The abolition of the “contracts in writing” rule in the 2009 Construction Act

AuthorAkintola Akintoye
PositionSchool of Built and Natural Environment, University of Central Lancashire, Preston, UK
Introduction

The construction sector is a major part of the UK economy ( Cabinet Office, 2011 ). The sector is worth about £110 billion per annum. The industry is highly fragmented, with over 300,000 businesses (of which 99.7 per cent are SMEs) and over two million workers. The UK construction industry is of vital importance, not only because of the sector's size, but also because of its output – the built environment – underpins most other economic activity, as well as contributing to the delivery of the Government's economic, social and environmental sustainability objectives (House of Commons, 2008). However, it is generally recognised that the industry is associated with low profit, delay in payments, cash flow concerns, insolvency, and short-term relationships compared with the other industries. In particular, claims and disputes have proliferated in the industry due, largely, to unfair payment practices ( Latham, 1994 ).

Furthermore, there is broad consensus, spread both across the industry and its customers, that construction under-performs in terms of its capacity to deliver value; poor and inconsistent procurement practices, particularly in the public sector (which accounts for nearly 40 per cent of the industry's workload), are leading to waste and inefficiency; and that there has been a lack of investment in construction efficiency and growth opportunities ( Cabinet Office, 2011 ).

Therefore, in order to ensure prompt cash flow, improving efficiency and productivity and to allow swift resolution of disputes by way of adjudication allowing projects to be completed without wasted profit and time in litigation, the “Housing Grants, Construction and Regeneration Act 1996” (HGCRA) was introduced in the late 1990s. This Act is also commonly known as the “UK Construction Act 1996” or the “1996 Act”. This Act has played an important role in improving the efficiency of construction supply chains in the UK ( BERR, 2008 ). The 1996 Act, however, has its strenghts and weaknesses. Hence, to ensure the 1996 Act is more effective in achieving its intended objective, amendments have been proposed by the Government after extensive consultation with the UK construction industry and its clients. The amended 1996 Act is called as the Local Democracy, Economic Development and Construction (LDEDC) Act 2009 (hereafter referred to as the “new Act”). The new Act aims to address a number of issues in the 1996 Act to make the legislation more effective at reducing unfair payment practices such as unduly prolonged or inappropriate cash retention in the construction industry and encouraging parties to resolve disputes by adjudication. In times of economic pressure, the new Act will have significant impact on the adjudication and payment method in the UK construction industry.

For instance, according to the Government's impact assessment ( BERR, 2008 ):

