April 6, 2011

Important changes to the 'Construction Act'

A new “Construction Act” will shortly introduce changes of which all main contractors and sub contractors should be aware

Those involved in Adjudications have been used to operating under the Scheme created by the succinctly named Housing Grants Construction and Regeneration Act 1996 (“HGRCA”). That Scheme is soon to be amended by the equally snappily named Local Democracy Economic Development and Construction Act 2009 (“LDEDCA”). There has been a delay in the commencement of the relevant parts of the Act (until probably October 2011) giving us time to assess the implications.

The new Act will considerably alter the already complicated rules relating to a contractor’s application for payment under the contract. The “new Scheme” is likely to require the paying party to issue a Payment Notice stipulating the amount due under the application. The time period for such a notice will still be not later than five days after a contract payment due date. However, if the paying party fails to give a Payment Notice then the receiving party (i.e. a sub contractor) can himself issue a Default Payment Notice. This can be issued any time after the date on which the paying party should have issued its Payment Notice. The only way that a paying party can then avoid the effect of a Default Payment Notice is to issue a “Pay Less” Notice (formerly known as a Withholding Notice).

A pay Less Notice is to be served not later than seven days before the Final Date for Payment.  There are further complicated rules for calculating the Final Date for Payment as this is extended by the number of days after the due date that a Default payment Notice is issued. Clear as mud! In short you must now be disciplined in issuing Payment Notices when receiving an application, failing which you must issue a Pay Less Notice within what could be very short timescales. 

The Adjudication provisions of the old Act only applied to contracts in writing: this lead to numerous jurisdictional challenges about the authority of the Adjudicator. The new Act will apply to written, partly written and wholly oral contracts. We feel this will throw up a whole new set of challenges. How is an Adjudicator going to determine the terms of an oral contract (where there is a dispute) without hearing from the parties? Adjudications may become even further protracted and costly.

It was the intention of the old Scheme that each party should pay their own costs of an Adjudication but that an Adjudicator had the discretion about who should pay his costs. This was often circumvented by contract clauses that required the person who commenced an Adjudication (nearly always the sub contractor) to pay all of the Adjudication costs come what may. The Technology & Construction Court through a series of cases has found that such clauses stifle the access to justice, hence new provisions have been brought in by the new Act where it is impossible to fetter the jurisdiction of an Adjudicator in respect of his own costs. However, section 141 may contain a loophole that still allows the parties to include a contract clause in respect of their own costs. It will be interesting to see how the courts approach this policy issue.

Pay when certified clauses (i.e. clauses which tie sub contractor payment with payment under a main contract) are to be prohibited.

Look out for further articles from us in connection with the commencement and effect of this important new legislation.

Click here for information on Holmes & Hills legal services relating to disputes in the construction industry and construction contracts.

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