Get ready for next round in contractual paper chase

The new Construction Act may be on hold, but Hamish Lal says it cannot be ignored.

What is the new Construction Act? When does it take effect? How will it impact our commercial contracts? What is all the fuss about a new Scheme? These are some of the questions raised by our clients – and with good reason. No one working for a client, main contractor or subcontractor can ignore the new Act or indeed the new Scheme. From 2011, their effects will ripple through standard form contracts, payment notices and procedures, and adjucation – so now is the time to ask questions.

The new Construction Act, which replaces the construction aspects of the Housing Grants, Construction and Regeneration Act 1996, is being delivered via the Local Democracy, Economic Development and Construction Act 2009. While the Bill received Royal Assent on 12 November 2009, it is important to note that the essential commencement order, required to bring into force part 8 of the new Act, which amends Part II of the 1996 Act, is still awaited.

So the new Construction Act will come into force when the government issues the commencement order – but before that can happen a new Scheme is needed. This in turn means that the government will be consulting the industry on its proposed new Scheme. The consultation is an opportunity to both be informed of the issues and to push for changes.

It is expected that the consultation will start this month. The latest expectation is that the government will consult on a specific form of the new Scheme rather than embark on a wide-ranging consultation on what the different parts of industry would like to see.

So what will change? Briefly, the amendments fall into two areas: adjudication and payment. On the adjudication side the amendments will:

• remove the requirement for a construction contract to be “in writing”, except the adjudication provisions of a contract, which must still be “in writing”.

• introduce a statutory slip rule for adjudicators’ decisions which would give adjudicators latitude in correcting minor errors in their decisions.

• restrict the parties’ right to agree who pays the costs of the adjudication until after the notice of intention to refer the dispute to adjudication has been issued. 

On payment, the amendments will:

• prohibit “pay-when-certified” clauses. In other words a main contractor cannot make payment to a subcontractor dependent upon their own payment being certified by the employer.

• introduce new rules on payment and withholding notices.

• include a requirement for the paying party to pay the notified sum.

• include new rights for contractors that suspend, in part or whole, performance for non-payment. This may or may not now require the contractor to walk-off site.

It is clear that any standard form agreements and any bespoke subcontracts will need to be amended to reflect the changes in the payment provisions. Of particular concern to main contractors – especially those working in the PFI sector – will be the requirement to exclude any payment clauses that make payment downstream contingent upon payment upstream or from a third party. Pay when paid and pay when certified arrangements will no longer work.

Simple things such as terminology and the names of the various payment notices will need to change. The definition of “due date” and “withholding notice”, for example, will need to be amended. Contracts will need to expressly state who is to issue the initial payment notice. Standard form notices and letters will also need to be amended and further details or allocation of sums being withheld will be needed. It is likely that this will be done after publication of the new Scheme.

If there is an adjudication, any agreement on who pays for the parties’ costs can only be made after a notice of adjudication has been issued. This means that any existing forms of contract will also need to be amended to take this change into account.

Despite all the changes, the Local Democracy, Economic Development and Construction Act 2009 leaves much unchanged. The following issues have not been addressed, for example:

• whether the timescales in the adjudication process are mandatory and absolutely fixed.

• whether a decision has to be handed over to the parties before expiry of the 28/42 day time period.

• whether several disputes can be referred to one adjudicator in one adjudication.

• whether there should be only one mandatory adjudication procedure.

• whether there should be different methods to enforce decisions.

It is unlikely that the new Scheme will address all these points. The Scheme is essentially there to regulate payments and the adjudication process where the parties’ contracts are found to be at odds with the terms of the Construction Act. It is therefore likely that the government’s drafting team will include clauses that bring colour and clarity to the new payment provisions while doing little to the adjudication procedure.

Once the Act comes into force – likely to be in 2011 – any gaps or cracks will, of course, be filled in by the courts. To that end, the new Act will inevitably be followed by a wave of legal arguments seeking to interpret exactly what the government meant to say when it drew up the new Act and the new Scheme.

The impetus behind the Act was to settle the problem areas with less recourse to the courts. But their role in construction will be far from over.

Hamish Lal is head of construction at solicitor Jones Day, London

Back to basics: Consistent contracts

Standard forms have done much to ease the pain of building contracts. The JCT, NEC and PPC2000 forms manage between them to address many of the construction industry’s needs.

However, clients often neglect the importance of engaging architects, engineers, project managers and other consultants on terms consistent with the building contract, and also ensuring that the contractor engages its own subcontractors and suppliers on consistent terms. Without an integrated set of project terms, the risk to the client is greatly increased.

NEC3 offers consistent professional appointments and building contracts, while PPC2000 brings the consultants and the contractor into a single contract. Both have consistent subcontracts, so all parties should be 
on the same terms.

JCT has no consultant appointments, however, apart from the recently published public sector form, so clients need to check whether any JCT contract matches other consultant appointments such as those published by RIBA, RICS, CIC and ACA, and whether each of these appointments matches the others.

Claims can arise from consultant delays and from delays in construction activities. To create binding deadlines for the whole team requires a set of contracts that create the same commitment to the programme.

Finally, many contractors use in-house subcontract forms. If these are not in line with the main contract, it may be harder for consultants to work with the main contractor in managing supply chain problems.

Many disputes are due to confusion over the timing of, and responsibility for, designs, site conditions and decision making, which can only be set out in a consistent set of contracts.

By Dr David Mosey, head of projects and construction, Trowers & Hamlins