Dispute Resolution Issues in the Construction Industry

3709 words (15 pages) Essay in Contract Law

07/08/19 Contract Law Reference this

Last modified: 07/08/19 Author: Law student

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Within the construction industry there are often disputes between the parties involved within the contract, may it be the client, the contractor, the purchaser, or any of the sub-contractors that have agreed to abide with the contract for the works required.  These disputes can arise for any number of reasons. Carter and Kadir (2016) explain that “some of the most common disputes within the construction industry are generally about claims for payment not being paid, delays caused where fault lies with one or more parties, defects ranging from snagging to structural issues not detected at an earlier stage and professional negligence when an employer believes that a consultant or contractor has failed to carry out their work with due skill or care.”

These reasons for disputes that are stated by Carter and Kadir have been agreed by many,an example would be Aeberli (2012) who states “A project is flexible until completion with the price being fluid until the end, this forms the opportunity for dispute due to uncertainty.  There are often long lead times and delivery periods in which circumstances can change. Projects are complicated with meticulous planning required where the possibility of error is forever present. With large sums of money involved the chance to dispute an action and save money is often an attractive idea.”

Due to the complex nature of the construction industry, the majority of construction contracts will include various clauses to regain any cost that is incurred due to the faults of another party (Lynch, 2018). These clauses lead to the most common occurrence of disputes within the industry, which is those that are involved with the financial aspects. Before 1998 the process to reconcile disputes, was either through arbitration or litigation. Due to the cost and time of these options it was often that smaller sub-contractors went without payment or had to wait a long period of time which would lead to cash flow issues.  This trend of larger contractors withholding payment from sub-contractors for unreasonable reasons was leading to serious concern across all levels of the industry (Aeberli, 2012).

Due to these concerns from within the Industry about financial disputes, the Government and those within the industry commissioned a report that also included participation from many major clients. Written by Sir Michael Latham in July 1994 the report was called “Constructing the Team: Joint review of procurement and contractual arrangements in the United Kingdom Construction industry”. It is now more commonly known as “The Latham Report.”

The report was written to try to tackle the issues and lay down a set of guidelines to be followed, especially with the making of payments and the issues of dispute so all involved within the industry knew what was expected of them and had the same set of rules to follow. The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) was formed after the report was written integrating many of the ideas that were within the Latham Report. It is within Part II of The Housing Grants, Construction and Regeneration Act 1996 that addresses construction contracts, payments, and dispute resolution (Wood, 1999).

Part II of the Act starts with the introductory provision by describing what is meant by a construction contract. Section 104 defines what a construction contract means and who the agreement is between to carry out construction operations. Consider Baldwins industrial services v. Barr Ltd when looking at section 104(1) (c) on what constitutes a construction contract and whom it is between (HM Government, 1996).

The term construction operations are explained further in Section 105 (1), it states that “construction operations include the construction, alteration, repair, maintenance, extension, demolition or dismantling of ” and proceeds to list all the works that it applies too and determines whether there is a contract between the named parties under section 104 (BPE, 2017).

Section 105 (2) explains those works that are not considered under the act to be considered as construction operations. These are principally works like drilling for oil or mineral extraction or where the primary purpose of the work can be described as process engineering i.e. water treatment (Aeberli, 2012).  This creates a clear distinction of the works that are considered under the scope of the Act (HM Government 1996). This needs to be clear as disputes often arise as seen in the case between North Midlands Construction plc v. A E E Lentjes (UK).

Section 106 continues to describe those works that are not covered by the act, however this section covers work that is to be carried out by the owner of the property who plans to live within the dwelling, an example of this is an extension to a property or a new home being built that the developer plans to reside in. A case of this can be seen between Edenbooth v. Cre8 development Ltd (BPE 2017).

The final section of the introductory provisions is section 107, this section discusses how the contract shall be communicated between those named parties discussed in section 104 and gives the various ways how. Predominately for the act to apply to the contract then the contract must be in writing (O’Reilly, 1999). This is important as if not recorded properly disputes can arise like in the case of Carrillion v. Devonport Royal Dockyard. The JCT standard contract states that in clause 1.7 that communication including without limitation, each application, approval, consent, confirmation, counter-notice, decision, instruction, or other notification shall be in writing. If an instruction is given that that is not in writing then it takes no immediate effect, but the contractor needs to confirm the terms within 7 days in writing, this is covered within clause 3.12 (JCT, 2016).

