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Introduction
Construction is one of the pillars of the UK economy. Figures supplied by the Department of Business, Enterprise and Regulatory Reform 2 ( BERR) show that in Scotland construction accounts for 7.6% of national gross value added. Its economic importance is wider. Well managed and successfully delivered construction projects improve public services (health, education and transport), business productivity (offices, communications and retail) and housing and cultural and public spaces.
There are over 14,000 enterprises active in construction contracting and consulting in Scotland, of which 98.2% are small or micro enterprises. Characteristically profit margins in the industry are low and insolvencies are high compared to the economy as a whole. The supply team on a construction project often includes a large number of firms.
The context for the Construction Act was originally set by Sir Michael Latham's 1994 report Constructing the Team. Latham's overall approach to improving the performance of the construction industry - greater collaboration and integration - was subsequently reinforced by Sir John Egan in Rethinking Construction (1998). A successful, collaborative commercial arrangement cannot be supported by poor payment practices.
The Construction Act
Since coming into force on 1 May 1998, a number of difficulties have come to light and concerns have been raised about the effectiveness of the Construction Act. These have been the catalyst for the current review.
How the Act Works?
The Construction Act has two main aims:
- to ensure prompt cash flow; and
- to allow swift resolution of disputes by way of adjudication.
The Act currently achieves this by -
- Providing a statutory right to refer disputes to adjudication. The adjudicator's decision is binding until finally determined by legal proceedings or arbitration (where there is an arbitration agreement) [section 108];
- Providing the right to interim, periodic or stage payments [section 109];
- Requiring that contracts should provide a mechanism to determine what payments become due and when, and a final date for payment [section 110(1)];
- Requiring that the payer gives the payee early communication of the amount he has paid or proposes to pay [section 110(2)];
- Providing that the payer may not withhold money from the sum due unless he has given an effective withholding notice to the payee [section 111];
- Providing that the payee may suspend performance where a sum due is not paid in full by the final date for payment [section 112];
- Prohibiting pay when paid clauses which link payment to payments received by the payer under a separate contract [section 113].
Other sections of the Act do the following -
- Define the scope of construction contracts [section 104];
- Define the meaning of construction operations including exemptions [section 105];
- Exempt residential occupiers [section 106];
- Restrict the application of the Act to contracts in writing [section 107];
- Provide a power to make a scheme for construction contracts [section 114];
- Make provision on service of notices, calculation of periods of time and application to the Crown [sections 115 - 117].
Background to this consultation
In January 2003 the Scottish Executive issued a Consultation Document on Improving Adjudication in the Construction Industry and published the Consultation and Proposals Report 3 in May 2004. However this was overtaken by the Chancellor's announcement in the Budget in March 2004 of a Review of the Construction Act:
"Following concerns raised by the construction industry about unreasonable delays in payment, the government will review the adjudication and payment provisions of the Housing Grants Construction and Regeneration Act in order to identify what improvement can be made."
Nigel Griffiths, then Parliamentary Under Secretary of State at Department Trade and Industry ( DTI now BERR), asked Sir Michael Latham to review the legislation. Sir Michael's findings were published in September 2004. His report concluded that the Construction Act is generally working well but some improvements would be helpful if means could be found to deliver them without adverse impacts on other parties or other elements of payment processes.
Following the publication of Sir Michael Latham's report, DTI published a consultation paper, Improving Payment Practices in the Construction Industry, in March 2005. This first consultation document considered a number of proposals under the following headings:
- improving the ability of parties to a construction contract to reach agreement on what should be paid and when;
- Improving the ability of parties to a construction contract to manage cash flow and enable completion of work on the project;
- Reducing disincentives to referring disputes to adjudication.
An analysis of the consultation responses was published in January 2006 and since then DTI have held an industry post consultation event, a series of discussions with their sounding board of key industry figures and conducted an informal consultation with the Construction Umbrella Bodies Adjudication Task Group to develop a more detailed consultation on specific proposals. On 20 June 2007 DTI issued a second Consultation Document jointly for England and Wales which considers amendments to Part II of the Housing Grants Construction and Regeneration Act 1996, which would be taken through the UK Parliament by the UK Government and would affect both England and Wales.
The consultation issued on 20 June by DTI and the Welsh Assembly also covers amendments to the Scheme for Construction Contracts (England and Wales) Regulations 1998. In so far as they affect England these would be taken through the UK Parliament by the UK Government immediately after the primary legislative amendments have been passed. In so far as they affect Wales, the amendments to the Scheme will need to be taken through the Welsh Assembly separately by the Welsh Assembly Government.
The Construction Act also applies in Scotland and policy responsibility for the Act in Scotland and the Scheme for Construction Contracts (Scotland) Regulations 1998 is a matter for the Scottish Executive. Any amendments affecting Scotland would be a matter for the Scottish Parliament to agree.
This consultation exercise within Scotland relating to Part II of the Housing Grants, Construction and Regeneration Act 1996 and The Scheme for Construction Contracts (Scotland) Regulations 1998 is being conducted separately from England and Wales. However it does replicate the proposals in the consultation issued on 20 June by DTI and the Welsh Assembly and therefore this consultation has been limited to 8 weeks from the standard 12 weeks consultation period.
In considering the responses to this consultation we will be continuing to keep in mind
- The need for improvement in payment practices under the legislation for all concerned.
- The need to respect the principle of freedom of contract, keeping intervention only for those situations where it is deemed essential.
- The possibility of guidance to address certain issues as an alternative to regulation.
- The continuing development of case-law on adjudication and the payment provisions of the Construction Act.
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