Latham 2 - review of the Housing Grants, Construction and Regeneration Act 1996

Sir Michael Latham has been appointed to undertake the government's promised review of the Housing Grants, Construction and Regeneration Act 1996. A review group has been set up and a timetable for action agreed. So what needs changing and why?

A consultation paper will be published in October with a deadline for responses in mid December. Detailed mechanisms for implementation will then be prepared and handed over to the government for implementation at the end of March 2005.

It is impossible to predict with any certainty what the results of Sir Michael's review of the Act and its subordinate legislation, the Scheme for Construction Contracts, will be. It is however relatively straightforward to pinpoint the issues which will be under scrutiny by the review group over the next ten months or so.

Adjudication

In general terms there is no doubt Adjudication has been exceptionally well received by the industry. Statistics produced by Glasgow Caledonian University's Adjudication Reporting Centre show that around 2000 Adjudicators are nominated by Adjudicator Nominating Bodies each year. Of all of the disputes which go to Adjudication, only a fraction end up in court and an even smaller fraction end up in a successful challenge to the decision. There is self evidently no fundamental flaw in Adjudication which requires fixing. In a response to the December 2000 review by the CIB, the DTI (then DETR) explained that any review of the Act should be directed towards making it more effective and not reopen the compromises that underlay its drafting.

Unless Sir Michael disagrees with this policy it is unlikely we will see any fundamental changes in approach through the present review. Nevertheless, there is always room for improvement and the following paragraphs highlight some areas where improvements might be made.

Meaning of "construction contract"

Section 104 of the Act deals with the definition of "construction contract". Agreements to do architectural, design or surveying work are expressly included in this definition. The recent Scottish Appeal Court decision of Gillies Ramsay Diamond v PJW Enterprises Ltd (presently unreported) sharply focused the question of whether it is appropriate for issues of professional negligence to be dealt with by Adjudication. Professional negligence is a matter with serious consequences for those involved (and of course their insurers) and the Court found that the Adjudicator in question "had little grasp of the subject". The fact is that in many disputes between professionals and their clients, the central issue will be the standard of performance by the professional.

If it is accepted by Latham that it is not appropriate for such issues to be resolved by adjudicators in a 28 day process, this is one issue his review may address.

Meaning of "construction operations"

Section 105 of the Act deals with the definition of "construction operations" and has been the subject of some Court decisions because of uncertainties as to whether certain operations fall within the definition. One of the earliest examples is Homer Burgess v Chirex Annan (2000 BLR 124) where the Court had to consider whether installation of pipe work on a site (where the primary activity was the production, transmission, processing or bulk storage of pharmaceuticals) fell within the definition of "construction operations". The Adjudicator had found that it did not, but the Court disagreed and found that it did. Further clarification of the definition of "construction operations" would therefore be helpful.

There is also an issue as to why operations within certain industries such as the processing industry and the water industry are excluded from the "construction operations". This however is probably the kind of fundamental issue the DTI felt should not be reopened and so is unlikely to be the subject of change.

Application to residential occupiers

At present, contracts with residential occupiers are excluded from the application of Part II of the Act by section 106. This is an issue which may benefit from further discussion, as Adjudication could be an appropriate remedy for a residential occupier. Careful consideration would however be necessary to ensure that inequality in experience of Adjudication and comparative lack of financial muscle would not disadvantage the residential occupier to any material extent.

Agreement in writing

The definition of "agreement in writing" in section 107 of the Act has caused difficulty and recent decisions by the Court of Appeal have given a narrow construction to this phrase. The Court of Appeal has held that all material terms of the contract must be in writing but one judge has gone further by suggesting that all terms of the contract must be in writing. Furthermore, there is a body of opinion which suggests that the Act should apply to any construction contract, whether in writing or otherwise.

The difficulty is one of practicality. Establishing the existence of a contract and what its terms are (in the absence of a written contract) is a preliminary issue which could easily swallow up the whole 28 day (or even 42 day) process. Such a task is therefore at odds with the aim of Adjudication which is to provide a speedy remedy. It is therefore unlikely that any review of the Act will extend Adjudication to any construction contract, whether in writing or otherwise.

The narrow interpretation given to the meaning of "agreement in writing" by the Court of Appeal and the uncertainty as to whether only material terms or all terms must be in writing could, however, usefully be clarified through the review process.

