First of all, may I thank you for the privilege you have accorded me in asking me to speak to you today on the somewhat vexed Act known as The Housing Grants Construction and Regeneration Act 1996. I am a Solicitor and, as Mr. James would say, deal in "pure law" and from that experience I can assure you, if any assurance is needed, that law has little to do with the reality of building construction or building disputes. However, it is a sad fact of life that building disputes must normally be decided according to the strict law regardless of any recognition of the reality of the situation.

This is not always so, however, since the Arbitration Act 1996 actually enables Arbitrators to decide disputes on the basis of "ex aquae bono" principles if the parties agree. Indeed, as you are probably aware, Clause 46 of the 1996 Arbitration Act enables an Arbitrator or Tribunal to decide the dispute, if the parties wish, in accordance with "such other considerations as are agreed by them or determined by the Tribunal", a truly open book!

This privilege, alas, is not accorded to an Adjudicator under the Housing Grants Construction and Regeneration Act 1996 (which I will hereafter call "the Construction Act"). He must decide the disputes in accordance with the pure law.

In principle, Part II of the Construction Act provides that where a Construction Contract (as defined in Part II) exists, then:

(i) Either party has a right to have a difference or dispute dealt with by Adjudication

(ii) In Contracts of a duration of 45 days or more, payment of the consideration must be made by stage payments (whether the parties like it or not) and

(iii) "Pay when paid" clauses are with one exception invalid and unenforceable.

Clauses 104 to 107 of Part II of the 1996 Act deal with the definition of Construction Contracts. Clause 108 is a provision that gives the parties a right to adjudication. Clauses 109 to 112 deal with the question of payment by instalments and clause 113 deals with the pay when paid clause.

Before considering these clauses in any detail it is worthwhile stressing that the Act gives a right not an obligation for a party to adjudicate. This is just as well because the Act and its provisions contain a number of deficiencies and, indeed, there are considerable disadvantages in resolving disputes in this way over the process of Arbitration. As I see it, the principle disadvantages are as follows:

(a) The Adjudicator's decision is valid only until there is a final determination by a Court or by Arbitration. This means, in my opinion, that the facts and decisions can be reviewed "de novo" and determined in an entirely different way, substantially altering the parties' positions.

(b) There is no provision requiring an Adjudicator to act fairly; only impartially.

(c) As in Arbitration, an Adjudicator can act inquisitorily, but unlike an Arbitrator he does not have to tell the parties what other information or considerations he takes into account. Thus, if they do not know, they have no opportunity to explain matters or correct misunderstandings.

(d) There is no requirement for a complaining party to satisfy any burden of proof, and finally.

(e) There is no acknowledged means of enforcing the Adjudicator's decision (at any rate as the position now stands). This is further discussed below.

During the course of the Seminar some of these disadvantages were discussed. Mr. Dancaster, who has considerable experience and is an acknowledged Authority on Adjudication, was of the view that the Adjudicator's decision on the facts would (could?) not be reversed by the Court or in a later Arbitration. I am not sure that this is right and my own view is that the Court or an Arbitrator will have to look at the facts and issues "de novo".

Graham Watts, who is the Chief Executive of the Construction Industry Council, made the suggestion that the Act did not require that an Adjudicator should be independent. He drew a distinction between the requirement of the Act that an Adjudicator should act impartially and the necessity for independence. It seems to me, however, that an Adjudicator who is not independent say, for example, (as has been mooted) because he is also the Engineer or the Architect involved in the contract, could not, de facto, be impartial. It is true that the Act says that the Adjudicator must "act" impartially rather than "be" impartial. However, I find this distinction one that is very unlikely to attract the favour of a Court.

Part II of The Construction Act is not easy to read or understand. Essentially, however, as I have said, it requires all Construction Contracts to provide for rights for a party to go to Adjudication, for stage payments where the contract is for a period of 45 days or more, and it invalidates "pay when paid" clause. In addition, under Clause 112 (relating to payment) there is an important provision entitling the Contractor to suspend work if the proper payments are not made on the due dates. The question always is, of course, what are the proper payments and what are the due dates? However, let us commence our analysis of Part II of the Act.

What is a Construction Contract?

There are four clauses dealing with this.

(a) Clause 104 defines the type of agreement to which the Act applies.

(b) Clause 105 defines the meaning of a Construction operation.

(c) Clause 106 excludes contracts with residential occupiers and also provides for Exclusion Orders to be made subsequently by the Secretary of State. . . . . . . . . . . . . and

(d) Clause 107 provides that the Act only applies where the contract is in... writing.

Nothing can replace a detailed examination of these clauses by looking at the Act itself. However, there are a number of important points worth calling to your attention.

Pursuant to Clause 106 an Exclusion Order has been made and there is excluded from Part II of the Act the following:

(a) Section 38 and Section 278 Agreements under the Highways Act

(b) Section 106 under the Planning Act

(c) Section 104 under the Water Industry Act.

