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Construction Contracts (England and Wales) Exclusion Order 1998

Scheme for Construction Contracts (England and Wales) Regulations 1998

Construction Contracts (Scotland) Exclusion Order 1998

Scheme for Construction Contracts (Scotland) Regulations 1998

11.20 a.m.

Baroness Farrington of Ribbleton rose to move, That the draft orders and regulations laid before the House on 18th December 1997 and 12th and 19th January 1998 be approved [18th and 20th Reports from the Joint Committee].

The noble Baroness said: My Lords, I beg to move en bloc the four draft orders and regulations standing in my name on the Order Paper. I understand that that is acceptable to those of your Lordships who take part in such debates.

Part II of the Housing Grants Construction and Regeneration Act 1996 deals with construction contracts. Section 108 requires that all construction contracts provide parties with the right unilaterally to

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refer disputes arising under the contract to adjudication. Sections 109 to 111 require construction contracts to provide certain payment mechanisms and notice provisions, and Section 113 prevents "pay-when-paid" clauses operating in most circumstances.

Where a construction contract does not comply with these sections of the Act, the relevant provisions of the Scheme for Construction Contracts take effect. In other words, the scheme is intended to be imported as implied terms into contracts which do not comply with the Act.

Part II of the Act was intended to cover a wide range of construction contracts. However, there are certain types of contract and agreement which, although connected in some way with construction operations, were never intended to be caught by the provisions of the Act. The exclusion orders are intended to ensure that such contracts and agreements do not fall within the scope of the Act. They cover certain agreements made under statutory provisions; head contracts under the private finance initiative; finance agreements, and development agreements.

Both sets of regulations have been subject to a great deal of consultation. It has not been possible to please all parts of the industry over their every detail. But it is quite clear that there is an overriding desire across the industry for the regulations to be put in place as soon as possible so that the industry can at least begin to benefit from Part II of the Act. I therefore commend these orders to the House.

Moved, That the draft orders and regulations laid before the House on 18th December 1997 and 12th and 19th January 1998 be approved [18th and 20th Reports from the Joint Committee].--(Baroness Farrington of Ribbleton.)

Baroness Hamwee: My Lords, I welcome the orders and regulations and wish to raise three brief points. I apologise to the House and to the Minister for being unable to give detailed notice of them. With regard to the two draft regulations, the first point relates to paragraph 20(a) dealing with the adjudicator's decision. It allows the adjudicator to revise certificates and decisions unless they are expressed in the contract with which he is dealing to be final and conclusive. The prospect is that the statutory right to refer disputes to adjudication could be undermined. Contracts could provide for adjudication provisions to apply but that all decisions and certificates would be final and conclusive; in other words, equivalent to contracting out of the adjudication provisions. Can the Minister comment on that? If not, perhaps she can write to me.

Paragraph 24 of the regulations relates to enforcement by the court. The enforcement provisions are those which will apply to the adjudication. The scheme amends the Arbitration Act 1996 and in consequence gives the courts the power to enforce the adjudicator's decisions. The scheme does not amend Section 42(1) of the Act, which provides that unless otherwise agreed by the parties the court may make an order. I am not sure whether that is an oversight or whether deliberate action has been taken in leaving Section 42 as it stands.

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I appreciate that the orders are not amendable and that I have not given the Minister notice of those points. However, I understand that in response to representations her honourable friend the Parliamentary Under-Secretary of State, the Minister for London and Construction, has indicated to the industry that if there is evidence of abuse the regulations can be revisited. Can the Minister confirm that? If not, can she write to me?

Finally, do the Government intend to introduce rules of court to facilitate an application under paragraph 24 to enforce the adjudicator's decision? If they intend to introduce rules of court, which it appears are required, when are they likely to emerge?

Lord Howie of Troon: My Lords, the orders arise from Part II of the Housing Grants, Construction and Regeneration Act 1996, about which we had considerable detailed discussion in this House when my party was in opposition. The view which it then took on the matter is not the view which it appears to be taking now.

The problem was that the Government totally confused the ideas of adjudication and arbitration. Our debates were largely guided towards teaching the Government and their advisers the distinction between those two aspects of civil engineering contracts. The House will be aware of my long-standing relationship with the construction industry.

The Construction Industry Council reminded the Government that Part II of the Act was intended to implement certain aspects of the report made by Sir Michael Latham several years ago. It did so only in a partial manner and pointed out (I quote from the CIC's information):

    "In view of the quick fix, rough justice nature"--

that was Sir Michael Latham's description of adjudication--

    "the CIC believe that there are no circumstances in which the adjudicator's decision can be final".

However, it was agreed that it could be binding until the end of the contract, at which point the participants in a dispute or disagreement would then go to arbitration; arbitration being binding and final, but adjudication being temporary. It is a quick fix, rough justice solution to an interim problem. It was the kind of thing which consulting engineers used to do without adjudication.

I endorse the remarks of the noble Baroness, Lady Hamwee, in relation to paragraph 20. It has the effect of making adjudication arbitration. I sincerely hope that the Government will grasp hold of that idea because we have a new Government with clear eyes and clear minds. However, they seem to have taken this particular piece of legislation out of a pigeon hole to which it was consigned some time ago. I ask the Minister to realise that that part of the regulation is in error.

I have only one other point to make in relation to the regulations. I draw the Minister's attention to paragraph 2(3) which states that,

    "an 'adjudicator nominating body' shall mean a body ... which holds itself out publicly as a body which will select an adjudicator when requested to do so by a referring party".

