Changes to the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”) are due to come into force shortly.  (For an overview of the changes and their impact on standard forms and payment practices please click here. To see how the amended Construction Act will look please click here.) 

Only affect construction contracts (as defined) entered into after the changes come into force will be affected.  This will occur in England and Wales on 1 October 2011 and in Scotland on 1 November 2011. Equivalent changes to Northern Ireland's legislation have been passed but a commencement date is yet to be set.

An amended Scheme for Construction Contracts (“the Scheme”) will also take effect.  Drafts for England, Wales and Scotland are currently before their respective Parliaments / Assembly - to see a redline indicating the amendments for England and Wales, please click here. It is expected that these amendments will be materially the same as those eventually adopted in Northern Ireland (expected to be introduced later this year). 

The Scheme implies default rules into construction contracts that do not make certain basic provisions for adjudication and payments, as the Construction Act requires.  Most contracts (including standard forms) will be amended to comply with the Act and therefore the Scheme will not apply to them.  However, the number of contracts affected by the Scheme may still increase, as the changes to the Act remove the requirement for contracts to be “in writing”; with the Scheme’s rules also being implied into construction contracts that are partly or wholly oral.

Amendments to the Scheme were necessary as a result of other changes being made to the Act.  Government also said that further amendments would incorporate best practice from the industry’s various bespoke adjudication schemes, thereby reducing the need for them, but this aim seems to have been lost in the consultation on the Scheme’s amendments that ended in June 2010. 

The key features of the new regime given effect to by the Scheme are as follows:

Payment

The default payment rules are to remain payer-led.  That is, the trigger for payments will be a payer-issued payment notice, which the payer has the opportunity later on to withhold against.  There are, however, two key differences introduced by the new Act, reflecting changes that will apply whether or not the Scheme applies. 

First, where the payer fails to give a valid payment notice on time, the payee’s preceding payment application may qualify as the payment notice or, failing that (and more commonly when the Scheme applies), he may issue a payment notice of his own.  The payer may still withhold against the payee’s payment notice. 

The key test for whether a payment notice or a “notice of intention to pay less than the notified sum” (“pay-less notice”, here, for short) is compliant will be whether it states the “basis” on which the stated sum is calculated.  This concept, which derives from 110(2) of the existing Act and the current Scheme, is largely untested.  Pending clarification from the courts, unfortunately there will be uncertainty as to what is required for a payment notice or a pay-less notice to specify adequately the “basis” on which the stated sum is calculated.  One authority suggests that more detail is required than the existing requirement of stating the “ground” for withholding in a withholding notice (although the Government suggested during consultation that it would not increase the detail required in such notices).  If that is correct, payers may find it particularly burdensome providing valid payment notices and pay-less notices (and the different information needed for each).

Second, the Scheme amendments reflect the heightened importance given to payment notices in the Act amendments (both those issued by payers and payees).  If a valid payment notice is given specifying the “basis” on which the stated sum is calculated, in the absence of a pay-less notice (for whatever reason) the sum stated in the payment notice is payable by the final date for payment without further ado.  This differs from the present situation when it is sometimes still possible to dispute the sum due because, say, work was not done, was defective or had already been paid for.  In such cases in future, absent a valid pay-less notice, the payer must pay the sum stated in the payment notice with his recourse being to ensure he does not overpay when the next payment notice is given - assuming the final payment notice has not already been given and the payee does not in the meantime go insolvent.

Adjudication

For adjudication the proposed changes include:

  • Requiring the adjudicator to inform the parties as to the date of the referral. 
  • Giving adjudicators five days to correct their decisions, at the parties’ request or on their own initiative.  Despite the latter option, there is no express provision for ensuring the parties are given a reasonable opportunity of being heard if an adjudicator is minded to change his decision (as there is under the Arbitration Act 1996, section 57). 
  • Deleting the rarely used and little understood provision for adjudicators to require all or part of their decisions to be complied with peremptorily.

Government decided against:

  • Taking any new action in respect of the amended Act’s ban on so-called Tolent clauses that require one party to an adjudication (usually the referring party) to pay the other parties’ costs and all of the adjudicators’ charges, win or lose. The aim of such clauses is to deter adjudication. The ban is not as well drafted as it might have been, but will be brought into force with the rest of the changes to the Construction Act.
  • Strengthening the confidentiality of the adjudication process.
  • Giving adjudicators a freestanding power to award interest in the absence of any agreed contractual provision for interest (like courts and arbitrators).

Government had apparently hoped to create a more attractive Scheme for parties to opt into, having declined to adopt a single mandatory adjudication procedure (which would have prevented most if not all of the Construction Act avoidance devices that will survive the amended Act coming into force).  However, the Scheme’s adjudication rules are already widely used - for example from 2003 the JCT adopted them for its widely used standard forms.  Also, most industry schemes are very similar to the Scheme’s rules and do not contain Act avoidance devices – unlike bespoke rules. 

It is likely that when the amended Act comes into force with an amended Scheme on 1 October, the various industry schemes will simply be amended in line with the Scheme’s changes (rather than abandoned) and that bespoke rules will continue to contain Act avoidance devices.

Scottish differences

As mentioned above, the amended Act will come into force in Scotland on 1 November 2011 rather than 1 October 2011 in England and Wales. This unfortunate difference may produce uncertainties for cross-border contracts concluded in October 2011 that do not incorporate standard forms or other terms allowing for the changes in the amended Act.

Numerous differences also exist between the Scottish and English amendments to the Scheme. Most of these are minor, but one potentially significant difference is a requirement under the Scottish amendments for greater detail in a payer’s payment notice. As indicated above, the English amendments require such a notice to stipulate the amount claimed and the “basis” upon which the amount is claimed. The Scottish amendments go further than that (and than the amended Act suggests) and require the notice to state “the work to which the sum relates”. Oddly, this requirement would not appear to apply to a pay-less notice in Scotland (which implies that the “basis” for the sum the payer considers due need not identify the work it relates to). The reason for this difference is unclear. 

Given that the various governing authorities across the UK have consistently said that they wish to ensure uniformity in the Act’s operation, the lack of co-ordination between them this close to implementation is disappointing.  It will only add to the already high cost the construction industry will pay for changing its standard forms and payment practices.

To view a pdf of this Law-Now, please click here.

References: The Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011