Meaning of "dispute"

Despite various Court decisions on the question of when a "dispute" has arisen, a significant ground for challenge of an Adjudicator's decision remains that the Adjudicator had no jurisdiction, as there was no "dispute" in existence. A further issue is that certain types of dispute, for example complicated loss and expense claims, have been said to be unsuitable for resolution in a 28 days process – albeit that time is often extended by agreement.

A statutory definition of "dispute" (beyond simply including "any difference" as set out in section 108 of the Act) would be of assistance to parties, their advisors and Adjudicators. Some industry commentators have, however, made the point that attempting to define a "dispute" may have the unintended consequence of "throwing out the baby with the bathwater". Any statutory definition of "dispute" would need to be carefully drafted to avoid such a situation from occurring.

Mandatory scheme

One of the recommendations of the CIB review in 2000 was to eliminate "bespoke" Adjudication provisions in favour of a statutory scheme which would apply "across the board". This recommendation was echoed in a letter to the Minister for Construction, Nigel Griffiths MP, by the Society for Construction Law in September 2003.

The reason given for this proposal was that reliance on the Scheme for Construction Contracts as a fall-back where a contract does not contain any, or any Act compliant, Adjudication provisions "increases the risk of jurisdictional challenge". It was also said that the plethora of bespoke provisions "provides a fertile ground for the development of [Adjudication] avoidance mechanisms".

There is no doubt that disputes about whether or not particular bespoke provisions are "Act compliant" give rise to jurisdictional challenges which would not exist if one Scheme applied to all. Similarly disputes as to whether or not an Adjudicator had properly been appointed would be likely to fall away as familiarity with one process developed.

Given the level of sustained support for this proposal, from a cross section of the industry, this may well be the most significant change to come out of the Latham review.

Fees and costs

A particularly nasty clause for subcontractors – whom the Act was principally intended to help – is the clause which provides that the subcontractor will pay both its own costs and the costs of the other party in an Adjudication, no matter what the outcome.

The CIB in their 2000 report to the DETR roundly condemned this practice as being against the spirit and intention of the Act. They recommended that the Act and Scheme be amended to require each party to meet its own costs.

It is thought this is a change which Sir Michael will certainly recommend.

The question of the Adjudicator's fees is less straightforward but it is difficult to see why there should be any difference in principle between the treatment of an Adjudicator's fees and a party's costs. If success is not to be a factor in one, why should it be a factor in the other? On that basis we may also see amendment to the Act requiring an equal split of fees between the parties.

There are other minor points which have been raised in relation to the Adjudication provisions such as enshrining the "slip rule" into the Act and tidying up the enforcement provisions. The above points are however those that are the major ones likely to be subject to Sir Michael's scrutiny.

Payment

In stark contrast to Adjudication, there is little by way of historical comment on the payment provisions of the Act and the Scheme.

"Pay when paid"

In their letter to the Construction Minister of September 2003, the Society of Construction Law stated that "notwithstanding the payment provisions of the Housing Grants, Construction and Regeneration Act 1996… lengthy payment periods and delays in payments continue severely to damage construction business…Many contractors currently impose unreasonably long payment periods on their sub-contractors, partly perhaps to buy themselves time to pay in the absence of being able to rely on "pay when paid" arrangements".

The Society concluded that this area should be reviewed in the light of current attempts to get round the ban on "pay when paid", for example by the use of "pay when certified" clauses.

The ban on "pay when paid" does not currently apply when the third party (who is to make payment before then next party gets paid) is insolvent. This has been the subject of calls for review and it is difficult to see why this should not be changed. It is precisely when there is an insolvency at the top of the chain that those at the bottom of the chain will suffer most, unless they have the benefit of statutory protection.

Notices

The review could usefully clarify the effect of failure to serve a "payment notice" under section 110 of the Act (if any) and the circumstances in which a "withholding notice" under section 111 is required.

Conclusion

All indications are that Sir Michael's review will not be a fundamental root and branch review. It is simply a matter of tweaking the Act and the Scheme in the right areas in order to improve the effectiveness of the legislation in achieving its stated aims. Improvements can no doubt be made, but the task of the review group is to ensure that in seeking to make improvements there are not unintended consequences which undermine the present effectiveness of the Act or lead to parties bringing serial actions before the Court for judicial clarification.

For more information please contact Alasdair McKenzie at [email protected]