CIOB East Midlands Changes to the Construction Act: May 2011

1. CIOB East MidlandsChanges to the Construction Act: May 2011 Roger Smith Associate T: 020 7489 2046 M: 07815 086639 E: rsmith@tudorrosellp.co.uk Tudor Rose Partnership LLP 1 Temple Avenue, London, EC4Y 0HA www.tudorrosellp.co.uk THE TUDOR ROSE PARTNERSHIP LLP

2. When you enter into a construction contract, you acquire certain statutory rights and obligations under the Housing Grants, Construction and Regeneration Act 1996. Those rights and obligations are about to change by way of the Local Democracy, Economic Development and Construction Bill. The purpose of today is to consider those changes and how they affect you in practical terms. THE TUDOR ROSE PARTNERSHIP LLP

3. Introduction • Two sessions; one on the current position and one on the proposed changes in respect of (i) payment and (ii) adjudication. • Introduction to the speaker. • Introduction to the attendees. THE TUDOR ROSE PARTNERSHIP LLP

4. Session One Current Position Payment THE TUDOR ROSE PARTNERSHIP LLP

5. Payment • A party to a construction contract is entitled to payment by instalments, stage payments or other period payments for any work under the contract, unless the duration of the contract is (estimated to be) 45 days. • The parties are free to agree the intervals at which, or the circumstances in which, payments become due. • In the absence of such agreement the provisions of The Scheme apply. THE TUDOR ROSE PARTNERSHIP LLP

6. The Scheme Day 0: End of relevant period (every 28 days) Day 7: Due Date Day 12: Notice of Payment (5 days after the Due Date) Day 17: Notice of Withholding (no later than 7 days before the Final Date for Payment) Day 24: Final Date for Payment (17 days after the Due Date) THE TUDOR ROSE PARTNERSHIP LLP

7. What must the Notice(s) say? • A Notice of Payment must communicate the payment proposed to be made specifying to what the payment relates and the basis on which that amount is calculated. • A Notice of Withholding must communicate the amount to be withheld, the ground(s) for withholding and the amount attributable to each ground. THE TUDOR ROSE PARTNERSHIP LLP

8. Notice of Payment or Notice of Withholding? • What goes in to each? • Was there an entitlement in the first place? • Think of the difference by way of example • What is the penalty for failing to issue a Notice of Payment? • None? • Arguably a reversal of the burden of proof • What is the penalty for failing to issue a Notice of Withholding? • Fatal! THE TUDOR ROSE PARTNERSHIP LLP

9. Session One Current Position Adjudication THE TUDOR ROSE PARTNERSHIP LLP

10. Adjudication What is adjudication currently? • Adjudication is industry specific dispute resolution. • Brought in by HGCRA following the Latham report in 1996 • Intended to ensure cash flow in the industry keeps moving. • Changed and evolved from its inception. THE TUDOR ROSE PARTNERSHIP LLP

11. Adjudication • Available – right to refer a dispute at any time. • Quick -28 days. But not always! • Binding until either litigation or in arbitration. • Cheap. Is it? • Enforceable by the courts. Even if wrong! • Accepted and liked by the industry -95% of all adjudication decisions are paid without further challenge THE TUDOR ROSE PARTNERSHIP LLP

12. Adjudication Right to refer a dispute at any time providing: • There is a construction contract in accordance with the meaning of sections 104, 105 and not within section 106 of HGCRA THE TUDOR ROSE PARTNERSHIP LLP

13. Adjudication • S104 of the HGCRA: Construction contracts. (1)In this Part a “construction contract” means an agreement with a person for any of the following— (a)the carrying out of construction operations; (b)arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise; (c)providing his own labour, or the labour of others, for the carrying out of construction operations. THE TUDOR ROSE PARTNERSHIP LLP

