The deadline for consultation on the latest stage of Sir Michael Latham's review of the Construction Act has now passed. What are the key issues and what happens next?
The background
To the casual observer it may seem that barely a year passes without a renewed public debate about the effectiveness of the Construction Act, the name popularly given to part II of the Housing Grants, Construction and Regeneration Act 1996. The consensus across the industry is that the Act is working well. So why this further bout of navel-gazing?
Perhaps inevitably, the answer lies in one of the main areas which the Act was intended to improve – industry cash flow. Specialist sub-contractors in particular argue that unreasonable delays in payment still persist and in April 2004 the Government appointed Sir Michael Latham to review the operation of both the payment and the adjudication provisions of the Act. It was Sir Michael's report "Constructing the Team", published 10 years earlier, which created the momentum for change which resulted in the Act.
For the first stage of his review Sir Michael appointed working groups to consider the workings of the Act and come up with proposals for any areas requiring improvement. In some cases (admittedly what a colleague of mine insists on calling "no brainers") the groups managed fairly painlessly to agree recommendations for action. There was however no consensus on how to tackle a number of more contentious issues.
The Government's consultation paper set out proposals in all areas addressed by the working groups. In most instances these reflected the conclusions of the groups but in a few cases where there were differences of view the paper contained new proposals.
The consultation paper
The ground covered by the paper is substantial. Its contents fall broadly into four categories:
- a summary of the key conclusions of stage one of the review;
- a total of fourteen wide ranging consultation questions relating to both adjudication and payment under the Act;
- a separate set of questions addressing the potential regulatory impact of each proposal; and
- an account of proposals not put forward for consultation coupled with an invitation to consultees to comment on these and also to come up with proposals of their own for improving the Act.
The proposals which are unlikely to be controversial include:
- a right to reimbursement for the costs of suspension and remobilisation and to the time required to remobilise; and
- the removal of the requirement to serve an initial payment notice under s.110(2) of the Act (although there are differing views on what should replace it).
Other recommendations will face a rougher ride. From discussions at the working party meetings and the DTI conference on the Act on 1st June, it is clear that there is concern that some of the proposals being advanced could damage the hard-won balance of competing interests, which many see as having been crucial to the success of the Act. As the consultation paper stresses, it is also important to preserve as far as possible the parties' freedom of contract.
Payment
Payment issues addressed in the consultation paper include the following:
- whether there should be a definition of the adequate payment mechanism which the Act requires a contract to provide;
- whether a withholding notice should include more detailed information than at present and, if so, what that should be;
- whether the use of "pay-when-certified" and "pay-what-certified" clauses should be restricted and/or subject to the provision of defined information to the payee; and
- whether "pay-when-paid" clauses should be ineffective in the case of upstream insolvency as well as in other situations.
In relation to all of these there is bound to be a wide range of views.
Adjudication
Here the most potentially far reaching proposal is that an adjudicator should be given the power to make final and binding decisions on a number of jurisdictional issues such as whether there is a construction contract within the meaning of the Act and whether there is a dispute. Our research into reported enforcement proceedings shows that most were concerned with jurisdictional challenges and over 60% of them failed. For the majority of adjudications such a move could therefore help reduce uncertainty and cost or at worst be neutral in its effect.
In the case of substantial and complex adjudications, however, the adjudicator having such powers could pose real risks, particularly given variable adjudicator quality. Mr Justice Jackson, the head of the Technology and Construction Court, delivered a powerful critique of these proposals at the DTI conference on 1st June and it is clear that his concerns are widely shared.
Next steps
Following the deadline for consultation of 21st June the DTI is committed to publishing detailed results during September. What happens next may depend at least in part on the extent of consensus which is achieved.
This is because the DTI is considering using a fast track alternative to conventional legislation and amending the Act by means of a so-called Regulatory Reform Order or RRO. For this purpose, though, not only must the effect of the proposed amendments be deregulatory – hence the detailed questions on regulatory impact in the paper – but also broad support is needed from those who will be affected. Without an RRO any changes to the Act could be years away. In the circumstances it is anyone's guess what the fate of this ambitious exercise will be.
