The “New” Construction Act (“the new Act”) or The Local Democracy, Economic Development and Construction Act 2009, to give it its proper name, will significantly amend the existing Housing Grants, Construction and Regeneration Act 1996 (“the 1996 Act”).
The 1996 Act tried to protect sub-contractors from those in the chain above them holding up payments. In particular it introduced the right to stage payments, to suspend performance for non-payment, and to refer disputes to adjudication? The new Act goes further. The intention of the changes is to promote a more reliable cash flow throughout all construction contracts and in the construction industry in general by stopping the age old practice of contractors holding up payments to sub-contractors until they themselves are paid.
The new Act which comes into effect on 1 October 2011 in England and Wales (1 November 2011 in Scotland). It will affect everyone directly involved in any business in the construction industry.
All construction contracts which are entered into on or after 1 October 2011 must comply with the provisions of the new Act. In practical terms this will mean that all projects currently at the tender stage may well be subject to the new provisions.
The main changes are as follows:
Payments to those down the chain
As stated above, at its most basic, the idea is that it will no longer be possible for anyone who owes money down the chain, to hold up paying it because they themselves have not been paid. Whilst the basic principles remain the same with the parties still free to agree the due date and the final date for payment, the new Act aims to end this practice and so introduces the concept of “Payment Notices” and Pay-less Notices”.
Below we talk of “employer” and “contractor” but we are talking really of any paying party and receiving party wherever they are in the chain.
A typical contract will require the employer to issue a Payment Notice not later than five days after the contract payment date is due. This Notice must specify what amount it considers is due to the contractor and the basis on which the amount is calculated. The employer then has to pay that amount. This is called the “notified sum”.
If the employer thinks less is due than was agreed it serves a “Pay-less Notice”. Such a Notice has to specify why that lesser amount is due and give very much greater detail as to how it has been calculated.
“Withholding Notices” are notices saying why payment is being withheld. Again full details must be given.
These can be issued by a contractor when an employer fails to serve a Payment Notice within the specified timescale. The notice must specify what sum the contractor says is due and the basis upon which it is calculated. The employer MUST pay this sum unless it is entitled to serve a Pay-Less Notice because it does not agree the sum set out in the Default Notice.
The “Payee-led” payment process
The new Act introduces a new optional “payee-led” process. Under this procedure the contractor issues the Payment Notice. The employer must pay the notified sum although it can issues a Pay-Less Notice if it considers the contractor is not due to all that it has claimed. The contractor cannot then serve a Default Notice as it has already indicated what sum it expects to receive. N.B. This Payee-led process can only be used IF SPECIFICALLY INCORPORATED INTO THE CONTRACT.
Three Significant individual changes
- ‘Pay when certified’ clauses are to be prohibited.
- This means that simply because an employer is yet to certify the main contractor, the main contractor can no longer rely on such clauses to prevent paying any sub-contractor;
- This new provision is expected to outlaw clauses in contracts which state that the release of retention is conditional on the issue of a Certificate of Making Good Defects (or similar).
- Going forward, contractors (wherever they are in the chain) should expect to see the release of retention linked to events in their own contract giving them more control over the release of their retention.
Suspension of Performance
Under the new Act, if a paying party fails to pay what is due, a receiving party can suspend performance of part of their obligations under the contract for non-payment. Under the 1996 Act a receiving party could only suspend all of their obligations for non-payment, which was more likely to be considered as abandonment of the whole contract.
- It will not be possible to fetter the Adjudicator’s jurisdiction in relations to his own costs.
Clauses that previously stated that the party commencing the adjudication process should pay the Adjudicator’s costs are outlawed as this meant that almost always the contractor has to pay those costs as it was the party being done out of its money.
Where disputes arise the new version of the Scheme to be introduced which will set out the default adjudication provisions. Adjudication will now apply to oral contracts. Adjudicators will be able to award costs on the merits of a case, whereas under the existing legislation the party invoking adjudication has to pay these costs.
These changes are as a result of concerns in the industry about payment delays down the chain and the unfairness and inaccessibility of adjudication.
The inclusion of oral contracts will no doubt lead to more disputes being referred to adjudication. It is hoped that the changes will encourage more of the smaller operators to commit their contracts to writing which will allow parties to operate on more clearly defined terms, so as to avoid disputes arising.
JCT has already issued a track changed version of its 2011 suite of contracts and intends to publish the full suite in September 2011.
NEC does not intend to publish its new contract until after the Act comes into force.
Bespoke contracts must take into account the new Act.
Know the new Adjudication process.
Beware the Default Notice – once issued and the employer does not agree the amount it must quickly serve a Pay-less Notice or risk having to pay a larger sum than it considers is due. Everyone in the chain must consider how it strictly controls the conditions under which Default Notices can be issued so that they do not go unnoticed and procedures must be put in place to activate Pay-less Notices in response if necessary.
For further details please contact Cara Forrest by email or by telephone 01453 762114.