Member Article

On 1 October 2011 changes to the Housing Grants, Construction and Regeneration Act 1996 will come into force. The changes will apply to any construction contract entered into on or after that date.

Construction contracts entered into before this date will continue to be governed by the old rules.

The key changes are set out below:

Contracts in writing and cost allocation

There is no longer a requirement for all the material terms of a construction contract to be in writing or evidenced in writing.  Accordingly contracts that are partly in writing or wholly oral can from 1 October be referred to statutory adjudication. The adjudication provisions of a contract must still be in writing, failing which the adjudication provisions of the Scheme for Construction Contracts 1998 will apply.

This change may give rise to more adjudications and an increase in the significance of witness evidence to establish the terms of oral agreements between the parties.

It could also lead to an increase in the number of extensions of time with more adjudications lasting longer - over the 28 day period. There is a risk of adjudication proceedings becoming ‘mini trials’ with witnesses being cross-examined and quizzed by the adjudicator.

The parties will no longer be able to agree who bears the cost of the adjudication proceedings before the notice of adjudication is issued - such clauses will be rendered ineffective. The parties can agree to allocate costs following service of the notice, but this must be recorded in writing. The adjudicator retains the power to allocate his fees and expenses between the parties as he sees fit - generally the loser pays.

Changes to the payment provisions

Payment notices by the employer (‘the Payer’) must now comply with the new post 1 October rules. Failure by the Payer to comply with these rules means that the contractor (‘the Payee’) can issue its own notice, or rely on its application for payment - which will then stand as the notice of the sum that requires payment.

The new procedure is as follows (note that the period of days can be changed in the actual contract):

• Payment due date (as set out in the contract).
• Payment notice due from the Payer to the Payee within five days of the due date for payment.
• If no payment notice served by the Payer, the Payee to serve a default payment notice. The final date for payment is extended by the number of days between the date the payment notice should have been issued and the date of the default payment notice.
• The Payer may seven days before the final date for payment serve a pay less notice (this replaces the withholding notice).
• Payment is made on the final date for payment of the amount in the last notice issued i.e. the payment notice, the default payment notice or the pay less notice.

The new contractor notice (default payment notice) will have an impact on employers as, in the absence of a subsequent pay less notice, the employer must pay the amount requested by the contractor.

Other issues:

Notice of contractor’s insolvency - the right to withhold money after a contractor becomes insolvent must be expressly set out in the construction contract.

Pay-when-paid clauses - the current prohibition of pay-when-paid clauses was being circumvented by the use of ‘pay-when-certified’ clauses, whereby a main contractor would link payment directly to the certification of payment under the main contract between the developer and contractor. So now payment cannot be linked to or conditional upon performance of another contract.

Payment of retentions to sub-contractors - cannot now be made contingent upon the issuing of the certificate of making good defects or payment of main contractor’s retention under the main contract. This will have a significant benefit to sub-contractors chasing retentions.

Suspension - the contractor now has a statutory right to recover remobilisation and demobilisation costs and any other costs associated with suspension together with an extension of time in respect of the suspension.

In addition a contractor will have the ability to operate suspension provisions of the contract in relation to just part of its works. This will potentially limit the effect of suspension on a contractor’s cash flow should the need to suspend arise.

All contracts including schedules of amendments to standard form contracts will need to be reviewed and amended. Shoosmiths can advise on these amendments and on any issues relating to the changes affecting construction contracts after 1 October 2011.