The Act

The changes proposed to the law on construction contracts in the Local Democracy, Economic Development and Construction Bill have at last reached the end of the parliamentary process, as the Bill received Royal Assent on the 12th November 2009. Whilst the Local Democracy, Economic Development and Construction Act is now on the statute books, the part relating to construction contracts (Part 8) (and indeed most of the core policies in other parts of the Act) is not yet in force, and awaits the issue of a commencement order by the Secretary of State.

The Act will amend some of the existing law relating to construction contracts set out in the Housing Grants, Construction and Regeneration Act 1996, but for the meantime the provisions in the old HGCRA will continue in force.

The next step is for consultation to take place on the consequential changes that will be required to the Statutory Scheme (this being the regime contained in the HGCRA which provides for contractual provisions for adjudication and payment to be implied into construction contracts that do not comply with the HGCRA). To allow time for consultation on the Scheme to take place and the changes implemented, the bringing into force of the new Act’s changes to construction contracts could be delayed until 2011.  

During the Bill’s passage through the Commons, a government amendment was made giving the Secretary of State the power to make an order disapplying any or all of the provisions of the 1996 Act (as amended by the new 2009 Act), which power would be subject to the necessary parliamentary approvals. It is possible the new legislation could be amended before it is even brought into force.

The revisions made

The new Act will apply to contracts entered into after it comes into force, so  no immediate action needs to be taken, but it is prudent to consider the new law and prepare for its coming into force. Developers, contractors and sub – contractors will in due course wish to review their conditions (and any bespoke amendments which they use in relation to standard forms) and ensure they are compliant. Payers and payees will wish to make sure they know how to operate the new payment regime.

Contracts in writing - requirement withdrawn

It is a requirement under the HGCRA for a construction contract to be an agreement in writing in order to qualify for the adjudication and payment rules; a key aim of the new legislation was to remove this requirement and to extend the Act’s scope to contracts that are oral or partly oral. This is achieved by the removal of the existing statutory definition of an “agreement in writing”. Agreements which under the old law would be excluded from the Act will now come within its scope.

However, it is noted the new Act requires the contract to include a provision “in writing” as to the right to adjudicate and the requirement for the adjudicator to reach a decision, otherwise the Statutory Scheme will apply. The change should result in fewer adjudicators decisions being unenforceable on the technicality that the agreement is not an agreement in writing, but the adjudication process could be the forum for more argument as to the terms actually agreed, for example, where a letter of intent has been accepted by action rather than by written means.

Short contracts still excluded at law

The provision in HGCRA which limits the Act’s payment regime to contracts where the works are 45 days or longer (S109(1)(a)) remains, so contracts for works of a short duration continue to fall outside the Act (unless the parties agree otherwise).

Payer and payee payment notices

The Act brings in a new payment regime which will be largely welcomed by sub – contractors as both payer and payee have the right to issue payment notices. However there is a new regime for parties to construction contracts to grapple with, and the payment clauses of most standard forms will require amending. The Statutory Scheme will also require revision.

The key provisions are as follows:

In relation to every payment provided for by a construction contract, the contract must require:
- the payer “or specified person” (ie the Architect or Contract Administrator) to give a payment notice to the payee specifying the sum due and the “basis on which that sum is calculated” , not later than 5 days after the payment due date, or

- the payee to give a payment notice to the payer specifying the sum the payee considers to be due and the basis on which it is calculated not later than 5 days after the payment due date.

Payer’s pay less notice

The payer or specified person may give a notice of its intention to pay less than the notified sum, and must specify the sum it considers to be due on the date the notice is served and the basis on which that sum is calculated (S144(1)), which notice must be given not later than the period prescribed in the contract for the giving of such a notice, or, if a period is not set out in the contract, a period that is not later than 7 days before the final date for payment.

Payee’s notice where payer failed to serve payment notice as required under the contract

If the payer or specified person fails to give a payment notice as required under the contract, the payee may give a payment notice to the payer at any time after the payer’s payment notice was due, which means the payee could issue a payment notice at any time prior to the final date for payment. If the payee gives a notice in these circumstances the final date for payment is postponed by the same number of days after the payment due date that the notice was given.

Payment of notified sum

The payer is required to pay the notified sum on or before the final date for payment (S111(1)). The notified sum is the amount specified in a notice complying with the contractual requirements as to notices (as set out above).

Payers be wary!

There are some potential pitfalls for the payer; if the payee has sent in a valid application for payment, as he may do under JCT SBC 2005, and the payer or certifier does not override that application with a valid payment notice or pay less notice, the sum applied for will be due, because the “notified sum” in the payees payment notice (or application) will be due for payment (new S111(1)and (2)). Another matter to watch for is how much detail is required in a ‘pay less’ notice, which must specify the sum due and the “basis on which that sum is calculated” (new S111(1)(4)); if the deduction is made for defects, how much of a breakdown of the defects/costs of repair/remediation will suffice?

Payee insolvency

The Act makes a small dispensation when it comes to the matter of payee insolvency; construction contracts may provide that where the payee becomes insolvent after the period prescribed for the service of a ‘pay less’ notice by the payer, the payer does not have to pay the sum due (S111(10)). This provision would appear to cut into the provisions commonly found in most standard forms which state that in the event of the payee becoming insolvent the payer is not bound to make any further payments to the payee, but in any insolvency situation the statutory rights available to parties must be considered.

Suspension

The new Act reinforces the right to suspend work in the event of non-payment. At present a payee is entitled to an extension of time for the period works are suspended for non-payment. This is extended so that in addition to the existing right to the period of suspension the payee will also be entitled to an extension for any additional period for re – starting the works after a period of suspension and the reasonable costs and expenses of suspension and re-commencement.

Interim Payments

There were calls for the legislation to do away with the tactic of including clauses in construction contracts which attempted to make interim payments final and conclusive, thus attempting to come out with the ambit of statutory adjudication. The drafting in the Act could do with tightening up for this objective to be said to be achieved. The Act provides that in meeting the requirement to provide an adequate mechanism for determining when payments become due under the contract, it is not permitted to make the date on which a payment is due to be determined by reference to “the giving to the person to whom the payment is due of a notice which relates to what payments are due under the contract.” (new S110 (1) (D)). It remains to be seen how this provision is interpreted.

Banning of “pay when certified “clauses

The Act does not permit clauses making payment conditional on the performance of obligations under another contract or on a decision by any person as to whether obligations under another contract have been performed. This will include pay when certified clauses (a ban on pay when paid provisions having already been made under the 1996 Act).  

A ban on “Tolent clauses”

There were calls for a ban on the use of “Tolent clauses”, which state that the Referring Party must pay both parties costs and the Adjudicator’s charges irrespective of the outcome of the adjudication process, such clauses clearly being a major disincentive to a claimant wishing to commence a statutory adjudication. The new Act includes such a ban, but agreements included in the construction contract or which are made after the giving of notice of an intention to refer the dispute to adjudication, which confer on the adjudicator the power to allocate how the parties should pay his or her fees and expenses will not flout the new law.

CONCLUSION

Whilst the industry is a step closer to the new reforms on construction contracts there is still a waiting game to be played. These are changes that will be welcomed by those further down the contractual chain, but some will be of the view the Act could have done more, and others that the Act will lead to another upheaval for the industry as standard forms have to be amended and new payment rules prevail.

There is however going to be plenty of time to mull over the changes, as consultation takes place on the Scheme and we keep a watching brief on the Act’s progress towards being brought into force. In the meantime, the HGCRA 1996 as it stands now, remains the rulebook.

Nikola Evans
Alway Associates