You will no doubt be aware of the extensive coverage of the changes to the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act). The changes to the Construction Act will be introduced by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (LDEDCA), which will come into force on 1 October 2011 in England and 1 November 2011 in Scotland.

All construction contracts entered into prior to the implementation date will be governed by the existing Construction Act but those entered into after 1 October 2011 will be governed by the new Act. There is now a limited amount of time to become acquainted with the changes and to implement them!

The key changes in the new Construction Act include the following:

Removal of the current limitation for construction contracts to be in writing

Contracts can now be oral as well as in writing. The new Construction Act will apply to all construction contracts, not just those in writing or evidenced in writing. This will include those construction contracts which are wholly in writing, partly in writing or wholly oral. However, if the (largely) procedural requirements of adjudication set out in Section 108 (2)-(4) are not in writing, then the Scheme for Construction Contracts will apply. The Scheme will be amended in line with the new Construction Act.

Needless to say, the scope of adjudication has been widened as hitherto disputes based on oral contracts could not be adjudicated. However, an adjudicator will potentially be faced with having to decide, as a preliminary issue, whether there was indeed a contract and if so, what its terms were. This may involve speaking to relevant personnel and evaluating conflicting evidence.

Allocation of costs of an adjudication

The new Construction Act will abolish so-called "Tolent" clauses whereby the parties can agree contractually that any party referring a dispute to adjudication should pay all the costs of the adjudication. The effect of such a term may be to prevent a referring party from starting an adjudication when there is a genuine dispute. This rationale follows the decision in Yuanda (UK) Co Ltd v WW Gear Construction Ltd (see our alert of 19 April 2010) where the court held that Tolent clauses were contrary to the Construction Act because they could fetter a party's right to adjudicate at any time until such time as it was financially viable.

The new Construction Act provides that any agreement between the parties concerning the allocation of the parties' costs relating to adjudication is ineffective unless such an agreement is made after the giving of notice of intention to refer the dispute to adjudication and is in writing.

Payment by reference to other contracts - abolition of "pay-when-certified"

The new Construction Act provides that it is not an "adequate mechanism" for determining what and when payments become due if the determination is dependent upon work carried out in another contract or a decision by any person under another contract as to whether work has been performed. This is aimed at outlawing "you are entitled when I am entitled" and "pay-when-certified" clauses. This will be an important amendment affecting the payment mechanism set out in many sub-contracts and PFI contracts. The current prohibition against "pay-when-paid" clauses will continue.

Also, it will not be possible to extend the payment due date by reference to the giving of a notice to the receiving party that payment is due. This outlaws a clause such as "the due date is whatever date we notify you as being the due date."

Payment notices

The existing provisions for payer notices (commonly referred to as section 110 notices and widely ignored under the current legislation because there is no sanction for failure to provide one) will be amended. The contract will have to provide either for the giving of a payment notice by the payer (the paying party) or by the payee (the receiving party). The notice must set out the sum due and how it has been calculated. Importantly, a notice must be served even if there is nothing due to be paid. If the contract provides for the payer to give the payment notice and the payer fails to do so then the LDEDCA provides for the payee to serve a payment notice in default. A payee will not, however, get a second chance if his application for payment is to count as the payee notice.

The existing section 111 (relating to the service of a notice of intention to withhold payment) will be repealed. A new section 111 which requires the payer to pay the "notified sum" set out in a valid payment notice will replace it. There will still be provision contained in the new section 111 for the payer to serve a "pay less" notice if it wishes to withhold any part of the notified sum. The requirement to pay the notified sum is intended to facilitate cash-flow by determining what is provisionally payable. The sums ultimately payable as detailed in the contract will be unaffected. It will no longer be possible to combine a payment notice and a pay less notice in one.

Suspension

The existing right to suspend is an "all or nothing" remedy. In contrast, the new Construction Act will permit the suspending party to suspend all or part of its obligations. Additionally, the suspending party will be entitled to an extension of time to cover the valid period of suspension plus any delay suffered as a consequence. It will also be entitled to payment of its reasonable costs incurred because of the suspension by the payer in default.

Points to consider

In light of the forthcoming changes, construction contracts will need to be reviewed and amended.

If contract provisions do not comply with the Construction Act then the Scheme for Construction Contracts will apply. The Joint Contracts Tribunal will publish a suite of 2011 contracts in September 2011 and publishers of other contracts such as the New Engineering Contract will also issue relevant amendments