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Legal Updates

Changes to the Construction Act

26 September 2011 #Construction


The Local Democracy, Economic Development and Construction Act 2009 comes into force on 1 October 2011.  This Act amends the existing Housing Grants, Construction and Regeneration Act 1996 known as the Construction Act. The Construction Act was intended to improve payment practices within the UK construction industry.  The future changes follow the same agenda, widening the application of the Construction Act to unwritten contracts and offering enhanced protection from unfair payment procedures.

The Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649) (the “Scheme”) is the secondary legislation which supplements the Construction Act.  The Scheme has also been amended and the revised version will apply to construction contracts entered into after 1 October 2011.

The Construction Act and the Scheme will not have retrospective effect. Contracts entered into before 1 October 2011 will continue to be governed by the provisions of the Construction Act 1996 in its original form. All contracts entered into after 1 October will be governed by the amended Act and the revised Scheme.  This may mean that main contractors will have sub-contracts subject to differing payment regimes (depending on whether the sub-contract in question is dated before or after 1 October).

This factsheet highlights the main themes of the changes and their impact on the parties to construction contracts.  The main changes fall into three categories:

  • Unwritten contracts
  • Adjudication procedures
  • Payment terms

1. Unwritten contracts

The provisions of the Construction Act have in the past applied only to construction contracts entered into “in writing”.  The courts have interpreted this requirement for written construction contracts narrowly in the past.  From 1 October this restriction will no longer apply.  Therefore, any construction contract made orally or part-orally, as well as in writing, will be covered by the Construction Act.

2. Changes to Adjudication Procedures

As a result of the changes, disputes arising from oral or part-oral contracts may be referred to adjudication.  This will open up adjudication to parties who were previously unable to use adjudication because the contract in question was not “in writing”.  Concerns have been raised that the determination of contractual issues may not be possible within the short timescale of adjudication or that this may lead to increased costs.  As a matter of best practice, parties should ensure that all contract terms (and any variations) are recorded in writing.  Parties should also take care to ensure that pre-contract negotiations are marked as being “subject to contract”.

Adjudication agreement must be “in writing”

Whilst contracts need no longer be in writing, if there is a written contract that contains a clause entitling the parties to refer a dispute to adjudication, that clause must satisfy each of the nine requirements for adjudication as set out in the Construction Act, namely:

  • Enable a party to give notice at any time of its intention to refer a dispute to adjudication;
  • Provide a timetable with the object of securing the appointment of the adjudicator and refer the dispute within 7 days of such notice;
  • Require the adjudicator to reach a decision within 28 days of referral (or such longer period as is agreed by the parties after the dispute has been referred);
  • Allow the adjudicator to extend the period of 28 days by up to 14 days with the consent of the referring party;
  • Impose a duty on the adjudicator to act impartially;
  • Enable the adjudicator to take the initiative in ascertaining the facts and the law;
  • Provide that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings or arbitration or by agreement;
  • Provide that the adjudicator is not liable for anything done or omitted in his role as adjudicator unless the act or omission is in bad faith. Any employee or agent of the adjudicator is similarly protected from liability; and
  • Permit the adjudicator to correct his decision so as to remove a clerical or typographical error caused by accident or omission. Under the revised Scheme, the adjudicator must correct the decision within 5 days of delivery of the decision to the parties.

Under the new regime, if each and every one of these requirements are not agreed in writing, all of Part 1 of the Scheme will apply by default.  The Scheme will also apply by default to adjudications arising out of contracts which have no written adjudication clause.  If you regularly do business on the basis of oral contracts you should therefore familiarise yourself with the Scheme.

Timetable

The revised Scheme now clarifies that the 28 day period for adjudication runs from the date the adjudicator receives the referral notice and not the date of dispatch by the referring party, as was previously the case.  The Adjudicator must also notify the parties of the date of receipt.

Adjudication costs

Under the new regime, any clause allocating parties’ liability for the costs of adjudication will be ineffective subject to two exceptions:

  • Parties may give the adjudicator power to determine who pays his fees and expenses; and
  • Parties may agree the allocation of adjudication costs but only after the notice of intention to refer has been issued.

