Part 8 of the Local Democracy, Economic Development and Construction (LDEDC) Act 2009 amends the adjudication and payment provisions in Part II of the Housing Grants, Construction and Regeneration (HGCR) Act 1996.
Due to the set implementation date, some projects may have main contracts under the old regime and some subcontracts under the new regime.
The LDEDC Act repeals the requirement for construction contracts to be in writing therefore, contracts that are partly in writing or wholly oral are now covered. This will allow parties to contracts to go to adjudication, even if their involvement is not formally recognized in writing.
Any adjudication provisions of a contract must still be 'in writing' if they are to have contractual effect, failing which the adjudication provisions of the Scheme for Construction Contracts will apply.
All construction contracts must have provision giving the Adjudicator power to correct any clerical or typographical error appearing in decisions arising either by accident or omission. Although the aim of this amendment is to put on a clear, statutory footing an adjudicator's ability to amend an obvious error in their decision, there is no stipulated time limit for correcting such errors.
Provisions within a construction contract requiring the referring party be liable for all the adjudicator's costs and the legal expenses of the other party irrespective of the outcome, will no longer be valid. This has often been a disincentive to pursuing adjudication. Any agreement between the parties concerning the allocation of the costs relating to adjudication is ineffective unless:
- They agree as to the allocation of the parties' legal and other costs after the giving of notice of intention to refer a dispute to adjudication; or
- The contractual provision is in writing, forms part of the party's construction contract and allows the adjudicator to allocate fees and expenses between the parties.
Under the HGCR Act a construction contract must have an 'adequate mechanism' for determining what payments are due, and when they become payable. The term 'adequate mechanism' was not defined, but the intention was to prevent pay-when-paid provisions. As compliance may be achieved if a certificate is issued by a third party under a superior contract (main building contract), 'pay-when-certified' provisions could be introduced which linked the timing or amount of payment to be paid under a subcontract to that certified under a main contract. This can create cash flow problems for subcontractors because they have no control over when a certificate on a main contract will be issued. If a certificate covers a number of subcontracts, delay by one subcontractor could result in delayed payment to all other subcontractors.
Amendments by the LDEDC Act forbid any payment mechanism established in a superior construction contract (main building contract) from being linked to the performance of obligations under a subcontract. Pay-when-certified clauses can no longer be used to prevent paying a subcontractor on the basis that a certificate in the main contract is yet to be issued. Although this amendment is intended to create a more regular and reliable cash flow for all parties throughout the duration of a construction project, Main Contractors would be required to fund payments to subcontractors before receiving payments under the main contract. Subcontractors are less likely to experience delays in payment but main contractors are likely to want to extend the payment period under subcontracts to allow more time for payment.
LDEDC Act permits the Employer and Contractor to agree payment provisions dependent upon the performance of a subcontractor to carryout its obligations under a subcontract.
Payment notices: contractual requirements
The LDEDC Act contains extensive amendments to the provision of payment notices. The following are now defined terms:
- Specified person - a person specified in or determined in accordance with the provisions of the contract
- Payee - the person to whom the payment is due
- Payer - the person from whom the payment is due
- Payment due date - the date provided for by the contract as the date on which the payment is due.
Once the provisions of the LDEDC Act come into force, a construction contract must oblige either the paying party, a specified person (for example the Employer's agent or the Contract Administrator) or the party entitled to receive payment, to serve a payment notice specifying both the sum considered due and the basis on which that sum is calculated. Importantly, the party entitled to receive payment will now be permitted to serve a payment notice, and applications for payment may constitute payment notices where the requirements of a payment notice are satisfied. Delaying the date of payment by making payment due only if a payment notice is issued by or on behalf of the payer will no longer be considered an 'adequate mechanism'.
The construction contract must specify that either the payer or the payee (but not both) will issue the payment notice. This must be issued not later than 5 days after the payment due date and paid before the final date for payment identified by the construction contract (the parties being free to agree how long the period is between the date the sum becomes due and the final date for payment). The payment notice must specify the sum the payer/payee considers to be due at the payment due date and the basis on which that sum was calculated. A payment notice must be issued, even if the amount of the payment notice is nil.
Payment notices: payee's notice in default of payer's notice
If the payer is required by contract to issue a payment notice and fails to serve that notice in the required form or in the set timeframe, the payee is entitled to issue a default payment notice. This should be issued as soon as possible after the 5 days allowed to issue a payment notice have elapsed. A default payment notice obliges the payer to pay the amount due and allows the payee their statutory right to suspend performance for non-payment. A default payment notice must satisfy the requirements of a payment notice; namely, it must specify the sum the unpaid party considers due on the due date and the basis on which that sum is calculated.
If a default payment notice is issued, the final date for payment is then postponed by the same number of days between the failure to serve the payment notice and the serving of the default payment notice. It is important to note that where the party entitled to receive payment makes an application for payment which satisfies the requirements of a payment notice; it is then precluded from serving a payee default payment notice where the paying party or the specified person fails to serve a payment notice in accordance with the terms of the construction contract.
Pay less notice
Paying parties are required to either pay the notified sum specified in either the payment notice or default payment notice, by the final date for payment or serve an effective pay less notice. This allows the payer to amend the sum due if it is later discovered that work covered or the amount notified within the payment notice turns out to be unsound.
In order to be effective, a pay less notice must specify the sum that the paying party considers to be due on the date the notice is served, the basis on which that sum is calculated and be served no later than the prescribed period prior to the final date for payment. If there is no contractual agreement between the parties as to the length of the prescribed period, the Scheme for Construction Contracts will imply a period of 7 days. Although it is a revaluation of the account including liquidated and ascertained damages, set offs and abatements there is no requirement that a pay less notice must include the ground or grounds for paying less or the amount attributable to such ground. Payers must ensure that payment notices and pay less notices are served as separate notices.
Suspension of performance for non-payment
The LDEDC Act clarifies the Contractor's right to suspend carrying out some, and not simply all, of the work in the event of non-payment. To validly suspend performance of its obligations by reason of non-payment, a default notice must be issued and there must have been failure to pay. The party in default (the party who has not paid) is liable to pay to the payee (contractor stopping work) a reasonable amount by way of costs and expenses incurred by exercising the suspension of all or part of the work; this might not include consequential losses or loss of profit. Not only is any period of stoppage to be disregarded in calculating any extensions of time as a consequence of suspension for non-payment, but the time which the Contractor requires to remobilize staff or return plant and equipment to the site must also be considered.