Analysis of Construction Contract Law of the United Kingdom - Essay Example

Analysis of Construction Contract Law of the United Kingdom Number Department Introduction The promulgation of the Local Democracy, Economic Development and Construction Act 2009 (LDEDCA) on 1st October 2011 reformed the regulation of construction agreements that have come into effect since then and is the foundation of this contract. The LEDEDCA embodies strategic reforms to the Housing Grants under the previous statute, the Construction and Regeneration Act 1996 (HGCRA). The main aim of the reforms was to correct perceived misgivings in the 1996 Act and keep construction industry in line with the current trends and quality and stringent regulatory requirements. This paper examines various clauses of the Sub-contract and their level of compatibility with the Construction Act 2009 and the Joint Contracts Tribunal rules. The Construction Law The enactment of the Construction Act 1996 on 1st May 1998 made it the sole regulatory mechanism for all construction contracts (Evans, 2005; Teichmann, 2011).  The law was intended to handle issues in the construction industry relating to payments for completed construction projects and the then rampant cases of prolonged and costly legal disputes that were bringing construction activities at the sites to a near standstill. In the Act, different stakeholders in the building industry now reached a consensus about the various provisions which sought rationalize payment issues and establish a new way of resolving disputes that would keep construction projects going on throughout the duration of seeking resolutions to conflicts. Adjudication was the new dispute resolution mechanism which was brought into the 1996 Construction Act. The Construction Acts are limited to regulating construction contracts only. Sinden et al (2012) have noted that a construction contract is a working arrangement between two parties with for purposes of implementing construction activities. In general, construction operations encompass erecting, altering, renovating, servicing, extension or bringing down of any buildings, constructions or works (Lynch, 2013; Evans, 2005). This broad definition of construction works also includes piping and electrical installations, drainage networks and tunnels, clearing the debris from the site, landscaping and applying finishing touches like painting and decorations among others. In light of these definitions, this sub-contract is well within the confines of a construction project. Owing to the applicability of the Construction Act 1996 to contacts formed in writing, this Sub-Contract was conceived within the law (Teichmann, 2011). Nonetheless, the Construction Act 2009 has since reformed the limitation and provided a reprieve for parties that are willing to enter into unwritten construction agreements. In light of this, construction contracts created after 30th September 2011 can be done in writing or orally or both. Suspension of Works Clause 11 of this contract is fully compliant with the Construction Act of 2009 regarding the issue of suspension of the Works pending the settlement of any dispute between the parties during the implementation of the contractual agreement (Abdallah, Darayseh, and Waples, 2013). The Act allows a contractor to withhold all or part of his duties under the agreement and also to ask for extension of deadline and costs incurred thereof to the employer within the period of contractor’s suspension of the duties and remobilisation.  Under Clause 11, the contractor is entitled to half of the total cost of the Works from the time a defect creeps in and the time of resuming the obligations under the contract. This is fair for the Sub-Contractor, who may refuse to attend site meetings or be complete certain tasks related to the works pending the release of their pay or be asked to defray the costly remobilisation expenses. As Rajendran, Clarke and Whelan (2013) have argued, in lieu of the contractual term and the provisions of the Constructions Act 2009, the Sub-Contractor will be better placed to remobilise for the works and enjoy the protection from any fines arising from interest rates, late payment and retention of payment, the Sub-Contractor opts to remove their assets from the site pending the settlement of the dispute (Dancaster, 2008). According to Rajendran, Clarke and Whelan (2013), the JCT rules on suspension of works are in line with the Sub-Contract and the two Acts, in the sense that, if there is no valid defect, for example, and there is an unnecessary delay of payment by the employer, Determination can be entered by the aggrieved party to successfully end the contract. In light of this, suspension that warrants Determination, usually involves the incapacity of a party to fulfil their obligations under a contract. Payment Issues According to Abdallah, Darayseh, and Waples (2013) the Construction Acts provides for three primary issues related to payment: these are; (a) requiring parties to a construction contract to reach an agreement on settling (a sub-contractor’s dues) in phases upon the completion of specific, quantifiable work that lasts for more than 45 days; (b) every construction contract should state clearly the approach to calculate the amount of payments owed (to the sub-contractor) and after how long; and (c) every construction contract must indicate a last date for settling of the dues so as to facilitate timely applications for claims either within the contractual agreement or through third parties. Payment issues are stipulated in 10.2 of the terms of the sub-contract. Under the clause the employer says that in the event that the Order specifies or estimates that the timeline within which the Sub-Contract Works will last for fewer than 45 days, then the payment for the Sub-Contract Works will be released at the end of one calendar month upon the finishing of the Sub-Contract Works or when the sub-contractor formally tenders a request for the release of payment, whichever is later. This clause is fair and in keeping with the Construction Act 1996, in the sense that it allows a period of about 15 days to the expiry of the 45-day period within which payments must be remitted for stage-wise works. Clause 10.3 of the contract provides that if the timeline for the Sub-Contract Works is more than or equal to 45 days, the initial and subsequent stage-wise payments shall be released to the Sub-Contractor on a piecemeal basis as indicated on the Order. The Order itself