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