Just when you thought you'd got to grips with the Construction Act...

6 July 2011

Changes to the Construction Act are due to come into force later this year and, as Stephen Clarke explains, they should not be underestimated by any party to a contract

An amended Construction Act is planned to be in place in October and it will have an impact on every contract in the construction industry. The key changes are the drastically changed payment provisions, the extension of the adjudication provisions and the new rules around suspension.

Payment notices: confusion ahead

Just as we were all starting to get used to the idea of “withholding notices” they have been scrapped. There is a new notice regime and parties need to get it exactly right or there could be dire consequences, whether they are the party paying — let’s call them the Employer (but it could of course be the contractor in a sub-contract) — or the ones being paid, let’s call them the Contractor.

The basics are that the Employer must issue a “payment notice” within five days of the “payment due date”. If they don’t, then the Contractor can issue a payment notice themselves and then — and this is the important point — the amount stated in that notice becomes the sum that must be paid by the Employer on the final date for payment.

The only escape for the Employer is the “pay-less notice”. This is what it says: a statement by the Employer that they do not owe all of the amounts claimed in the payee’s notice. If they do not get the notice in within the correct period then they will have to pay the amount claimed.

The time periods are complex and likely to be a source of huge confusion and many disputes. If no payment notice is issued within five days of the payment due date by the Employer and the Contractor decides to issue one, then the final date for payment is deferred by the same number of days as the notice is issued after the end of the five-day period when the Employer should have done so.

The pay-less notice (if one is to be served) must be issued by the Employer either in accordance with the contract or, if no period is stated, then seven days before the final date for payment. If the Employer drafts the contract cleverly then this period can be as little as one day before the final date.

All of these notices, whether served by the Employer or Contractor, must clearly provide the basis on which the sum has been calculated and, even if the amount is zero, there must still be a notice.

Adjudication: no need for a contract in writing

There have also been important changes around the adjudication rules. One of the main points of the previous rules was that all the main terms of the agreement between the parties had to be in writing — if there was no written contract then there was effectively no adjudication.

This has been dramatically changed in the new Act as construction contracts made verbally will now be included. This effectively means that a contract that you have agreed between the parties in a pub over a drink can now be the subject of an adjudication if a dispute arises.

The problem with this, of course, is that there are likely to be wildly different interpretations of what was said in the pub. This is likely to mean that, not only will there be more adjudications, but also an increase in disputes concerning the terms of the contract between the parties. Witness evidence concerning those terms is likely to be much more crucial. This makes it even more vital than before that any contracts you enter into are clearly evidenced in   writing and everyone understands exactly what the terms mean.

The other likely outcome of this provision is that there will be more oral meetings in front of adjudicators to enable them to decide whose evidence they prefer on the terms of the contract and this may increase the cost of a typical adjudication. There may also be disputes arising over written contracts which are “amended by oral discussions”.

The other major change made by the Act is the attempt to stop clauses in a contract which try to allocate in advance the costs incurred in an adjudication. There have been a number of contracts drafted which state that, regardless of who wins or loses the adjudication, the party starting it has to pay the cost and this has been recognised as unjust. Unfortunately, the drafting of this is not very clear and there is some debate among lawyers as to whether it will effectively outlaw these clauses.

The overall impact of these changes should not be underestimated. All of the standard contracts are in the process of being amended and you should look carefully at your own contracts and payment provisions to ensure they comply. The parties who will benefit from the inevitable early confusion will be those who have prepared in advance.

Stephen Clarke is a partner and head of the construction team at Clarke Willmott

New rights to suspend work

Another important change to the Act is the Contractor’s right to suspend any or all of their contractual obligations if they are not receiving payment in accordance with the contract. If this happens, they will receive an extension of time for the suspended period plus the consequential time necessary to restart the work.

The Contractor can also recover any costs and expenses reasonably incurred during the period of suspension.

Another unfair practice the new Act seeks to stop is attempts by the Employer to make payment conditional upon an event in another contract. For example, in a sub-contract this can mean that release of retention to a sub-contractor is made contingent upon the issue of a certificate of making good defects under the main contract.

This has now been stopped and the release of the retention will have to be made in relation to the sub-contract whatever the circumstances in the main contract.

Changes have been made in the provisions regarding the circumstances in which the Contractor becomes insolvent after the date when money should have been paid by the Employer. Following a House of Lords case known as “the Melville Dundas Case” the Employer will no longer have to make payment in these circumstances.

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