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I know that quite recently an Institute of Adjudicators has been established. I am sure that it is a worthy body. In fact, I know it is because I gave out some certificates for it a few months ago and saw those people in the flesh. They are very proper people. But that provision permits just about anyone to set up as an adjudicating body. My noble friend who sits here could set up an organisation and purport to be an adjudicating body. I believe that it would be a good idea for adjudicating bodies to be monitored or registered by the department in some way so that those bodies would have real authority.

Lastly, I endorse again the comments made by the noble Baroness, Lady Hamwee, in relation to my honourable friend Mr. Raynsford who has suggested that the Government will keep this matter under review for a time and, if it proves to be unsatisfactory, will look at it again. Instead of having that "if", it would be better for my honourable friend to review the workings of the Act and undertake to bring in new housing legislation which will not only correct the errors in the regulations but will also implement the rest of the recommendations of Sir Michael Latham which are not as yet in legislation.

11.30 a.m.

Lord Hacking: My Lords, with the leave of my noble friends on the Front Bench, perhaps I may express a few views from these Benches on the regulations.

I believe that we have every reason to be proud of our construction industry, our construction companies, our consulting engineers, in many disciplines, our architects and many others, as we look worldwide and see the achievements of our construction industry.

But our construction industry has also been subject to diverse problems. The difficulty--and I recognise it immediately--for government, whichever government are in power, is that they are not assisted by unity of views from the construction industry. Indeed, they suffer from the expression of diverse views arising out of the diverse problems of the construction industry. I well remember over 10 years ago, with the noble Lord, Lord Howie of Troon, when taking through this House the Latent Damage Bill the many diverse views from the industry which were then presented to the government of the day. Therefore, my colleagues on the Front Bench, remembering their days in government, will have sympathy for the Minister over the diverse views that are represented from the industry.

However, I should like to record that the industry is making good progress in consolidating its voice. For example, there is now a greater unity in contracts which are used in the construction industry. There are now more joint bodies which are able to represent the views of the industry to government. A particular achievement which I mention as a lawyer is that construction lawyers, with support throughout the industry, have managed to introduce and publish the Construction Industry Model Arbitration Rules.

One of the critical problems in the construction industry has been the problem of payment. As it happens, throughout this week I have been attending an

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arbitration and the critical dispute between the parties in this arbitration concerns the matter of payment. Therefore, it is reasonable and helpful to have the new provisions of this Act which are in Sections 109 to 113. They address the problems of payment. Section 109 gives entitlement to staged payments and Section 110 specifies that there should be a mechanism for determining what payments become due under the contract. Section 111 prohibits a party to a construction contract from withholding payment after the final date for payment unless an effective notice has been given. Section 112 gives the right to a party to suspend performance on the contract when that party has not been paid. In Section 113 there is a prohibition on entering into an agreement not to pay another party until the first party has been paid. That has been one of the serious problems, particularly for sub-contractors, when the main contractor refuses to pay the sub-contractors until he has been paid by the employer.

Therefore, we should welcome these provisions for the reasons I have sought to identify. It seems that they have a sound basis. The problem is that this scheme goes a great deal further. It does not just deal with payment disputes but with all disputes which arise in the construction industry. Also under Section 108(2)(a), it permits adjudication "at any time" relating to any dispute which might arise during the construction process.

Thus there is a wedge being driven into the inalienable right of parties to reach a contract on a consensual basis. The effect of the scheme is to apply obligatorily statutory terms of contract into all contracts that are negotiated within the industry. That goes against established party autonomy--for example, in the Arbitration Act 1996--and ignores the powers available, for example, under Section 39 of the Arbitration Act where parties can go for provisional relief during the course of the performance of the contract.

As a result of those concerns, strong views have been represented, as the Minister knows, from certain sections of the industry, particularly the construction lawyers. Far from reducing the number of disputes, there is a real danger that the floodgates could be opened and abuse perpetrated. For example, it will enable a contractor who is determined to pursue an unmeritorious claim to cause maximum disruption to the dispute resolution process or even to the proper administration of the contract. There is not even a provision whereby the right to adjudication terminates upon notice of arbitration being given or upon the commencement of legal proceedings. That is unique. Thus, a party which is dissatisfied with the rate of progress or even the likely outcome of arbitration proceedings appears still to have the right to refer the same dispute, or even part of it, to adjudication leading to a decision which will be binding until the dispute is determined finally by the arbitrator.

It also does not deal with the problem of the multi-party dispute which is a well known problem in industry disputes.

So strongly were the views held by a number of experienced practitioners in the construction industry that a collection of papers was drawn together by

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Professor John Uff and presented in printed form to the Government at the end of last year. It has the rather stinging title of, Construction Contract Reform: A plea for sanity. Therefore, I would ask the Minister to consider most carefully where we go from here. I accept that these regulations today should receive the approval of the House. Indeed, I am not asking for them to be withdrawn.

However, it may have been more sensible for the Government to go forward in steps and not in leaps. It may have been more sensible for them, for example, to bring in these new adjudication proceedings just in relation to payment disputes and not in relation to all disputes. Therefore, I join with the noble Lord, Lord Howie, and I believe also with the noble Baroness, Lady Hamwee, in asking the Government to monitor the process of the scheme and to keep it under review. If it should be shown that there is abuse and the number of disputes are multiplied rather than reduced, I hope that the Minister will be able to undertake to bring the matter swiftly back to Parliament.

The other matter that I should like to ask the Minister to consider now is the phrase of, "any time", in Section 108(2)(a) of the Act. It would not be a difficult matter and I believe that it could possibly be dealt with by secondary legislation. While I hesitate a little on that proposition, this is surely a matter which should be addressed. There should be a time limit because otherwise people will abuse the scheme. I hope that those observations have been helpful to the Minister and that she will, therefore, be able to bring some comfort to what I have said.

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