UK: The "New" Construction Act

Last Updated: 30 November 2011
Article by John Starr

Introduction

The Local Democracy, Economic Development and Construction Act 2009 (LDEDCA) came into force on 1 October 2011 and applies to all construction contracts entered into after that date.  It makes amendments to the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) in order to correct what were seen as anomalies in the Act or where loopholes had been spotted.

Background

Until now, the HGCRA has been known in the industry as "the Construction Act".  In this article, it is referred to as "the 1996 Construction Act".  The LDEDCA is referred to as "the 2009 Construction Act".

The 1996 Construction Act came into force on 1 May 1998 and applies to all construction contracts entered into after that date.  It was designed to address concerns in the industry about cash flow on construction projects and the increasing number of protracted and costly disputes that were stifling progress on site.

The problems in the industry were first highlighted in the 1994 Latham Report, Constructing the Team.  The need was identified for streamlined payment mechanisms and a new form of dispute resolution procedure that would allow projects to proceed.  The dispute resolution procedure was introduced by the 1996 Construction Act as "adjudication".

What is a construction contract?

The Construction Acts only apply to construction contracts.  A construction contract means an agreement with a person for the carrying out of construction operations.  The 1996 Construction Act lists the sort of things that are construction operations and the sort of things that are not.

Broadly speaking, construction operations include construction, alteration, repair, maintenance, extension or dismantling of any buildings, structures or works.  As you would expect, they also include installation of mechanical and electrical systems, drainage, cladding, site clearance, tunnelling, landscaping etc.  However, they also include such things as painting and decorating.  The Construction Acts also cover agreements to do architectural, design or surveying work or to provide advice on building or engineering in relation to construction operations.

There are various exclusions relating to the oil, gas and nuclear sectors and in relation to the manufacture and delivery to site of building or engineering components or equipment.  The Construction Acts do not apply to contracts with residential occupiers.

The 1996 Construction Act

The 1996 Construction Act applies only where the construction contract is in writing.  The major change brought in by the 2009 Construction Act is to remove that restriction.  Therefore, for construction contracts entered into between 1 May 1998 and 30 September 2011, you only need to look at written contracts.  From 1 October 2011, all construction contracts are covered, both oral and written and partly oral/partly written.

The 1996 Construction Act deals with two main issues: payment and adjudication.

Payment

Under the Act, (1) a party to a construction contract is entitled to stage payments unless the work is to last less than 45 days, (2) every construction contract is to provide an adequate mechanism for determining what payments become due and when and (3) every construction contract is to provide a final date for payment.

If the construction contract does not contain these provisions, they are imported from The Scheme for Construction Contracts (England and Wales) Regulations 1998 ("the Scheme").

The importance of the final date for payment is that a party to a construction contract may not withhold payment after the final date of a sum due under the contract unless he has given an effective notice of intention to withhold payment ("a withholding notice") detailing how much is to be withheld and the grounds for withholding.  Where a sum due under a construction contract is not paid in full by the final date for payment and no effective withholding notice has been given, the person to whom payment is due has the right to suspend performance of his obligations under the contract on giving seven days' notice.

The 1996 Construction Act also outlawed so-called "pay when paid" clauses, where payments, for example to a sub-contractor, were made conditional on the contractor having been paid for the relevant work by the employer.

Adjudication

Under the Act, a party to a construction contract has the right to refer a dispute arising under the contract for adjudication "at any time" under a procedure complying with the Act.  If the contract does not contain an appropriate procedure, the adjudication provisions of the Scheme apply.

The 2009 Construction Act

Ever since the 1996 Construction Act came into force, there have been ongoing discussions on how to improve it.  Various anomalies have come to light and various loopholes have been looked at by the courts.  It has taken over 13 years for amendments to be enacted, with resultant amendments to the Scheme, and many commentators believe that the 2009 Construction Act does not go far enough in responding to the industry's concerns, or alternatively that the cure is worse than the disease. 

The fundamental change brought about by the 2009 Construction Act is that the regime now applies to all construction contracts, whether in writing or not.  This came about because the Court of Appeal, in the 2002 case of RJT Consulting Engineers Ltd –v- DM Engineering (Northern Ireland) Ltd, decided that all the terms of a construction contract had to be in writing before the provisions of the 1996 Construction Act would apply.  It was felt that this had not been what Parliament had intended, but it is not clear that removing the restriction completely is necessarily going to improve matters.

The adjudication provisions of the 1996 Construction Act say, amongst other things, that construction contracts must contain a procedure requiring the adjudicator to reach a decision within 28 days of referral.  That is all very well when the adjudicator is presented with a written contract to construe and adjudicate upon.  However, what will happen when the adjudicator is presented with opposing views of the terms of an oral contract or even a dispute over whether a contract exists at all?  It is going to be much more difficult for adjudicators to make decisions on paper without hearing oral testimony, and delays in the process (already a cause of concern) will inevitably ensue.