Section 108 discusses the right to refer disputes to adjudication. The term “dispute” is classed as any differences that cannot be resolved through discussion between the parties involved within the contract (McGuiness, 2007). Adjudication is the first step to take with any unresolved disputes, however both parties must first agree that adjudication is a step that they wish to take, and it must be written within the chosen contract (Thomas, 2001). Standard forms of contract now include the provision for adjudication, within the JCT standard building contract in article 7 where it states, “If any dispute or difference arises under this contract, either party may refer it to adjudication in accordance with clause 9.2.” If adjudication is required for a dispute, then the contract will state who the parties are, this can be extremely important as can been seen in the case between A.J Brenton t/a Manton Electrical Components v. Jack Palmer where a disagreement about who the dispute was actually between arose (McGuiness, 2007).

The adjudication process is laid out within the HGCRA, firstly, notification must be issued to the other party that a dispute is to go to adjudication and clearly outline the scope of the dispute. Within seven days of this notification being issued an adjudicator should be named, whether it be an individual or a panel of professionals. The adjudicator can be written into the contract by prior agreement or one can be appointed when adjudication arises (Farrer, 2018).

Once the dispute has been referred to the adjudicator they have a period of twenty-eight days to reach a decision, this period may be extended by up to fourteen days if it is agreed upon by the relevant parties of the dispute (H M Government, 1996).

The adjudicator themselves are bound to carry out their investigation impartially as instructed by the HGRCA and to take the initiative of ascertaining the facts and the law of the dispute. The Scheme for Construction Contracts (England and Wales) Regulations 1998 paragraph 13 lays out how the adjudicator may proceed to gather the information that they require to conclude on the dispute.

Once a decision has been reached by the adjudicator on the matter of the dispute, the conclusions that they have reached do not have to be expressed to the parties under the JCT contract, however the parties may request an explanation on how the adjudicator came to their decision. When the decision is made any further actions that are required to be carried out must be included with any dates of completion, i.e. payments to be made must be included with a schedule of when they are due by (McGuiness, 2007).   

Once the decision has be made by the adjudicator, it is binding as stated in the HGCRA for an interim basis. It also states that the adjudicator is not liable for anything done or omitted unless in bad faith within the process. However, if the adjudicators decision has not been accepted by one or more of the parties then they can either go to litigation or arbitration. This is a risk as there are several cases like Macob Civil engineering v. Morrison Construction and Outwing Construction Ltd v. H. Randall where the dispute has reached the courts, in the cases previously named the Courts enforced the decision of the adjudicator by summary procedure (Knowles, 2005).  However, in some instances the Court will not enforce the decision of the adjudicator as seen in the Carrillion v. Devonport Royal Dockyard case.

 The second option to take if a party is unhappy with the adjudicators decisions is to go to arbitration, this choice should be only be considered as a very last option. It is an extremely costly choice to make and should only be used when the amount to be gained is of a substantial value that would make it worthwhile (McGuiness, 2007).    

Section 109 – 113 of the HGCRA deal with the procedures for payments. Entitlement to stage payments are covered within section 109 which states that “a party to a construction contract is entitled to payments by instalments, stage payments or other periodic payments for any work under the contract.”  It also goes on to explain that work which is specified as less than forty-five days within the contract or work agreed between the parties to be estimated at less than forty-days are excused from this statement (H M Government, 1996). In simple terms it is stating that those that are involved with the contract and carry out work in line with the terms are entitled to regular payments.

Within section 109 of the HGCRA it also states that the parties within the contract are free to agree payment terms. So, even thou the HGRCA states that payments are due regular payments, the terms of these payments can be agreed prior to work commencing between the parties. The JCT Standard Building Contract abides with this clause by including within its contract particulars the payment terms for the contract. This is further explained within section 4 where the terms of payments are broken down. If no payment terms are agreed upon by the parties then the Scheme for Construction contracts will apply (Arberli, 2012).

Section 110 covers the terms for dates of payments, it states that “an adequate mechanism for determining what payments become due under the subcontract and the final date for payments of such sums”.  As well as the HGCRA requiring the payment due date and the final payment date to be issued to the sub-contractor by the contractor, it also states that a notice of payment is due no later than five days after the payment due date (McGuiness, 2007).    

Under the wording of the HGCRA some confusion over dates can occur, the payment due date is not the date in which the subcontractor is due payment but in which the contractor payment period commences. This payment period is usually defined within the sub-contract documents. The final payment date is when the sub-contractor should be paid by. The parties need to be clear on these so disputes do not arise over these reasons.

The payment amount that is due is to be specified on the payment notification and the basis on which the amount was calculated. The JCT standard building contract the terms for interim payments – calculations of sums due are laid out in clause 4.14.

 Unfortunately, even thou this is laid out payment disputes are common, with the valuation of the work coming under scrutiny often. Whilst the sub-contractor may believe that the work has been carried out the contractor may not, this can be common if stage payments are used with the use of minor defects or snagging used to withhold payment. However as seen in Hoenig v. Isaacs where it was a lump sum contract, even thou all the work was not completed there was an entitlement to stage payment, albeit an amount less than the total sum (McGuiness, 2007).    

