Construction contracting has seen significant change in both the private and public sector in 2016, including the introduction of the long-awaited reform of the Public Works Contracts (effective from April 4 2016) and a definitive date for the operation of the Construction Contracts Act 2013 (July 25 2016).
The act applies to a wide range of construction contracts, including main contracts, subcontracts and professional team appointments entered into after July 25 2016 – in Ireland, irrespective of the law of the contract, it cannot be contracted out of. There are some limited exclusions relevant to the application of the act, including:
- contracts with a value of less than €10,000;
- public-private partnership contracts; and
- contracts for the construction of an owner-occupied dwelling of less than 200 square metres.
Most existing industry forms of construction contracts already comply with Section 3(1) of the act, which states that a construction contact must provide for the amount of each interim payment or an adequate mechanism for determining the amount of each interim payment. This acknowledges the possibility of milestone payments under main contracts or consultants' appointments – with an explicit exception for subcontracts, which must have a strict 30-day payment regime. It is also relatively straightforward to establish extant compliance across industry standard form contracts with Section 3(2) of the act, which provides for the inclusion in construction contracts of a payment claim date (or an adequate mechanism for determining the same) together with providing for the period for payment of the amount claimed.
However, Section 4 of the act sets out a new (albeit optional) regime in relation to the delivery of a payment claim notice. The main nuance to be aware of is that this section allows the contractor to issue a separate or (perhaps consolidated) payment claim notice to its usual interim payment application procedure prescribed in the contract. The receipt of the payment claim notice obliges the paying party to:
- set out in clear terms and within strict timelines the amount that it proposes to pay and any reasons for withholding payment; and
- pay the accepted amount by the payment due date.
Section 4 allows a five-day window following the payment claim date prescribed in the contract, within which the payment claim notice may be served (it must be served on the employer or another person specified under the construction contract). The employer or specified person has 21 days to respond. Time runs from the payment claim date, rather than the date of service of the payment claim notice.
Subsections 4(2) and 4(3) respectively set out in broad terms what the payment claim notice and the response notice should look like. Template notices have also recently been issued to stakeholders for review, but there is no certainty as yet to the weight that will be placed on them. It seems that they will not be appended to the Code of Practice as was originally proposed and will therefore be seen as guidance documents at most.
In circumstances where no response notice is issued by the employer or specified person, it is unclear under the act whether this amounts to admission of the entirety of the claim. This is the position in England and Wales. However, the act is silent on this and it must therefore be presumed that the claim is not fully admitted in such circumstances, at least until court guidance has been received from some of the first test cases which are certain to follow the introduction of the act.
Payment claim notices and response notices are not conditions to the parties' rights to refer a payment dispute to adjudication under the act. Section 4 expressly states that the rights and obligations conferred under it are in addition to any conferred by the terms of the construction contract.
Suspension, subcontracting and dispute resolution
Every subcontract must now contain 30-day payment terms or better and 'pay when paid' is outlawed except in the case of insolvency further up the chain.
Parties to construction contracts should be aware of the suspension provisions included in Section 5 of the act, which confer a statutory right to suspend works once the payment due date is missed, provided that a further seven days' notice of intention to suspend is given and a notice of intention to refer the dispute to adjudication has not been served.
Parties must also be aware that the right to refer a payment dispute to adjudication at any time will exist statutorily, irrespective of what their contract says.
Reflecting change in contracts
Arguably, the most important provisions of the act to reflect in construction contracts are the payment and suspension provisions. It appears that contractors always wish to serve a payment claim notice which triggers the consequent obligation to serve a response notice, and therefore paying parties should be on notice of the same in their contracts, together with the timelines for responding. It makes sense to align the parties' statutory protections with the contract. It is therefore prudent to consolidate the payment claim notice and any interim payment application that the contract provides, so that both issue within five days of the relevant payment claim date. It is best practice to incorporate precise drafting into construction contracts regarding content and the timing of the payment claim notice and response notice to align with the prescriptive nature of the act. The employer's or specified person's role in relation to the receipt and issue of payment claim notices and response notices respectively should also be expressly identified in the contract. Many contracts provide for the contract administrator to carry out this role. If this is the preferred practice, it should be noted in the contract that the contract administrator is the specified person for the purpose of Section 4 of the act.
Many contracts contain bespoke provisions which allow the contractor to suspend works for non-payment, but the timelines with respect to invoking such a right usually range between 30 and 90 days following the expiry of the payment due date and not within seven days' notice of having missed the payment due date, as the act now provides. This is a provision worth reflecting in the parties' contractual terms.
The extent of amendments required to the dispute resolution provisions of construction contracts may be less significant than those outlined above, except to acknowledge that the right to refer a payment dispute to adjudication exists at any time, irrespective of contract provisions. Parties may wish to continue to include the traditional forms of dispute resolution in their contracts in any event (particularly since the ambit of adjudication under the act extends only to "disputes relating to payment"). There is nothing prohibiting them from agreeing to alternate forums, so long as the parties are aware that the right to refer a payment dispute to adjudication at any time statutorily exists (including midway through another process). This may also be the reason why some parties may not wish to include an alternative dispute resolution forum to adjudication in their contract other than litigation or arbitration as a final and binding forum.
Amendment of standard form contracts
The public works forms of contract (PWC) have not yet been updated to take account of the payment, suspension or dispute resolution provisions of the act. They make no reference to payment claim or payment response notices and, for example, Clause 11 of PWC-CF1 contains certain inconsistencies with the statutory payment regime under the act. In the recent amendments to the PWC introduced by Circular 01 2016, significant amendments were made to the dispute resolution provisions of contracts, introducing the concepts of a standing conciliator and a project board, but with no mention of adjudication. It will be interesting to see what, if any, further amendments will be made before July 25 2016.
The Construction Industry Federation form of subcontract for use with the amended forms of PWC has, however, already been amended to provide for payment claim notices, response notices, a strict 30-day payment regime and adjudication.
There will be a lot of catching up to do over the coming months to ensure that industry standard form contracts are aligned with the payment, suspension and dispute resolution provisions that will be statutorily binding in Ireland for all construction contracts entered into after July 25 2016. Failure to amend the industry standard form contracts and appointments in advance of July 25 2016 will have no consequences, as the statutory provisions will apply in any event and override the contractual provisions. However, to the extent that they are in conflict, from a good contract management perspective and in the interest of avoiding further disputes regarding interpretation, all parties entering into construction contracts on or after July 25 2016 should seek to ensure that their provisions are compatible with the act to the greatest extent possible. There will be enough disputes to be had regarding the merits of claims and potential jurisdiction issues.