(Part 1 was published in Edition 38 Jan 99 news and view qv )

Useful Right to Adjudication, or A "Spanner in the Works"? Continued......

Payments by Instalments (ss.109-110)

Clause 109 provides that where a contract specifies a duration of 45 days or more or if it is agreed between the parties that the duration of the work is estimated to be 45 days or more, the contractor is entitled to payment by instalments. The instalment periods can be determined in the contract.

Suppose that no duration is specified in the contract and suppose that the parties are unable to agree that the duration of the work is estimated is to be more than 45 days. What happens then? Is this particular clause for payment by instalments excluded?

Supposing the employer says that the contract should only have taken no more than 40 days and that the other party says it could never have been done in that time but, as a matter of fact, it is found by an Adjudicator that it could have been done in 40 days. Should the stage payment clause apply?

The answer is "yes". The Clause is quite specific. It applies unless:

(a) It is specified in the contract that the duration of the work is to be less than 45 days or

(b) The parties agree.

If they do not agree and there is no specification in the contract that the duration is less than 45 days then this clause applies.

In their own contract the parties can agree what instalments there should be and when they should be paid. They must agree both these terms. It does not matter what they agree as long as they agree the instalments and when they are to be paid. It they do not, then it is dealt with under the terms of the Scheme for Construction which are much more onerous to the employer. (It effectively provides for payments equivalent to the value of the work done at 28 day intervals.)

Clause 110(1) makes two provisions:

(a) It provides that every Construction Contract shall provide a mechanism for determining what payments become due under the contract and when and

(b) It provides for a "final date for payment" in relation to any sum which becomes due. The parties are free to agree those matters between them. If they do not, the Scheme applies. (The Scheme provides the "final date" to be 17 days after the "due date". The due date, under the scheme, is 7 days from the expiry of the "relevant period" and the relevant period is calculated by reference to 28 day intervals)

This latter part of when the "final date for payment" is to be, is no doubt the equivalent of a credit period in normal supplier contracts: eg "the costs of materials delivered are to be paid for within 30 days of delivery of the invoice".

Clause 110(2) is by far the most complicated and enigmatic clause in this part of the Act. I have come to the conclusion that effectively what it says is, that the employer (or equivalent payer) must within five days after the date when the payment becomes due (not after the "final date of payment") give notice (it does not say in writing) specifying the amount of the payment made or proposed to be made and the basis on which the amount is to be calculated.

This somewhat convoluted clause actually reads as follows:

"110(2) Every construction contract shall provide for the giving of notice by a party not later than five days after the date on which a payment becomes due from him under the contract or would have become due if

(a) The other party had carried out his obligations under the contract and

(b) no set-off or abatement was permitted by reference to any sum claimed to be due under one or more other contracts specifying the amount (if any) of the payment made or proposed to be made, and the basis on which that amount was calculated"

If one notionally puts in brackets the words from "or would have become" down to "one or more of the contracts" and temporarily omits these, the clause reads as follows and becomes much clearer:

The idea behind the clause is a good one. Very frequently, contractors will make claims on a periodic basis and the employer will pay sums on account without specifying how they are calculated so the contractor is unaware what part of his claim is accepted and what part is rejected. This clause should overcome that problem.

The two sub sub-clauses in brackets, however, are some what incongruous because at first flush it is not clear whether they apply to the calculation of the date by which the notices are to be served or to the amount which is to be specified in the notice. They do give rise to real difficulties of construction:-

The sub-clauses provide that the notice relating to the amount of payment becoming due must "take into account"

(? and be on the basis that ?):

(1) "The other party has carried out his obligations" and

(2) "No set off or abatement was permitted by reference to any sum claimed to be due under one or more contracts"

Quite what this all means and how it is to work out in practice is beyond me. It is interesting to note that the "Scheme" incorporates similiar wording to subclause 2 when dealing with the subsequent clause of the Act on the question of the terms to be incorporated in Notice of intention to withhold payment but otherwise does not refer to them.

Notice of Intention to Withhold (S.111)

The Act, effectively, provides that an employer must pay whatever sums are due on a "final date for payment".

Clause 111 provides that a payer cannot withhold payment after that date unless he has given a notice of intention to withhold. The notice must:-

(a) Be given within the "prescribed period" as defined in the contract or, if none, as provided for by the Scheme. (The Scheme provides that the prescribed period is seven days before the final date for payment) and

(b) Set out the amounts and the grounds for withholding these amounts.

If a party refers the matter to adjudication, then payment does not become due until seven days after the decision, or the date which, apart from the notice, would have been the final date for payment, whichever is the later.

It is difficult to see what practical effect this clause will have, but the important point to note is that, unlike the clauses relating to adjudication rights and stage payments, the Act does not appear to require that every Construction Contract shall have a withholding clause. If an employer, therefore, wants to take advantage of this "withholding" clause he must ensure that it is inserted in his private contract because it will not be implied by statute as the other clauses are. The only matter that the Scheme implies relates to the period if such a clause is actually inserted.

Suspension of Performance

Clause 112 gives a contractor rights to suspend performance. It enables the contractor to suspend the performance of his obligations if payment is not made by the "final date for payment" provided that:

(a) No effective notice of withholding payment has been given and

(b) The contractor gives seven days' notice of his intention to suspend performance.

