Background and commencement
The Construction Contracts Act 2013 (“The Act”) was enacted on the 29th July 2013 – just over three years after it was originally introduced as a private member’s bill in the Seanad by Senator Fergal Quinn in May 2010. The Act has remained in stasis in the intervening years until the signing of the commencement order by interim Minister for Business and Employment Ged Nash on 13 April 2016.
The primary reason for the delay has been the time it has taken to appoint the members of the Construction Contracts Adjudication Panel required under S.8 of the Act. This was announced on 15 January 2016 in Iris Oifigiúil. Before the Act comes into force in July a Code of Practice for the conduct of adjudications under the Act will also be published.
Function of the Act
The principal function of the Act is the regulate payments under construction contracts by imposing a requirement that such contracts expressly provide for the amounts of all interim and final payments (or adequate mechanisms to determine them). The Act also renders so-called ‘pay when paid’ clauses ineffective and gives parties the right to refer any payment disputes under construction contracts to adjudication.
When will the Act apply and can its application be excluded?
The Act will apply to all construction contracts entered into after 25 July 2016. It is important to note that S.2(b) of the Act precludes the parties to a construction contract from contracting out of the Act.
What does the Act apply to?
The Act applies to construction contracts (whether or not in writing) where the executing party is engaged in construction operations on behalf of the other party to the contract. The definition of “construction contract” is quite broad and will include inter alia:
- Main contracts;
- Architectural and other design appointments;
- Engineers’ appointments; and
- Project management appointments.
However, the definition also includes a broad ‘catch all’ provision as it will apply to any contracts “to do work or provide services which are ancillary to construction contracts”. This must be read in light of the stated exceptions where the Act will not apply which are set out in more detail below.
The key definition in the Act is that of “construction operations” which refers to “any activity associated with construction…”. The definition is broad in scope and takes its cue from the corresponding definition in the UK’s Housing Grants, Construction and Regeneration Act 1996.
Exceptions – circumstances where the Act does not apply
(i) Non-construction activities in contract:
The Act will only apply to the construction related elements of a contract. In other words, where a contract includes provisions relating to ‘non-construction’ related activities or operations the Act will not apply to those provisions.
(ii) Manufacture and delivery:
The Act excludes from the definition of “construction operations” the manufacture or delivery to site of building or engineering components or equipment, materials, plant, machinery or components for mechanical, electrical, fire or communications systems.
However, the Act will apply where contracts for the supply of such items also provide for their installation.
(iii) Low value contracts and small dwellings:
The Act also excludes from the definition of “construction contracts” any contracts for a value of €10,000 or less as well as contracts relating to dwellings of a floor area of no greater than 200 square metres where one of the parties to the contract is occupying (or intends to occupy) the dwelling as their residence.
(iv) Employment contracts and PPP contracts:
Finally, the Act does not apply to contracts of employment or PPP contracts although there is nothing to suggest it will not apply to a works subcontract sitting underneath the overarching PPP contract.
What does the Act provide for?
Once it has been determined that the contract in question is a “construction contract” relating to “construction operations” as defined in the Act it is important to be aware of how the Act will affect the contract. The primary headings under the Act are:
- Payments under construction contracts;
- Payment claim notices;
- Right to suspend work for non-payment; and
- Right to refer payment disputes to adjudication (and to suspend work for non-compliance with adjudicator’s decision).
Looking at each of these in turn:
(i) Payments under construction contracts:
The Act stipulates that all construction contracts shall provide for:
- The amounts of interim and final payments (or an adequate mechanism to calculate such amounts);
- Payment claim dates (or an adequate mechanism to determine); and
- The period for payment.
Where a construction contract does not provide for the above then the Schedule to the Act will impose default payment provisions on the contract. The Schedule provides for defined intervals for payment claim dates as well as a basic method for calculating the amounts of interim payments.
