Summary and implications

On 1 October 2011 the provisions of the Housing Grants Construction and Regeneration Act 1996 (Construction Act) relating to construction contracts changed. The changes are more than just cosmetic and will potentially have a significant impact on those involved in the domestic construction industry. The main changes are:

  • the removal of the requirement that a construction contract must be in writing for the Construction Act to apply to it;
  • amendments to the way in which construction contracts must deal with payment and in particular the way in which notices must be given;
  • alterations to the statutory adjudication provisions to address problems that are perceived to exist with the previous provisions.

The changes to the Construction Act have necessitated amendments to the Scheme for Construction Contracts (England and Wales) Regulations 1998 (Scheme). Those changes also came into effect on 1 October 2011.

The practical consequences of the amendments remain to be seen however it seems likely that issues will arise as contracts are negotiated and disputes occur over the coming months, and while the industry adapts to the amendments

Background

After lengthy periods of consultation the Local Democracy, Economic Development and Construction Act (LDEDCA) received Royal Assent on 12 November 2009. The consultation exercises were the result of lobbying from various parts of the construction industry who felt that problems existed with the Construction Act that needed to be addressed.

The Construction Act consultations dealt with the fundamental changes that will come into effect. The Scheme consultation also looked at a number of issues which Government identified could improve the adjudication process. Ultimately those further issues were not pursued.

Oral and partially oral contracts

The Construction Act will now apply to wholly oral, partially written and partially oral, and wholly written contracts. This change has been made to deal with a broad industry view that the narrow interpretation by the courts of what constitutes a contract in writing did not reflect what happens in practice on construction projects.

The courts had held that all material terms of the contract must be recorded in writing otherwise it was not a contract in writing and the provisions of the Construction Act would not apply. This meant the protection afforded by the statutory provisions on payment certainty and adjudication did not apply to those parts of the supply chain where formal written contracts are often not finalised. As the original purposes of the Construction Act were to provide payment certainty and keep cash flowing through the supply chain there was a strong feeling that this provision required change.

This change only strengthens the importance of parties ensuring that they have recorded in writing what has been agreed between them, as otherwise the risk of disputes over the precise terms of the bargain agreed will increase. For the same reason it reinforces the need to accurately record the scope and consequences of any variations.

The reference to adjudication of disputes under oral or partly oral contracts is an area where the provisions of the amended Construction Act are likely to receive early scrutiny. It may be that the time for the conduct of adjudications will need to be extended as adjudicators will have to resolve the precise terms of the contract under which the dispute has arisen. This could require an early meeting with the adjudicator and may require the parties to submit witness evidence as to the terms agreed.

Payments

Significant amendments have been made to the sections of the Construction Act that deal with payment provisions in construction contracts. The biggest practical change is to the payment notices that contracts must provide for.

Construction contracts must now provide for a payment notice to be issued no later than five days after the payment became due. That notice can be issued by either the paying party, or the party who is due payment, or can be issued by a third party such as a contract administrator. If the paying party is required to issue the notice and fails to do so then the party who is due the payment will now be entitled to issue their own payment notice.

Paying parties, or third parties acting for them, will need to be careful to ensure that they do not miss the date when they have to issue a payment notice. If they do then the party that is due payment will be able to specify the sum due as the default position.

The opportunity for a paying party to pay less than the amount identified as being due still exists in the amended Construction Act. Rather than being called withholding notices however the new provisions refer to a “notice of intention to pay less”. These new notices must specify the sum that the paying party considers is due and specify the basis on which that sum due has been calculated (even if the amount is zero) to explain why that party intends to pay less than the sum identified as being due.

Further amendments have been made to outlaw ‘pay when certified’ clauses, which sought to link payment under a contract to the certification of a sum as being due under another contract, and to strengthen the rights of party when they suspend for non-payment.

The prohibition of ‘pay when certified’ clauses extends the existing prohibition of ‘pay when paid’ clauses and is designed to ensure contracts provide a clear payment mechanism that allows the party due money to know when it will be paid. An exclusion to the prohibition of ‘pay when certified’ clauses has been made for construction contracts between the project company and the main contractor on Private Finance Initiative projects.

Despite strong lobbying from the supply chain ‘pay when paid’ clauses remain legal in circumstances where a party up the contractual chain has become insolvent.

The position of an unpaid party has been improved however with the strengthening of rights when the party suspends work for non-payment. The amendments now mean that a party can suspend part of the works and that they can recover their costs incurred in stopping and then restarting the suspended work. This potentially makes suspending work less of a nuclear option, and suspension may be something that parties consider more seriously now extra protection has been provided.

Adjudication

The Construction Act adjudication provisions have received less in the way of amendments than the payment provisions. Whilst the requirement that construction contracts no longer have to be in writing will open adjudication up to a wider range of parties the underlying provisions were not seen as requiring a great deal of change.

The most significant amendment, and one that deals with what was seen as an abuse of the provision for adjudication, is the prohibition on parties pre-agreeing that one of the parties to a dispute would pay all of the costs and expenses including the other party’s costs. This type of provision was used on occasion by employers/contractors to try and prevent contractors/sub-contractors from referring disputes to adjudication as the cost of doing so would often make the exercise worthless.

Some concerns have been raised by industry commentators that the drafting that seeks to prohibit these type of provisions is not sufficiently clear to achieve that aim. There is a view that the door has been left open for parties to continue to agree clauses that pre-allocate adjudication costs to one party in certain circumstances as long as the clause complies with the new section 108A of the Construction Act.

Given the lack of clarity it is likely that this type of clause will be the subject of disputes and it would not be surprising to see such a dispute before the courts before too long. How the courts will deal with section 108A remains to be seen, however it is unfortunate given how long it took for the amendments to the Construction Act to be enacted, that a little extra time was not taken to tighten the drafting of section 108A and to avoid the likely disputes that will follow.

The remaining changes to the adjudication provisions have provided for a slip rule (to allow adjudicators to correct clerical or typographical errors) and have clarified (by an amendment to the Scheme) that the 28 day period for adjudication runs from the day the adjudicator receives the referral to adjudication.

What does this mean in practice?

For contracts under negotiation but not fully signed and dated until on or after 1 October 2011, it means certain amendments may be needed to ensure they reflect the new requirements, particularly on payment.

The full effect of the amendments to the Construction Act may not be felt for some time. It will inevitably take some time for people to get used to the new payment provisions in particular and for the first few months the negotiation of new contracts may take a little longer as parties make sure they fully understand how the new regime works.

The operation of the new payment provisions and specifically the need for the paying party to issue its payment notice by the specified date may catch some people out. It would be sensible for paying parties to make sure they have systems in place so that payment notice dates are not missed.

The removal of the requirement that construction contracts must be in writing will probably also catch out a few people who may suddenly find themselves in adjudication arguing about what the terns of their contract are. The management of variations and ensuring they are recorded in writing is going to be an important area given the number of disputes that already exist about the effect of variations. Disputes about oral variations will only complicate matters further.

Once the industry becomes used to the changes it will be interesting to see if the Government continues to be lobbied by parts of the industry who feel the changes should have gone further. Will we see another round of consultations and further amendments to the Construction Act 10 years from now?