UK: Upcoming Changes To The Law Applying To Construction Contracts

Last Updated: 10 August 2011
Article by Suzanne Reeves

The Housing Grants, Construction and Regeneration Act 1996 (HGCR Act) introduced the right for parties to construction contracts to adjudicate, and introduced the payment mechanism which the construction industry is now familiar with. This Act has been in force for over 10 years but is about to change when the Local Democracy, Economic Development and Construction Act 2009 (LDEDC Act), comes into force making various amendments to the original Act. The LDEDC Act is expected to come into force this autumn. Anyone who deals with contracts for construction work will need to be aware of these changes.

The Current Law

To fall under the protection of the HGCR Act under the current law the construction contract must be in writing. It must also be for works or advice specified in the Act (i.e. it must not relate to oil or gas extraction, nuclear power or works for a residential occupier etc).

Payment

The contractual payment mechanism in the HGCR Act entitles the payee to stage payments for work done, and provides for calculating the sums due to the relevant contractor or consultant and the final date for payment. It also provides that if a payer does not serve a "withholding notice", he cannot withhold monies from the payee which are otherwise due. If no withholding notice is served, the payee can suspend his works on notice until he is paid and he can of course, adjudicate.

Adjudication

The HGCR Act allows either party to a qualifying construction contract to refer disputes relating to it to an adjudicator at any time. The process from referral of the dispute to a decision is quick, taking 28 days (unless a short extension is agreed). The decision of the adjudicator is binding until the parties agree otherwise or refer the decision to the Courts or arbitration and an alternative decision is made. In practice, relatively few adjudication decisions are challenged in the Courts or by arbitration. The Courts will rarely refuse to enforce an adjudicator's decision unless it can be shown that there is a valid jurisdictional challenge (i.e. the adjudicator has acted outside of his jurisdiction in some way).

Parties can agree their own adjudication and payment terms in their contracts within the limits of the HGCR Act, but if they do not comply with its basic requirements, then the provisions of the "Scheme" for payments under the Act automatically apply and imply terms into the contract.

Changes in the LDEDC Act

Although the Courts and the construction industry have ironed out various issues that have arisen from the HGCR Act over the years, there were parts of it that were thought not to work as well as they might. Following an industry review, the LDEDC Act is expected to come into force in the autumn and will make various changes to the current law. This may raise new issues for the Courts, legal practitioners and those engaged in the construction industry alike.

The right to adjudicate and an implied contractual mechanism for payment are here to stay, but the LDEDC Act will make various changes to the HGCR Act about which you should be aware. The key changes are as follows:

  • A construction contract will no longer need to be in writing for the Act to apply. Parties who have an oral or partly oral contract will be able to rely on the Act (which could cause some practical difficulties for adjudicators going forward).
  • The contract will have to include a written provision allowing the adjudicator to correct typographical or clerical errors (such as miscalculations) in his decision (known as the 'slip rule'). Under the existing law, case law has already implied such a right for adjudicators without the need for a written provision in the contract.
  • The HGCR Act already outlawed "pay when paid" clauses. The new Act will also prohibit "pay when certified" clauses in most contracts. A main contractor cannot therefore make payment to his sub-contractors conditional on his own payment by the employer being certified. This could have a significant impact on those working in the PFI industry.
  • The payment and withholding notice provisions are to be overhauled. For example, either party (rather than only the payer) may now issue a payment notice stating how much is due. Payment notices must also be given even if the amount due is zero (this could be important to bear in mind during the rectification period of some contracts). "Withholding notices" are to be replaced by "pay-less notices". If no notice to pay less is given then this notified sum in the original payment notice becomes due.
  • The right for the payee to suspend work if he is not paid will be stronger. The suspending party will be able to claim the costs resulting from exercising his right to suspend as well as claiming an extension of time to complete his work for the delays resulting from the exercise of the right of suspension.
  • There is a provision in the new Act dealing with pre-agreeing the allocation of costs of future adjudications in the contract (known in the industry as "Tolent" clauses). The intention is that clauses that provide that the party making an adjudication claim will be liable to pay all costs of the adjudication will be outlawed unless agreed by both parties at the time of the adjudication. Unfortunately however the relevant legislation wording is ambiguous and we may have to wait for the Courts to interpret the legislation before it can be said with certainty that such clauses are illegal.

Practical Points

The LDEDC Act will apply to all construction contracts that are entered into after the Act is brought into effect, which is expected to be some time in October 2011. If you are entering into a construction contract around that date it is important to consider whether there are any other contracts further up or down the chain. If there are, it is advisable to ensure that all contracts in the contractual chain are consistent to avoid a situation where, for example, the main contract is governed by the provisions of the HGCR Act, but the sub-contracts (entered into a few weeks later perhaps), are governed by the LDEDC Act.

Practically speaking, if you have standard terms already in place that apply to construction works using the terminology of the HGCR Act, these will need to be amended to be brought in line with the new payment procedure and terminology. Of course, the people actually administering payments under construction contracts will also need to be aware of the changes.

You should bear in mind that even if you make a contract for construction works entirely verbally after the LDEDC Act comes into force the protection of the Act will apply. Even if the contract is completely verbal, if it is for construction works caught by the Act, you can refer a dispute to adjudication, equally you could find yourself on the receiving end of a notice to adjudicate. The payee in a relevant construction contract will be able to rely on the LDEDC Act payment provisions once the LDEDC Act comes into force. If you are the payer you will need to serve "pay-less notices" if you do not agree with an amount the payee says is due to them. You will also need to remember to serve the relevant notices even if the amount to be paid is zero.

Suzanne Reeves, Head of the Construction Team sat on the Government Working Party set up to review the payment provisions of the LDEDC Act. She also sits on the Joint Contracts Tribunal (JCT) Drafting Sub-Committee and has been involved in dealing with amendments to JCT contracts to take account of the LDEDC Act changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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