(LDEDCA) 8 2009
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AMENDING THE ‘CONSTRUCTION ACT’ THE LOCAL DEMOCRACY, ECONOMIC DEVELOPMENT AND CONSTRUCTION ACT 2009 WHAT IS THE CONSTRUCTION ACT? Part II of the Housing Grants, Construction and Regeneration Act 1996 (commonly referred to as the “Construction Act” or “HGCRA”) is, arguably, the single most important piece of legislation affecting the UK construction industry. Its origins lie in the wake of the last recession in the early 1990s and its aims were (1) to improve payment practices within the industry and thereby facilitate cash flow and (2) to introduce, as a new option in the dispute resolution process, a procedure known as adjudication – designed to help the parties obtain a speedy decision. Readers will be aware that the Construction Act covers the vast majority of building and engineering contracts and consultant appointments in the UK and that it is not possible to “contract out” of its provisions; accordingly, any changes made to it will have far-reaching implications. AMENDING THE CONSTRUCTION ACT: THE LDEDC ACT 2009 The common view is that, generally, the Construction Act has been a success; the payment provisions have facilitated cash flow while adjudication although often described as a ‘pay first, argue later’ procedure has helped parties to resolve disputes more quickly. The Act came into force in 1998 but, just five years later, there was already talk of the need to amend some of its provisions and make changes. A review of the Construction Act began in earnest in 2004. The thrust of the reform was to strengthen and improve cash flow and rights to adjudication. In November 2009, the Local Democracy, Economic Development and Construction Act 2009 (the “LDEDC Act”) received Royal Assent. The provisions of Part 8 of the LDEDC Act operate as a series of amendments to the Construction Act. Accordingly: ■ in this note, references to the “2009 Act” are to Part 8 of the LDEDC Act; and ■ it is important to remember that the 2009 Act will amend the Construction Act and not repeal and replace it. WHEN WILL THE CHANGES COME INTO FORCE? The 2009 Act is not yet in force. A commencement order is needed to bring it into force and, as yet, no date has been set for this. The changes will come into effect on a date to be stipulated by ministers in Westminster, Cardiff and Edinburgh. In addition, the 2009 Act will not come into force until the Scheme for Construction Contracts
Transcript of (LDEDCA) 8 2009
Amending the ‘ConstruCtion ACt’the LoCAL demoCrACy, eConomiC deveLopment And ConstruCtion ACt 2009
WhAt is the ConstruCtion ACt?
Part II of the Housing Grants, Construction and Regeneration Act 1996 (commonly referred to as the “Construction Act” or “HGCRA”) is, arguably, the single most important piece of legislation affecting the UK construction industry. Its origins lie in the wake of the last recession in the early 1990s and its aims were (1) to improve payment practices within the industry and thereby facilitate cash flow and (2) to introduce, as a new option in the dispute resolution process, a procedure known as adjudication – designed to help the parties obtain a speedy decision.
Readers will be aware that the Construction Act covers the vast majority of building and engineering contracts and consultant appointments in the UK and that it is not possible to “contract out” of its provisions; accordingly, any changes made to it will have far-reaching implications.
Amending the ConstruCtion ACt: the LdedC ACt 2009
The common view is that, generally, the Construction Act has been a success; the payment provisions have facilitated cash flow while adjudication although often described as a ‘pay first, argue later’ procedure has helped parties to resolve disputes more quickly.
The Act came into force in 1998 but, just five years later, there was already talk of the need to amend some of its provisions and make changes. A review of the Construction Act began in earnest in 2004. The thrust of the reform was to strengthen and improve cash flow and rights to adjudication.
In November 2009, the Local Democracy, Economic Development and Construction Act 2009 (the “LDEDC Act”) received Royal Assent. The provisions of Part 8 of the LDEDC Act operate as a series of amendments to the Construction Act. Accordingly:
■ in this note, references to the “2009 Act” are to Part 8 of the LDEDC Act; and
■ it is important to remember that the 2009 Act will amend the Construction Act and not repeal and replace it.
When WiLL the ChAnges Come into ForCe?
The 2009 Act is not yet in force. A commencement order is needed to bring it into force and, as yet, no date has been set for this. The changes will come into effect on a date to be stipulated by ministers in Westminster, Cardiff and Edinburgh.
In addition, the 2009 Act will not come into force until the Scheme for Construction Contracts
02 | Amending the ‘Construction Act’
(England and Wales) Regulations 1998 (the “Scheme”), and equivalent schemes in Scotland and Northern Ireland, have been revised.
ConsuLtAtion on the sCheme For ConstruCtion ContrACts
In March, the Department for Business Innovation & Skills (“BIS”) launched a consultation on the Scheme. England & Wales, Scotland and Northern Ireland have their own schemes: statutory instruments which supplement the Construction Act and contain default provisions which apply should a construction contract fail to comply with the Act.
The consultation closed in June and we are now awaiting the findings from that exercise. The purpose of the consultation was to seek views from the industry on the consequential amendments that need to be made to the Scheme in order to implement the 2009 Act, and to set out proposals put forward by the Construction Umbrella Bodies Adjudication Task Group (CUBATG) to improve the effectiveness of the Scheme.
