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Construction Act Changes

New legislation which amends both Part II of the Housing Grants, Construction and Regeneration Act 1996 (known throughout the industry as "the Construction Act") and the Scheme for Construction Contracts (England and Wales) Regulations 1998 comes into force in England and Wales on 1st October 2011.

The changes will apply to construction contracts entered into on or after this date.

The purpose of this note is to give you a summary of the most important changes and what they might mean for your construction projects.

Formally the new legislation is contained in Part 8 of the Local Democracy, Economic Development and Construction Act 2009. The new provisions affect two key aspects of the Construction Act - payment mechanisms and adjudication.

Key changes to payment provisions

The new regime is designed to give greater clarity as to what is due and when. As with all new things, the up-dated provisions will take some getting used to - particularly the changes in terminology. For example, Notices of Withholding are gone. The key changes are:

  • Payment notices

The payment notice is still required to be issued by the paying party (and is similar to the old regime). A payment notice must be given not later than 5 days after the payment due date which is the date provided for by the contract. The notice must specify the sum that is considered to be/have been due at the payment date (even if the sum is zero) and the basis on which that sum was calculated.

If no payment notice is served, the person to whom the payment is due may serve a default payment notice at any time after the payment notice was due. Where a default notice is served, it should be done as soon as possible because it affects the final date for payment. Serving a default notice may impact on how much a receiving party is entitled to receive and its right to suspend for non-payment but there are detailed provisions surrounding the circumstances and effect of default payment notices which we would be happy to cover further with you.

  • Pay less notice

A pay less notice entitles the paying party to pay less than the sum in the payment notice or the default notice provided that the notice is given to the unpaid party no later than the prescribed period of seven days before the final date for payment. The pay less notice must specify the sum considered to be due and the basis of the calculation. This is similar to the old Notice of Withholding but with the added obligation to show "a calculation", there could be some guidance required from the Courts as to what is the proper and valid form of a pay less notice.

  • Suspension rights for non-payment

The right to suspend for non-payment has been expanded. Previously, a party could only suspend all of its obligations on the basis of non-payment. Now the unpaid party can serve notice to suspend performance of all or part of its obligations under the contract - so an unpaid contractor, for example, can choose to suspend a key part of the works but carry on with other aspects. The party which suspends its performance on the grounds of non-payment can now also recover reasonable costs.

  • Pay when certified

There are further restrictions on conditional payment clauses. The main point to note here is that, ‘pay when certified' and other conditional payment clauses are void because it is not permissible to link payments under one contract to certification under another. However, there are certain exceptions in the case of "upstream insolvency" and management contracting.

Key changes to adjudication provisions

Adjudication is now established as the most commonly used mechanism for formal dispute resolution and the new Act aims to improve the process. The key changes are:

  • Contracts need no longer be ‘in writing'

Construction contracts will no longer have to be ‘in writing' to fall within the scope of the Act. This means that contracts can be wholly written, partly written or oral. Care must be taken though, as more disputes may arise between the parties over what the terms of the contract are and parties should mark pre-contract negotiations as ‘subject to contract' to ensure those negotiations are not deemed to be part of the contract.

For the first time, therefore, Adjudicators will have the right to determine the terms of the contracts they are adjudicating upon. It is expected that, initially at least, this will lead to lengthier and more costly adjudications until such time at the Courts provide some guidance.

Additionally, the right to refer a dispute to adjudication will only arise where the adjudication provision has been incorporated "in writing". So if you wish to reserve the right to adjudicate, make sure that part of the contact, at least, is in writing.

  • Adjudication costs

Before these new amendments, the Construction Act 1996 was silent on the costs and fees of the adjudicator.  It was common for some contracts to contain provisions that a referring party was to be responsible for all of the adjudicator's costs and, in some cases, for the legal and other costs of the Responding Party (so-called Tolent clauses - named after the first case dealing with a clause of this sort that came before the High Court).

Now the parties may give the adjudicator the power to allocate his own fees and expenses between the parties - but any other clause in a contract to the contrary (such as forcing the referring party to pay all of the adjudicator's costs) is ineffective. Alternatively the parties can agree allocation of their costs of the adjudication but only after the adjudication has commenced.

There is still much academic debate in the industry as to whether it is possible - under the new Act - for the parties to include a provision in the contract that one party pay all the legal and other costs of the other party in respect of an adjudication, but the current position of the High Court is that such a clause is not enforceable and it is expected that the Courts will remain of this view.

  • Slip Rule

The adjudicator will now formally have the power to correct any "slips" or minor errors in his award - which is formal confirmation of what has become normal practice in adjudication in any event.

The above represents a brief summary of the new Act. Laytons Construction team is, as ever, more than happy to:

  1. conduct a "health-check" of your own in-house or bespoke construction contracts and appointments to ensure compliance with the new Act; and
  2. Brief you and your team in greater detail as to effect of the new Act, take you through the new payment regime and help set up your internal systems to meet key dates for notices to be served.

Guildford
Contact James Stewart email: mailto:james.stewart@laytons.com

London
Contact John Beesley email: mailto:john.beesley@laytons.com

Manchester
Contact Mark Gillies email: mark.gillies@laytons.com

 

For PDF version of this focus sheet please click here

This Focus is offered on the basis that it is a general guide only and not a substitute for legal advice. Laytons cannot accept any responsibility for any liabilities of any kind incurred in reliance on this Focus.