What amendments?

The 1996 Housing Grants etc Act is being amended by the Local Democracy, Economic Development and Construction Act 2009.

When are the amendments due to come into force?

In England & Wales: 1 October 2011 and in Scotland: 1 November 2011.

Which contracts will be affected?

The amended version of the Act will apply to all “construction contracts” entered into on or after 1 October or 1 November 2011 (as appropriate). On projects in progress on the start date, some subcontracts might therefore be governed by the Construction Act, without the LDEDCA amendments, and others by the amended Act. Subject to the contract wording, a similar issue could arise on framework agreements.

Will construction contracts still have to be in writing?

No. The amendments to the Construction Act remove the requirement that the “construction contract” must be in writing.

The amended Act still retains, however, a requirement that the contractual provisions as to the adjudication machinery (e.g. notice, timetable etc) should be in writing, with the default provision that, if they are not, the relevant provisions of the amended Scheme for Construction Contracts apply.

Is there a downside to this change?

Expect more disputes about whether or not the parties agreed a “construction contract” and, if they did, what were its terms.

How can I try to guard against this possibility?

State clearly in all pre-contract negotiations, in meetings and correspondence, that the negotiations are “subject to contract” (although even this may not always be effective (RTS v Molkerei). See also Moria v Bednash in case notes below). Applying this label is intended to prevent the parties being legally bound unless and until they have entered into a formal written contract.

Entire agreement clauses may also be helpful.

What changes are being made to adjudication?

  • Adjudicators will be able to correct clerical or typographical errors arising by accident or omission in their decisions. No time limit is placed on this power by the Act but the England & Wales amended Schemes set a limit of five days from delivery of the decision to the parties.
  • Agreements as to the allocation between the parties of costs “relating to the adjudication”, for example, the notorious “Tolent clause”, requiring the referring party to pay all the adjudication costs, whatever the outcome, will only be valid if:
    • in writing in the construction contract and “...confers power on the adjudicator to allocate his fees and expenses as between the parties,”

    or

    • made in writing after the notice of adjudication has been given.

The new wording in the amended Act was intended to outlaw Tolent clauses but there is debate (so far unresolved) as to whether it achieves that.  

  • Under the amended England & Wales Schemes, the adjudicator must inform the parties of the date of receipt of the referral notice and the date for the decision is calculated from the receipt date instead of the referral notice date.  

Are pay when certifie d clauses and other conditional payment clauses still valid?

Only in a management (or similar) contract, a first tier PFI subcontract and a pay when paid clause limited to upstream insolvency.

A provision in a “construction contract” making payment conditional on the performance of obligations under another contract, or on a decision by someone as to whether obligations under another contract have been performed (for example, the issue of a certificate), or determining the due date by reference to a notice given to the payee, are to be ineffective (new S110(1A) and (1D)) - but with three important exceptions:

  • where the “construction contract” arrangements are for the construction operations to be carried out by a third party (e.g. a management contract);
  • a first tier PFI subcontract; and
  • (as previously) a pay when paid clause limited to upstream insolvency.

The exceptions will not however apply to a management contractor’s “construction contract” with a Works Contractor – see new S110(1C), or to PFI subcontracts below the first tier.

Do the s110(2) payment arrangements stay the same?

No. There are changes to the payment notice arrangements.

What changes?

  • A payment notice is required, even if the payment due is zero - see new S110A(4). Zero payment notices could therefore, for example, be required at appropriate intervals during the defects liability period.
  • A payee can give a payment notice.  

The “construction contract” may require or allow the receiving party to issue a payment notice (e.g. its application). Alternatively, if no notice is issued by the paying party or specified third party (but should have been), the receiving party can issue a default payment notice (see new section 110A(1)(b) and sections 110B(1) & (2)).

In either case, the amount specified in the payee’s payment notice is the sum the paying party must pay (subject to any new-style s111 notice -see 12 below).

  • If the receiving party’s payment notice is issued after the relevant date (five days after the due date, as previously), the final date for payment will be postponed by a corresponding period, to allow time for the new-style S111 notice (see new section 110B(3)).
  • Note that the receiving party’s application for payment could constitute its default payment notice if the paying party (or third party) fails to give a notice (see section 110B(4)). Since the receiving party can only give one payment notice, this means that it cannot, in these circumstances, claim more than it previously applied for.

Does the paying party still have to pay the “sum due”?

No. The paying party has to pay the “notified sum”. This is the amount specified in the payment notice issued by the paying or receiving party (or third party) (see new section 111(2)). It is the sum the paying party must pay (subject to any new-style section 111 notice).

If no notice is issued, no sum is payable.

Does the s111 withholding notice stay the same?

No. The original Construction Act withholding notice has been replaced by a second payment notice - of an intention to pay less than the notified sum.

Does the content of the new s111 pay less notice stay the same?

No. Instead of setting out the ground(s) for withholding, the new S111 notice must instead specify the basis on which the sum identified in the notice has been calculated. A calculation is now required.

Does the amended Act deal with the Melville Dundas issue?

S 111(10) of the amended Act responds to the uncertainty created by Melville Dundas Limited (in receivership) and others v George Wimpey UK Limited and others [2007] UKHL 18. It provides that, if, under the contract, the paying party does not, in the event of insolvency, have to pay a sum due and if the receiving party becomes insolvent after the period for serving a new S111 pay less notice, the paying party does not have to pay the notified sum.

What statutory changes have been made to the right to suspend?

Under the amended Act, a party entitled to suspend performance:

  • can choose to suspend only part of their obligations (S112(1));
  • would be entitled to a reasonable amount for costs and expenses reasonably incurred as a result of the suspension (S112(3A)); and
  • to an extension of time for any delay caused “… in consequence of…” exercising the right to suspend (S112(4));