Amendments to the Construction Act

by Michael Smith
NBS Information Specialist

The Local Democracy, Economic Development and Construction Act 2009 (LDEDCA) received Royal Assent on 12 November 2009. This article looks at certain provisions, in Part 8 of the new Act, relating to construction, which came into force on 1 October 2011.

Origins

The origins of Part II of the Housing Grants, Construction and Regeneration Act 1996 (commonly referred to as the Construction Act) stem from the last UK recession, in the early 1990s. Its aims were to improve payment practices within the industry, facilitating cash flow, and to introduce a new option in the dispute resolution process - adjudication. The original Act came into force in 1998, but in 2004 provisions were made to review it. The thrust of these reforms was a strengthening of the rights to adjudication and improvements in cash flow.

These reforms became law in November 2009, when the Local Democracy, Economic Development and Construction Act 2009 received Royal Assent. The Construction Act covers the vast majority of commercial building and engineering contracts and consultants’ appointments in the UK, so it is not possible to ‘contract out’ of its provisions.

What is a construction contract?

The definition of ‘construction contracts’ in the Construction Act includes anyone carrying out or arranging for others to carry out construction operations. Construction contracts include agreements to do architectural, design, or surveying work, when providing advice on buildings, engineering, interior or exterior decoration or on the laying out of landscape.

However, there are specific exemptions, including planning agreements under Section 106 of the Town and Country Planning Act 1990 and agreements under certain sections of the Highways Act 1980. The Act does not apply to contracts with ‘residential occupiers’ i.e. homeowner/occupiers.

Amendments to the Construction Act

Part 8 of the LDEDCA contains amendments to the Construction Act. The main key changes outlined in the new Act are:

Changes to adjudication rules:

• Construction contracts are no longer required to be ‘in writing’
• Introduction of a statutory slip rule to England, Wales and Scotland
• Parties can no longer agree who pays the costs of the adjudication before Notice of Adjudication is given.

Changes to payments:

• Elimination of ‘pay when certified’ clauses that link to other contracts
• New payment notices and the replacement of withholding notices
• Improvements to the statutory right to suspend for non-payment
• Outlawing a contractual provision whereby a payment notice triggers the due date.

There are also two important changes made relating to the Government’s power to make exclusion orders and to adjudication costs. All of the major amendments to the Construction Act are outlined below:

Exclusion orders

The principal amendment made relates to the governmental power to exclude particular types of construction contract from the operation of Part II of the Construction Act. This will give the Government more flexibility, as previously an exclusion order could only disapply all of the provisions of the Construction Act.

In addition, this power of exclusion was previously conferred on the Secretary of State alone; the LDEDCA now confers a similar power on Welsh and Scottish ministers, and correspondingly limits the Secretary of State’s power of exclusion to construction contracts carried out in England. It is expected that the Government will use the new powers to disapply the provisions of the Construction Act to PFI subcontracts.

Currently there is the potential for a situation in which the Scottish Parliament and Welsh Assembly can exclude particular types of construction contract from the operation of the Construction Act, when the same types of contract are not excluded in England, and vice versa.

Adjudication costs

The current position under the Construction Act is that a party should bear its own costs of adjudication. This ensures that neither party is committed in advance of adjudication as to how costs would be shared.

The prohibition (as originally drafted) would have abolished the usual practice of allowing an adjudicator to allocate his or her fees and expenses. As a result, the prohibition was amended prior to Royal Assent. Under the LDEDCA, parties may agree in advance to confer power on the adjudicator to allocate his or her own fees and expenses provided such agreements are in writing and are contained in the construction contract. However, any agreement about the parties’ own costs can only be made after the referral notice has been issued, but this must be in writing. Unless these requirements are met any agreement made between parties about adjudication costs (their own costs and/or the adjudicator’s fees and expenses) will be ineffective.

Written and oral contracts

The LDEDCA removes the requirement for construction contracts to be evidenced in writing by repealing the provision that the Construction Act applies only to contracts in writing, extending the provisions of the Construction Act to oral and partly oral agreements.

The consequence of removing this requirement may be that more disputes are referred to adjudication, as the legislation now covers contracts arising from letters of intent, more jurisdictional challenges are likely to be made to an adjudicator’s appointment, and more cases may subsequently be heard by the Technology and Construction Court.

Changes to the payment provisions

‘S110 payment notices’ and ‘S111 withholding notices’ have been criticised for not reflecting the realities of how payment cycles generally operate in the industry.

The LDEDCA aims to remedy this by linking payment notices with withholding notices: establishing a regime of notices and counter-notices which will improve transparency as to amounts due and paid (following the new concept of a ‘notified sum’). The ‘notified sum’ is the amount specified in the payee’s ‘default’ notice and the client is obliged to pay this amount unless a withholding notice is served.

The crux of the change is that the LDEDCA requires the payer to pay the notified sum to the payee, unless an effective withholding notice has been issued within the agreed or prescribed period.

Delayed payment

The LDEDCA contains measures to prevent payments to subcontractors being delayed by operations carried out under other contracts. This is intended to address the problem of payments to subcontractors being determined by certificates issued under an upstream contract, which may also cover work done by other subcontractors.

Prohibition of pay when certified clauses

The Construction Act requires construction contracts to include an ‘adequate payment mechanism’ for determining the amount and due dates of payments. Section 113 of the Construction Act prohibited pay when paid clauses, except where the third party is insolvent.

The LDEDCA extends the range of prohibited conditional payment clauses to pay when certified provisions. Whilst this change will clearly benefit subcontractors, it may force main contractors to fund more payments.

Suspension

If a contractor has not been paid in full by the final date for payment, they are entitled to suspend the whole of the works. The LDEDCA now seeks to add flexibility to this rather rigid response to non-payment by giving the contractor the right to suspend part of the works.

A party who validly suspends work because of non-payment will, under the new provisions, also be entitled to:

• Reasonable costs and expenses arising from the suspension
• Not only an extension of time covering the period of the suspension but also any additional time spent ‘in consequence of the exercise’.

This strengthens the suspending parties’ position as they can choose to stop work entirely or to withhold specific strategically important work whilst also maintaining progress on the project as a whole.

Conclusions

All construction contracts used after 1 October 2011 in England and Wales (and 1 November in Scotland) have to reflect the LDEDCA amended scheme for payment and adjudication, or have its terms implied in by default. Allied to this many companies standard terms and conditions will likewise need to be amended to reflect the changes to the legislation as key provisions in any current terms relating to payment may now become unenforceable.

Related NBS information:

Articles:

• Changes to the Construction Act

Selected links:

• The Local Democracy, Economic Development and Construction Act 2009
• LDEDCA explanatory notes

 

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