If any payment amount is to be withhold for any reason, then a notice to withhold payment must be issued within the prescribed period before the final payment date. These dates are agreed within the sub-contract documents. No payment is to be withhold after the final payment date. This is covered by section 111 of the HGCRA.  If a notification to withhold payment is issued, then the notification must clearly state the amount that is to be withhold and the reasons for this payment being withheld. As per the language of the contract, the notification must be in writing (HM Government, 1996).

The issuing of pay less notices and the timing of payment is incredibly important, not only for the impact that it can have on cash flow for the sub-contractor but if a client is unaware of the provisions laid out within the HGCRA and the sub contract, then an unscrupulous sub-contractor can take advantage. A tactic that is commonly known within the industry as “smash and grab” has been used throughout the years.  This is when a payer fails to issue a correct pay less notice within the terms of the contract, the other party is then entitled to claim the amount that they applied for in the application, this is irrespective of the value of the work carried out (Thompson, 2015). An example of a smash and grab case is the ISG Construction Ltd v. Seevic College case.  

To ensure that this tactic is not used it is imperative that pay less notices and payments are dealt with correctly and on time as per the contract or construction act. Within the JCT standard building contract the issue of a pay less notice is explained in clause 4.12. With this being said, recently as can seen in the case between Grove Developments v S&T UK Ltd the High Court has been looking into smash and grab adjudications and is now looking to favor the client rather than the contractor in smash and grab claims (Lowe, 2018).

Section 112 instructs on the actions that a party my take if they fail to be paid, as explained within the HGCRA if a party fails to be paid and no notice to withhold payment has been given then they have the right to suspend work without prejudice from the employer. Before they can suspend work a notice that they are suspending their obligations under the contract must be issued with the reasons why at least 7 days before the suspension begins (HM Government, 1996). As explained by Sheridan (2018) the option to suspend work is not widely taken, this is due to the uncertainty and the risk of the claim being a breach of contract.

Section 113 invalidates the provision of a paid when paid clause being inserted within the construction contract. A paid when paid clause is when a contractor waits to be paid themselves by the employer before releasing any payments to subcontractors (Ruggieri 2010).  The section further goes on through clause 113 (2) – 113 (5) to define what is classed as insolvency and the actions to be taken if this occurs (Arberli, 2012).

The final four sections of the HGRCA, sections 114 – 117 are supplementary provisions. Section 114 includes the use of the Scheme for construction Contracts (England and Wales) Regulations 1998 where the original contract is non-compliant with the HGRCA. This means that the works can continue under the contract whilst still having legality (H M Government, 1998).

Section 115 of the HGCRA instructs the parties that they are “free to agree on the manner of service of any notice or other document required or authorised to be served in pursuance of the construction contract.” This allows the parties to agree the best form of correspondence between themselves and any deadlines that they which to set out for the correspondence. However, if this cannot be agreed or is overlooked then the Act has laid out provisions to be followed (H M Government, 1996).  This can be seen within the JCT standard contract clause 1.7 which covers the provisions of notices and communications.

Section 116 the reckoning of periods of time states the period of when an act begins, it also includes within the section days which are not to be included within that period as per the Banking and Financial Dealings Act 1971 (lynch, 2018).

The final section of Part II, section 117 is for the crown application, this covers any form of construction contract that is entered into or on behalf of the Crown and the Duchy of Cornwall, it however does not include contracts for the Queen in a private compacity (Aeberli, 2012).

By carrying out the provisions laid out in the HGCRA and by not being able to lawfully withhold payments for unacceptable reasons and an option for quick resolution of disputes has helped improve cashflow and help to ensure that projects are completed on time.  The HGCRA has improved the way the industry works between main contractors and their sub-contractors and will hopefully continue to do so.  

References

Table of Cases

  • A.J Brenton t/a Manton Electrical Components v. Jack Palmer. (2001)
  • Baldwins industrial services v. Barr Ltd (2003)
  • Carrillion v. Devonport Royal Dockyard. (2003)
  • Edenbooth v. Cre8 development Ltd. (2008)
  • Grove Developments v S&T UK Ltd [2018]
  • Hoenig v. Isaacs. (1952)
  • ISG Construction Ltd v. Seevic College. (2014)
  • Macob Civil engineering v. Morrison Construction (1999)
  • North Midlands Construction plc v. A E E Lentjes (UK). (2009)
  • Outwing Construction Ltd v. H. Randall (1999)

Bibliography

  • Adriaanse, J (2016). Construction contract Law. 4th ed. London: Palgrave.
  • Institution of chartered engineers (2017). NEC 4. Engineering and construction contract. Option B: Priced contract with a bill of quantities. 4th ed. Telford: NEC.
  • Parris, J (1985). Arbitration Principles and Practice. London. Collins Professional and Technical Books.
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