After much speculation it has been confirmed that the changes to the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”) will take effect from 1 October 2011. The changes contained within the Local Democracy, Economic Development and Construction Act 2009 will apply to all construction contracts entered into after 1 October 2011.

So what steps should those involved in the construction industry take now to prepare for the changes?

Review Your Contracts

The amendments to the Construction Act make key changes to the current payment regime. Now is the time to review standard contracts and ensure those responsible for administering contracts understand the new payment regime, the terminology used and the practical impact of the changes.

Under the new payment regime, construction contracts must require a Payment Notice to be served in relation to every payment provided for under the contract by either:

  • the Payer (the person from whom the payment is due);
  • the Payee (the person to whom payment is due); or
  • a specified person (for example, an architect).

The Payment Notice must set out the sum the person giving the notice considers to be due and the basis upon which this sum is calculated. If the Payment Notice is served by a specified person it must state the sum the Payer or specified person considers to be due and the basis upon which the sum is calculated. Note the following points:

  • There is still a requirement to serve the Payment Notice even if the notified sum is zero.
  • If the Payer or specified person is required to serve the Payment Notice but fails to do so, the Payee may instead serve the Payment Notice. This is a significant change to the old regime.
  • The sum notified in the Payment Notice must be paid on or before the final date for payment unless the Payer or specified person subsequently gives the Payee a notice of the Payer’s intention to pay less than the notified sum. This notice must be given within the prescribed period and must specify what the Payer considers to be due and how this sum has been calculated.

Importantly, a construction contract will not be regarded as having an adequate payment mechanism if payment is made conditional upon the performance of obligations under another contract. This essentially means that parties are unable to delay payment by relying on “paid when certified” clauses. However, this new provision will not apply to first tier PFI sub-contracts as they are to be excluded from the operation of s110(1A) of the amended Construction Act. Note that, the prohibition on “pay when paid” clauses continues to apply to PFI sub-contracts.

Understand Rights Relating to Suspension of Works

Under the amended Construction Act a party can choose to suspend part of the works for non-payment in addition to the existing right to suspend all of the works. The suspending party will also be able to recover a reasonable amount in respect of costs and expenses reasonably incurred as a result of the suspension. These new provisions strengthen the rights of the suspending party and extend its rights to recover losses associated with both remobilization and demobilization.

Ensure All Contracts Are in Writing

Currently, the provisions contained within the Construction Act apply only to contracts in writing. The amended Construction Act removes this requirement. This means that disputes under oral construction contracts will now be capable of being referred to adjudication. Certain provisions relating to the adjudication procedure must be in writing failing which the adjudication provisions of the (amended) Scheme for Construction Contracts will apply. There is also now a requirement that the contract includes provisions in writing to permit the adjudicator to correct his decision to remove clerical or typographical errors.

It is more important than ever to ensure construction contracts are in writing. Adjudications under oral contracts will be even more unpredictable and should be avoided. It will be very difficult for an adjudicator to decide what has been agreed between the parties where there is an oral contract and there is conflicting evidence as to the terms. The only way to avoid such uncertainty is to have a carefully negotiated written contract.

Review Terms Allocating the Costs of Adjudication

Contracts should also be reviewed in respect of any terms seeking to allocate the costs between the parties relating to the adjudication of a dispute. Currently, construction contracts can contain provisions whereby one party agrees to be responsible for the costs of an adjudication irrespective of the outcome. If a dispute does arise, this type of provision can severely discourage a party from exercising its statutory right to refer a matter to adjudication due to the costs that would be incurred.

The amended Act provides that any term attempting to allocate the costs of adjudication between the parties will be ineffective unless the written construction contract confers power on the adjudicator to allocate his fees and expenses between the parties or it is an agreement made in writing after the notice of adjudication has been served.