultation period “to ensure that everyone is satisfied with how the legislation will operate when it is introduced”. It appears the Bill will still be enacted by the year’s end but that – critically - it will not come into force before late 2010, if not early 2011. The Bill will only affect contracts entered into after it comes into force - so the impact of the changes to the Construction Act will be later than some may have thought.

This consultation will follow the four and a half years of consultation (ending last September) on changes to the Act. Given that as at today the Act has been in force for only 11 years this indicates both the difficulty in obtaining any industry consensus on the changes as well as their complexity.

2. The government is consulting with the Construction Umbrella Bodies Adjudication Task Group to identify a consensus on amending the adjudication procedure contained within the statutory Scheme. The Scheme’s rules are implied into construction contracts that do not make certain basic provisions for adjudication and payments, as the Construction Act requires.

The Bill makes significant changes to the Act’s payment regime (for details on which please see earlier Law-Nows). It has long been apparent that these require equivalent changes to the Scheme’s default payment rules. While making these changes (the drafting of which is yet to be published) the opportunity is also to be taken to change the Scheme’s default adjudication procedure. This, the government says, is “to ensure it incorporates the best practice common to the various industry [adjudication] schemes”. The government considers that this “should remove the need for many of the industry schemes”.

It seems that the government hopes to create a more attractive Scheme for parties to opt into rather than a single mandatory adjudication procedure (which it ruled out in 2006). However, the Scheme is already widely used (for example from 2003 the JCT adopted it for its widely used standard forms). Also, most industry schemes differ little from the Scheme’s rules and do not contain Construction Act avoidance devices – unlike parties’ bespoke rules which do and as the Bill stands may continue to do so (save for the device referred to below). A mandatory procedure would prevent most if not all Construction Act avoidance devices that would otherwise survive the Bill’s enactment.

These developments are reminiscent of when the Construction Act was first introduced. It was enacted by the Conservative government in 1996, but not brought into force until 1998 when the Labour government approved the Scheme’s default rules (following a much criticised consultation process). If the bringing into force of the Act’s changes is to be delayed, it remains to be seen whether the government that is in power in late 2010/early 2011 (given the intervening general election) decides to bring them into force.

In the meantime, the government appears intent on enacting (as opposed to bringing into force) its proposed changes to the Construction Act without amending them. It has, however, acknowledged one respect in which it will be unable to do this. The government intends in the House of Commons to amend the proposed ban on clauses that require one party to an adjudication (usually the referring party) to pay the other parties’ costs and all of the adjudicators’ charges, win or lose. The aim of such clauses is to deter adjudication. As drafted the Bill’s ban is wide enough to ban pre-adjudication agreements that empower adjudicators to apportion how the parties should pay their charges (so that they may direct the loser to pay all of them). The amendment will exclude such agreements, which in fact mirror the current Scheme. While an important correction, it is unlikely to save agreements that pre-determine how adjudicators’ charges should be apportioned, such as the NEC3 Adjudication Contract which requires the parties to share them equally.

Unfortunately the Bill passed through the Lords without anyone apparently mentioning the adverse impact of the Act and the Bill upon PFI/PPP contractual arrangements, in particular in banning equivalent project relief provisions which are standard to – and an important aspect of - PFI/PPP subcontracts. One solution would be to exclude such subcontracts from the Act’s scope.

We will report again on the Bill’s progress through the House of Commons.

References: House of Lords report stage on Construction Act changes (clauses 135 and following of the Local Democracy, etc. Bill) and Baroness Andrews’ letter to Interested Peers