The Construction Act (The amendments)

Previous postings of Heina v Beck & Enforcement of Adjudication Decisions as a result of Brown v Complete Building Solutions have primarily revolved around two pieces of Primary Legislation, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. In effect the 2009 act has been primarily an updating of the previous legislation to clarify where over time the law has been seen to be deficient. We should therefore look at the material changes that took place.

 As these two pieces of legislation, where they apply to construction activities first define what would be a Construction Contract in accordance with the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations.

This leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider the major changes of the 2009 Act

The major changes took effect with after amendments were made to The Scheme for Construction Contracts in 2011 and apply to contracts entered into after this.

The table below explains the key changes that were made to the 1996 Act:

CHANGE POINTS TO NOTE

 

 

Contracts in writing no longer required

Section 107 of the 1996 Act will be repealed.

The payment and adjudication provisions of the 1996 Act will now apply to all construction contracts, whether written, oral or a mixture of both.

The parties will still have to have a written adjudication clause in their contract that complies with section 108 of the 1996 Act. If they do not, the Scheme will apply.

Adjudication may be used more widely but it is likely that more time will be taken up in future adjudications arguing about what the terms of the contract are.

Ability to award costs restricted

Parties will not be able to agree in advance who will pay the costs of Adjudication.

The adjudicator also cannot be given the power to award legal costs.

 

 

 

Under the new section 108A, only two types of costs agreement will be effective:

1) An agreement in writing in the construction contract which gives the adjudicator power to split liability for the adjudicator’s own fees and expenses between the parties; and

2) An agreement on costs made in writing between the parties after the notice of adjudication is served.

 

New slip rule

Under new section 108(3A), construction contracts will have to contain a provision in writing allowing the adjudicator to correct clerical or typographical errors in his decision, arising by accident or omission.

 

The Act is silent on how long an adjudicator will have to make corrections. Parties would be wise to agree a timescale in their contract.

Notably, the Adjudicator will be permitted but not compelled to make corrections and his ability to do so will be limited. He is unlikely to be able to correct factual or reasoning errors or errors of judgement.

Pay when certified clauses banned

‘Pay when certified’ clauses will be banned under new section 110(1A), except where the construction contract is an agreement for someone else to carry out construction operations and payment is conditional on that other person performing their obligations.

 

 

 

 

The exception to section 110(1A) will mean that management contracts will not be outlawed.

Equivalent project relief clauses in Public / Private Partnership contracts, which normally contain conditional payment arrangements, may have to be redrafted.

Payers may try to find other mechanisms to minimise the effect of this, such as by inserting a longer payment period into the subcontract than the period in the main contract.

‘Pay when paid’ provisions will still be ineffective under section 113, except where there is an upstream insolvency.

Due date can’t be determined by notice

Under new section 110(1D), making the due date dependent on the payer giving a payment notice will be banned.

This is not an adequate mechanism for determining when payments become due.

If there is such a clause in the contract, it will be ineffective and the Scheme will apply.

New payment notices

The payment notice provisions of the 1996 Act will be replaced.

Under new section 110A, a payment notice will have to be given not later than five days after the payment due date.

The construction contract may provide for the payer (person paying), the payee (person receiving payment) or another specified person to give this notice.

The payment notice must be issued, even where the amount due is thought to be zero.

To be valid, the notice must state the sum that the person giving the notice considers to be due (or to have been due at the payment date) and the basis on which that sum is calculated.

Where a specified person gives the notice, it may state the sum that either the specified person or the payer considers to be due.

If the payer fails to serve a valid payment notice but the payee has already submitted an application for payment, the amount set out in the application will become due. Payers should therefore be careful to serve their payment notices on time.

New payment default notices

Under section 110B, where the payer (or a specified person) is supposed to but has failed to issue a valid payment notice, the payee may serve a ‘payment default notice’.

Where a valid payment default notice is given, the final date for payment of the notified sum will be postponed by the number of days that it took the payee to issue the payment default notice after the payer failed to issue the payment notice.

The payment default notice must state the sum that the payee considers to be due and the basis on which it is calculated.

Payment default notices should be served promptly, to minimise any delay to the final date for payment and to ensure that suspension rights can be exercised if payment is not made.

A payment default notice cannot be served if the contract provides for the payee to serve the payment notice.

Withholding notices replaced by “pay less” notices

The withholding notice provisions of the 1996 Act are to be replaced.

Under new section 111, the notified sum (the amount specified in a valid payment notice or payment default notice) must be paid on or before the final date for payment, unless the payer (or a specified person) serves a valid ‘pay less notice’.

Money can still be withheld without a ‘pay less notice’, if the payee becomes insolvent after the period for issuing the notice has expired.

A “Pay Less otice” must state the payer’s intention to pay less than the notified sum. It must be served not later than the prescribed period before the final date for payment.

It must specify the sum that the payer considers to be due on the date the notice is served (even if that is zero) and the basis on which that is calculated.

A ‘pay less notice’ cannot be served before a payment notice or a payment default notice has been served.

 

Enhanced rights on suspension

Where the payee is entitled to suspend performance under section 112 of the 1996 Act, their rights will be enhanced.

The payee will:

1) be able to suspend their obligations in whole or in part;

2) be entitled to be paid the reasonable costs and expenses associated with the suspension; and

3) be entitled to an extension of time which includes time required to remobilise.

Enhanced compensation rights may encourage parties to use this remedy.

Suspension may now be seen as an even more effective way of securing payment.

 

 

 

 

 

 

In the next post we will have a look at these changes in more detail and what should be included to ensure compliance with and protection from changes from that seek to dilute the effectiveness of the changes.

 

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