{"id":265,"date":"2019-08-07T10:00:02","date_gmt":"2019-08-07T10:00:02","guid":{"rendered":""},"modified":"2019-08-07T10:58:51","modified_gmt":"2019-08-07T10:58:51","slug":"dispute-resolution-construction-industry-0284","status":"publish","type":"post","link":"https:\/\/www.lawteacher.net\/free-law-essays\/contract-law\/dispute-resolution-construction-industry-0284.php","title":{"rendered":"Dispute Resolution Issues in the Construction Industry"},"content":{"rendered":"

Within the construction industry there are often disputes between the parties<\/a> involved within the contract, may it be the client, the contractor, the purchaser, or any of the sub-contractors that have agreed to abide with the contract for the works required.  These disputes can arise for any number of reasons. Carter and Kadir (2016) explain that \u201csome of the most common disputes within the construction industry are generally about claims for payment not being paid, delays caused where fault lies with one or more parties, defects ranging from snagging to structural issues not detected at an earlier stage and professional negligence when an employer believes that a consultant or contractor has failed to carry out their work with due skill or care.\u201d <\/p>\n

These reasons for disputes that are stated by Carter and
\nKadir have been agreed by many,an example would be Aeberli (2012) who states \u201cA
\nproject is flexible until completion with the price being fluid until the end, this
\nforms the opportunity for dispute due to uncertainty.  There are often long lead times and delivery
\nperiods in which circumstances can change. Projects are complicated with
\nmeticulous planning required where the possibility of error is forever present.
\nWith large sums of money involved the chance to dispute an action and save
\nmoney is often an attractive idea.\u201d <\/p>\n

Due to the complex nature of the construction industry, the
\nmajority of construction contracts will include various clauses to regain any cost
\nthat is incurred due to the faults of another party (Lynch, 2018). These
\nclauses lead to the most common occurrence of disputes within the industry,
\nwhich is those that are involved with the financial aspects. Before 1998 the
\nprocess to reconcile disputes, was either through arbitration or litigation. Due
\nto the cost and time of these options it was often that smaller sub-contractors
\nwent without payment or had to wait a long period of time which would lead to
\ncash flow issues.  This trend of larger
\ncontractors withholding payment from sub-contractors for unreasonable reasons was
\nleading to serious concern across all levels of the industry (Aeberli, 2012).<\/p>\n

Due to these concerns from within the Industry about
\nfinancial disputes, the Government and those within the industry commissioned a
\nreport that also included participation from many major clients. Written by Sir
\nMichael Latham in July 1994 the report was called \u201cConstructing the Team: Joint
\nreview of procurement and contractual arrangements in the United Kingdom
\nConstruction industry\u201d. It is now more commonly known as \u201cThe Latham Report.\u201d <\/p>\n

The report was written to try to tackle the issues and lay
\ndown a set of guidelines to be followed, especially with the making of payments
\nand the issues of dispute so all involved within the industry knew what was
\nexpected of them and had the same set of rules to follow. The Housing Grants,
\nConstruction and Regeneration Act 1996 (HGCRA) was formed after the report was
\nwritten integrating many of the ideas that were within the Latham Report. It is
\nwithin Part II of The Housing Grants, Construction and Regeneration Act 1996 that
\naddresses construction contracts, payments, and dispute resolution (Wood,
\n1999).<\/p>\n

Part
\nII of the Act starts with the introductory provision by describing what is
\nmeant by a construction contract. Section 104 defines what a construction contract
\nmeans and who the agreement is between to carry out construction operations.
\nConsider Baldwins industrial services v.
\nBarr Ltd<\/em> when looking at section 104(1) (c) on what constitutes a
\nconstruction contract and whom it is between (HM Government, 1996). <\/p>\n

The
\nterm construction operations are explained further in Section 105 (1), it states that \u201cconstruction operations
\ninclude the construction, alteration, repair, maintenance, extension,
\ndemolition or dismantling of \u201d and proceeds to list all the works that it
\napplies too and determines whether there is a contract between the named parties
\nunder section 104 (BPE, 2017). <\/p>\n

