The Local Democracy, Economic Development and Construction Act 2009 received Royal Assent on 12 November 2009 ("the 2009 Act"). The provisions of Part 8 of the 2009 Act contain various amendments to Part II of the Housing Grants, Construction & Regeneration Act 1996 ("the Construction Act"). These provisions are intended to come into force in Scotland on 1 November 2011 (one month after they come into force in England and Wales) and will apply to "construction contracts" that are entered into by parties from that date.
So what are the amendments to the Construction Act and what does this mean for parties entering into construction contracts?
Abolishment of the requirement for construction contracts to be in writing
Currently in terms of the Construction Act a construction contract is required to be in writing. The provisions of the 2009 Act will amend the Construction Act so that it will apply not only to written contracts but also to contracts entered into orally or contracts that are party oral and party written. This is perhaps the most controversial of all the amendments. One of the previous criticisms of the Construction Act was the fact that parties could use an argument that the contract was not in writing to seek to try and step outside the regime of the Construction Act where not all of the material terms of the contract were in writing, thus defeating the purpose and aim of the Construction Act.
However, it should be noted that the amendments to the Construction Act will require that the adjudication provisions in a construction contract must be in writing otherwise the Scheme adjudication provisions will apply. In other words, parties will need to ensure that they have included within their contract in writing adjudication provisions compliant with the requirements of section 108 otherwise they will find that the Scheme will apply.
Adjudicator’s power to make corrections
The 2009 Act amends the Construction Act to give power to an adjudicator to correct his decision so far as to remove a clerical or typographical error arising by accident or omission. One of the problems that a successful party to an adjudication has faced in the past is where the adjudicator’s decision awarding a sum of money has contained a genuine error (for example, an arithmetic error). The successful party was stuck with that error. This mischief has now been cured by the amendment incorporated by the 2009 Act.
Another issue that has arisen is where a construction contract included that whoever referred a dispute to adjudication was liable for all the adjudicator’s costs and the legal expenses of the other party irrespective of the outcome. This has often been a disincentive to pursuing adjudication. The 2009 Act provides that a contractual provision dealing with the allocation between parties of costs relating to the adjudication of a dispute arising under a construction contract will be ineffective unless (1) such a provision is made in writing, is contained in the construction contract and confers the power on the adjudicator to allocate his fees and expenses between the parties; or (2) is made in writing after the giving of notice of intention to refer the dispute to adjudication.
The new payment regime
The 2009 Act makes amendments to Sections 110 and 111 of the Construction Act and provides a new regime for payment provisions in construction contracts.
Section 113 of the Construction Act prohibits "pay when paid clauses". A new section 110(1A) is inserted into the Construction Act to extend the range of prohibited conditional payments. The new section 110(1A) provides that a construction contract does not provide an adequate mechanism for determining what payments become due, or when, where that construction contract makes payment conditional upon (1) the performance of obligations under another contract; or (2) a decision by any person as to whether obligations under another contract have been performed. What that effectively means is that the payment provisions within a construction contract cannot be linked to provisions under another contract. The intention of this new provision is to prevent a situation where a sub-contractor is unable to obtain payment until sums are certified under the main contract, to which he is not a party (i.e. to prohibit "pay when certified" clauses).
However, this provision will not apply where the construction contract is an agreement between the parties for the carrying out of construction operations by another party whether under sub-contract or otherwise. This amendment (section 110(1C)) creates a material exception to the general prohibition imposed by section 110(1A) to ensure that payments in a superior contract can of course continue to depend upon the work carried out in a sub-contract. So, for example, in a construction contract between parties A and B where a party C is to carry out construction operations it will remain permissible for A and B to provide in their contract that payments in that contract may be dependent upon C carrying out those obligations under their contract with B.
Amendments are also made to Section 110 of the Construction Act (i.e. the provisions relating to an adequate mechanism for determining what payments became due under the contract). Currently payment notices are dealt with under Section 110(2), however, these are now to be replaced with Section 110A Notices. Section 110A Notices basically require the payer to give a notice no later than 5 days after the payment due date or alternatively to require the payee to give a notice not later than 5 days after the payment date stating the sum that the payer considers to be or to have been due at the payment due date and basis upon which that sum is calculated. Where a notice is to provided by the payee then that notice must state the payee considers to be or to have been due at the payment due date and the basis upon which that sum has been calculated.
Under Section 110B where the payer has defaulted in issuing the Notice then the payee may give a written Notice complying with Section 110A(3) anytime after the date on which the Notice referred to was required to have been given. Where such a Notice has been given then the final date for payment shall be regarded as postponed where the same number of days is a number of days after the date when the Notice ought to have been given.
Amendments are also made to Section 111 (Withholding Notices). Section 111 now refers to a requirement on the payer to identify in a notice the sum that the payer considers is due (i.e. the different sum the payer considers is due) and the basis on which that sum is calculated. If such a notice has not been issued then the payer must pay the notified sum on or before the final date for payment. It is believed that the effect of the counter-notice will be similar to that of the previous withholding notice. The amendments also appear to deal with the decision of the House of Lords in Melville Dundas Limited (in receivership) and others v George Wimpey UK Limited and others in which the House of Lords decided that a payer could legitimately withhold payment even where a withholding notice had not been issued where the contract provided that monies did not require to be paid in the event of the payee’s insolvency. In terms of the amendments to the Construction Act, it is made clear that such contract provisions remain restricted to insolvency situations.
It is of note that the amendments to Section 111 will render previous case law on section 111 withholding notices obsolete but no doubt the new legislation will generate its own body of case law over time.
Amendments are also made to Section 112 to enhance the right to suspend following payment under Section 112. A party will be entitled to choose to suspend part of his obligations and will be entitled to be paid a "reasonable amount in respect of costs and expenses reasonably incurred" as a result of such suspension. It is hoped that this amendment will persuade those in the industry to use this remedy more often as currently the costs and effort involved in suspension dissuade a party from taking such a step.
It has taken some 5 years for the review to be carried out and amendments to the Act put in place. However, these provisions will come into force on 1 November 2011 and it is expected that the relevant amendments to the Scheme in Scotland (as well as in England and Wales) are intended to apply from 1 November 2011.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.