The Construction Act changes - in force now!

Updated October 2011

The Construction Act, or to give it its full title, the Housing Grants (Construction and Regeneration) Act 1996, has changed. The changes came into force in England and Wales on 1 October 2011 and changes will follow in Scotland on 1 November. These changes will apply to all construction contracts entered into after the relevant date.

The changes are set out in the succinctly titled, Local Democracy, Economic Development and Construction Act 2009. They affect both the payment provisions and the adjudication provisions in the old act. The key changes are set out below.

All contracts entered into after the relevant date will need to be amended to reflect the changes. Major standard forms, such as the JCT and NEC have issued amendments to reflect the new requirements, and the TLT construction team can advise on amendments to non-standard documents.

Payment notices with teeth – the new default notice

• Payment notices can now be given by the paying party, the payee or a third party.
• The party that gives the notice must be specified in the contract. In many cases this will be the Employer’s Agent or Engineer administering the main contract, and the main contractor under sub-contracts.
• The notice must specify the amount due and how that amount is calculated.
• If no payment notice is given, the payee can serve a default notice, setting out the same information. If no pay-less notice is issued (see below) then this will be the amount due for payment.
• There is an exception. Where an application for payment is made under the contract by the payee, this may take effect as a payment notice. If that is the case, the amount due (subject to any pay-less notice) will be the amount of the application.
• This change is hugely significant. Under the old act, there was no sanction for failing to serve a payment notice. This meant that regardless of whether a notice was issued, the parties could still dispute the amount due. Now, unless an effective pay-less notice is served, if the paying party fails to serve a payment notice, they will have to pay the amount set out in the payee’s default notice or application.

Withholding notices replaced by pay-less notices

• If the paying party wants to pay less than the amount of the payment notice/default notice, they must serve a pay-less notice at the requisite time before the final date for payment.
• The parties can agree the requisite time. If they don’t, the Scheme will apply.
• Unlike withholding notices, the pay less notice must specify the amount considered due and the basis of calculation.

An end to pay-when-certified clauses

• Pay-when-paid clauses remain ineffective. In addition, it is no longer permitted to link payment in one contract to payment obligations under another contract.
• This means pay-when-certified clauses, preventing payment becoming due under a sub-contract until the relevant works are certified under the main contract, are now ineffective
• There are exceptions for management contracting, where payment can be linked to certification down the contractual chain, and possibly for tier 1 PFI contracts.

Enhanced rights to suspend work

• Suspension for non-payment no longer needs to relate to all of the works. Any part of the works can now be suspended.
• The right to extend time now covers time for remobilisation and there is a right to recover reasonable costs and expenses arising out of the suspension.

Payment and Insolvency

• The act has been amended to reflect the existing case law. If the payee becomes insolvent after the latest date for a pay-less notice, but before the final date for payment, payment can be withheld.

Contracts no longer need to be in writing to adjudicate

• The old act applied only to contracts in writing. This made for frequent challenges to adjudicators’ jurisdiction where some or all terms had been agreed orally.
• This requirement has been removed. This means that contracts made by word of mouth and a handshake can be adjudicated.
• If the agreement to refer disputes to adjudication (i.e. the adjudication clause) is not in writing then the Scheme will apply to determine the adjudication procedure.

This will make a big change to the number of disputes that can be adjudicated. Although it will have the benefit of restricting jurisdictional challenges to the enforcement of decisions, it will make the adjudicator’s task more difficult. If the parties don’t agree on the terms, the adjudicator will have to decide what terms were agreed before he can go on to apply them.

Other changes to Adjudication

• Agreements, pre-adjudication, to allocate costs are now ineffective. This means that contracts can no longer require the referring party to pay the adjudicator’s fees.
• There is an exception for agreements allowing the adjudicator to apportion his fees and expenses.
• Contracts must allow the adjudicator to correct typographical, clerical or arithmetical slips in their decision. If the Scheme applies this power must be exercised within 5 days of the decision being issued.

If your contract has not been amended to bring it into line with the new act, then the Scheme for Construction Contracts will apply. Consequential amendments to the Scheme also came into force on 1 October (1 November in Scotland). For the most part they mirror the changes to the Act, but there are one or two additional tweaks.

The changes will, no doubt take time to bed in. It is likely that the early days will see some unfortunate cases where the consequences of the changes have not been appreciated. In the long term, we hope that the changes will improve certainty and should pay dividends for those who administer their contracts accordingly.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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