Statutory payment and adjudication provisions excluded for certain sewage and water contracts

• United Kingdom

• Real estate dispute resolution

02-09-2022

What changes have been made?

The introduction of a new procurement model for water and sewage contracts has necessitated the need to exclude certain contracts from the provisions of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA).  The HGCRA provides for statutory rights of payment and adjudication that are not suitable for these new types of contract (which are similar to PFI agreements, that are already excluded).  These changes will take effect from 1 October 2022 pursuant to The Construction Contracts (England) Exclusion Order 2022 (the Order). 

What contracts are affected?

Ofwat (the regulatory body for water and wastewater) has introduced a new procurement model known as Direct Procurement for Customers (DPC) for the design, building, operation, and maintenance of high value water and sewerage infrastructure.  This is a new means of outsourcing, which is hoped to bring significant benefits to water companies and their customers through innovation and lower life cycle costs.

The procurement method depends on the following two types of contract.  These are the contracts that the Order excludes from the provisions of the HGCRA:

1. Direct Procurement for Customers Competitively Appointed Provider Contracts (the “CAP Contract”)

The CAP Contract is a contract that has been competitively tendered by a water or wastewater company for services in relation to the delivery of certain large infrastructure projects, resulting in the selection of a competitively appointed provider (the “CAP”).  The CAP is likely to be a special purpose vehicle owned by a private consortium, which will usually include a construction company, funder and service provider.

Under the Order these contracts are excluded from all of the provisions of the HGCRA, such as: (a) the right to be paid interim, periodic, or stage payments; (b) the right to be informed of the amount due or amounts withheld; (c) the right to suspend performance for non-payment; (d) the right to adjudication; and (e) the prohibition of pay when paid clauses.

2. Direct Procurement for Customer (DPC) First Tier Sub-Contracts (the “CAP Sub-Contract”)

The CAP Sub-Contract is the first tier of sub-contract under which obligations under the CAP Contract are sub-contracted to another, usually a main contractor.

These are excluded from only s.110(1A) HGCRA, which states that a payment provision should not be conditional on the performance obligations under another contract, or a decision by any person as to whether obligations under another contract have been performed.  All of the other provisions of HGCRA still apply.  In particular this includes s.113, which prohibits payment provisions being conditional upon payment from a third person, except when that third person is insolvent.

These amendments do not affect the remaining sub-sub-contracts throughout the remaining supply chain, which remain subject to all of the provisions of the HGCRA.

Why have these changes been introduced?

The financing arrangements of the DPC operate on the basis of a unitary charge, which is paid according to actual costs incurred and which become due only when the water or sewerage asset is complete and capable of operating.

Without the Order, the CAP Contract and CAP Sub-Contracts would fall under the definition of a construction contract under HGCRA, which prescribes that the contract must contain certain payment arrangements, such as the prohibition of pay when paid clauses and the right to interim staged payments.  If a contract is non-compliant with the provisions of the HGCRA then the relevant payment provisions of the Scheme for Construction Contracts are implied and will take precedence over the contractual provisions designed for DPC.  This would undermine the structure and operation of these project agreements and make them less attractive to investors.

Important points to note

1. Other contracts already excluded

This Order is limited to a specific procurement model in a highly regulated sector between water and sewerage companies and private companies.  It is a technical exclusion and is narrow in scope.

However it is worth remembering that there are already other exclusion orders in force that omit certain forms of contract from the provisions of HGCRA. In particular PFI agreements are already excluded under the Construction Contracts (England and Wales) Exclusion Order 1998 and the Construction Contracts (England) Exclusion Order 2011.

2.  Applies from 1 October 2022

The order was made on 15^th July 2022 and it is due to come into force on 1 October 2022. It would be prudent for contracts that are caught by the Order to be entered into after this date.

3. Only affects contracts in England, not Wales

As this is a devolved administration matter, Wales is due to consider whether it will adopt similar legislation.  It will be necessary to maintain a regular check on the position in Wales.