The Act also renders any ‘pay when paid’ clauses in a construction contract ineffective. These clauses would otherwise allow the paying party under a contract to withhold payment where they themselves are awaiting payment from a third party under a separate contract. The presence of these clauses in sub-contracts over the years has been very damaging to small sub-contractors in particular as larger main contractors have relied on them to withhold monies. There is one exception to this however which arises where the third party (upon whose initial payment the payment under the relevant contract is conditional) is the subject of insolvency proceedings.
(ii) Payment claim notices:
The Act now requires the party seeking payment under the construction contract to provide the employer with more information than a basic invoice. The Act stipulates that a payment claim notice must specify:
- The amount claimed (even if zero);
- The period/stage/activity to which the payment claim relates;
- The subject matter of the payment claim; and
- The basis of calculation of the amount claimed.
The information requirements of the payment claim notices will provide the paying party with more detail in respect of the work for which they are paying the contractor or sub-contractor. Whilst the Public Works Contract published by the GCCC is quite prescriptive in the information required from a contractor when seeking payment it is worth noting that the RIAI form of contract provides that the contractor provide a ‘detailed progress statement’ to the architect when seeking payment. However, the contents of the statement are not specified. The Act now gives more direction as to what is expected to be provided by way of supporting information for payment under all construction contracts.
The Act also provides that the paying party has 21 days to dispute the amount being sought under a payment claim notice. When doing so the paying party must (a) set out the amount proposed to be paid, (b) the reason for the difference in the amounts sought and proposed to be paid and (c) the basis on which the amount proposed is calculated. For those familiar with the existing UK legislation, this is effectively the same as a ‘withholding notice’ in the Housing Grants, Construction and Regeneration Act, 1996.
(iii) Right to suspend works for non-payment:
The Act also introduces a right for the party seeking payment under a construction contract to suspend the works where they have not been paid in full any amount due to them by the due date for payment. The party seeking payment may then suspend the works (but not all of their obligations under the contract – their other obligations will continue, e.g. maintaining insurance) by notice in writing not earlier than the day after the due date for payment giving:
- the grounds for the proposed suspension; and
- at least seven days’ notice of the start of the proposed suspension.
This right to suspend for non-payment ceases where either the amount due is paid in full prior to the start of any proposed suspension or where either party refers the payment dispute to adjudication.
(iv) Right to refer payment disputes to adjudication:
The Act provides that either party to a construction contract may refer any payment dispute under the contract to adjudication. This does not prevent the parties to a construction contract from agreeing to an alternative method of dispute resolution under the contract but the Act essentially “trumps” the contract. For example, adjudication could be initiated in the middle of a mediation process, or indeed before any of the contractual dispute processes even commence, because the right is to refer is “at any time”.
The decision of the adjudicator is binding until the payment dispute is finally settled by the parties or if a different decision is reached in arbitration or court proceedings in relation to the adjudicator’s decision. The decision of the adjudicator (if binding) can be enforced by means of a court order. The parties will bear their own costs for the adjudication and the adjudicator’s fees are paid in accordance with his/her decision.
This adjudication procedure is broadly similar to that contained in the UK’s Housing Grants, Construction and Regeneration Act, 1996 although the UK legislation allows the parties to use adjudication for any dispute (not just payment disputes – although these do constitute the majority of construction disputes) under a construction contract.
Finally, the Act also grants the right to suspend work for failure to comply with an adjudicator’s decision in a similar fashion to the right to suspend work for non-payment as set out above.
Whilst the provisions of the Act are to welcomed it is disappointing that it has taken six years from its original introduction in the Seanad to be passed into law. In that time a significant number of smaller contractors and sub-contractors have gone out of business who might have survived if the Act had been in place to protect them.
It can also be argued that the legislation is reactive rather than pro-active. The construction industry in Ireland was in sharp decline long before the introduction of the Act in the Seanad in 2010 but the UK has had similar legislation in place since 1996. Many will raise the question as to why Ireland did not follow suit more quickly.
In 2016 there are encouraging signs that the Irish construction industry is growing albeit output is not at the same levels prior to the economic recession. It will be interesting to monitor the impact of the Act in the coming years to see whether it plays a part in aiding the industry’s ongoing recovery.