From 1 October, clauses (known as “Tolent” clauses) that require the payee or referring party to pay all of the payer’s or responding party’s legal costs and all of the adjudicator’s fees and expenses, irrespective of the outcome of the adjudication, will be outlawed.  If a contract contains a Tolent clause the adjudication provisions of the Scheme will apply in their entirety.

3. Changes to the Payment terms

The payment provisions within the Construction Act have been rewritten.  Existing standard terms and conditions will need to be reviewed and amended to ensure compliance with the new payment rules.

Adequate Payment mechanism

The Construction Act requires every construction contract to contain an adequate mechanism for determining when payments become due under the contract.  From 1 October any contract which determines the date for payment by reference to a notice given to the payee by the payer is not an “adequate mechanism”.

Pay-when-certified and pay-when-paid clauses

The new regime will prohibit “pay when certified” clauses pursuant to which payment is due only upon certification of payment under another contract.  The only exception to this rule is where the clause is contained in a contract providing for construction work by others as is the case with management contracting.

The existing exception to the prohibition on “pay when paid” clauses is preserved.  A “pay when paid” is clause is permitted were a payer is not paid due to another payer’s insolvency (known as “upstream insolvency”).  These clauses will continue to be lawful.

Payment Notices

A new system of payment notices has been introduced.  In many cases a standard form contract may require a few amendments in order to comply with the new payment regime.

The payer (or a specified person such as an architect, project manager or engineer) must send notice to the payee of the sum considered due at the payment due date and the basis on which that sum is calculated.  The notice must be given even if the sum due is zero.

If the payer does not send notice within 5 days of the due date the new regime allows the payee to send its own payment notice or default payment notice.  However, if the payee has submitted an application for payment before the date on which the payer’s notice was required then there is no requirement for a second notice.  The application for interim payment will act as the payee’s notice.  This means that a contractor does not have two chances to issue a payment notice and cannot increase the amount due if the employer fails to issue its notice.  This means that the sum due, or “Notified Sum”, will automatically become the amount specified in the application for payment (subject to the right to withhold payment).

A payee should ensure that it has issued its default payment notice if one is required. If not:

  • It cannot validly suspend performance for non-payment; and
  • The payer is not obliged to pay the payee under the new section 111.

Right to withhold payment

The changes bring about a change in terminology.  The new section 111 contains a positive obligation to make payment of the “Notified Sum” ie the sum referred to in the payment notices and not the “sum due” as per the pre-1 October regime. 

If a party wishes to withhold payment then it must issue a “Pay Less Notice”.  The “Pay Less Notice” is similar to a withholding notice under the pre-1 October regime.  The notice must be given not later than a prescribed period before the final date for payment and must:

  • Specify the sum the payer considers is due and
  • Set out the basis of the calculation of the Pay Less Notice

Non-payment – right to suspend performance

The existing provisions allowing a contractor to suspend performance if it has not received payment have been extended.

The amendments allow the contractor to choose to suspend performance in relation to certain parts of the works or to suspend performance of the works as a whole.

The unpaid party may also claim payment of its reasonable costs and expenses in relation to the suspension.  The unpaid party will also benefit from an extension of time which will include the period of delay caused by the suspension and not just the period of suspension itself.  This means that an unpaid contractor may claim for the reasonable demobilisation and re-mobilisation costs in consequence of any suspension for non-performance. 

Conclusion – be ready for the changes

Parties should:

  • Know their payment notices and keep the enhanced right to suspend performance in mind;
  • Use the Scheme or incorporate the Act’s nine adjudication requirements into contracts;
  • Avoid the use of Tolent clauses;
  • Ensure that oral contracts include payment terms, otherwise the relevant parts of the Scheme will apply;
  • Ensure that pre-contract negotiations are marked subject to contract; and
  • Review standard terms and conditions and consider amending in light of the new legislation.
Clarkslegal, specialist Construction lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Construction matter please contact Clarkslegal's construction team by email at constructionsector@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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