Section 105 (2) explains those works that are
\nnot considered under the act to be considered as construction operations. These
\nare principally works like drilling for oil or mineral extraction or where the
\nprimary purpose of the work can be described as process engineering i.e. water
\ntreatment (Aeberli, 2012).  This creates
\na clear distinction of the works that are considered under the scope of the Act
\n(HM Government 1996). This needs to be clear as disputes often arise as seen in
\nthe case between North Midlands
\nConstruction plc v. A E E Lentjes (UK). <\/em><\/p>\n

Section 106 continues to describe those works
\nthat are not covered by the act, however this section covers work that is to be
\ncarried out by the owner of the property who plans to live within the dwelling,
\nan example of this is an extension to a property or a new home being built that
\nthe developer plans to reside in. A case of this can be seen between Edenbooth v. Cre8 development Ltd <\/em>(BPE
\n2017). <\/p>\n

The final section of the introductory
\nprovisions is section 107, this section discusses how the contract shall be
\ncommunicated between those named parties discussed in section 104 and gives the
\nvarious ways how. Predominately for the act to apply to the contract then the
\ncontract must be in writing (O\u2019Reilly, 1999). This is important as if not
\nrecorded properly disputes can arise like in the case of Carrillion v. Devonport Royal Dockyard<\/em>. The JCT standard contract
\nstates that in clause 1.7 that communication including without limitation, each
\napplication, approval, consent, confirmation, counter-notice, decision,
\ninstruction, or other notification shall be in writing. If an instruction is
\ngiven that that is not in writing then it takes no immediate effect, but the
\ncontractor needs to confirm the terms within 7 days in writing, this is covered
\nwithin clause 3.12 (JCT, 2016). <\/p>\n

Section 108 discusses the right to refer disputes to adjudication. The term \u201cdispute\u201d is classed as any differences that cannot be resolved through discussion between the parties involved within the contract (McGuiness, 2007). Adjudication is the first step to take with any unresolved disputes, however both parties must first agree that adjudication is a step that they wish to take, and it must be written within the chosen contract (Thomas, 2001). Standard forms of contract<\/a> now include the provision for adjudication, within the JCT standard building contract in article 7 where it states, \u201cIf any dispute or difference arises under this contract, either party may refer it to adjudication in accordance with clause 9.2.\u201d If adjudication is required for a dispute, then the contract will state who the parties are, this can be extremely important as can been seen in the case between A.J Brenton t\/a Manton Electrical Components v. Jack Palmer<\/em> where a disagreement about who the dispute was actually between arose (McGuiness, 2007). <\/p>\n

The adjudication process is laid out within the HGCRA,
\nfirstly, notification must be issued to the other party that a dispute is to go
\nto adjudication and clearly outline the scope of the dispute. Within seven days
\nof this notification being issued an adjudicator should be named, whether it be
\nan individual or a panel of professionals. The adjudicator can be written into
\nthe contract by prior agreement or one can be appointed when adjudication
\narises (Farrer, 2018). <\/p>\n

Once the dispute has been referred to the adjudicator they
\nhave a period of twenty-eight days to reach a decision, this period may be
\nextended by up to fourteen days if it is agreed upon by the relevant parties of
\nthe dispute (H M Government, 1996). <\/p>\n

The adjudicator themselves are bound to carry out their
\ninvestigation impartially as instructed by the HGRCA and to take the initiative
\nof ascertaining the facts and the law of the dispute. The Scheme for
\nConstruction Contracts (England and Wales) Regulations 1998 paragraph 13 lays
\nout how the adjudicator may proceed to gather the information that they require
\nto conclude on the dispute. <\/p>\n

Once a decision has been reached by the adjudicator on the
\nmatter of the dispute, the conclusions that they have reached do not have to be
\nexpressed to the parties under the JCT contract, however the parties may
\nrequest an explanation on how the adjudicator came to their decision. When the
\ndecision is made any further actions that are required to be carried out must
\nbe included with any dates of completion, i.e. payments to be made must be
\nincluded with a schedule of when they are due by (McGuiness, 2007).   <\/p>\n

