THE NEW ACT
2nd February 2011

The mouthful that was the Housing Grants, Construction and Regeneration Act 1996, which thankfully became more familiarly known amongst the many within and associated with the Construction Sector as “the Act”, is due for amendment.

The Act had been due for amendment by the equally, if not even greater mouthful, Local Democracy Economic Development and Construction Act 2009, thankfully now quickly becoming known as “the New Act”, but before the amendments can come into force changes need to be made to the Scheme for Construction Contracts England and Wales 1998 (known as “the Scheme”).

It had therefore, been expected that the New Act would have come into force in April 2011; however, it does not now appear that it will come into force until October 2011.

Nevertheless, what are the important changes that the New Act will bring, when it does eventually come into force?  Part 8 of the New Act amends part 2 of the Act, both of which of course, concern “construction contracts” as defined within the Act.

The New Act repeals s.107 of the Act so that the payment and adjudication provisions of the Act shall apply whether the construction contract is in writing or not.

The difficulty that may arise is that it may be necessary to spend a disproportionate amount of time upon arguments as to what are the contract terms compared to that upon the substantive issue referred.  Further, whilst a construction contract need not be in writing, the adjudication provisions pertaining to the construction contract must, otherwise the provisions of the Scheme shall apply.

The New Act inserts the following after s.108 of the Act:

Only time and the courts will decide whether this new provision is sufficient to achieve that which it was, apparently, originally intended to address.  For example, it may be possible to successfully argue a variation upon the theme that a contractual term which provides,

‘that whilst the adjudicator is empowered to allocate his fees and expenses as between the parties, the Referring Party shall reimburse the Responding Party such sum as the adjudicator may decide the Responding Party shall bear, or variations upon such theme,’

is effective having apparently satisfied the requirements of the New s.108A.

Bloor Construction (UK) Ltd v Bowmer & Kirkland (London) Ltd (2000) established that in the absence of an express term to similar effect, there is an implied term in the adjudication agreement that an adjudicator may correct accidental errors and omissions.  The New Act frames this provision in statute but sadly fails to take advantage of the opportunity to clarify as to how long an adjudicator may have to make such corrections.  It is suggested that this is likely to be as circumstances reasonably dictate./p> The ability to take advantage of the slip rule however, remains limited to correcting clerical or typographical errors.  It is unlikely to extend to the correction of the adjudicator’s factual, reasoning or judgement errors.

Whilst “paid when paid” remains banned under the Act, the insertion of s.110(1A) by the New Act broadly bans “pay when certified” provisions from construction contracts except in those circumstances in which the construction contract is an agreement for someone else to execute the work and payment is conditional on that someone else doing so, for example management contracts.

It likely therefore that Payers (i.e. the paying party) may seek to rely upon extended payment periods as a consequence, in order to compensate for this change.

s.110 of the Act is also amended by the New Act, prohibiting the determination of the due date by reference to a payment notice to be given by the Payer.  Contravening clauses will be ineffective and the relevant provisions of the Scheme will apply.  This demonstrates the need to have a “New Scheme” in place before the New Act may come into force.

Payment notices under the Act have been changed so that under the new s.110A, a payment notice will have to be given no later than 5 days after the payment due date.  The construction contract shall provide whether the Payer or Payee (i.e. the party to be paid for services rendered) or Specified Person shall issue the notice.  We anticipate that the JCT standard suite of contracts shall provide for a Payer led payment mechanism, as so to as it is expected that the revised Scheme for Construction Contracts shall.

Payers will need to pay particular attention to the need to issue a payment notice even where the amount due is thought to be zero, and include within it the basis on which that sum has been calculated.

In circumstances of a Payer led payment mechanism and in the event that a Payer or a Specified Person fails to issue a Payment Notice, the Payee may issue a “Default” Payment Notice pursuant to s.110B.  The Default Payment Notice may be given at any time after the Payer’s Payment Notice should have been issued, but was not.

In the event of such a Default Payment Notice, the final date for payment is postponed by the number of days after the due date that a Default Payment Notice is issued.  Note however, that a Default Payment Notice cannot be served if the Payee is to serve the payment notice under the contract.

Main Contractors commonly require Sub-Contractors to submit applications so that the same may be considered as part of the Main Contractor’s overall valuation process with regard to the Main Contract works.  With the introduction of the New Act all should be aware that if the Payee has already issued a Payment Notice (e.g. a Sub-Contractor’s application for payment) before the date that the Payer’s Notice was required to be issued either because the contract in question requires or permits such, then under the New Act such shall be the Payee’s “Default Payment Notice”.

Having the Payer under a Payer led payment mechanism failed to have issued a Payment Notice and having instead received a Default Payment Notice, unless the Payer issues a “Pay Less Notice” before the prescribed period before the final date for payment pursuant to the new s.111, the Payer shall be obliged to pay the Default Payment Notice in full, save for in the event of the Payee’s insolvency after the period for issue of the notice has expired.

The “Pay Less Notice” must state the sum that the Payer believes is due on the date the notice is issued, even if that is ‘Nil’, together with the basis upon which it has been calculated.

A “Pay Less” Notice can only be served either after a Payment Notice or a Payment Default Notice has been served.

s.145 of the New Act introduces new features to s.112 of the Act which provides a useful tool against defaulters.  The Payee will now be able to suspend their obligations either in whole (which those in the industry are used to), or in part.  The Contractor/ Sub-Contractor could therefore simply suspend its obligation to execute Variations/ Changes.  Those who are forced to take such drastic action as to suspend will also be entitled to be paid the reasonable costs and expenses associated with the suspension together with an extension of time including time necessary to remobilise.

The changes to s.112 of the Act should prove an even more effective method of securing payment.