The amendments to the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) are due to come into force on 1 October 2011 in England and Wales and 1 November 2011 in Scotland.
The Joint Contracts Tribunal 2011 Design & Build Tracked Change contract has been published and amendments to other standard forms will be released soon. Many in the industry have amended their standard terms.
No requirement for construction contracts to be in writing
The amended Construction Act will apply to all construction contracts, not just those in writing. This will eliminate arguments over whether or not all of the terms of the contract have been recorded in writing, but may open up other areas of potential dispute such as:
- What oral terms have been agreed?
- Is there a contract at all? This may be particularly relevant where work has started while the parties are still negotiating the terms of the contract.
Adjudicators should have no difficulty deciding what oral terms (if any) have been agreed. They already consider witness evidence and make decisions on issues where there is little or no contemporaneous documentation. Construction projects are not perfect and there will inevitably be sub-contracts (and indeed main contracts) that are not concluded in writing.
Take minutes of meetings and circulate them contemporaneously, and keep detailed diary entries of on-site instructions, as this could be vital evidence to support your case on the terms of the oral contract. Putting in place systems (such as standard pro forma minutes with tick boxes to indicate the type of contract, the amendments agreed and terms for payment) may reduce the risk and cost of this type of dispute.
If work must start before the terms of the contract are agreed then at least put in place a letter of intent, preferably limited in scope and capped in value.
Construction contracts will still have to provide an adequate mechanism for determining what payments become due under the contract and when. However, this requirement will no longer be satisfied if the contract makes payment conditional on either:
- the performance of obligations under another contract;
- a decision by any person as to whether obligations under another contract have been performed; or
- the giving by the payer of a notice which relates to what payments are due under the contract.
This effectively outlaws "pay-when-certified" clauses or clauses based on the principle of "the due date is whatever we tell you it is".
This general prohibition will not apply to management contracts and does not affect the use of "pay- when-paid" clauses in insolvency situations (which will still be governed by section 113 of the Construction Act as enacted).
Pursuant to draft Exclusion orders (in England, Wales and Scotland) the pay-when-certified prohibition will no longer apply to first tier private finance initiative (PFI) sub-contracts (where the special purpose vehicle (SPV) sub-contracts its construction obligations). PFI agreements (between the public authority and the SPV) will remain excluded from the operation of the entirety of Part 2 (adjudication and payment provisions) of the Construction Act.
Make sure that:
- standard form contracts comply with the amended Construction Act;
- the new standard forms are used with effect from 1 October 2011 (and that includes contracts currently being negotiated but which are concluded after 1 October); and
- those administering the contracts on a day-to-day basis know how the new contracts operate and procedures are in place to help them operate the contracts properly.
The changes relating to payment notices are the most likely to cause difficulty and provide the potential for costly errors by the parties. Construction contracts will have to provide that:
- Either the paying party or the receiving party (payee) must give a payment notice within five days of the due date, setting out the sum they consider to be due and the basis upon which that sum is calculated (the Payment Notice).
- The Payment Notice is to be served even if the sum is zero.
- If the paying party is to serve the Payment Notice, and it fails to do so, then the receiving party can serve a Payment Notice in Default (PND). However, if the contract permits or requires the receiving party to make an application for payment before the Payment Notice is served, that application will count as the PND (this is reflected in clause 4.9.3 JCT D&B 2011 tracked document). The unpaid party will not be permitted to serve another PND.
- If the payee is to serve the Payment Notice and it fails to do so, there will be no entitlement to that interim payment.
- If a PND is served then the final date for payment is pushed back by the same number of days as the period between the date the paying party should have served its Payment Notice and the date the PND is served. However, if the receiving party's application for payment is to count as its PND, this may be helpful to the receiving party because the final date for payment will not be delayed.
- The requirements for Withholding Notices are removed and replaced with Pay Less Notices (PLN). PLNs must set out the sum the payer considers to be due (on the date it is served) and the basis upon which that sum is calculated.
- The time for service of the PLN is the same as that for the existing Withholding Notice.
Over coming months, and potentially years, there will be particular problems with projects that have already started where the main contract (and its payment provisions) are under the existing payment regime and some of the sub-contracts (where work starts after 1 October 2011) are under the new payment regime. Contracting parties should:
- know which contracts are which; and
- ensure the contract administrator understands the new payment regime, how to operate it and the relevant dates for Payment Notices and Pay Less Notices.
If it is the receiving party's obligation to serve the Payment Notice, it should know the final date for service. If the notice is served late there will be no entitlement to an interim payment.
The amendments to the Construction Act introduce new provisions intended to outlaw the use of so-called 'Tolent' clauses in contracts that, for example, hold the referring party responsible for all the costs of the adjudication including the adjudicator's fees and the other party's costs.
There has been debate in the legal press about the potential ambiguity of the drafting of this new provision. Are 'Tolent' type clauses completely outlawed or are these clauses enforceable, so long as the clause "...confers powers on the adjudicator to allocate his fees and expenses between the parties"? The former is probably the correct view but, at some stage, clarity from the courts will be required.
The amendments also introduce the 'slip' rule: an express provision that the adjudicator may correct his decision to remove any clerical or typographical errors.
Otherwise, the requirement to include a compliant adjudication procedure within every construction contract remains unchanged. However, these provisions must still be 'in writing'. In default, the provisions of the Scheme for Construction Contracts will apply.
The amendments extend the right for the receiving party to suspend for non-payment, to allow partial suspension. The notice period is still seven days. The amendments also introduce clarity by creating an express entitlement to an extension of time and associated loss and expense.