Once the decision has be made by the adjudicator, it is
\nbinding as stated in the HGCRA for an interim basis. It also states that the
\nadjudicator is not liable for anything done or omitted unless in bad faith
\nwithin the process. However, if the adjudicators decision has not been accepted
\nby one or more of the parties then they can either go to litigation or
\narbitration. This is a risk as there are several cases like Macob Civil engineering v. Morrison
\nConstruction<\/em> and Outwing Construction
\nLtd v. H. Randall <\/em>where the dispute has reached the courts, in the cases
\npreviously named the Courts enforced the decision of the adjudicator by summary
\nprocedure (Knowles, 2005).  However, in
\nsome instances the Court will not enforce the decision of the adjudicator as seen
\nin the Carrillion v.
\nDevonport Royal Dockyard case.<\/em><\/p>\n

 The second option to
\ntake if a party is unhappy with the adjudicators decisions is to go to arbitration,
\nthis choice should be only be considered as a very last option. It is an extremely
\ncostly choice to make and should only be used when the amount to be gained is of
\na substantial value that would make it worthwhile (McGuiness, 2007).    <\/p>\n

Section 109 – 113 of the HGCRA deal with the procedures for
\npayments. Entitlement to stage payments are covered within section 109 which states
\nthat \u201ca party to a construction contract is entitled to payments by
\ninstalments, stage payments or other periodic payments for any work under the
\ncontract.\u201d  It also goes on to explain
\nthat work which is specified as less than forty-five days within the contract
\nor work agreed between the parties to be estimated at less than forty-days are
\nexcused from this statement (H M Government, 1996). In simple terms it is
\nstating that those that are involved with the contract and carry out work in
\nline with the terms are entitled to regular payments. <\/p>\n

Within section 109 of the HGCRA it also states that the
\nparties within the contract are free to agree payment terms. So, even thou the
\nHGRCA states that payments are due regular payments, the terms of these
\npayments can be agreed prior to work commencing between the parties. The JCT
\nStandard Building Contract abides with this clause by including within its contract
\nparticulars the payment terms for the contract. This is further explained
\nwithin section 4 where the terms of payments are broken down. If no payment
\nterms are agreed upon by the parties then the Scheme for Construction contracts
\nwill apply (Arberli, 2012).<\/p>\n

Section 110 covers the terms for dates of payments, it
\nstates that \u201can adequate mechanism for determining what payments become due
\nunder the subcontract and the final date for payments of such sums\u201d.  As well as the HGCRA requiring the payment
\ndue date and the final payment date to be issued to the sub-contractor by the
\ncontractor, it also states that a notice of payment is due no later than five
\ndays after the payment due date (McGuiness, 2007).    <\/p>\n

Under the wording of the HGCRA some confusion over dates can
\noccur, the payment due date is not the date in which the subcontractor is due
\npayment but in which the contractor payment period commences. This payment
\nperiod is usually defined within the sub-contract documents. The final payment
\ndate is when the sub-contractor should be paid by. The parties need to be clear
\non these so disputes do not arise over these reasons. <\/p>\n

The payment amount that is due is to be specified on the
\npayment notification and the basis on which the amount was calculated. The JCT
\nstandard building contract the terms for interim payments \u2013 calculations of
\nsums due are laid out in clause 4.14. <\/p>\n

 Unfortunately, even
\nthou this is laid out payment disputes are common, with the valuation of the
\nwork coming under scrutiny often. Whilst the sub-contractor may believe that
\nthe work has been carried out the contractor may not, this can be common if
\nstage payments are used with the use of minor defects or snagging used to
\nwithhold payment. However as seen in Hoenig
\nv. Isaacs <\/em>where it was a lump sum contract, even thou all the work was not
\ncompleted there was an entitlement to stage payment, albeit an amount less than
\nthe total sum (McGuiness, 2007).    <\/p>\n

If any payment amount is to be withhold for any reason, then
\na notice to withhold payment must be issued within the prescribed period before
\nthe final payment date. These dates are agreed within the sub-contract
\ndocuments. No payment is to be withhold after the final payment date. This is
\ncovered by section 111 of the HGCRA.  If
\na notification to withhold payment is issued, then the notification must
\nclearly state the amount that is to be withhold and the reasons for this
\npayment being withheld. As per the language of the contract, the notification must
\nbe in writing (HM Government, 1996).<\/p>\n