  • Improvements to the adjudication framework should save the UK construction industry an estimated £1 million per annum in aggregate or £600 on average per adjudication (3 per cent of the total cost of the adjudication).
  • Amendments to the “payment notice” requirements in the legislation should save the UK construction industry approximately £5.8 million in administration costs per annum, for example by removing the requirement that payment notices should be served where the contract already provides for notices from third parties, i.e. payment certificates.
  • Improvements to the payment framework to ensure contracts create clear and timely entitlements to interim payment should save an estimated 1-1.5 per cent on the average project – reflected across the construction sector in England and Wales, this represents £1-1.5 billion.
  • A critical review of literature reveals that the amendments made in the new Act falls broadly into two categories ( Donohoe, 2005, 2009 ; Cordery, 2009 ; CIArB, 2010 ; Brampton and Hayward, 2010 ; Packman, 2010 ; BIS, 2010 ): changes to payment procedures; and changes to the statutory adjudication procedure. The key changes to payment procedures include:
  • The abolition of pay-when-certified clause (i.e. under the new Act, a mechanism for payment is not adequate if it makes payment conditional upon the performance of obligations under a different contract).
  • Suspension of performance for non-payment (i.e. the new Act provides for compensation of costs and expenses reasonably incurred during suspension).
  • Counter-notice (i.e. the general rule regarding payment is that the payer must pay the notified sum on or before the final date for paying (the sum notified in the payment notice)).
  • Payment notice (the new Act provides that there will be an “adequate mechanism” requires a “payment notice” to be issued which states the “notified sum”).
  • Similarly, the key changes to the statutory adjudication procedure include:
  • The abolition of “contracts in writing” rule (i.e. the 1996 Act applied only to contracts that were in writing, whereas the scope of the new Act is broadened to include oral contracts and/or partly oral and partly written contracts as well).
  • Tolent clauses and other matters concerning adjudication costs (i.e. The 1996 Construction Act was silent on who should pay the costs of adjudication. The adjudicator was given no power to award costs and it has therefore always been assumed that, in the absence of any contractual provision to the contrary, each party should pay their own costs).
  • Slip-rule (i.e. an amendment has been made to allow an Adjudicator to correct their decision “so as to remove a clerical or typographical error arising by accident or omission”).
  • Similar to the UK Construction Act, the Building and Construction Industry Security of Payment Act 1999 was introduced in New South Wales (NSW Act), Australia. The NSW Act was introduced in an attempt to counter the security of payment problem in NSW ( Uher and Brand, 2005 ). According to NSW Government (1999) report, the key aim of the NSW Act was to ensure that any person who undertakes to carry out construction work or who undertakes to supply related goods and services under a contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services. To achieve this objective, the NSW Act has introduced new statutory rights for claimants, such as: a right to progress payments; a right to interest on late payments; a right to suspend work; and a right of lien. The Act also renders void “pay-when-paid” clauses in construction contracts, and the parties cannot contract out of the Act. In addition, the Act introduced a unique form of “rapid adjudication” of disputes over progress payment amounts whereby an independent adjudicator makes an interim determination as to the amount of progress payment to be paid to a claimant by a respondent ( Brand and Uher, 2010 ; Uher and Brand, 2008, 2005 ).

    Davenport (2004) notes that the adjudication scheme in NSW bears some likeness to the adjudication scheme prescribed by Part 2 of the UK HGCRA Act 1996, which introduced the first adjudication scheme for the construction industry. However, unlike the UK scheme, which allows the construction contract to provide procedures for adjudication, the NSW Act imposes a performance of adjudication compulsory procedure for adjudication.

    The paper aims to report on the findings of an online questionnaire survey. This paper discuses the rationale for the abolition of “contracts in writing” rule in the new Act. Further, it has explored the level of awareness of the UK industry on the abolition of “contracts in writing” rule, potential affect as well as key challenges to the adjudication process with the aforementioned change in the new Act.

    Rationale for the abolition of “contracts in writing” rule

    Section 107 of the 1996 Act states that:

    […] the provisions of this part apply only where the construction contract is in writing, and any other agreement between the parties as to any matter is effective for the purposes of this part only if in writing.

    This implies that where materials and significant terms of a contract are agreed orally and not in writing, the contract will be excluded from the provisions of the 1996 Act. However, it is common in the construction industry that a large number of constructions work to be undertaken on the strength of an oral agreement ( BIS, 2010 ; Brewer, 2006 ). Therefore, one of the most important changes made in the new Act is the repeal of s. 107 of the 1996 Act. The rationale underlying this change is that s. 107 has been interpreted restrictively by the courts, such that all of the non-trivial terms of the construction contracts must be “in writing” or “at the very least evidenced in writing” could be adjudicated ( CIArB, 2010 ). Therefore, construction contracts which had partially in oral and partially in writing, or fully oral agreements were could not be referrable to statutory adjudication.

    For instance, in March 2002 the Court of Appeal decision in RJT Consulting Engineers Ltd v. DM Engineering (Northern Ireland) Ltd [2002] EWCA Civ 270 case decided that all of the terms of a construction contract had to be evidenced in writing in order for the 1996 Act to apply. The same principal has been applied in Carillion Construction Ltd v. Devonport Royal Dockyard Ltd [2003] BLR 79 (TCC) case that the statutory right to adjudicate could be lost where there had been an oral variation to a contract...

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