Seanna Mulrean provides an overview of the Construction Contracts Act.
The Construction Contracts Act 2013 (the Act) was enacted by the Oireachtas in July 2013, but it has not yet come into force. The commencement of this Act is eagerly awaited by the construction industry.
The legislation was introduced by Senator Feargal Quinn in the Seanad as a Private Members' Bill, with the key objective of improving cash flow within the construction industry. The Act aims to do so by introducing a new payment regime and new fast track statutory dispute resolution mechanism of adjudication.
The Act will apply to all construction contracts entered into after commencement of the Act. Contracting parties cannot limit or contract out of the provisions of the Act. A construction contract is broadly defined for the purposes of the Act and includes traditional building contracts and agreements in relation to ancillary services, such as maintenance, architectural, design or surveying work and interior and exterior decorating appointments. Certain contracts are excluded, for example, those of a value less than €10,000 and contracts for works on residential dwellings, unless the property has a floor area in excess of 200m².
In terms of the new payment regime, the Act prohibits "pay when paid" clauses, which are contractual conditions that provide that payment or timing of payment is conditional on the making of a payment by a third party. This is a fundamental protection of the new legislation and one which is particularly important for subcontractors and those parties lower down the contractual chain. Accordingly, even if a party higher up the contractual chain, such as the main contractor, has not been paid, this cannot be used as the basis for refusing to pay a sub-contractor, except where the party further up the contractual chain is insolvent.
All relevant construction contracts must include adequate mechanisms for determining the amount to be paid to a contractor, the period for interim payments and when payments will become due. Many standard forms of construction contract used in Ireland set out payment provisions which generally comply with this requirement. Where a contract is silent on payment provisions, the default provisions set out in the Act shall apply. The Act sets out default intervals for stage payments of thirty days which will apply as well as a default formula for calculating the amount of an interim payment due at a particular claim date.
The Act introduces a new concept of payment claim notice. Where a payment claim notice is submitted in the form prescribed and the amount is contested by the employer, the employer, or main contractor, in the case of a sub-contract, has twenty-one days to respond, setting out the amount that it proposes to pay and the reason why it differs from the amount claimed in the payment claim notice. This notice must also set out the basis of the calculations used to arrive at the amount proposed to be paid. Where the parties cannot agree the payment amount by the payment due date, the employer must pay the amount stated in the response or withholding notice. In the meantime the contractor may dispute the withholding notice by referring the matter to adjudication.
Sub-contractors under the Act will also have a statutory entitlement to suspend work when payment has been withheld for work which has been completed. The suspension cannot continue once the dispute relating to payment, in respect of which the suspension relates, has already been referred to adjudication. This is viewed by industry commentators as having the potential to dilute the effect of a threatened suspension of works and will also mean that a sub-contractor will have to proceed with works while adjudication is ongoing.
The Act introduces a new statutory dispute resolution procedure of adjudication. A party is entitled to refer any dispute relating to payment to adjudication at any time. The parties may agree to appoint an adjudicator of their own choice or from the panel of adjudicators to be established under the Act. Failing agreement, the adjudicator shall be appointed by the chair of the Panel. The process is intended as a fast-track means of payment disputes resolution and so the adjudicator must decide on the matter within twenty-eight days of the date of their appointment. The period may be extended by up to fourteen days with the consent of the referring party. The adjudicator's decision is binding and becomes immediately enforceable. The decision can only be avoided if the paying party is successful in overturning the decision.
The Act is widely welcomed within the construction industry and it is hoped it will address the cash flow issues which are common at all levels within the industry. Despite Construction Industry Federation calls on the Government earlier this year to fix a date on which the Act will become operational, this has still not happened. Responsibility for the implementation of the Act was transferred from the Department of Public Expenditure and Reform to the Department of Jobs, Enterprise and Innovation with effect from 20 October this year and a number of key tasks have yet to be completed before the Act can be brought into force. This includes the publication of a Code of Practice for Adjudicators and the establishment of a Panel of Adjudicators. It is currently expected that the Act will be commenced by the Spring of 2015.