The New Construction Act comes into force in England on 1 October '11.
Construction Contracts entered into on or after 1 October this year will be required to comply with a new set of payment rules and procedures, and adjudications under those contracts will be subject to new statutory provisions.
It is very likely that you will need to review your internal procedures and update your standard notices and contract terms. JCT are issuing a 2011 suite of documents. No doubt the providers of other standard forms will follow suit.
As is the case already, non-compliant contracts will be subject to the relevant provisions of the Scheme for Construction Contracts. A revised Scheme will come into force at the same time.
The changes are made by Part 8 of the Local Democracy, Economic Development and Construction Act 2009, and the key changes are highlighted below.
Wider Application
- The payment and adjudication rules will no longer be restricted to contacts in writing.
Changes to Payment Procedures
- The contract must require the payer or another specified party to issue a payment notice (even if the sum due is nil). The requirements of a payment notice have not changed. Previously there was no consequence for a failure to give a payment notice. Under the new rules, the notice must be given and if it is not, the payee may give a default payment notice setting out the sum due. In this case, the final date for payment will be postponed by the time taken to give the default payment notice.
- If the payee has already submitted a payment application which meets the requirements for a payment notice, the application will take effect as a payment notice and no additional default payment notice is needed.
- The sum set out in the payment notice (or default payment notice) is the 'notified sum' and must be paid unless the payer serves a 'pay less notice'.
- Pay less notices replace withholding notices. In substance they are similar. A pay less notice must state the amount the payer considers to be due and the basis this amount was calculated as opposed to what is being withheld and the grounds for that.
- In the absence of a pay less notice, the payee must pay the notified sum. The key change is that, where the payer has failed to give a payment notice, the notified sum must be that specified by the payee in his default payment notice in his initial application. It is now imperative that a payer ensures that the correct notices are given in a timely fashion to protect its position.
- A payment notice cannot be combined with a pay less notice. Previously a payment notice and withholding notice could be combined, so you may need to change your procedures.
- If an adjudicator decides that a sum greater than the amount specified in the relevant notice should be paid, that sum must be paid either: 7 days after the decision; or the final date for payment (if that has not passed).
- 'Pay when certified' clauses are prohibited. This rule does not apply to management contracts but it does apply to the trade contracts between the management contractor and its sub-contractors.
- The due date for payment cannot be calculated by reference to the giving of a notice.
- If the event of non-payment, the payee can now suspend all or part of its obligations under the contract. The payee will be entitled to be paid the expenses incurred due to the suspension and to an extension of time for the period of suspension. This is already provided for in many standard forms but is less common in bespoke forms.
- Payment need not be made if the contract provides that no further payments are due upon the payee becoming insolvent and the payee has become insolvent after the prescribed period for giving a pay less notice. This may be a useful provision in the current climate.
Changes to Adjudication
- The right to refer disputes to adjudication is no longer restricted to contracts in writing, but the contractual provisions for adjudication must be in writing. Where there are no compliant written adjudication provisions, the relevant parts of the Scheme for Construction Contracts will apply. The application of adjudication to contracts that are not in writing presents a new set of issues for adjudicators to grapple with and will inevitably lead to new jurisdictional challenges and new case law.
- The contract must now provide for the adjudicator to correct his decision in order to rectify errors arising by accident or omission.
It is understood that the Government intended to prohibit so called 'Tolent' clauses, which are clauses obliging one party to pay all costs of the adjudication regardless of who wins. In our view, and that of many commentators, the parliamentary draftsman and the Government have made rather a mess of trying to deal with this point and, on a literal reading the new legislation, have made it very easy to devise a compliant Tolent clause. Those affected by the legislation will be very interested to see whether the courts find a way of interpreting the legislation so as to give effect to the Government's intentions
The contents of this brochure are intended as guidelines for clients and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.
Thomas Eggar LLP is a limited liability partnership registered in England and Wales under registered number OC326278 whose registered office is at The Corn Exchange, Baffin's Lane, Chichester, West Sussex, PO19 1GE (VAT number 991259583). The word 'partner' refers to a member of the LLP, or an employee or consultant with equivalent standing and qualifications. A list of the members of the LLP is displayed at the above address, together with a list of those non-members who are designated as partners. Regulated by the Solicitors Regulation Authority. Lexcel and Investors in People accredited.
Thomas Eggar LLP is not authorised by the Financial Services Authority. However, we are included on the register maintained by the Financial Services Authority so that we can carry on insurance mediation activity which is broadly the advising on, selling and administering of insurance contracts. This part of our business, including arrangements for complaints and redress if something goes wrong, is regulated by the Solicitors Regulation Authority. The register can be accessed via the Financial Services Authority website. We can also provide certain further limited investment services to clients if those services are incidental to the professional services we have been engaged to provide as solicitors.
Thesis Asset Management plc, our associated financial services company, provides a comprehensive range of investment services and advice. Thesis is owned by members of Thomas Eggar LLP but is independent of and separate to it. No lawyer connected with Thomas Eggar LLP provides services through Thesis as a practicing lawyer regulated by the Solicitors Regulation Authority. Thesis is authorised and regulated by the Financial Services Authority. Thesis has its own framework of investor protection and professional indemnity cover but Thesis clients do not enjoy the statutory protection of solicitors' clients.
