Construction—Lexis®PSL comments on key developments in 2018 and 2019
In this year’s end of year comment, our Lexis®PSL Construction team consider what their standout legal development was in construction in 2018 and preview the anticipated talking points for 2019.
First published on Lexis®PSL on 12 December 2018.
What was the standout legal development in your area this year?
For us, the standout development was the Grove v S&T litigation, specifically as it concerned interim payments under the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996). In February, the Technology and Construction Court (TCC) held that an employer was able to challenge, by way of further adjudication, the amount due to a contractor in respect of an interim application, by reference to the true value of the works—even if the employer had not given a valid payment notice or pay less notice ( EWHC 123 (TCC), 177 ConLR 30). This was then upheld by the Court of Appeal in November ( EWCA Civ 2448).
How has this impacted on practice in your area?
The HGCRA 1996 sets out a regime for payments in construction contracts, largely in order to ensure the cash flow of contractors. The regime operates on a system of notices—often the contractor makes an application for payment to the employer, and the employer then gives a payment notice followed by a pay less notice. However, as shown by the amount of case-law on this issue, it is not unheard of for an employer to fail to give either a valid payment notice or pay less notice.
Prior to Grove v S&T, if the employer failed to give either notice, it would be deemed to have agreed to the amount claimed in the contractor’s application (ISG v Seevic  EWHC 4007 (TCC), 157 ConLR 107 and Galliford Try v Estura  EWHC 412 (TCC), 159 ConLR 10). It led to what was termed by some as ‘smash and grab’ adjudications—ie a contractor would obtain an adjudication award for the amount of its interim application (relying simply on the employer’s failure to give the required notices), and the employer would then be unable to bring a further adjudication to determine the true value of the works.
Grove v S&T confirmed that it was in fact open to an employer to bring a second adjudication to determine the true value of the works, and recover any overpayment made to the contractor. Significantly, this can only happen after the employer has paid the ‘notified sum’, ie the amount in the contractor’s application (the Court of Appeal was keen to emphasise this point). Accordingly, there is still an incentive on the employer to give the required notices, but the consequences of failing to do so are clearly less severe now than they were before Grove v S&T.
What Lexis®PSL content would you recommend to find out more about these developments?
You will find comprehensive coverage of this case in:
- News Analysis: Court of Appeal confirms right to adjudicate true value of the works in absence of payment/pay less notice (S&T v Grove Developments)
- News Analysis: Failure to give a payment or pay less notice—a change of approach (Grove Developments v S&T)
(which concerns the TCC’s judgment)
- Practice Note: Payment provisions under the HGCRA 1996
- Practice Note: Interim payments in construction contracts
What do you think will be the key development next year?
Aside from Brexit (for more on which, see below), a key development in 2019 may be a change to the law concerning the retention of payment in construction contracts. However, it has to be said that matters are moving slowly in this regard.
There are two developments that we have been watching closely here in the Construction team:
- the first is the consultation process carried out by the UK government on the practice of cash retention under construction contracts. Among other things, it asked about the effectiveness of existing mechanisms used as an alternative to retentions, the appropriateness of a cap on the proportion of contract value that can be held in retention and the costs and benefits of holding retentions in a retention deposit scheme or trust account. The consultation ran from 24 October 2017 to 19 January 2018, but the outcome still has not been published
- the second is a private member’s bill introduced by Conservative MP Peter Aldous, with apparent cross-party support (the Construction (Retention Deposit Schemes) Bill). This calls for retention monies to be protected in a similar manner to the established system for tenant deposits by landlords. The Bill was introduced to Parliament on 9 January 2018 but the second reading has been postponed multiple times—it was originally meant to take place on 27 April 2018 but is currently scheduled for 25 January 2019
We understand that, at the Construction News Summit on 20 November 2018, Minister Richard Harrington indicated that the government would be making an announcement on changes to retentions law ‘very soon’.
What do you think this will impact and how do practitioners find out more?
In many contracts, up to 10% (but normally 3–5%) of interim payments due to a contractor are retained by the employer. The idea is that, if any work turns out to be incomplete or defective, the employer can then use that money to rectify the defective work. If there are no defects, then the money is released to the contractor—normally half on practical completion, and half at the end of the defects liability period.
Reform, if any, could be through the introduction of a system in which retention monies are protected in some way—in particular against insolvency on the part of the company holding the monies. This call for change appeared before the Carillion collapse, however that sequence of events has given the change more support.
For further information, see:
- Practice Note: Retention of payment in construction contracts
- in relation to the Bill, News Analyses: Construction (Retention Deposit Schemes) Bill published and Construction (Retention Deposit Schemes) Bill takes first steps
- in relation to the consultation, News Analysis: Exploring possible changes to construction retentions and the HGCRA 1996
Other developments of interest
Other developments on the radar include:
- a ban on use of combustible materials in external walls of high rise residential (and certain other) buildings, due to come into effect on 21 December 2018 (see News Analysis: Building Regulations amended to ban use of combustible cladding in certain high rise buildings
- the Business Contract Terms (Assignment of Receivables) Regulations, SI 2018/1254, which will invalidate restrictions on assignments of receivables in certain types of contract with SMEs entered into on or after 31 December 2018 (see News Analysis: The Business Contract Terms (Assignment of Receivables) Regulations 2018 and the construction industry)
- the outcome of a consultation on the 2011 changes to the HGCRA 1996, which ran in parallel with the retentions consultation referred to above (again, see News Analysis: Exploring possible changes to construction retentions and the HGCRA 1996)
- the new disclosure regime for the Business and Property Courts, which comes into effect on 1 January 2019 (see Practice Note: Business and Property Courts—the disclosure pilot scheme)
For the full list of what’s on the horizon, see Practice Note: Construction future developments tracker.
As the UK prepares to withdraw from the EU in March 2019, Brexit will continue to be essential reading for all legal practitioners. See: Brexit—Lexis®PSL comments on key developments in 2018 and 2019.