Summary of key changes

1 Background to the New Act

1.1 Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (the “New Act”) which amends the adjudication and payment provisions in Part II of the Housing Grants, Construction and Regeneration Act 1996 comes into force on 1 October 2011. It is expected that the Scheme for Construction Contracts 1998 will be amended to bring it into line with the New Act and will be published contemporaneously.

1.2 The construction industry will face an interim period during which the “original” Construction Act 1996 will apply to contracts entered into prior to the New Act coming into force, and the New Act will apply to all new contracts entered into after 1 October 2011.

2 Key changes

Adjudication

2.1 The requirement for a construction contract to be “in writing” will be removed. This will open up contracts that are (i) partly in writing or (ii) wholly oral to statutory adjudication.  

2.2 However, the adjudication provisions of a contract must still be “in writing” if they are to have contractual effect, failing which the adjudication provisions of the Scheme for Construction Contracts 1998 will apply.  

2.3 The New Act requires parties to include a written provision in their contract confirming the adjudicator has the power to correct any clerical or typographical error appearing in his decision arising by accident or omission.1  

2.4 On the issue of adjudicaton costs, the parties will no longer be able to agree who will bear the costs of any adjudication prior to the notice of adjudication being served2 and any costs agreement following service of the notice of adjudication must be recorded in writing.3 The adjudicator will always be able to apportion his fees as he sees fit.

2.5 This will bring to an end contract terms which require the referring party to bear the costs of the adjudication albeit that a clause that requires the referring party to pay the responding party’s costs, whatever the outcome of the adjudication, whilst permitting the adjudicator to apportion his fees and expenses as between the parties4 might survive.

Payment

2.6 Any payment mechanism whereby the payer (or any third party) decides when payment becomes due will become unlawful.

2.7 New payment notices5 will replace withholding notices. The new notices will need to state (i) the sum the payer (Employer/Main Contractor) or payee (Contractor) considers is (or was) due at the payment due date and (ii) the basis on which that sum is calculated.

2.8 The new procedure is as follows:  

2.8.1 Payment due date.  

2.8.2 Payment Notice due from Payer or third party within 5 days of due date for payment.

2.8.3 If no Payment Notice is issued the Payee shall serve a default payment notice. The final date for payment is extended by the number of days between the date the Payment Notice should have been issued and the date of the default notice.  

2.8.4 The Payer may 7 days before the final date for payment serve a Payless Notice being a revaluation of the account including LAD’s. This notice replaces the withholding notice. Note that set offs and abatements will now be part of the revaluation.  

2.8.5 Payment is made on the final date for payment of the amount in the last notice to be issued.

2.9 Note the parties may contractually agree to change the time periods set out above.  

Suspension

2.9 The statutory right to suspend for non-payment will be extended to include “any or all of” the contractor’s obligations. Suspension is likely to become much more widespread as a result.6

2.10 But, the party suspending cannot validly suspend performance of its obligations by reason of non-payment unless it has first issued a default notice and there has been a failure to pay.  

2.11 Under s112(3A), any defaulting party will be liable to pay the suspending party’s reasonable amount in relation to the costs and expenses reasonably incurred by the party suspending in exercising the total or partial suspension and an extension of time in respect of the suspension and remobilisation costs. It is likely that the recovery of any such direct costs and expenses would be limited to direct, as opposed to consequential losses and loss of profit.

2.12 Section 112(4) widens the time period for suspension (and therefore any associated costs) with the wording ‘in consequence of the exercise of [the right to suspend].

Conclusion

3 While many of the changes, especially to adjudication, are simply catching up on case law and reflecting concerns with the old system, everyone is going to need to adapt to the more fundamental changes to payment arrangements and from 1 October 2011 to familiarise themselves with the new language of default notices and Payless Notices and the opportunities and problems that this new language will bring.