Construction update October 2011

Changes to the ‘Construction’ Act and the Scheme

The amendments to the Construction Act 1996 came into force in England on 1 October 2011 (and Scotland on 1 November 2011). This means that most construction documents used in the UK including building contracts, professional appointments and sub-contracts, will need to reflect the new law.

Part 8 Construction Act 2009 operates by introducing a series of amendments to the Housing Grants, Construction and Regeneration Act 1996. There are also amendments to the Scheme for Construction Contracts - i.e. an Amended 1998 Scheme.

In essence this will mean changes to the payment regime; the statutory adjudication process; and an enhanced right for contractors/consultants/sub-contractors to suspend work for non-payment and claim costs/expenses. These changes arise from concerns in the construction industry about unnecessary payment delays and a desire to improve access to adjudication.

The provisions of the Construction Act 2009 relating to contracts in writing, payment, suspension, correction of decision, and costs are reviewed below.

Contracts in writing

Previously a common challenge to an adjudicator’s jurisdiction to hear a dispute was that there was no contract in writing. The leading case law on the construction of Section 107 of the Construction Act 1996 (which set out that a construction contract must be evidenced in writing) held “what has to be evidenced in writing is, literally, the agreement, which means all of it, not part of it.” (Ward L.J, RJT Consulting Engineers v DM Engineering (NI) Limited (2002).)

The Construction Act 2009 has opened up the jurisdiction of the adjudicator. Contracts can now be wholly in writing, partly in writing or wholly oral. The adjudication agreement must be in writing, however, if it is not in writing the Scheme (as amended) will apply.

Whilst it is expected that this change will remove jurisdictional challenges based on contracts not being in writing or evidenced in writing, it is anticipated that it may result in more complex and lengthy adjudications deciding what the contract terms, particularly if the contract is said to be wholly oral, actually are.

This change may well lead to a greater amount of dissatisfaction with Adjudicator’s decisions with what could very easily be seen as ‘rough justice’ and may result in an increase in challenges to adjudication awards.

The advice is, more than ever, make sure your contract is clearly and fully set out in writing.

Payment

Under the Construction Act 1996 contracts needed to provide an adequate mechanism for determining what payment become due and when (“the due date” – Section 110) and the payer needed to give notice five days after payment became due specifying the amount of payment it would make and the basis on which it was calculated (“payment notice” – Section 110). Parties were free to agree the period between the due and final date for payment. In order to withhold payment the payer was required to serve a withholding notice in accordance with Section 111, such notice had to be given within the prescribed period before the final date for payment and state the ground(s) for withholding.

The term "adequate mechanism" was not defined, but the Construction Act 1996 Act expressly prevented pay - when - paid provisions (except where a payer was not paid because of insolvency upstream). However, the courts held that a provision whereby a certificate is issued by a third party under a superior contract may be an "adequate mechanism". Consequently, forms of pay - when - certified provisions were created which often limit the timing or indeed amount of payment to be paid under, say a sub-contract, to that certified under a main contract. Such provisions are equally as mischievous for sub-contractors as pay-when-paid provisions because they have no control over when a certificate on a superior contract will be issued. They may not even be aware of when such a certificate is issued. Also, if a certificate covers works undertaken by a variety of sub-contractors, delay by one sub-contractor in completing its section of the work will result in delayed payment to all other sub-contractors, until that element of outstanding work is completed.

The Construction Act 2009 Act seeks to prevent this mischief. It is not, now, an 'adequate mechanism' to make the determination of what payments are due, and when, dependent upon work carried out in another contract (e.g. a superior contract) or upon someone's decision as to whether work has been carried out in another contract.

With respect to payment notices, there was concern that payers were trying to delay the date for payment by providing that the due date would not commence until a payment notice had been given to the payee or pending that payment would only be made if a payment notice was issued by or on behalf of the payer.

The Construction Act 2009 has made changes to the notice regime, introducing section 110A (by virtue of section 143). Contracts must now provide for the payer, a specified person, and the payee to be able to give notice. A payment notice must state the amount of the payment due and the basis on which that sum is calculated even if the sum due is zero. If such notice provisions are not incorporated into the contract then the relevant provisions of the Scheme shall apply as an implied term.

In circumstances where a payer or specified person fails to give a payment notice then section 110B (introduced by section 143 of the Construction Act 2009) applies. Section 110B allows the payee to give notice in default. It is important to note that a payee's application for payment, under section 110A, may be the notice for the purposes of this section and as such a second notice under section 110B may not be required. Also of note is that the payee's notice in default extends the final date for payment (i.e. between the date when the payer failed to serve notice and the payee serving the notice). For example, if the payer was due to issue a notice on the 1st of the month but doesn’t, and the payee issues a notice on the 6th of the month the final date for payment will be extended by 5 days.

