Variations and the HGCR Act 1996

© Daniel Atkinson 2002 23 May 2002

The Housing Grants Construction and Regeneration Act 1996 applies to construction contracts which are entered into after 1st May 1998(Section 104(6)). With the passage of time it would be expected that objections to jurisdiction based on Section 104(6) would disappear. That is not the case. The problem that remains and is of practical interest on large projects, is the effect of an agreement made after 1^st May 1998 but which is supplemental to a main agreement made before 1^st May 1998. Does the revised agreement fall under the Act?  This question has been examined in two cases, one dealing with a novation agreement and the other with a variation agreement.

The first case is Yarm Road Limited v Costain Limited (2001) TCC before Judge Havery. The work involved was a road widening Junctions 18 to 19 of the M5 motorway. Costain was the main contractor and sub-contracted part of the works to Cleveland Structural Engineering Limited by a sub-contract 7th August 1995. It was agreed that Yarm Road would take over the subcontract from Cleveland and be responsible for all the work previously performed. This was achieved by a novation agreement dated 14th August 1998 between Cleveland, Yarm Road and Costain.  The novation provided for Cleveland to be released and discharged from the sub-contract, and for Yarm Road to perform the sub-contract and to be bound by the terms as if it was a party to the sub-contract instead of Cleveland.

Costain argued that if the novation agreement fell within the Act, then Yarm Road could claim for interest by way of damages for breaches of contract occurring in 1995, 1996 and 1997, on the basis that monies were withheld in the absence of a proper withholding notice. Treating the 1996 Act as applying retrospectively in that way would mean that Costain were potentially liable in damages for failure to serve a withholding notice in 1995, 1996 or 1997, when the withholding notice regime itself had yet to be conceived.

Judge Havery accepted that if anomalies existed that they were potentially serious.  Judge Havery held that the wording of the Act was clear and the effect inescapable, that the novation agreement fell within Section 104(6). Judge Havery declared that Yarm Road was entitled to pursue two disputed claims against Costain by way of Adjudication under the 1996 Act. Although the decision may be correct on a literal interpretation of the Act it is contrary to common sense.

The second case is Earls Terrace Properties Limited v Waterloo Investments Limited (2002) before Judge Seymour. Waterloo undertook to manage the development of properties at Earls Terrace for Earl in an agreement between them dated 4^th December 1996.  The parties entered into a variation agreement by deed dated 20^th July 1998 that varied the 1996 Agreement.  Waterloo served a Notice of Adjudication on 28^th January 2002.  On 6^th February 2002 Earl sought a declaration that the person appointed to act as adjudicator had no jurisdiction to act.  Judgment was given on 14^th February 2002.

It was not in dispute, at least in the instant proceedings, that the 1996 Deed Agreement was a construction contract within the meaning of the Act.  One issue then was whether or not the 1998 Deed Agreement could itself be considered a construction contract falling under the Act.  Judge Seymour recognised the possibility that an agreement varying a construction contract made before 1^st May 1998 may itself be a construction contract as defined in the Act.  In that case it was likely that the Act would apply at least to the variation agreement and possibly, although Judge Seymour expressed no view on this issue, there may be some scope for the application of the Act to the original agreement by reason of the variation agreement.  He found however that the variations in the 1998 Deed Agreement were simply sums of money with no change in the services or the period for performance.   The Deed Agreement was not therefore a construction contract under the Act.

The interesting argument raised by Waterloo was based on distinguishing the 1996 Agreement from the agreement as varied by the 1998 Deed Agreement, the revised contract.  The 1996 Agreement did not fall under the Act when it was made.  The revised contract was entered into in its new form on 20^th July 1998 when the original contract was varied and that was the relevant date for purposes of Section 104 of the Act.

Judge Seymour did not accept Waterloo’s analysis.  He decided that Waterloo’s analysis would lead to a rather bizarre consequence. He held that by Section 104(6) of the 1996 Act, Parliament plainly intended that the far reaching, and to some extent possibly draconian, provisions of the Act should only apply to construction contracts which were made at a date after which the parties making the contract were aware that the provisions of Act were going to apply to that contract.   He held that Parliament did not wish to bring within the scope of the Act contracts that were made at a time when the parties could not have envisaged that provisions of the Act would be thrust upon them.

Judge Seymour held that the effect of the Deed Agreement 1998, varying the 1996 Agreement only in relation to fees, was not retrospectively to drag bawling and screaming within the 1996 Act the 1996 Agreement which, when made, did not fall within the scope of that Act.   On that basis the declaration sought by Earls was made that the adjudication was void and of no effect, and that the appointed person had no jurisdiction to act as an adjudicator.

Although the two cases involved quite different facts, there is a clear difference in logic.  Judge Havery was prepared to accept the serious anomalies arising from the retrospective consequences of his decision.  Judge Seymour was not prepared allow such an effect, although he recognised the possibility that a different variation agreement which itself was a construction contract might be caught by the Act and even possibly have retrospective consequences.

It does appear therefore that the effect of agreements after 1^st May 1998 supplemental to a main agreement that is not caught by the Act, will depend upon the contents and the nature of the supplemental agreement.  Agreements between new parties, as in a novation agreement, will be analysed without reference to the main agreement even if there are retrospective consequences.  Supplemental agreements between the same parties that do not change the nature of the construction operations in the main agreement, will not be caught by the Act. We must wait to see what other types of supplemental agreement may be caught by the Act and may have retrospective consequences.