Bad Commerce in Construction Contracts… What Amendments to the Construction Act or other Legislation could improve the Industry?

The commercial imbalance of power in construction contracts and not getting paid are the biggest issues faced every day in the construction and civil engineering industries. The Construction Act attempts to outlaw such bad commerce and reduce bankruptcies and the struggle faced by those in the industry. For example, it makes ‘pay when paid’ clauses void and makes it an absolute right to be paid and adjudicate.

 

So, what else could an amended Construction Act or other legislation do to stamp out commercial bad practice and balance the contract power? 

Why is retention allowed? It ends up very often lost to the paying party. The problem with retention is that the sums are often small, that is up to £10,000, and each needs to be prosecuted as a separate case making such prosecution uncommercial as the costs are not normally recoverable (e.g. in adjudication or small claims court) so they often get written off by the payees. It is a subtle form of unjust enrichment for the payer. There are all kinds of arguments and excuses for not paying retention and it is very often never released and this topic has caused quite a lot of debate in recent times. The debates have included proposals to force the funds to be held in special deposit accounts but never the outlawing of the practice. There are problems also with whose money is it when one party goes bankrupt and so on, the money should always belong to the payee, but it does not unless there is an extensive agreement to demonstrate that it does belong to the payee and stored separately. That does not happen in practice. The simple answer is to make retention illegal, easily done by making it so in an amended Construction Act. In practice rightly or wrongly, any potential issues nearly always are subject to withholding of funds in the interim. So why have retention?

Conversely, if it transpires that an overpayment has been made for whatever reason and retention has not been taken how does the payer get the money back? It is not clear in many construction contracts on how the payer can obtain a refund, the mechanisms for such often do not appear until the final payment stage is reached, which might be a long way off or such a right may be absent completely. With no terms or rights apparent, the payer might be forced into common law, a restitution claim or similar without any defined outcome and risk of failure. A clear statutory right and payment mechanism to claim a refund as soon as it is known and at the final stage would avoid such arguments and provide a simple answer to often difficult situations. It is suggested such a right ought to be available in any event and more so if retention was to be abolished. 

A simple click in the law here would transform the entire business world in respect of debt recovery costs and interest, which should be mandatory. The LPCD Act allows interest on late payment at 8% above the base rate plus reasonable debt recovery costs. It only kicks in at present, however, when there is no other late payment term included in the contract. For example, it is often seen that 2% interest will be paid including debt recovery costs, that is totally inadequate, but payee parties are forced to sign up to it. If contracts have to comply with the LPCD Act and set a minimum of 8% above base and debt recovery costs and taking precedence over all other legislation, the cost and misery of late and non-payment would be alleviated and fair. For example, the costs of recovering a debt or payment due in adjudication should attract the interest and reasonable debt recovery costs. That would make adjudication possible in exceptional cases where it might cost £50,000 to recover monies that should have been paid. Why should the injured party suffer all its own costs at all? It is damage due to the other party’s breach. The law seems to see costs, which would not have been incurred but for the other party, as unrecoverable money that cannot be awarded or in full. That culture needs to change, and legislation can do this through a simple change to the LPCD Act.

This would require contracts to comply with simplicity. For example, if a party signs up to a contract clause which says hand delivery of a notice at an address in Estonia on a Tuesday that would be illegal and reduced to say an email if the law made it mandatory to serve a notice by any effective means at a relevant address. Notices served ineffectively due to process and address not complied with are not just and make no sense where a perfectly clear communication or claim is failed by a Court or tribunal on such a technicality.

 

There are often cases where the contractor is blamed for a construction failure, which they then in turn blame the Architect and Engineer for design failure. The bun fight ensues, but who then does the Client take to adjudication? The current position is adjudicate under the contract between the two parties, but if the matter was taken to court the Client would join all parties in the process, why not adjudication? If there is a statutory right to adjudicate is easy and that would be where the rules are generated as the contracts might all have different adjudication clauses. The statute rules when written would need to take precedence, that could simply be done with an amended Scheme for Construction Contracts.

  

The entitlement to payment is made absolute by the Construction Acts so any clause that says you will not be paid unless you jump through this hoop is void, a good example is sign the contract or you will not be paid, that is void. What is not so clear are the validity of clauses that time bar claims for more time if certain conditions are not met. Outlawing these types of clauses is desirable to avoid arguments.