14. Adjudication (2)References in this Part to a construction contract include an agreement— (a)to do architectural, design, or surveying work, or (b)to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape, in relation to construction operations. (3)References in this Part to a construction contract do not include a contract of employment (within the meaning of the Employment Rights Act 1996). (4)The Secretary of State may by order add to, amend or repeal any of the provisions of subsection (1), (2) or (3) as to the agreements which are construction contracts for the purposes of this Part or are to be taken or not to be taken as included in references to such contracts. THE TUDOR ROSE PARTNERSHIP LLP

15. Adjudication • S105 of the HGCRA: (1)In this Part “construction operations” means, subject as follows, operations of any of the following descriptions— (a)construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings, or structures forming, or to form, part of the land (whether permanent or not); (b)construction, alteration, repair, maintenance, extension, demolition or dismantling of any works forming, or to form, part of the land, including (without prejudice to the foregoing) walls, roadworks, power-lines, telecommunication apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence; THE TUDOR ROSE PARTNERSHIP LLP

16. Adjudication (c)installation in any building or structure of fittings forming part of the land, including (without prejudice to the foregoing) systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or security or communications systems; (d)external or internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration; (e)operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this subsection, including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection, maintenance or dismantling of scaffolding, site restoration, landscaping and the provision of roadways and other access works; THE TUDOR ROSE PARTNERSHIP LLP

17. Adjudication (f)painting or decorating the internal or external surfaces of any building or structure. (2)The following operations are not construction operations within the meaning of this Part— (a)drilling for, or extraction of, oil or natural gas; (b)extraction (whether by underground or surface working) of minerals; tunnelling or boring, or construction of underground works, for this purpose; (c)assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery, on a site where the primary activity is— (i)nuclear processing, power generation, or water or effluent treatment, or THE TUDOR ROSE PARTNERSHIP LLP

18. Adjudication (ii)the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink; (d)manufacture or delivery to site of— (i)building or engineering components or equipment, (ii)materials, plant or machinery, or (iii)components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or for security or communications systems, except under a contract which also provides for their installation; (e)the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature. THE TUDOR ROSE PARTNERSHIP LLP

19. Adjudication (3)The Secretary of State may by order add to, amend or repeal any of the provisions of subsection (1) or (2) as to the operations and work to be treated as construction operations for the purposes of this Part. (4)No such order shall be made unless a draft of it has been laid before and approved by a resolution of each House of Parliament. THE TUDOR ROSE PARTNERSHIP LLP

20. Adjudication • S106 of the HGCRA 106 Provisions not applicable to contract with residential occupier. (1)This Part does not apply— (a)to a construction contract with a residential occupier (see below), or (b)to any other description of construction contract excluded from the operation of this Part by order of the Secretary of State. (2)A construction contract with a residential occupier means a construction contract which principally relates to operations on a dwelling which one of the parties to the contract occupies, or intends to occupy, as his residence. In this subsection “dwelling” means a dwelling-house or a flat; and for this purpose— THE TUDOR ROSE PARTNERSHIP LLP

21. Adjudication • “dwelling-house” does not include a building containing a flat; and • “flat” means separate and self-contained premises constructed or adapted for use for residential purposes and forming part of a building from some other part of which the premises are divided horizontally. (3)The Secretary of State may by order amend subsection (2). (4)No order under this section shall be made unless a draft of it has been laid before and approved by a resolution of each House of Parliament. THE TUDOR ROSE PARTNERSHIP LLP

22. Adjudication • The contract must either contain an adjudication clause which sets out how and when a party can give notice of intention to refer to adjudication or the provisions of the Scheme are imported in to the contract. THE TUDOR ROSE PARTNERSHIP LLP

23. Adjudication • The contract is in writing in accordance with section 108 of HGCRA NB – it does not need to be signed. A letter of intent may constitute a contract. There are a number of decisions as to what constitutes ‘in writing’. EMAIL – PROCEED WITH CAUTION!! THE TUDOR ROSE PARTNERSHIP LLP

