Changes to the UK Construction Act (the "Act") overhaul certain payment procedures and dispute resolution or "adjudication" provisions, generally enhancing the rights of subcontractors and other payees. Part 8 of the Local Democracy, Economic Development and Construction Act 2009 amends Part II of the Housing Grants, Construction and Regeneration Act 1996, and came into force in England and Wales for contracts entered into on or after October 1, 2011. It will affect contracts in Scotland entered into on or after November 1, 2011. The revised Scheme for Construction Contracts imports the provisions noted below, among others, into construction contracts that do not comply with the Act. There are different schemes for England, Wales and Scotland.

The top five changes affecting the construction industry are:

  1. Oral contracts now governed by the Act
  2. Parties to pay their own adjudication costs
  3. Separate payment and "pay less notices" required
  4. Pay-when-certified clauses unenforceable
  5. Partial suspension of performance along with costs, and time extension allowed

Oral Contracts. The Act will now apply to all construction contracts whether in writing or not, wholly or partially. Therefore, it will be possible to adjudicate disputes under oral contracts, and the new payment notice provisions below will apply to oral contracts. Although dispute resolution provisions must still be in writing, all contracts—written or oral—need to comply with the Act. The Act will import default provisions into noncompliant written and oral contracts. One such default provision provided by the Act is that either party may give notice at any time that a dispute is being referred to adjudication; and within seven days of the notice to refer, the adjudicator must be appointed and referred the dispute.

Adjudication Costs. Under the amendments, each party shall bear its own adjudication costs. Contract terms that predetermine which party pays the adjudication costs are rendered ineffective. In other words, "Tolent" clauses,1 whereby the referring party or the subcontractor generally would be held responsible for all costs of the adjudication, are no longer enforceable. However, the contract can provide that the adjudicator determines which party pays the adjudicator's fees.

Pay Less Notices. Withholding notices no longer exist under the amended Act and are replaced by pay less notices, which notify the payee what the payer considers the amount to be due and the basis for that amount. However, unlike the withholding notices, a payer is still required to issue a separate payment notice, even if it intends to issue a pay less notice. Once the payment notice is issued, the amount in the notice becomes the sum due, unless the payer issues a pay less notice. If the payer fails to issue a separate payment notice, the payee can issue its own payment notice. If the contract permits or requires applications for payment, then the payee's application for payment will be treated as the payee's payment notice, and the payer may then issue a pay less notice.

Pay-When-Certified Clauses. Under the prior act, "pay-when-paid" clauses are unenforceable, and now the amendments close any loophole for clauses conditioning payment on performance under a separate contract or a third party's obligations. Under the Act, pay-when-certified is not considered an "adequate mechanism" for establishing when payments become due. Construction management contracts and certain "first-tier" subcontracts on public-private venture projects (PPP / PFIs) are excluded from the prohibition.

Partial Suspension of Performance. Prior to the amendments, a contractor had the right to suspend all performance for nonpayment, in effect stopping work altogether. Now, a contractor can partially suspend performance for nonpayment, having the option to suspend certain work without fully demobilizing. The contractor has an automatic right to recover time and reasonable costs of suspending, and will be entitled to a time extension for any delay