The Housing Grants, Construction and Regeneration Act 1996 Part 2 regulates dispute resolution and payment provisions in the Construction Industry. Changes were introduced to the Act by the Local Democracy, Economic Development and Construction Act 2009, and the Government has now brought forward proposals to implement those changes with a view to their coming into force on 1 October 2011.

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The Government has published an analysis of consultation responses to its implementation proposals, and has produced draft legislation to implement the changes, which are aimed to become effective on 1 October. The 1996 Act, as amended, provides that, if parties do not include certain provisions (now in their amended form) in their contracts, then a Government Scheme applies to imply the necessary terms. A draft Exclusion Order has also been produced relating to first tier PFI subcontracts.

The 2009 Act made provision for changes to both the dispute resolution (adjudication) and the payment provisions of the 1996 Act. The changes can be summarised as follows:

Adjudication

  • Contracts in writing. It is no longer necessary for construction contracts to be in writing in order to be covered by the provisions of the 1996 Act, as amended. However, any agreement as to adjudication must be in writing or else the Scheme will apply.
  • Clerical errors. The Adjudicator is given power to make corrections to his decision so as to remove clerical or typographical errors. If the contract makes no such provision the Scheme will apply, and this now permits the Adjudicator to make corrections as long as he does so within 5 days of the delivery of the decision to the parties. This period does not operate to suspend compliance with any obligations contained in the Adjudicator's decision.  
  • Legal costs. The parties are no longer permitted to make provision in their contract as to the allocation of the parties' legal and other costs in relation to the dispute. They can, however, make provision as to the Adjudicator's fees and expenses. They can also agree as to the allocation of the parties' legal and other costs after the giving of notice of intention to refer a dispute to adjudication. Commentators have questioned whether the Act inadvertently (as this was apparently not the Government's intention) permits the parties to make provision for allocation of their legal and other costs so long as they also make provision for the Adjudicator's fees and expenses. This might, for example, permit a party to provide that the other will pay all such costs, irrespective of outcome. The Government have said in their response to the consultation that they do not accept this view, but it remains to be seen whether case law will confirm their approach.  
  • Other minor changes. The Adjudicator must now inform every party to the dispute of the date that he receives the referral notice upon receipt of such notice. Also, the Adjudicator's ability to order the parties to comply peremptorily with his decisions has been removed.

Payment and the Exclusion Order

The Government has, following the consultation process, taken the view not to make further general amendments to the payment provisions in the Scheme, as it concluded there was a lack of clear consensus to move away from the current position. The key changes made by the Scheme and the Exclusion Order:

  • Clarification of the final payment due date for contracts that last less than 45 days. The final payment is due on the expiry of 30 days following completion of the work, or the making of a claim by the payee, whichever is the later.
  • A payer-led approach. Section 143(3) of the 2009 Act inserts a new section 110A into the 1996 Act whereby either party or a third party can give the payment notice. A new section 110B permits (but does not require) the payee (the contractor in most cases) to give a payment notice where the construction contract provides for the employer to do so and the employer fails to do so. However, paragraph 9 of the Scheme is amended so that, if the parties fail to provide for the issue of the payment notice, then it falls on the payer (the employer) to give the notice not later than 5 days after the payment due date.  
  • Timing for issue of the pay less notice. The 2009 Act replaces the "withholding" notice with a "pay less" notice. Under the amended Scheme the period for the notice to be issued remains at not later than 7 days before final date of payment is determined (the Joint Contracts Tribunal 2011 contracts provide for 5 days).  
  • Pay when certified provisions. An anomaly which has plagued PFI contracts has, at last, been addressed. The 2009 Act prohibits pay-when-certified provisions in subcontracts. However, the draft Exclusion Order makes an exception in the case of PFI first tier subcontracts (eg the main construction subcontract), so that such subcontracts may contain provisions where payments are conditional upon obligations being performed under, say, the project agreement, such as the issue of payment certificates. Pay-when-paid provisions in subcontracts (including PFI subcontracts) remain ineffective.

Next Steps

The Government expects to be in a position to commence the changes to the primary and secondary legislation on 1st October 2011. Those negotiating construction contracts will need to review the payment and adjudication provisions if they do not wish the revised Scheme to apply automatically. The Joint Contracts Tribunal has already published track changes highlighting the amendments to the payment and adjudication provisions in their new 2011 suite of contracts.

Scotland and Wales have their own versions of the amendments, both to the Scheme and the Exclusion Orders. Despite the Government stating in its report on the analysis of the consultation process that it is a shared objective that legislation relating to construction contracts remain more or less the same throughout the whole of Great Britain, we understand that there are significant differences between the English and Scottish Schemes. The operative parts of the Exclusion Orders are, however, all the same. The Welsh amendments are also expected to come into force on 1 October 2011, whilst the Scottish amendments are due to come into force a month later on 1 November 2011.