24. End of Session One • Take a break • Reconvene in 15 minutes please THE TUDOR ROSE PARTNERSHIP LLP

25. How are current rights and obligations about to change?* *about to? The Bill has received Royal Ascent and latest indication is that it will become effective from 1 October 2011 THE TUDOR ROSE PARTNERSHIP LLP

26. Session Two Forthcoming Position Payment THE TUDOR ROSE PARTNERSHIP LLP

27. Notice of Payment It is not necessarily the payer who issues the payment notice: • The Payer may be obliged to issue an Employer Payment Notice; OR, • The Payee may be obliged to issue a Contractor Payment Notice [whichever is stated in the contract] THE TUDOR ROSE PARTNERSHIP LLP

28. Failure to issue an Employer Notice of Payment Where an Employer Payment Notice has not been given to the Contractor within 5 days after the payment due date, the Contractor can give the Employer a Contractor Payment Notice at any time after the final date on which the Employer Payment Notice was required to be given. • Reinforcing that the penalty for failing to issue the notice is a reversal of the burden of proof? • What happens to the payment timetable in this instance? THE TUDOR ROSE PARTNERSHIP LLP

29. Notice of Withholding • The term “Notice of Withholding” becomes a thing of the past. • The Employer is the pay the Contractor the notified sum on or before the final date for payment. • The Employer may, however, give the Contractor a notice of the Employer’s intention to pay less than the notified sum not later than (7 days) before the final date for payment, specifying: • The sum the Employer considers to be due on the date the notice is served • The basis on which the sum is calculated [The distinction between Notice of Payment and Notice of Withholding appears to have gone. Is the new notification system simply a chance to have “a second bite at the cherry”? ] THE TUDOR ROSE PARTNERSHIP LLP

30. Suspension for Non Payment • Currently a right to suspend performance (subject to notice) • Key changes: • Allow contractor to suspend all, or part, of the works • Allow the suspending party to recover a reasonable amount in respect of its costs and expenses incurred in the suspension from the non-paying party • Arguably confer a right on the Contractor to claim an extension of time from the date of suspension until the sate when the Contractor has mobilised THE TUDOR ROSE PARTNERSHIP LLP

31. Session Two Forthcoming Position Adjudication THE TUDOR ROSE PARTNERSHIP LLP

32. Adjudication How is adjudication changing? 1) ORAL CONTRACTS • The LDEDCA removes the need for a contract to be in writing. Therefore a dispute can be referred to adjudication on the basis of an oral contract THE TUDOR ROSE PARTNERSHIP LLP

33. Adjudication 2) SLIP RULE • The slip rule is a rule by which an adjudicator can correct an arithmetical mistake in his decision within a certain period after issue of the decision. • The new Act makes legislative provision for this. THE TUDOR ROSE PARTNERSHIP LLP

34. Adjudication 3) ADJUDICATORS/ PARTY FEES • The new Act allows parties to make provision for the costs of an adjudication in writing after the issue of a notice of intention to refer a dispute to adjudication. • Not currently permissible. • ‘Tolent’ Clauses THE TUDOR ROSE PARTNERSHIP LLP

35. Adjudication What will be the effect of these changes?? • In reality no one knows. • Some thoughts: • Oral contracts may cause more adjudication referrals. THE TUDOR ROSE PARTNERSHIP LLP

36. Adjudication • Oral contracts may instigate stage adjudications which will need to determine firstly if there will be a contract and then the substantive issue(s). • Oral contracts may require adjudicators to received a greater volume of oral evidence. Are they trained to deal with this?? THE TUDOR ROSE PARTNERSHIP LLP

37. Adjudication • Oral contracts might increase the costs for the parties as disputes could take longer to decide. THE TUDOR ROSE PARTNERSHIP LLP

38. Thank you for listeningAny questions? THE TUDOR ROSE PARTNERSHIP LLP