The other main changes brought about by the 2009 Construction Act are as follows:

Payment

1. "Pay less notices".  The 1996 Construction Act provided for a payment mechanism whereby (1) a sum fell due for payment, probably because it was certified by the contract administrator, (2) the payer (usually the employer) gave a "payment notice" saying how much he was going to pay, (3) the payee (usually the contractor) had the opportunity to make representations before (4) the payer gave a withholding notice before the final date for payment.  The problem was that the whole mechanism was triggered by a payment falling due, and that could, to some extent, be influenced by the employer.  Also, there was no sanction for failing to give a payment notice, so no-one ever bothered.

Under the 2009 Construction Act, the payee (again, usually the contractor) can himself trigger the payment mechanism by giving his own payment notice.  If the payer is meant to give a payment notice, but fails to do so, the payee can also give a payment notice at that stage (known as a "default notice").  The amount in the payment notice (whether payer's or payee's) becomes "the notified sum".  The payer then has to give a "pay less notice" before the final date for payment if he intends to pay less than the notified sum.  It is actually a bit more complicated than that and arguably much more complicated than it needs to be.

2. Suspension.  Under the 1996 Construction Act, a contractor could suspend performance of his obligations under the contract if he was not paid by the final date for payment and he had not received an effective withholding notice.  This was useful to the contractor because otherwise suspension of the works would be a breach of contract.  The Act also allowed him to ignore the period of suspension when calculating how long the job had taken him, in other words he was allowed an extension of time for the period of suspension.  However, suspending the works was a big risk for the contractor to take – if he had got it wrong he would be in fundamental breach of contract.  Also, it could cost him a lot of time and money to remobilise after a suspension.

The 2009 Construction Act allows the contractor to suspend all or part of his obligations under the contract and also to claim extension of time and loss and expense for the period of suspension and remobilisation.  This is good for contractors, who will now be able, for example, to refuse to come to site meetings or finish a particular element of the works until they are paid.  They should also no longer be penalised financially if they decide to pull off site.

3. "Pay when certified" clauses.  The 1996 Construction Act outlawed "pay when paid" clauses.  However, certain employers found that a way round this was to make payment, for example to a sub-contractor, conditional on the sub-contractor's work having been certified for payment under the main contract, a so-called "pay when certified" clause.  The 2009 Construction Act outlaws these clauses.  Cynical sub-contractors will tell you that, in reality, "pay when paid" is alive and well, whatever the Construction Acts might say.

Adjudication

1. Slip rule.  The 1996 Construction Act did not contain a provision allowing an adjudicator to correct errors in his decision.  In the 2000 case of Bloor Construction (UK) Ltd –v- Bowmer & Kirkland (London) Ltd, the Technology and Construction Court decided that such a provision could be implied, by analogy with the "slip rule" in court proceedings, where the error was clerical or typographical arising by accident or omission, and this is reflected in the 2009 Construction Act.

2. "Tolent clauses".  The 1996 Construction Act was silent on who should pay the costs of adjudication.  The adjudicator was given no power to award costs and it has therefore always been assumed that, in the absence of any contractual provision to the contrary, each party should pay their own costs.

It became fashionable, since it is usually contractors who start adjudications, for employers to include in their building contracts a clause saying that the party who starts an adjudication should pay both parties' costs.  Such a clause was upheld in the 2000 case of Bridgeway Construction Ltd –v- Tolent Construction Ltd and they became known as "Tolent clauses".  They have now been outlawed by the 2009 Construction Act.

Arguably, this amendment was unnecessary because the Technology and Construction Court had already ruled, in the 2010 case of Yuanda (UK) Co Ltd –v- WW Gear Construction Ltd, that such clauses were in contravention of the 1996 Construction Act because they restricted the right of a party to refer a dispute to adjudication "at any time".

Indeed, some commentators even go so far as to say that, because the wording of the 2009 Construction Act is ambiguous, the amendment is actually a step backward from the Yuanda decision.


The new JCT

The JCT have introduced a new 2011 suite of contracts to take account of the amendments brought in by the 2009 Construction Act.  These new contracts are to be used on all projects after 1 October 2011.

The impact of the new Act

It remains to be seen how the 2009 Construction Act will impact on the running of construction contracts, especially how parties will cope with the complexity of the payment provisions and how adjudicators will cope with deciding the terms of oral contracts.

It is clear that the coming year or so will be particularly difficult for the industry as parties come to terms with the new Act.  Will pre-1 October 2011 contracts novated post-1 October 2011 be subject to the 1996 Construction Act or the 2009 Construction Act? Pre-1 October 2011 frameworks drawn down post-1 October 2011 will probably be subject to the 2009 Construction Act, but what about payment mechanisms already being operated orally under the 1996 Construction Act, which then become incorporated into a written contract under the 2009 Construction Act?  Which, if either, Act does that come under?  How do you operate a post-1 October 2011 sub-contract that is meant to be back-to-back with a pre-1 October 2011 main contract?  Post-1 October 2011 variations or amendments to a pre-1 October 2011 contract are unlikely to affect the position, but what if the scope of work is increased?  Sometimes it is not even clear when a contract has come into existence, particularly if it is not in writing, and even a written contract will usually be held to apply retrospectively to work already performed under it.  A construction contract complying with the new rules may be argued to have been breached by things that happened before they came into force.  All of this is fertile ground for disputes.  In the short term, at least, the "new" Construction Act may just make things worse – until the anomalies are put right in next new Construction Act, but that may be another 13 years away. 

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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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