provides for the derivation of the intervals for payment from the day the Sub-Contractor begins to render his services at site. As Adams (2008) has said, the employer provides yet another option that would precipitate payment: pre-existing schedules on the Order can also be used to determine when payments are due, provided that in any such claims for payment the Sub-Contractor meets the conditions set out in Clause 10.1. This clause basically imposes an obligation on the Sub-Contractor to be fully compliant with different collateral documents which must be available when processing such payments. Collateral requirements Although, Clause 10.1 is mainly intended to compel the Sub-Contractor to comply with the stringent payment requirements set up in the Construction Acts, the duties that the Sub-Contractor owes the employer under the “Order” are material to the implementation of the contract, but unfair because they are a creation of only the employer. As such, the letter and spirit of the provisions of the order with regards to payment were not negotiated between the two parties and thus, constitute unfair contract terms. Unlike the Order requirements that should be seen as flexible, collateral documents don not need any flexible negotiations. The collateral documents as articulated under clause 9.1 are: a performance bond; guarantee of the parent company provided the Order so specifies; insurance documents; a validly filled Safety, Quality and the Environment Questionnaire; and VAT compliance reports among others. Apart from these payment conditions, the only misgiving of the required documents which might prove disadvantageous to the Sub-Contractor is the guarantee of the parent company (Adams, 2008). If the document is listed among the primary requirements, then it could put the Sub-Contractor in a disadvantaged position, more so if it is a small standalone company that seeks to cut a niche for itself in the construction industry. Article 9.2 of the contract specifies that the documents should be provided to the Contractor within 7 days upon the receipt of the written request. The request will be sent to the Sub-Contractor ahead if the practical finishing of the works is expected within the timeline. This clause aims to rein in any form of delays in the release of payments that may inconvenience the Sub-Contractor upon the completion of the Works, thus can be construed as fair and based on mutual trust and responsibility between the parties (Sinden et al, 2012). However, Clause 13 of the contract requiring the Sub-Contractor to furnish the Contractor with collateral warranties if the Order so requires is a rather unfair term considering that the Sub-Contractor was not a party to the negotiation of the Order terms. Payment delays Brown (2005) says payment delays were a common phenomenon in English construction contracts during the better part of 1990s and before. However, the Construction Act 1996 somehow reined in the behaviour. The requirement to include the final date when the payment is due was established in the Acts and has been enshrined in this contract to deter cases of any party to a contract withholding payment unnecessarily, especially after the expiry of the payment period (Iain, 2010). Of late and as provided for in the contractual, the only exception to payment delays occurs only when the employer makes his or her intention to withhold the payment known to the beneficiary, well in advance, by serving a withholding notice on them. The withholding notice generally specifies the amount that the party intends to withhold and valid reasons for withholding it.  In light of this provision, where an amount of payment sum to be paid under a construction contract has not been released in full on or before the final payment date and no appropriate communication of the reason for withholding the payment has been issued, the owed party is well within the law to suspend his or her services under the contract, provided seven days’ notice has been served on the payer. Article 10.8 of the contract is fair in the sense that the Contractor will give notice of their intention to withhold payment a day prior to the final date of payment, specifying the amount of payment that will be withheld and sufficient reason(s) behind the move. In light of this, the employer has complied with the Construction Act 1996, by keeping “pay when paid” terms out of the contract (Brown, 2005). In such scenario, payments to the Sub-Contractor would wait until the employer has received payments from whichever party they serve. Advance Payments Advance payments are avoided under this contract and also under the JCT rules. The quest to avoid upfront payments by employers has resulted in unnecessary delays in the release of payments, causing inconveniences to Contractors (Ramsey and Limited, 2007). But in this case, the employer seems to have given the contractor a rare reprieve by beginning the processing of payments one-week in advance and not upon the completion of works as required under the JCT rules and the Construction Acts. In addition, this contract is fair because it does not have any clauses requiring the Sub-Contractor to wait unnecessarily longer for the “certification” of their due payments. Despite the fact that forms of unnecessary delays of payment had been outlawed under the Construction Act 1996, certain employers could still circumvent the law by introducing clauses hinging the payment of a sub-contractor on the condition that any of such payments had to be certified before release. The certification would take unnecessarily longer. The unfair clauses of “pay when certified” have been arguably dubbed as the reincarnation of the “pay when paid” clauses, which were in existent before the enactment of the Acts, and worked in favour of the employer (Jenkins and Stebbings, 2006). On its part, Masadeh (2014) argues that the JCT recommends withholding of an agreed amount of the payments under the contract until the successful completion of phases of work. This saves the employer of upfront payments which could be costly if the contractor fails to deliver on the services as agreed upon by the parties under the contract. Payment upon completion of the work normally saves the stakeholders costly impacts such as liquidation of a subcontractors or long-drawn legal battles to settle defects arising from the implementation of a contract. Adjudication Any disputes arising from the execution of a construction contract may be referred by either party for adjudication