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Caught in the act

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The Scheme for Construction Contracts, part of the Construction Act, provides quick and easy dispute resolution

Part II of the Housing Grants Construction & Regeneration Act, 1996, colloquially known as the Construction Act, has been operational since 1 May 1998 when the Scheme for Construction Contracts was enacted, giving life to what some commentators regard as the most important legislative measure to apply to the construction industry in the past decade. It is so important that the date of formation of a contract is now the first issue which advisers to those with construction problems will wish to ascertain. If it was formed after 1 May 1998 the client will have, in most instances, the opportunity to have its problems addressed and resolved quickly.

Architects and designers should therefore realise that they will inevitably be faced with the effects of the Construction Act, whether a reference is taken out between the contractor and the employer, or between the employer and professional consultants. In a recent adjudication, the matter in dispute was not the quality of the works or the performance of the contractor but the sums of money to be paid to an architect following dismissal by the employer.

In this case the architect was preparing a change-of-use application for a listed building to convert it into luxury flats. As often happens, the developer thought the approvals were not being received quickly enough, and also required additional storeys to the building to provide greater density of letting. The planning authority would not agree to those extra proposals and eventually, because of the resulting delay, the architect was dismissed from the commission. He had only received a small proportion of the fees to which he would have been entitled on receipt of building- regulation and planning approvals.

The first obstacle for the architect to overcome was that the act only applies to contracts in writing. There was no written agreement between the architect and the employer, invariably the case at the early stages of a project where the architect undertakes works 'at risk'. However, the definition of 'contract in writing' contained within the act is very broadly drafted and includes contracts evidenced in writing, even if by a third party. Thus, a course of letters between two parties or their representatives which refers to a contract between them will suffice as evidence in writing of a contract and enable the Construction Act to apply.

In accordance with the scheme, an application was made to a nominating body to appoint an adjudicator. This adjudicator, whose primary profession was as an architect, was appointed within three days and, confirming his willingness to act in the referral, duly received documentation setting out the claim for loss of profit which the architect had suffered through his removal from the project by the employer. The reaction of the employer to this was to argue that since there was no written contract the adjudicator had no jurisdiction to act and that there was nothing to be adjudicated upon.

Considering the submissions, the adjudicator set down a procedure by which he required a response from the employer to the architect's claim within seven days, whereupon a meeting would be convened at which he would hear the submissions about the contract and question the parties as to the allegations and counter-allegations made in their respective documents. This point illustrates the speed with which an adjudication can proceed and also the inquisitorial nature of the adjudicator's powers permitted by the act.

Following a response from the employer, a meeting duly took place and, after hearing submissions, the adjudicator decided that there was a contract in writing, the Scheme for Construction Contracts applied, and he had the necessary jurisdiction to reach a decision. The meeting continued with the adjudicator receiving submissions concerning the claims and counter- claims and then proceeding to question the parties directly. It was an informal process, in which there was no swearing under oath and Christian names were used.

The adjudicator subsequently found for the architect and ordered the employer to pay £50,000 in regard to the sums in dispute, with the adjudicator's costs of £2000 to be split equally between the parties. Those with any experience of dispute resolution in the construction industry will recognise that these costs are very low and, taken together with the timescale involved, may agree that the act is the ideal solution for quick and inexpensive resolving of disputes.

Practical experience certainly suggests that disputes to which the act applies can be settled very quickly by negotiation just because the act requires the parties to confront their differences. With regard to architects, this could be a difference of opinion between the architect and the contractor as to the quality of the works, extensions of time, loss and expense.

Contractors have recently enquired about their position should they disagree with an architect about the quality and workmanship used during a construction contract. Contractors would be perfectly within their rights to require that such issues be referred to an adjudicator for a decision, which could quite easily lead to sums of money not certified to the contractor in respect of alleged non-compliant work being paid to the contractor.

It should, however, always be remembered by architects and designers that the Construction Act is a double-edged sword: they may also invoke the adjudication procedure against an employer if some dispute should arise between them. Many employers will try to retain or delay payment of a portion of the fees payable to their professional advisers by alleging poor working practices or negligence. If an architect or designer was being paid less than that due, he or she could invoke the right, provided by Section 112 of the act, to suspend further provision of services, as well as seeking adjudication, and the combination of these two factors could prove a powerful incentive to employers to pay outstanding fees.

One vital issue that all professional advisers must consider when faced with a reference to adjudication is that of professional-indemnity insurance. Many insurance providers have strict guidelines which, if not complied with by the insured, can result in the withdrawal of cover for adjudication decisions. Hence, it is advisable to be fully conversant with both the procedures laid down by the insurers and the provisions of the act. For those firms with qa procedures, this should form an element of their monitoring process. Our experience so far has been that the act offers significant opportunities to those who are alive to them and represents a positive advance in ensuring that disputes are dealt with both promptly and efficiently. We believe that the Construction Act is a great success and will be of benefit to the entire construction industry.

Peter Gracia is a consultant and Roger Louch is director of adjudication services with James R Knowles in Cardiff

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