This extension has given rise to some concern that a payer could benefit from its own failure to serve a notice and could be open to abuse.

Under the new law there is a requirement to pay the notified sum (by virtue of section 111 amended by section 144) in accordance with the payment notice or the payee’s notice in default, except in circumstances where the payer gives a notice to the payee of an intention to pay less than the notified sum. So the old system of withholding notices has been replaced by a notice of an intention to pay less.

Such notices must state the sum the payer considers is due and the basis on which the sum is calculated. They must also be given not later than the prescribed period before the final date for payment. Whilst there is no longer a statutory requirement to state the ground(s) for withholding and give a breakdown of the amount attributable to each ground many query the difference between setting out the ‘grounds’ and the ‘basis of calculation’.

It is essential payees note the effect of these changes on the right to suspend. Any failure by the payee to issue a payment notice in default will prevent the payee from suspending in full or part its obligation to perform.

The Construction Act 2009 has also regularised the law as set out in Melville Dundas such that, subject to the contract terms, a payer may not need to pay an insolvent payee.

It is clear that the parties need to carefully monitor the payment process in each contract to ensure that any defaults in issuing the required notices do not adversely affect cash flow and the supply chain.

Suspension

The Construction Act 2009 has also sought to alleviate the risk of exercising the right to suspend. Previously, if either the grounds for suspension had not arisen or a notice had not been properly given then the suspension may have been regarded as a repudiatory breach of the contract. This allowed the innocent party to treat the contract at an end and held the party that wrongfully suspended liable for damages for breach.

The new law permits partial suspension by allowing the suspension of “any or all” of the obligations under the contract. It has been suggested that the exercise of the right to suspend “part” of the obligations is less likely to give rise to any suggestion of a repudiatory breach of contract. However a wrongful suspension of part may still be a refusal to perform the contract. Much will depend on the circumstances.

The Construction Act 2009 also gives a statutory right to the repayment of costs of a suspension such that the defaulting party will be liable to pay to the contractor stopping work, a reasonable amount by way of costs and expenses incurred by stopping work. It further extends the rights of the contractor to an extension of time. The contractor is now entitled to an extension of time for the time it requires to re-mobilise staff or return plant and equipment to the site.

It is anticipated that these amendments will increase the exercise of the right of suspension, particularly the right to suspend part of the obligations. However, it will still be necessary to carefully consider the right to suspend before exercising the same to ensure the entitlement has in fact arisen.

Corrections of decisions

Following the judgment in Bloor Construction (UK) Ltd v Bowmer & Kirkland (London) Ltd [2000] in which it was held that adjudicators have a limited power to correct mistakes in their decisions, the Construction Act 2009 has introduced a provision requiring contracting parties to provide in their contract that the adjudicator has the power to correct any clerical or typographical errors in the decision.

The purpose of the amendment is to give clear powers to the adjudicator to amend obvious errors in their decisions.

With respect to the making of any necessary amendments no time period or limit within which amendments can be made has been set by the Act. However, in YCMS Limited -v- Grabiner and another (2009) Akenhead J said that "it will be an exceptional and rare case in which a revision can be made more than a few days after the decision." While the case is before the new Act it is likely to reflect the current position.

The principle behind this decision and the purpose of the Construction Act 1996 was to facilitate cash flow. Therefore, if an adjudicator could revise his decision at any time up to 21 days after the decision then it would slow down and interfere with swift enforcement and undermine the principle of adjudication. Thus, any party requiring corrections to be made should pursue the matter without delay.

Costs of adjudication

Previously the matter of the allocation of the costs of an adjudication was not dealt with. Costs of an adjudication could not be awarded against the parties unless the parties agreed, provided always that such an agreement did not discourage a party to go to adjudication.

The Construction Act 2009 provides that any contracted provision by the parties relating to the allocation of the costs of an adjudication will be ineffective except in two circumstances. To be effective any agreement relating to the costs of an adjudication must be in writing and 1) it must be a provision of the construction contract that the adjudicator can to allocate his own fees and expenses between the parties, or 2) be made after the giving of notice by one party to the other of the former's intention to refer a dispute to adjudication.

Conclusion

The changes whilst not huge in substance are mandatory i.e. you can't contract out of these requirements therefore construction documents which do not comply will have terms implied into them by the Scheme.

It is important to note that the changes do not have retrospective effect so any construction documents that you have been negotiating prior to 1 October and are currently being negotiated will need to be amended or drafted to reflect the new law.