at any time within the course of implementing the contract (Sinden et al 2012; Chileshe, Khatib, and Farah, 2013). If a contract lacks an appropriate dispute resolution mechanism, the Scheme adjudication procedures shall apply. In this case, proper adjudication procedures have been included in the construction contract under the Supplemental Condition A. The adjudication procedure includes; the procedure and period within which a dispute should be filed; the role of the adjudicator; how to handle his or her death or incapacity; how the adjudication should be conducted; and the settlement of adjudication fees. The adjudication clauses under the Acts state that construction contracts should provide for adjudication within 28 days of filing a dispute (Brown, 2005; Jenkins and Stebbings, 2006). The latest Act considers this strict adjudication timeline and advocates for written and oral submissions in order for an adjudicator to arrive at the best possible decision. In this case, the contract provides for a four-week period within which a party may discover any source of dispute. Another four weeks within which to file the complaint with the adjudicator; and a further four weeks for the adjudication process are also included in the terms (Ramsey, and Limited, 2007). These clauses are well in line with the provisions of the two Construction Acts. The only issue that has been left out of the adjudication process in the contract is the ratio of sharing the cost of adjudication. The Sub-Contractor is clearly disadvantaged, especially if the process does not kick off. Whereas, the adjudicator is more impartial to make a decision on the sharing of the costs between the parties to the contract, the Sub-Contractor would be injured by sharing adjudication fees in equal proportion by the employer. This is especially true in the event that the defect causing the dispute the result of the employer’s inability to adhere to the contractual terms (Clause A6.1). The contractual clause further states that any party that has taken the initiative to seek adjudication would be liable for any reasonable fees should the process stall. This another clearly unfair term of the contact in the sense that it would instil some fear upon the Sub-Contractor to refrain from seeking adjudication “at any time” as required under the Construction Act of 1996 (Masadeh, 2014). The clause may prompt a Sub-Contractor that lacks adequate financial resources to overlook clear violations of contractual terms for fear of being asked to foot extra costs. Regardless of this reasoning, an empowered adjudicator as provided for under this contract is better for more impartial and conclusive decisions (Brown, 2005; Redmond, 2008). The tradition of a powerful adjudicator can be traced partly to the court decisions made since 1998 and partly to the provisions of the Construction Act of 2009. The JCT has also amended it rules to be in comport with the Act. The four-week period within which the contractor should lodge a complaint is well within the revised rules of the Joint Contracts Tribunals (JCT) (Brown, 2005). The JCT says the aggrieved party should seek adjudication for any dispute soonest, provided the dispute cannot be resolved by the principals. The body also recommends court proceedings for more serious cases and arbitration for minor disputes or as the parties may wish to find an amicable solution (Bramble, and Callaham, 2010). Litigations are however considered separately and not as appeals against the verdict of an adjudicator. Case Law The omission of “Tolent Clauses” in the Construction Act of 1996, which mainly involve who should settle adjudication costs prompted Parliament to outlaw them under the new legal regime. Previously, as Hughes, Champion and Murdoch (2007) would recall, it had become a common trend for employers to include clauses requiring whoever started such processes (contractors in almost all of the cases) to settle the adjudication costs. In lieu of the seemingly slacken regulations, the court legitimised them in the case of Bridgeway Construction Ltd v Tolent Construction Ltd (2000) CILL1662. But now, it is not only inappropriate but illegal to sneak the clauses in a construction contract. The employer therefore erred by inserting an unfair contractual term requiring the Sub-Contractor to settle any costs arising from an aborted adjudication process. Interestingly, in the case of Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720, the court ruled that by introducing the “Tolent Clauses” into a construction contract, the party would be breaching the provision of the Construction Act 1996, requiring any party to a construction contract an unfettered rights to apply for the adjudication process any time (Chileshe, Khatib, and Farah, 2013). It is arguable that owing to the lack of clarity of the issue in the Construction Act of 2009, the amendment seems to be a reversal of the gains that the construction industry had made in the formation of contracts (Bramble, and Callaham, 2010). Conclusion Generally, this contract meets the conditions set out in the Construction Act 1996 and the Construction Act 2009. In addition, it is also largely compliant with the JCT rules on seeking adjudication whenever a dispute arises; settlement of payments within 45 days for smaller works; and the due process of adjudication. However, the “Tolent Clauses” requiring the contractor to settle any costs resulting from an aborted adjudication, since contractors are the main complainants, is unfair. In addition, splitting of the adjudication fees equally between the parties is also unfair, especially if the employer is found to be liable for the defect spawning the dispute. The following amendments to the contract are necessary: a) renegotiation of the terms of the Order process with the contractor to make them fair; b) sharing adjudication fees and other relevant costs arising from the process based on the level of liability of the parties to the contract, and c) extending the period of withholding notice from one day to three days to facilitate timely communication of payment delays to the workers at the end of the equation. References Abdallah, A.A., Darayseh, M., and Waples, E. 2013. Incomplete contract, agency theory and ethical performance. Journal of General Management, 38(4), pp.39-56. Adams, F. K. 2008. 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The New Construction Act: How does it apply to builders merchants? Legal Issues in Business, 7, pp.8-18. Read More