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I was recently asked by an engineer client whether the amendments to the Housing Grants, Construction and Regeneration Act 1996 (HGCRA), which are expected to take effect on 1 October 2011, will make any difference to him. “Yes”, I said, “and I think you will like them.”
The changes affect the statutory payment, suspension and adjudication provisions and apply to all construction contracts (as defined by HGCRA) entered into from 1 October 2011 in England and Wales and 1 November in Scotland. Existing contracts will continue to be governed by the old regime. The principal changes are discussed below.
Payment
Engineers, whose applications for payment are generally not certified by third parties, only derive a partial benefit from the existing payment and withholding notice regime. In the absence of a payment or withholding notice in response to an application for payment, the client would not be entitled to raise a set off against the fees claimed – for example by alleging that the design information was inadequate and caused losses due to delay – but could still argue that the fees were not “due”, putting the engineer to proof that they were. This might mean the time-consuming task of proving the stage of completeness of the designs.
The new regime is likely to help. It enables the payee, in certain circumstances, to serve a payment notice and gives them some teeth:
A construction contract will have to require the payer or payee (or a “specified person”, i.e. a contract administrator) to give a notice specifying the amount they consider due and how it is calculated;
If the payer or specified person is required to give the notice and does not, the payee may give a default notice. Alternatively, if the contract requires or permits the payee to give a notice (e.g. a payment application) before the payer issues its payment notice and the payee has done so, that will stand as the payment notice in the absence of one from the payer;
If the payer intends to pay less than the sum stated in a notice from the payee, it must give a counter (or “pay less”) notice (the new form of withholding notice) stating the sum it considers due and how it is calculated;
In the absence of a counter notice, the payer must pay the sum specified in the payment notice by the final date for payment. Significantly, this may be the sum applied for, meaning the old arguments about the sum “due” become irrelevant.
Another point that may help is that when a payer serves a “pay less” notice they must set out what sum they consider due and ‘the basis on which that sum is calculated’. This is in contrast to the requirement under the old regime where the payer had to state the amount proposed to be withheld and the ground for withholding, or if there is more than one ground, the amount attributable to each.
Setting out the basis upon which a sum is calculated means more than stating the amount proposed to be withheld. Does it mean providing a breakdown of the amount withheld and, if there is more than one ground for withholding, a breakdown of each? The section is unclear and creates additional scope for argument about whether a “pay less” notice is ineffective. My expectation is that adjudicators will seek to interpret the new provision in line with the old one.
The new regime extends the prohibition on “pay when paid” clauses to “pay when certified” clauses whereby, for example, payment under a sub-consultancy agreement is conditional upon payment being certified under the main contract. Arguably such terms may already have been invalid but, in my experience, engineers acting for design and build contractors have been required to observe them. Under new appointments from 1 October, they can be rejected, unless they are in the first tier of sub-contracts under the head agreement on PFI projects which the government proposes to exclude from this prohibition. Sensibly, this prohibition also does not apply to management contracting arrangements.
Clauses that provide that the due date is determined by reference to a notice from the payer will also be prohibited.
If or to the extent that your appointment does not comply with HGCRA, the Scheme for Construction Contracts will apply. The Scheme will be amended to reflect the changes to HGCRA.
Suspension
HGCRA created a statutory right to suspend performance of your services for non-payment. It is reputed to have been under-used, although I have seen many firms of engineers make good use of it to extract payment or protect themselves from bad debt.
To address obstacles to its use, the statutory right has been enhanced so you will be entitled to:
- Suspend part only or as previously, all, of your services;
- Reasonable costs and expenses of suspending;
- Additional time, not just for the period of suspension, but for time required to de-mobilise safely and remobilise afterwards.
No doubt there will be arguments over claims for additional cost and time. No guidance is given on the basis upon which an entitlement should be assessed. What if the suspension is long and the engineer is fully committed elsewhere by the time their client finally pays up? Should they be compensated for any further delay or the expense of obtaining extra resource? In my view, there will be cases where that is appropriate provided the engineer has done everything reasonably possible to minimise the cost and delay.
Adjudication
The most important change to adjudication is that statutory adjudication (where there is no contractual adjudication provision, but the contract is governed by HGCRA) will be available for contracts that are oral or partly oral. This avoids jurisdictional arguments about whether all of the contractual terms are in writing, but places an extra burden on adjudicators in having to decide whether an oral or partly oral contract exists at all and, if so, what its terms are. Adjudication hearings are likely to become more common as a result, although there is a reluctance among some adjudicators to allow the parties to cross-examine each other’s witnesses.
Importantly, if you wish to have a contractual adjudication procedure, you must set out certain minimum requirements in writing (see the amended version of section 108 of HGCRA). If you do not, your procedure will be replaced by the Scheme. Notably, the new section 108 requires adjudicators to be empowered to correct clerical or typographical errors in their decisions so, unlike under the old regime, your contract (or the rules you adopt) must provide for this.
Clauses stipulating who will bear the costs of an adjudication are intended to be prohibited and along with them any clauses giving the adjudicator power to award party costs. The parties may still confer a power upon the adjudicator to allocate his or her fees and expenses and may reach agreement on the costs of the adjudication after a Notice of Adjudication is served.
Unfortunately, the drafting of this section is unclear and it is debatable whether a clause that:
- Gives the adjudicator power to allocate his fees and expenses; and
- Gives the adjudicator power to deal with the parties’ costs, or possibly even fixes how the parties’ costs will be borne,
will be rendered ineffective or not. The government says it will be and the courts will try to give effect to this intent, but they have their work cut out for them.
Final thoughts
American novelist Ellen Glasgow once said: All change is not growth, as all movement is not forward. That is a fair point. The new regime addresses some of the shortcomings of the previous one, but it does not cure them all and it creates new difficulties. I have advised my engineer clients to ensure that any appointments entered into after 1 October are drafted to reflect the new regime and to keep their ears to the ground for developments on the new areas of uncertainty. I recommend you do the same.
Peter Stockill MSc FCIArb can be contacted at peter.stockill@blm-law.com
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