UK: Construction Act Changes What You Need To Know

Last Updated: 9 November 2011
Article by Doug Wass

Introduction

After years of discussion and speculation, changes to the Housing Grants, Construction and Regeneration Act 1996 (the Act) will come into force in England and Wales on 1 October. The revisions to the Act will usher in certain fundamental changes, most notably the extension of the Act to cover oral contracts. Whilst other changes, particularly those relating to payment notices, are more procedural in nature, the consequences of failing to comply with them could be serious.

Application

The revisions to the Act will only affect construction contracts (including building contracts, sub-contracts and appointments) entered into on or after 1 October. As a result, payment and adjudication provisions in construction contracts entered into on or after 1 October will need to reflect the changes in the Act. If they do not, the payment and adjudication provisions in those contracts will be replaced by the relevant provisions of the Scheme for Construction Contracts, meaning that parties will need to comply with the timescales and procedures set by Parliament rather that those which they have carefully negotiated.

The JCT and NEC are currently in the process of publishing new versions of their standard form contracts. You can therefore expect to see 2011 versions of these contracts used for projects from October this year, as well as changes to our own suite of building contract and appointment documents.

Contracts entered into before 1 October will be unaffected by the changes and will continue to be subject to the existing regime.

Key Changes

You need to be aware of the following key changes to the Act:

  1. From 1 October, the Act will apply to oral as well as written contracts. This means that payment and pay less notices (discussed further below) will need to be issued and disputes can be referred to adjudication regardless of whether or not the underlying construction contract is in writing. Formalising contracts in writing will therefore be critical in order to ensure certainty about payment terms and to avoid the obvious risks associated with adjudication under oral contracts where the scope of the parties' contractual obligations will almost certainly be unclear.
  2. The payment notice provisions have been revised so that the parties can decide whether it should be for the payer (usually the employer or contractor) or the payee (usually the contractor, sub-contractor or consultant) to serve notice of the proposed value of any interim payment. At present, the payer is responsible for serving a payment notice within five days of the due date setting out the sum it proposes to pay for the period or stage of work in question. Under the new regime, if the payer is responsible for service of the notice, but fails to serve this on time, the payee will be able to issue its own default notice setting out the proposed value of the interim payment.
  3. Withholding notices are to be replaced by pay less notices. Under the existing regime, if the payer does not propose to make an interim payment in full, it must serve a withholding notice setting out the amount it proposes to withhold and the grounds for this. In equivalent circumstances under the new regime, the client must serve a "pay less notice". Rather then setting out the sum to be withheld, a pay less notice must set out what the payer actually proposes to pay and the basis on which this has been calculated. The aim of the modifications to the withholding provisions is to increase the amount of information provided to contractors, sub-contractors and consultants where applications or valuations are not paid in full and to prevent arbitrary deductions.
  4. Contractors, sub-contractors and consultants will be entitled to suspend performance of their services in part, as well as in whole, in the event of late payment. This means that rather than simply refuse to carry out any further work at all (which is something that most payees appear to see as a weapon of last resort signalling an end to any prospect of an amicable settlement of the dispute or a continuing commercial relationship), a contractor might, for example, refuse to follow an instruction for a variation or to attend site meetings or a consultant may refuse to carry out periodic inspections. It may well be that contractors, sub-contractors and consultants will be more willing to exercise rights to suspend part of their works than they have been to suspend all of their works in the event of late payment. This is particularly the case given that they will also now be entitled to an extension of time for any delay associated with the suspension and to recover any reasonable costs and expenses which they incur as a result of the suspension. However, the payee will still need to serve seven days' notice of its intention to suspend performance.
  5. Changes to the adjudication provisions are intended to prevent parties agreeing in their contracts who will bear the legal costs of any adjudication. However, the provisions are poorly drafted and so it will be important to take legal advice on the impact of any proposed adjudication provisions which are intended to impact upon the liability of each party for legal costs and the fees of any adjudicator.

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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