Key amendments to the Construction Act
July 2011

Oral contracts permissable

The requirement for construction contracts to be in writing or evidenced in writing before they will be caught by the provisions of the Construction Act will be abolished. This means that the Construction Act will apply to oral, partly oral and written construction contracts (including written construction contracts which are subsequently amended orally).

As a result it will be important to make sure that all those dealing with the formation and carrying out of  construction contracts are aware of the effect of issuing verbal instructions.  Many contracts already require verbal instructions to be confirmed in writing and it will remain important that there is a process for recording such instructions, particularly oral changes agreed on site.

One of the objectives behind the review of the Construction Act was to encourage parties to resolve disputes by adjudication. By allowing oral and partly oral construction contracts to be regulated by the Construction Act, the number and scope of adjudications is likely to increase and adjudicators will undoubtedly hear more disputes about whether a contract was formed and the extent of such terms.

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Due Date cannot be determined by a payer notice

Any provision in a construction contract which provides that the due date for payment commences or depends on the giving of a payment notice by the payer is ineffective. This will catch pay-when-notified clauses.

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Pay-when-certified clauses prohibited

Pay-when-paid clauses are currently prohibited (in most situations) under section 113 of the Construction Act. Under new section 110 (1A) pay-when-certified clauses will be banned. However, this blanket ban is subject to the following two exceptions:

• Section 110 (1C) permits a pay-when-certified clause where the construction contract is an agreement between the parties for someone else to carry to carry out the construction operations and payment is conditional on that other person performing those construction operations - this exception  is likely to permit a pay-when-certified clause in a management contract.
• “First tier PFI sub-contracts” will be exempt by virtue of the separate Exclusion Order which is to come into force with the amendments to the Construction Act. Further details on this exemption can be read in our briefing.

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Payment and Pay Less Notices

The system of payment notices is changing. It remains the case that each construction contract must provide an adequate mechanism for determining a due date and a final date for payment. However, the old regime of payment notices and withholding notices will be deleted.

New payment notices

The old payment notices are replaced with section 110A payment notices.  To be valid a payment notice will have to:

• specify the sums considered to be due on or before the due date for payment; and
• the basis on which that sum is calculated.

The payment notice will have to be given not later than five days after the payment due date. The construction contract may specify that the payer, another “specified person” (such as the architect or quantity surveyor) or the payee is to give the payment notice.

The amount in the payment notice becomes the notified sum or the amount due.

A payment notice will still need to be issued even if there is nothing due to be paid (i.e. the notified sum is zero - section110A (4)).

New default payment notices

Under section 110B, where a payer is required to give valid payment notice but fails to do so, the payee may serve a default payment notice.  This default payment notice must state the sum that the payee considers to be due and the basis on which that sum is calculated.  

Crucially, the effect of section 110B (2) and (4) is that if the payer fails to issue a valid payment notice (as required) and the payee has already submitted an application for payment then that payment application is deemed to be the default payment notice and the payee will not be required to issue a separate default payment notice.  The amount specified in the payment application will therefore become due.  

Where a payment default notice needs to be given by the payee it should be given as soon as possible since the final date for payment will be postponed by the number of days that it took the payee to issue the payment default notice (after the failure of the payer to issue the payment notice). (section 110B (3)).

Payers will need to ensure that their payment notices are issued on time.

Pay Less Notice

Under new section 111 withholding notices are to be replaced by a notice “to pay less than the notified sum” (Pay Less Notice). The payer must pay the notified sum (the amount specified in a valid payment notice or payment default notice) on or before the final date for payment, unless the payer (or specified person) issues a valid Pay Less Notice.  

To be valid the Pay Less Notice must specify:

• the sum that the payer considers to be due; and
• the basis for the calculation of that sum.

The Pay Less Notice must be given not later than the prescribed period before the final date for payment. The prescribed period can be set out in the construction contract; but if not, the 7 days as prescribed by the Scheme will apply.  A Pay Less Notice cannot be issued if a payment notice or a  default payment notice has not been issued by the payee.

The payer will be required to pay the amount in the Pay Less Notice before the final date for payment. The only exception to this is if the payee becomes insolvent after the expiry of the time for giving the Pay Less Notice and before the final date for payment and the contract allows for withholding of sums due in cases of insolvency.

If, however, a payer fails to serve a Pay Less Notice regarding one regular payment, there is nothing to suggest that it could not serve a notice relating to the next payment, giving a recalculation of sums due.

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Suspension of works

Where the suspending party is entitled to suspend performance under section 112 of the Construction Act, those rights will be enhanced. The suspending party will be:

• entitled to suspend the whole, and as a result of the changes, part of their obligations;
• entitled to the reasonable costs and expenses incurred by the suspension, such as the costs associated with removing plant and equipment and re-mobilisation costs; and
• entitled to time "in consequence" of exercising the right to suspend (in addition to the current right to seek an extension of time for the period of suspension). This additional time would include extra time to re-mobilise staff and to return plant and equipment to the site.

These improved rights might mean that the right to suspend becomes more frequently used as it is likely to be seen by the suspending party as an effective way to secure payment without embarking on adjudication.

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Adjudication

Although the requirement for construction contracts to be in writing is to be abolished, the procedural requirements of adjudication set out in section 108 (2) - (4) will need to be set out in writing, otherwise the adjudication provision of Scheme for Construction Contracts (Scheme) will apply.

The Scheme will be amended in line with the Construction Act. Each of England, Wales and Scotland have published their own amended Scheme.

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New Slip rule

A statutory slip rule to enable the adjudicator to correct a clerical or typographical error is introduced under section 108(3A). This means that construction contracts will have to contain a provision enabling the adjudicator to correct such errors arising by accident or omission failing.

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Ability for parties to agree costs restricted

Under section 108A any contractual provision by the parties in a construction contract concerning the allocation between them of costs relating to an adjudication is ineffective except in two cases:

• where the provision is in writing between the parties and allows the adjudicator to allocate his own fees and expenses between the parties (Section 108A (2) (a));
• where the provision is made in writing between the parties after the giving of the notice of intention to adjudicate (Section 108A (2) (b)).

This means that parties will no longer be able to agree in advance who will pay the costs of any adjudication.  This will prevent instances where employers have sought to include provisions in construction contracts requiring the party referring the dispute to adjudication to pay all of the costs of the adjudication, including the adjudicator’s fees (so called Tolent clauses). Such provisions are thought to fetter a party’s right to adjudicate at any time.  The parties will only be able to agree who pays legal costs if this is done in writing after the giving of the notice of intention to adjudicate.  

Parties will still be able to give the adjudicator the power to allocate his own fees and expenses between them, if they do so in writing or this is provided in the construction contract.

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