The issuing of pay less notices and the timing of payment is
\nincredibly important, not only for the impact that it can have on cash flow for
\nthe sub-contractor but if a client is unaware of the provisions laid out within
\nthe HGCRA and the sub contract, then an unscrupulous sub-contractor can take
\nadvantage. A tactic that is commonly known within the industry as \u201csmash and
\ngrab\u201d has been used throughout the years.  This is when a payer fails to issue a correct
\npay less notice within the terms of the contract, the other party is then entitled
\nto claim the amount that they applied for in the application, this is
\nirrespective of the value of the work carried out (Thompson, 2015). An example
\nof a smash and grab case is the ISG
\nConstruction Ltd v. Seevic College<\/em> case.  <\/p>\n

To ensure that this tactic is not used it is imperative that
\npay less notices and payments are dealt with correctly and on time as per the
\ncontract or construction act. Within the JCT standard building contract the
\nissue of a pay less notice is explained in clause 4.12. With this being said,
\nrecently as can seen in the case between Grove Developments v S&T UK Ltd the High Court has
\nbeen looking into smash and grab adjudications and is now looking to favor the
\nclient rather than the contractor in smash and grab claims (Lowe, 2018).<\/em><\/em><\/p>\n

Section
\n112 instructs on the actions that a party my take if they fail to be paid, as
\nexplained within the HGCRA if a party fails to be paid and no notice to withhold
\npayment has been given then they have the right to suspend work without
\nprejudice from the employer. Before they can suspend work a notice that they
\nare suspending their obligations under the contract must be issued with the
\nreasons why at least 7 days before the suspension begins (HM Government, 1996).
\nAs explained by Sheridan (2018) the option to suspend work is not widely taken,
\nthis is due to the uncertainty and the risk of the claim being a breach of
\ncontract. <\/em><\/em><\/p>\n

Section
\n113 invalidates the provision of a paid when paid clause being inserted within
\nthe construction contract. A paid when paid clause is when a contractor waits
\nto be paid themselves by the employer before releasing any payments to subcontractors
\n(Ruggieri 2010).  The section further
\ngoes on through clause 113 (2) – 113 (5) to define what is classed as
\ninsolvency and the actions to be taken if this occurs <\/em>(Arberli,
\n2012). <\/p>\n

The final four sections of the HGRCA, sections 114 \u2013 117 are
\nsupplementary provisions. Section 114 includes the use of the Scheme for
\nconstruction Contracts (England and Wales) Regulations 1998 where the original
\ncontract is non-compliant with the HGRCA. This means that the works can continue
\nunder the contract whilst still having legality (H M Government, 1998). <\/p>\n

Section 115 of the HGCRA instructs the parties that they are
\n\u201cfree to agree on the manner of service of any notice or other document
\nrequired or authorised to be served in pursuance of the construction contract.\u201d
\nThis allows the parties to agree the best form of correspondence between themselves
\nand any deadlines that they which to set out for the correspondence. However,
\nif this cannot be agreed or is overlooked then the Act has laid out provisions
\nto be followed (H M Government, 1996).  This
\ncan be seen within the JCT standard contract clause 1.7 which covers the
\nprovisions of notices and communications. <\/p>\n

Section 116 the reckoning of periods of time states the
\nperiod of when an act begins, it also includes within the section days which
\nare not to be included within that period as per the Banking and Financial
\nDealings Act 1971 (lynch, 2018).<\/p>\n

The final section of Part II, section 117 is for the crown application,
\nthis covers any form of construction contract that is entered into or on behalf
\nof the Crown and the Duchy of Cornwall, it however does not include contracts
\nfor the Queen in a private compacity (Aeberli, 2012). <\/p>\n

By carrying out the provisions laid out in the HGCRA and by
\nnot being able to lawfully withhold payments for unacceptable reasons and an
\noption for quick resolution of disputes has helped improve cashflow and help to
\nensure that projects are completed on time. 
\nThe HGCRA has improved the way the industry works between main
\ncontractors and their sub-contractors and will hopefully continue to do so.  <\/p>\n

References<\/h2>\n