The Construction Act and its amendment – adjudication

Part 8 of the Local Democracy, Economic Development and Construction Act substantially amends the Construction Act. It affects all "construction contracts" in England, Wales and Scotland. The amendments to the Construction Act are in force in relation to construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

The aims of the amendments are:

• to increase clarity in construction contracts;
• to introduce a 'fairer' payment regime, and improve rights for contractors to suspend their work in non-payment circumstances;
• to encourage the use of adjudication for the resolution of disputes.

This guide considers changes to the adjudication system under the Construction Act from 1 October 2011 in England and Wales, and from 1 November 2011 in Scotland.

The Scheme for Construction Contracts

The Scheme for Construction Contracts (England and Wales) Regulations, known as 'the Scheme', supplements the Construction Act in England and Wales and provides a fall-back provision where the contract itself does not include the eight adjudication provisions specified in the Construction Act. These provisions take effect as implied terms. A similar Scheme exists in Scotland through the Scheme for Construction Contracts (Scotland) Regulations.

A revised Scheme applies to all construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

The adjudication provisions of the Scheme will apply if:

• a construction contract's adjudication procedure does not comply with the Construction Act, even in just one respect;
• the necessary adjudication provisions are not contained in the contract;
• the parties have an oral or partly oral contract and the necessary adjudication provisions are not in writing.

Contracts in writing

The first and most significant change to the Construction Act is the abolition of the requirement for construction contracts to be in writing. The Construction Act will now apply to all construction contracts - those which are wholly in writing, partly in writing or wholly oral.

This is an issue which affects adjudication in particular and it is intended to prevent parties relying on the previous law to raise jurisdictional challenges and to generally make adjudication more difficult. There may have been good reasons for these challenges as the adjudicator should be able to know what contract he is applying. Certainty is important when adjudication takes place under such a demanding timetable. However, there was a perception that challenges were being made unnecessarily.

The new legislation gets rid of the requirement for contracts to be in writing. However, some provisions such as the provisions for adjudication, costs and the slip rule must still be in writing and if they are not then the Scheme will apply.

This change is likely to have an impact where there are letters of intent and where contracts are based on standard terms and conditions, but supplemented by oral agreements. Previously a party could not adjudicate on those sorts of agreement unless the written part contained a provision for adjudication but this will now be possible. Hearings are more likely to take place so that adjudicators can determine what the contract actually consists of, and it is possible that adjudicators will need to ask for more time so that they can decide these issues.

This will make it even more important to ensure that agreements are fully recorded in writing. A good way to avoid arguments as to verbal agreements is to have entire agreement clauses  which make it clear that formal agreement between the parties is limited to the contents of the document. These clauses will not always prevent arguments, but they will improve the position of a party arguing against an oral agreement.

The slip rule

The previous law: an adjudicator's decision is binding until finally decided by subsequent court or arbitration proceedings, or by agreement between the parties. The courts have repeatedly made it clear that this means that the adjudicator's decision will be enforced, even if the adjudicator has made an error in reaching it.

However, since Judge Toulmin's decision in the Bloor Construction case in 2000, an exception has been accepted in the case of:

• clear or obvious errors ('slips');
• which have been corrected within a very short time following the publication of the decision.

A number of the standard forms also give the adjudicator power to correct these slips.

The amendment: construction contracts will have to include a provision, in writing, which allows the adjudicator to correct errors:

• of a clerical or typographical nature;
• arising by way of an accident or omission on the adjudicator's part.

If a construction contract does not comply with these requirements then the relevant provision will be implied into the contract under the Scheme.

The amendment does not say how long the adjudicator has to exercise his power but if no period is chosen by the parties a five day period will be provided for under the Scheme. This means that any errors which need correction must be identified as soon as possible after the decision is published.

Costs of adjudication

The previous law: although adjudication is generally less expensive than court procedure, parties will still need to pay the adjudicator's fees and expenses as well as their own costs of participating in the process. The Construction Act did not previously deal with the issue of costs, leaving parties free to agree whatever they wanted as to who should bear the costs. So called 'Tolent' clauses, named after the construction company's case against Bridgeway in 2000, say that the referring party must pay the costs of adjudication even if it wins. In this case, Bridgeway had raised adjudication proceedings against Tolent and was successful, but there was a term in the contract which provided that the party serving the notice to adjudicate would bear the costs of both parties. The court held that the clause was a legitimate form of developing the procedure in relation to costs despite the apparent unfairness of it.

There were two problems with the Tolent drafting being permitted:

• there is no incentive for a party to keep its costs to a reasonable level if it knows the other side will be paying for them;
• even if adjudication is used, a deserving party may end up out of pocket because it will have to pay its costs and the other side's costs even if it wins. This serves as a disincentive to using adjudication.

The amendment: any contractual provision, whether or not it is actually contained in the construction contract, relating to the allocation of adjudication costs between the parties will be ineffective and unenforceable unless it is made in writing and:

• it is in the contract and confers a power on the adjudicator to allocate his fees and expenses; or
• is made after the adjudication process begins.

The intention was to prohibit any contractual provisions which do not comply with the new rule. This was reflected in a 2010 case where it was held that a Tolent clause conflicted with the Act and would therefore be replaced with the provisions in the Scheme.

In practice, agreements on costs after the adjudication process has begun are very unlikely to occur. There is however uncertainty at present as to whether the wording of the new Act actually prohibits Tolent clauses, and how it sits with the 2010 decision.

Conclusion

The main changes to adjudication procedure under the Construction Act are:

• the amended Act will apply to construction contracts whether made in writing or made orally. It will be even more important to ensure that contracts are executed properly and that there is no scope for arguing about verbal agreements;
• adjudication may become more complicated due to the need to identify any oral terms;
• adjudication provisions will need to be amended both in the standard forms and in contracts bespoke to their users.