Some important changes to the Construction Act came into force on 1 October 2011. Employers, contractors, sub-contractors and consultants should all be operating the new regime for contracts entered into since 1 October.
Under the old Act, the industry was used to payment notices and withholding notices, and it did not take long for people to realise that there were no consequences if payment notices were not given. It took Parliament even longer to do anything about it, but now they have. They have also made some changes to adjudication.
The new Construction Act has changed the way payments are made. The payee now has greater rights in the absence of the correct notices being given on time. If you do not issue the correct notices under the Act, you could be forced to pay for works which have not been properly carried out or carried out at all, and you will be unable to correct the position until the next pay date.
Under the new Act if the paying party fails to give a payment notice on time or at all, the receiving party can issue a default payment notice setting out what they consider to be due and why any time after the time for giving a payment notice expired. In that case, the final date for payment will be postponed by the number of days between the date the payment notice should have been issued and the date the default payment notice was issued.
The new Act may also permit the subcontractor's application for interim payment to stand as the default payment notice, provided it sets out the sum that the payee considers to be due at the payment date and the basis on which that sum is calculated. In this situation, the time for payment will be unaffected.
This significant change shifts the balance of power for both parties. In short, if you don't tell your contractor, sub-contractor or consultant what you are going to pay them, then you will have to pay the amount requested as due, irrespective of how accurate the application for payment is.
Conversely, this is a wonderful opportunity for contractors, sub-contractors and consultants to ensure fair payment from clients. They should ensure that their standard application for payment will fulfil the requirements of the new Act so that it can stand as a default payment notice should the need arise.
Previously a withholding notice would state what was not being paid and why, now a pay less notice must state what will be paid and why, so you will need to update your standard notices accordingly as an invalid pay less notice will jeopardise your position. In addition, you could previously combine payment notices with withholding notices, this is no longer an option, and separate notices must be given.
Everyone should now ensure they understand the new rules, revising procedures and standard contracts to make sure they do not get caught out. There may be projects where the main contract is executed pre 1 October and subcontracts are post 1 October in which case the contracts managers will need to operate both systems in tandem on the project.
'Pay when certified' clauses will become unlawful (except in management contracts under the new Act). This will most radically affect release of retention in subcontracts which, under the old regime, would usually be triggered by PC and the Certificate of Making Good Defects under the main contract. This is prohibited and JCT have dealt with this by including a 'Retention Release Date' in its standard subcontract. In practice contractors will need to calculate that date very carefully to ensure that there is sufficient float to be confident that they will have received release of retention under the main contract prior to being obliged to release it down the line.
The right to suspend for non-payment is also being bolstered. There will be a right to suspend part of the obligations, in addition to the existing right to suspend completely. Further, if the right to suspend is exercised there is a statutory entitlement for that party to be reimbursed the cost of doing so and to an extension of time. This will make suspension more accessible to contractors and we may well see more of it.
The new Act also introduces a big change to adjudication. Previously statutory adjudication was only available where the contract's terms were ALL in writing. The new Act now allows statutory adjudication in any construction contract. Inevitably it is suspected that the number of adjudications are set to increase rapidly. However, the new Act introduces new challenges for adjudicators. They will need to decide issues as to whether a contract exists, and to what are its terms (which are notoriously difficult). No doubt we shall see more outings in Court.
Clearly the best way to protect your business from getting into expensive and unnecessary disputes over the existence of a contract and/or its terms is to ensure that you have appropriate standard documents for your contracts managers to issue when invitations to tender are sent out. It is plain to see the benefit the new Act may have on cashflow, however, there are pitfalls for the unwary and those who don't want to get caught out must get prepared.
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