The abolition of the “contracts in writing” rule in the 2009 Construction Act
Author | Akintola Akintoye |
Position | School of Built and Natural Environment, University of Central Lancashire, Preston, UK |
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 ):
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.
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
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