(d) Externally financed developments under Section 1 of the National Health Service

(e) Private finance initiative contracts

(f) Construction Contracts which are Finance Agreements (as therein defined). . . and

(g) The relevant Agreements

All these need looking at in detail but one in particular strikes me as of considerable interest. Under (f), excluding certain Finance Agreements, a Construction Contract is excluded if it is a contract under which the principle obligations include an undertaking by a person to be responsible as surety for the debt or default of another person including a fidelity bond, advance payment bond, retention bond or preference bond. It seems to me that, on the face of it, any Construction Contract in which, for example, directors of a sub- contractor company provide a guarantee for his company might be excluded from Part 11 of the Act as a result of this clause. I doubt if it was the intention but it may well be the effect.

There are many other startling consequences from these sections that define whether or not there is an applicable Construction Contract too numerous to go into in this article. Another, particularly significant provision, however, that strikes home is the provision whereby the right to adjudicate is now statutorily implied to agreements to

(a) provide architectural design or surveying or

(b) provide advice on building engineering, interior or exterior decoration or on the laying out of landscape in relation to construction operations (104(2)).

These clauses would seem to me to catch all architectural agreements for services and, indeed, legal advice agreements on construction claims. A client who now comes to a solicitor and requests him to consider a Construction Contract, as defined in the Act, is now bound,it would appear, by this "right to adjudicate" provided by the Act, in his own contract for services. In my firm we have terms of business which provide the machinery for unhappy clients or clients who disagree with our costs. In future, where a solicitor advises on Construction Contracts, his client will have an additional right to adjudication if there is a dispute as to payment of costs or as to the advice given and it must be remembered that a notice to adjudicate can be given at any time. It has even been suggested that these words "at any time" (see clause 108(2)(a)), enabling a party to give notice at any time of his intention to refer a dispute to adjudication, override the provisions of the Limitation Act. How are the Courts going to decide on this one?

The Framework

The Act provides a framework or structure, if you like, for the implication of these various terms. What, in fact, the Act says, is that if you do not incorporate these terms in your contract then they will be implied statutorily by a Scheme for Construction. This Scheme has now been prepared and introduced and came into effect in May of this year. The full title of this is "The Scheme for Construction Contracts (England and Wales) Regulations 1998". It sets out the machinery and details for the operation of the provisions contained in the statute if the individual private contracts of the parties do not provide for the three matters, that are the subject of this part of the Act.

Requirement to be in Writing

Clause 107 provides that this part of the Act, Part II, only applies where the contract is in writing. It then defines what is meant by this. These complicated provisions are a mirror of the provisions in the Arbitration Act 1996 which have previously been the subject of considerable debate.

In fact, I think it would be most unlikely indeed for any Construction Contract to be excluded by reference to the fact that it is not "in writing" as provided for in this section of the Act. This clause 107 itself could form the basis of a whole article but the practical effect of the clause is that virtually any Construction Contract will be or will become a contract in writing by reference to the acts of the parties. This is because any document or sound recording which records or mentions any part of the agreement virtually at any time, makes it an "agreement in writing".

The Right to Adjudicate

Clause 108 of The Act provides that a Con struction Contract (as defined by the Act) must incorporate the following terms; (otherwise they are statutorily incorporated by the Act the details whereof are set out in the Scheme). The points to be incorporated are:

1. That a party should have a right to give notice of referral to adjudicate

2. That the contract should provide for the appointment of an Adjudicator in seven days. (This can be extended by agreement of both parties generally, or by the referring party alone, for a further 14 days).

3. For the Adjudicator to make a determination within 28 days of referral.

4. For him to act impartially.

5. For him to be able to take his own initiative in ascertaining the facts and the law.

6. For his decision to be binding until determined finally by legal proceedings or by Arbitration.

7. For the Adjudicator not to be liable to the parties for anything done unless he acts in bad faith

Regarding point 6, however, section 108(3) does have a saving clause, in that the parties may agree to accept the decision of the Adjudicator as finally determining the dispute. This, presumably, has to be agreed at some time prior to the making of his decision otherwise the agreement might fail for want of consideration.

This, in my opinion, is the saving clause for the whole of the system. If the parties do not agree to make the decision as final it could be reversed with disastrous effects either by subsequent Arbitration or by the Courts and the parties simply could not rely on it until the matter is finally disposed of by the court or an Arbitrator.

Regarding point 7, a most interesting point of discussion arose during the Seminar when the distinction between the Adjudicator's liability as set out in the Construction Act was compared to that of an Arbitrator under the Arbitration Act. An Arbitrator, under the Arbitration Act, is immune from liability; i.e. it means that even third parties cannot sue him for negligence. Not so with the Construction Act where the Adjudicator is not liable only as between the parties not to third parties. If, therefore, he gives a negligent decision as a result of which a third party is affected by it, he can be sued by the third party for negligence in tort (as opposed to contract). Thus it is envisaged that professional insurance for an Adjudicator will be of some considerable significance as opposed to that of an Arbitrator who is not liable to anyone unless he acts in deliberate bad faith.

Roderick O'Driscoll

The second part of this article appears in the may 99 issue qv.