The Local Democracy, Economic Development and Construction Bill 2008 (the "Bill") which proposes to amend the Housing Grants, Construction and Regeneration Act 1996 (the "Construction Act") has recently been presented before Parliament. The amendments proposed in the Bill are substantially similar to those disclosed in a Draft Construction Contracts Bill which was released by the Department of Business Enterprise and Regulatory Reform in July 2008 (the "Draft Bill").

The amendments proposed in the Bill are the result of extensive reviews concerning the application of the payment and adjudication provisions in the Construction Act and increased concerns in light of the current economic downturn regarding the cash flow of contractors.

The main provisions of the Bill are as follows:

  • It will not be necessary for a construction contract to be in writing before the payment protections in the Construction Act may apply. However, before the adjudication provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 may apply, a construction contract must contain in writing certain terms concerning the conduct of the adjudication.
  • The parties to a construction contract are to include a written provision entitling the adjudicator to correct his or her decision so as to remove a clerical or typographical error. It is questionable whether this provision is necessary in the context of an English law contract since an adjudicator already has this power at common law. It is also questionable whether a compulsory contractual provision is the most appropriate means to address this issue.
  • The parties to a construction contract shall not be permitted to specify the basis on which the costs the parties incur in the course of an adjudication (for example, legal fees or the adjudicator's fees) are to be allocated. Instead, the parties may make such an agreement once a party to the construction contract has issued a notice indicating its intention to refer a dispute to adjudication. The intention of this provision is presumably to encourage the parties to consider the costs of pursuing the adjudication and, if possible, secure a commercial settlement.
  • The Construction Act requires all construction contracts to contain an adequate mechanism to determine 'what payments become due under the contract, and when'. To this extent, the Construction Act also prohibits 'pay when paid' arrangements. Until recently, parties to construction contracts have attempted to circumvent this prohibition by the application of 'pay when certified' or 'entitled when entitled' arrangements. Surprisingly, these mechanisms were held in the case Midland Expressway Ltd v Carillion Construction Ltd to fall within the scope of the 'pay when paid' prohibition. The Bill restates this prohibition against 'entitled when entitled' and 'pay when certified' arrangements. The key difference is that it will permit payment arrangements in which the amount payable to a contractor depends upon an assessment of the work performed by a sub-contractor.
  • The Bill replaces the current system of payment notices with a system of payer notices and payee notices. A 'specified person' (that is, a person specified in the contract such as an architect, engineer or employer's agent) may issue a 'payer notice' on behalf of the employer. This notice outlines the sum the 'specified person' considers due and the basis upon which that sum is calculated. Where a 'payer's notice' is not provided within the required time period, a payee (that is, the contractor) may issue a 'payee notice' specifying the sum it considers due and the basis upon which that sum is calculated. The final date for payment of the sum specified in the payee notice will be postponed by the number of days elapsing since the last date on which the payer could have issued a payer notice and the date on which the payee issues a payee notice. Further, the Bill permits an employer to issue a notice within a specified period before the final date for payment evidencing its 'intention to pay less than the notified sum' and the basis on which any amounts are to be withheld.
  • In the case Melville Dundas Ltd v George Wimpey UK Ltd, the House of Lords interpreted the Construction Act's withholding notice mechanism so as to permit the employer to exercise its contractual right to withhold further payments once the contractor became insolvent. This was despite the fact that the employer did not issue a withholding notice within the prescribed period. The Bill gives effect to this decision, but only in circumstances where a contractor becomes insolvent after the period in which a withholding notice may be issued has concluded.
  • Finally, the Bill clarifies that, when a contractor suspends the performance of the works on account of the employer's failure to make a payment, the contractor is entitled to suspend in part the performance of the works (that is, it need not suspend the performance of the entire works. Also, the contractor may recover from the employer the costs and expenses reasonably incurred as a result of that partial suspension.

In light of the current economic circumstances, the Bill's primary focus is those matters that may impact upon a contractor's cash flow. Accordingly, other provisions in the Draft Bill concerning the conduct of adjudications have been excluded.

In any event, if these amendments to the Construction Act are enacted, members of the construction industry should carefully review the adjudication and payment provisions of their contracts to ensure continued compliance with the Construction Act.