Key Changes to the Construction Act 1996
to be Implemented from 1 October 2011

As long ago as November 2009 the Local Democracy, Economic Development and Construction Act 2009 ("the 2009 Act") received Royal Assent.

The 2009 Act contains important provisions amending Part 2 of the Housing Grants, Construction and Regeneration Act 1996 ("the 1996 Act").

However the 2009 Act provided that those changes would only be operative from an unspecified future date to be provided by a statutory instrument.

After lengthy delay and much debate and consultation, the statutory instrument was made on 27th June 2011.

The 2009 Act will apply to all contracts entered into from 1st October 2011.

The Main Changes

Ending the practice of limiting payment to certification under other contracts

The 1996 Act outlawed the practice of "pay-when-paid" provisions (except in the limited circumstances where the payer does not receive payment as a result of an insolvency further up the chain).

The 1996 Act also requires a construction contract to which the Act applies to have an "adequate mechanism" for determining what payments are due and when they are to be paid.

There is no definition of "adequate mechanism" in the 1996 Act and a not uncommon practice has developed whereby main contractors (and others) provide that payment is limited to certification under the main contract (or another contract in the chain).

The Courts have held that such provisions may constitute an "adequate mechanism" and are therefore valid.

This can have major cashflow consequences for sub-contractors and others affected by such clauses as usually they will have no control over when a certificate may be issued under a contract to which they are not a direct party.

Furthermore quite legitimately certification may be withheld or delayed because of problems in the main contract (e.g. delay by an unconnected sub-contractor) which could then hamper cashflow for the sub-contractor who has properly completed its work but is awaiting payment.

The 2009 Act aims to end this practice by providing that a payment mechanism may not be linked to performance under another contract. There is one exception whereby the employer and main contractor are free to agree that payment under the main contract is dependent upon the performance of a sub-contractor's work.

Theoretically this change should be a significant benefit to sub-contractors in improving their cashflow. The downside may be a worse position for main contractors who may face having to find funds to pay their sub-contractors considerably before receiving payment themselves.

It remains to be seen whether main contractors attempt to mitigate this by extending the final date by which they have to make payments.

Changes to the Payment and Related Notices

A widespread practice has developed in the industry whereby employers (and main contractors) attempt to delay the date for payment by providing that the due date for payment only arises once a payment notice has been given to the payee.

The 2009 Act outlaws this practice and it will no longer be possible as such a provision would no longer be an "adequate mechanism".

There are also some significant and important changes to the provisions relating to payment notices brought about by the 2009 Act.

In future the construction contract must specify that either the payer or the payee will issue the payment notice. The payer/payee must serve this no later than 5 days after the payment due date. The notice must set out the sum which the payer/payee considers is due at the payment date and state the basis upon which the calculation was made.

If it is the payer who is to issue the notice, in the event of failure to do so, the payee may issue a default payment notice. This is a significant new right for payees. The final date for payment is then postponed by a period equal to the delay between when the payment notice should have been served and the date when the default notice is served.

One very important point for payees to note is that a payee cannot suspend work if a payment notice has not been given by the payer. Its remedy is to serve a default notice and only if the payer fails to respond to that by the final date for payment will the right of suspension arise.

Withholding/Counter Notices

By now most people in the construction industry will be familiar with the fact that the 1996 Act requires a paying party to give a "withholding notice" if it wishes to pay less than the sum which would otherwise be due. The 1996 Act requires only such notice to be given before the final date for payment has passed and the notice has to comply with the rules about specifying what sums are being withheld and why.

The 2009 Act no longer refers to "withholding" notices but uses the term "counter-notice" instead.

The 2009 Act does not allow a payee to issue a counter notice seeking a greater sum than in the payer's notice. If the payee is unhappy with that amount its remedy is to seek an adjudication.

The counter notice will have to specify the "basis" upon which any sum is being withheld in contrast to the "grounds" for withholding as required under the 1996 Act. It is unclear whether this change of wording will have any significant impact and to what extent, if at all, it will require more or less information.

Right of Suspension for Non-Payment

The 2009 Act introduces a right for a contractor who has not been paid to suspend part of its obligations. This could well be a valuable weapon for contractors.

At present there is a right to suspend the whole of the work for non-payment but this is always considered a risky course as if it subsequently transpires that the contractor was wrong to do so the suspension may be considered as a repudiatory breach of contract leaving the contractor without the right to complete the work and facing a claim for damages.

In a recent case a contractor thought it was safe in suspending work when it had not received payment even though an adjudicator had awarded in its favour. However the contractor turned out to be mistaken in that the sum had been included in a later payment.

Although on this occasion the Court decided that the suspension did not amount to a repudiation it was a close run thing and the consequences of a decision in favour of the employer could have had very serious effects for the contractor.

By only suspending in part it is thought much less likely that this will be seen as a repudiation as the contractor will not have abandoned the whole of the work.

Additionally the 2009 Act gives contractors in this position the right to extension of time to remobilise if the contractor reinstates work after payment.

Extension of the Acts to Oral Contracts

The 1996 Act required a contract to be in writing or evidenced in writing before the 1996 Act applied and the Courts have adopted a narrow construction of this so that unless all the terms (other than trivial ones) are in or evidenced in writing the 1996 Act does not apply.

The 2009 Act changes this and now the 1996 Act will apply whether wholly or partly in writing or wholly oral. However adjudication will only be available if there is a written agreement to adjudicate complying with the amended 1996 Act.

Adjudication - Costs and Errors

The 2009 Act outlaws the dubious practice of imposing "tolent" clauses in contracts.

These clauses have long been seen as an interference with the right to adjudicate as typically they provide that the referring party (or in extreme cases the contractor) pays the costs whatever the outcome. This is clearly a strong disincentive to use adjudication. Perhaps surprisingly the Courts at least initially decided these clauses were valid.

More recently some Judges have cast doubt upon their validity but the 2009 Act will in any event bring them to an end by providing that any contractual provision which seeks to provide in advance the basis upon which the costs of an adjudication will be allocated will be ineffective.

The 2009 Act also clarifies the case law by making it clear that an adjudicator does have power to correct any clerical or typographical errors in his decision.

It is important to understand that this power is only to correct obvious mistakes not for "second thoughts".

Whilst there is no express time limit to make such corrections they will usually need to be made very quickly. In YCMS Limited v Grabiner (a case where Colman Coyle acted for the successful Claimant in enforcing an adjudication decision) Mr Justice Akenhead stated "it will be an exceptional and rare case in which a revision can be made more than a few days after the decision".

The Scheme for Construction Contracts ("the Scheme")

As readers will doubtless be aware the Scheme set out detailed procedures and rules to give effect to the provisions of the Act. The government has been carrying out a detailed review and consultation on the necessary amendments as a consequence of the 2009 Act and it is anticipated that a new scheme will be published shortly.

 

For more information on the changes to the act and the effects, or for advice on any other construction issue please contact our Construction Department on 020 7354 3000

Date Published : 06/07/2011