Quite how effective this Clause will be remains to be seen. The employer has a number of issues that he can raise in defence for his failing to make payment. For example:

(i) He can first dispute that any payment is due (eg works not finished).

(ii) He can claim set-off for defects (unless I have mistaken the effect of Clause 110(2)(b)).

(iii) He can give notice of intention to withhold payment (if there is a provision for this in the contract).

(iv) He can go to adjudication, where the decision is anyway binding only until finally determined by Arbitration or by the Court unless the parties have agreed that the Adjudication should be final and binding.

Only after all this can the contractor safely suspend work, unless the parties agree that the Adjudicator's decision will be final under Clause 108(3). The decision will then presumably be enforceable by summary judgment; and the contractor will be able to safely suspend work after an Adjudication. If he turns out not to be justified in his suspension he runs the risk of having repudiated the contract.

"Pay when Paid" Clauses

Clause 113 is a clause that makes "pay when paid" clauses ineffective. It simply provides that a provision in the contract making payment conditional on receiving payment from a third party is ineffective unless that third party (or a party upon whom he is dependent for payment) is insolvent.

At what stage does he have to be insolvent? The answer is, presumably, when the payments are due. Therefore it seems an employer can still put in this type of clause as a condition of his contract but it will only become effective if there is an insolvency on or by the due date for payment. Employers can still therefore usefully include this provision in their contracts.

An insolvency means an actual winding up order or administration order or the like for partnerships and individuals.

Supplementary Provisions

Clauses 114 to 117 contain supplementary provisions.

Clause 114 paves the way for the making of a "Scheme for Construction" containing provisions about the matters referred to in the Act. This Scheme has now been made and came into operation on the 1st May 1998. It is quite a detailed document and essentially provides the details of the conditions required by the Act when the parties have made no provisions for them in the main contract.

Clause 115 deals with notices.

Clause 116 deals with the calculation of periods, and

Clause 117 deals with contracts with the Crown.

Peremptory Orders

Clause 24 of the Scheme is a most interesting clause and provides for a modified incorporation of Section 42 of the Arbitration Act 1996. Now, Section 42 of the 1996 Act provides that, unless the parties otherwise agree, a Court may make an Order requiring the parties to comply with a Peremptory Order of a tribunal:

"42 (1) Unless otherwise agreed by the parties, the Court may make an order requiring a party to comply with a peremptory order made by the tribunal.

(2) An application for an order under this section may be made

(a) by the tribunal (upon notice to the parties)

(b) by a party to the arbitral proceedings with the permission of the tribunal (and upon notice to the other parties) or

(c) where the parties have agreed that the powers of the court under this section shall be available

(3) The court shall not act unless it is satisfied that the applicant has exhausted any available arbitral process in respect of failure to comply with the tribunal's order

(4) No order shall be made under this section unless the court is satisfied that the period to whom the tribunal's order was directed has failed to comply with it within the time prescribed in the order or, if no time was prescribed, within a reasonable time

(5) The leave of the court is required for any appeal from a decision of the court under this section"

The Scheme modifies the Clause insofar as an application to the Court can only be made by the Adjudicator himself, or by a party with the permission of the Adjudicator.

The original intention of Clause 42 of the Arbitration Act was, I think, intended to apply to Peremptory Orders relating to the Arbitration process and not to orders which affected the substance of a dispute. However, it is not limited as such in the Arbitration Act and nor is it so limited in the Scheme. In fact, since there is no process requirements required in an Adjudication, (unless the provisions of the Scheme are incorporated) the incorporation of a Court's power to enforce an Adjudicator's Order might well have been intended to relate to an Adjudicator's decision on the substance of a dispute.

Hence, this may be the manner in which an Adjudication decision could be enforced by the Court.

It does, however, remain to be seen under what circumstances a Court will make an Order enforcing an Adjudicator's Peremptory Order relating to the substance of a dispute between the parties. For example, would a Court order a party to comply with a Peremptory Order of an Adjudicator to pull down a wall, when the Act itself makes it clear that an Adjudicator's decision is only binding until a dispute is finally determined by legal proceedings or Arbitration. The effect on third parties' rights in enforcing such an Adjudicators Order made under a fairly simple and somewhat flawed process of adjudication, where full investigation may not have taken place, could be quite horrendous.

It might also be argued that the Scheme, in so far as the incorporation of this clause is concerned is "ultra vires" the Act. Is it really a "provision" about "a matter referred to" in Part II of the Act. If so the scheme could practically deal with anything at all.

Conclusion

It seems to me, as a Solicitor, that the Act is only going to be of any real help if both parties agree that the Adjudicator's decision is going to be final. There is no provision in the adjudication process for considering the rights and obligations of third parties as there is in arbitration and it must be remembered that to a very large extent the Adjudicator's decision is the fruit of a process wherein, because of the time constraints more than anything else, a proper investigation of the situation may not have been carried out by some one properly qualified to do it.

It will be interesting to see how the Scheme and the Act work or, indeed, whether they work at all. Is it flawed or fatally flawed by its deficiencies? It will also be interesting to note to what extent the Courts will enforce an Adjudicator's decision prior to the finality of an arbitration or the issue being finally determined in a Court.

I hope that the Act and Scheme will be further developed and considered rather than abandoned since it appears to me to contain a number of good ideas which should not lightly be discarded. As it stands, it seems to me to be a "dangerous spanner in the works".