The Construction Act refers to the right to suspend work with a 7-day notice if the notified payment is not made, but what is not clear is whether the Act imposes a condition that the contract must have such a clause and if not what is implied. The Scheme contains the absent terms that can be implied and the Scheme is absent any such terms. Adding such to the Scheme would make the right clear.

 

For 20 years it has been accepted that the interim valuation process is totally different to the final valuation process and that interim values can be opened up and completely revalued in the final valuation. In a recent 2022 adjudication case this has made this complicated. If a subsequent dispute is referred to adjudication that is the same of substantially the same as a previous decision it is well known that an adjudicator cannot decide it again. However, where an account was previously decided in the interim it has been held that a final account valuation can adjust such a value and it is not the same. Until now, in Essential Living (Greenwich) Ltd v Elements (Europe) Ltd 8th June 2022, the adjudicator is now faced with crossing  the jurisdiction line if he falls foul of deciding the same issue decided in the interim in a final assessment. Potentially this will create unjust defences, difficulties and more enforcements. The law needs to be simple here with a statutory right for the adjudicator to be free to make a final assessment irrespective of any interim decision to avoid enforcement issues.

If you have to engage an Expert or a Claims Consultant to fight your corner in a dispute, the higher bar of doing so is outside of the scope of what would be in the contract price or an anticipated cost. The general rule is that to engage such the cost should be recoverable in relation to loss or damage associated with a breach of contract. It is not set in stone though, so if there was a provision at statute that allows where appropriate reasonable costs of Experts or Claims Consultants to be recoverable in connection with breaches of contract, it would make any decision by an adjudicator, court, or tribunal easier when faced with such a claim. All that would be needed is to determine if there was a breach leading to the costs and how much is reasonable. It is quite incredible how parties put to cost are rarely put back into the position they would have been in but for the other party, there is culture to devalue and oppose cost awards in disputes. The prospect of costs being awarded against the breaching party including adjudication costs under the banner of debt recovery as eluded to above, would reduce the level of dispute, keep parties out of court and work towards payment problems being less prevalent.

The process of adjudication is now a well established and supported process in the UK legal system and construction. There are numerous cases we have encountered where householders or consumers are precluded from adjudication when they could benefit, but there is no clause agreed and section 106 of the Construction Act excludes them. The householder is often faced with lengthy and expensive court proceedings and when adjudication is explained to them they would use it and keep cases out of the Court. It is right that the Construction Act excludes consumers to preserve their assumed ignorance of the law, however it would be a simple amendment to allow the householder the right to adjudicate in the normal way and the other commercial party remaining precluded from the process. The commercial party has the option of agreeing a contract adjudication clause at the outset with the householder in line with their assumed familiarity with the law.

Arbicon receives countless enquiries every week, where we conclude there is nothing we can do to help householders who have fallen foul of unscrupulous contractors. In most cases overpayment or advance payment has been made and the contractor has run off to Spain and there are no contract rights to fall back on so only expensive and lengthy Court proceedings against a valueless contractor as an actionable option. Referring to the click in (3) above allowing householder adjudication would go somewhere to alleviate this problem but there should be a minimum standard that contractors must meet by maintaining say a statutory licence to practice run by the government for contracts of values say above £10,000. It should be a criminal offence if not licenced. Examples nearly always include substantial sums of say £25,000 paid on account followed by a small amount of work done then the contractor disappears. A licensed contractor scheme it is suggested would have to be solvent and provide a personal financial guarantee, sign a properly drafted contract, meet professional capable qualified standards of workmanship, be fully insured and be banned from demanding any advance payments plus payment only made on satisfactory completion.

A statute that makes it an offence to charge advance payments needed. Advance payments as noted above allows unscrupulous contractors to take money before work is done and abandon the work. The trusting consumer that falls foul of this situation is told by the authorities that it is a civil matter and they should sue, which may prove impossible. It is often really legalised theft if the work is not done or money returned.  

In conclusion, aiming to rule out bad payment practice and where disputes occur making time and cost quicker and more palatable with the help of legislation has proved very effective thus further improvements would be welcome.