Susan White looks at the effect of the “new” Construction Act which came into force on 1 October 2011

In the last couple of years I felt that everyone in the world of Construction had finally become used to the provisions of the Housing Grants Construction & Regeneration Act 1996 (commonly called the Construction Act).  Developers and funders were aware that to pay less than an invoiced sum, notices of withholding had to be given or the full amount would be due even if there were grounds for set off.  Adjudication was a known risk.  The standard forms of contract were familiar territory.

But just when everyone was comfortable with the old regime, the new Construction Act (otherwise known as the Local Democracy, Economic Development and Construction Act 2009) has come into force and with it amendments to a number of the old provisions, particularly in respect of payment.

The good news is that it’s not retrospective so the old rules apply to pre-October contracts; the not so good news is that if you don’t specifically include the new rules in future building contracts and professional appointments etc., then the new provisions will be implied which means that a paying party could comply with set off rules in a contract but still be required to pay the full sum because the rules he should have complied with are implied by statute. This is why the standard forms of contracts and appointments (JCT, NEC etc.) have all been amended and old forms should not be used.

The main changes can be summarised as follows, though please bear in mind this is a summary only of some quite complex provisions:

• Under the old rules the Construction Act applied only to contracts in writing.  The payment and adjudication provisions under the new Act apply also to oral and or partly written contracts. This actually makes getting all terms in writing more important or risk being faced with adjudication arguments as to verbal agreements with all the uncertainties that can bring, and adjudicators deciding what is or is not in your contracts!
• The old act did not say anything about the adjudicator’s fees, and some contracts were therefore drafted to force a referring party to pay all the adjudicator’s fees or even the other side’s costs whatever the outcome - clearly a deterrent to contractors pursuing payment.  Now the parties can agree in the contract that the adjudicator may allocate his fees and expenses between the parties but any other provision is outlawed.
• An adjudicator can correct minor inaccuracies or “slips” in his decision after he has handed it down.
• There are further restrictions on “pay when paid” clauses. Under the new Act it is forbidden to link payments under one contract (eg. a sub-contract) to certification of payments under another contract (eg. the main contract).
• The biggest changes come in the rules on payment. The aim is to give further clarity to the payment process.  Whilst a notice setting out what the paying party intends to pay (“the notified sum”) must still be served no later than five days after the due date for payment, there are now sanctions for failure to do so.  In essence, in the absence of a payment notice stating a different sum, the notified sum due to be paid will be the sum claimed.  This will be due (and not open to arguments that the invoicing party must prove its calculations) by the final date unless a “pay less notice” is served.  This must be served before the “final” date for payment - the default is seven days before but the parties can agree another period.  The pay less notice must set out a calculation of what is admitted to be due, not just give grounds for withholding.  It is likely the courts will need to decide what needs to be covered by such a “calculation”. In the absence of a pay less notice, the notified sum must be paid.
• If the sums due for payment are not paid, the new Act puts the payee in a stronger position than under the old provisions eg. allowing suspension of any of its obligations under the contract, not just work.  There is also a statutory right to be paid a “reasonable amount” for costs arising from the suspension eg to remobilise once payment has been made and the suspension lifted.

In summary, the new provisions attempt to address commonly perceived faults under the old regime – the outcome is undoubtedly to give greater power to the person being paid.  Anyone making the payments or administering payments must proceed with caution!