The Local Democracy, Economic Development and Construction Act 2009 (the “2009 Act”) received Royal Assent on 12 November 2009, after a passage through Parliament marked at each stage by intensive lobbying by various interested industry groups on the proposed changes to the Housing Grants Construction and Regeneration Act 1996 (the "1996 Act"). The relevant changes are set out in Part 8 of the 2009 Act.

Whilst the changes will not be retrospective in effect, as the 2009 Act will apply only to those construction contracts entered into after it comes into force, they are far reaching, particularly in relation to the payment regime and will entail amendment to the UK standard forms and bespoke forms of contract and subcontract.

It currently remains unclear when these provisions will come into effect but it is unlikely to be before the end of the year, to allow time for the statutory Scheme to be updated to reflect the changes to the 1996 Act.

The principle changes to the 1996 Act are:

Oral Contracts: Where the 1996 Act only applied to construction contracts which were in writing, the 2009 Act in contrast applies to all construction contracts including where terms are partially or wholly oral. The only proviso to this is that the adjudication regime must remain in writing (or the Scheme adjudication provisions will apply).

Adjudication: The 2009 Act encourages the use of adjudication by outlawing clauses which require one party to an adjudication (usually the referring party) to pay all of the costs of the adjudication, win or lose, unless such terms are agreed in writing after the decision to refer a dispute to adjudication.

There is also a provision, giving statutory effect to the English common law “slip” rule, allowing adjudicators to correct clerical or typographical errors in their decisions arising by accident or omission.

Payment Notices: Given the widespread criticism of the 1996 Act payment regime, the changes introduced by the 2009 Act are aimed at producing a more transparent, simplified scheme for payment. Whether it achieves this is open to debate as the amended provisions are extremely complex.

Essentially a payer or specified person must serve a payment notice every time a payment is to be made giving notification of the sum which he or she intends to pay (the “notified sum”) even if the amount to be paid is zero. Importantly, if the payer or specified person fails to serve a notice, the payee may serve a notice specifying the sum due and the basis on which it was calculated and that sum shall, in the absence of a withholding notice (now called a 'pay less' notice), be the sum which the payer requires to pay.

Where the payee gives such a notice, the final date for payment of this sum is moved back by the same number of days as the notice was delayed, which some have argued is inequitable as payment is thereby delayed as a result of a breach of the contract by the payer!

'Pay Less' Notices: The 'pay less' notice replaces what was formerly known as a withholding notice. As before, it is necessary to serve a 'pay less' notice a set number of days before the final date for payment if a deduction is to be made.

Conditional Payments: There is a ban on 'pay-when-entitled' and 'pay-whencertified’ provisions. This provision in particular has given rise to criticism, particularly in relation to its effect on PPP/PFI projects as it cuts across the type of “equivalent project relief” clauses which are standard in PPP subcontracts and which funders usually view as essential.

However, there is some hope that, in response to lobbying, the government will exercise its exclusion powers to exclude PPP subcontracts from the ambit of the ban on “pay when certified” clauses.

Right to Suspend: The 2009 Act improves the provisions regarding suspension of work/services in the event of non payment. It provides that the contractor can stop carrying out some, not simply all, of the work in such a case and the payer will be liable for any reasonable costs and expenses incurred by the payee as a result of the suspension.

It has been possible only to give a flavour of the changes to the 1996 Act which will take effect when the 2009 Act comes into force. The provisions are complex and will require to be reflected in updated contracts and subcontracts, both bespoke and standard form. It is worth starting to become familiar with the changes now in preparation for their coming into effect and considering whether you have in-house forms of contract which will need updating.