The consultation document set out the following proposed changes and questions:
■ the inclusion of an express provision allowing the adjudicator to determine how payment of his fees should be apportioned;
■ the inclusion of a slip rule giving the adjudicator seven days to correct his decision;
■ the incorporation of new rules to reflect the new payment-notice framework;
■ a proposal to clarify the date of referral, for example seven days from the receipt of the adjudication notice by the adjudicator;
■ asks whether parties are content with the current position that an adjudicator cannot adjudicate related disputes unless the parties agree;
■ questions whether the position on confidentiality of the adjudication process should be clarified;
■ asks whether the limitations under the Scheme on an adjudicator’s power to open up and review any decision or certificate that is said to be final and conclusive should be lifted or clarified; and
■ asks whether an adjudicator should be given wider powers to award interest.
Where do We go From here?
As the responses submitted as part of the consultation will be reviewed by BIS after the general election, a new scheme is unlikely to become law until next year at the earliest. In addition, the Government will probably allow a three-to-six month lead-in period before the provisions of the 2009 Act are brought into force particularly as the
industry will need to get to grips with new provisions and bodies such as the JCT, SBCC, NEC, ICE, and consultants’ professional organisations will need to produce amendments to their standard-form contracts.
1994 Constructing the Team (The “Latham Report”)1996 HGCRA receives Royal Assent1998 HGCRA comes into force2004 Reform of HGCRA begins2009 LDEDC receives Royal Assent2010 Consultation on Scheme2011/2012 Scheme and LDEDC come into force;
bodies (JCT/ NEC) issue revised forms
tWo LAst-minute ChAnges
Two important changes were made just before the 2009 Act was passed. These relate to the Government’s power to make exclusion orders and to adjudication costs.
Exclusion orders
The principal amendment made relates to the governmental power to exclude particular types of construction contract from the operation of the Construction Act. The 2009 Act extends the Government’s power to exclude certain types of construction contract from part, or all, of the provisions of Part II of the Construction Act. This will give the Government more flexibility, as previously an exclusion order could only disapply all of the provisions of the Construction Act.
In addition, this power of exclusion was previously conferred on the Secretary of State alone with the result that any exclusion orders applied only in England, Wales and Scotland. The 2009 Act, however, confers a similar power on Welsh and Scottish ministers and correspondingly limits the Secretary of State’s power of exclusion to construction contracts carried out in England.
There is, therefore, the potential for the Scottish Parliament and Welsh Assembly to exclude particular types of construction contract from the operation of the Construction Act when the same types of contract are not excluded in England, and vice versa. This would lead to confusion. For example a call-off contract under a framework agreement for works to be carried out in Scotland could be excluded from the operation of the Act despite works carried out in England under such a contract still being subject to the Construction Act.
The Government will use the new powers to disapply the provisions of the Construction Act to PFI sub-contracts (currently PFI contracts are excluded under the Act, but the PFI sub-contracts are not). It is to be regretted that Parliament did not seize the opportunity to address this long-standing anomaly in relation to PFI/PPP arrangements despite intense industry lobbying.
Adjudication costs
The current position under the Construction Act is that a party should bear its own costs of adjudication.
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The Bill originally prohibited parties from agreeing how the costs of an adjudication (their own costs and the adjudicator’s fees and expenses) should be allocated, unless they come to an agreement after the referral notice had been issued (the “prohibition”). This approach was taken to ensure that neither party was committed in advance of an adjudication as to how costs would be shared. There have been instances of contractors insisting on clauses whereby the referring party agrees to pay both parties’ costs regardless of the outcome.
The prohibition (as originally drafted) would have abolished the usual practice of allowing an adjudicator to allocate his or her fees and expenses, and this received opposition. There was also a concern that the parties might try to avoid paying the adjudicator’s fees and expenses because of an ineffective clause in the construction contract dealing with adjudication costs.
As a result, the prohibition was amended prior to Royal Assent. Under the 2009 Act, parties may agree in advance to confer power on the adjudicator to allocate his or her own fees and expenses provided such agreements are in writing and are contained in the construction contract. However, any agreement about the parties’ own costs can only be made after the referral notice has been issued and it must be in writing. Any such agreement may also address the allocation of the adjudicator’s fees and expenses in the absence of prior agreement in the construction contract.
Unless these requirements are met after the 2009 Act comes into force, any agreement made between parties about adjudication costs (ie their own costs and/or the adjudicator’s fees and expenses) will be ineffective.
other Key Amendments
Written and oral contracts
The 2009 Act removes the requirement for construction contracts to be evidenced in writing by repealing the provision that the Construction Act applies only to contracts in writing. It thereby extends the provisions of the Construction Act to oral and partly oral agreements. Once in force, then the Construction Act will apply to both written and oral contracts, and should put an end to disputes about whether a contract is in writing.
The consequence of removing this requirement may be that more disputes are referred to adjudication, as the 2009 Act will ensure that the legislation covers contracts arising from letters of intent (which are often amended orally or by conduct); that more jurisdictional challenges are likely to be made to an adjudicator’s appointment; and that more cases may subsequently be heard by the Technology and Construction Court.
Changes to the payment provisions
The current regime of so called “S110 payment notices” and “S111 withholding notices” has been criticised for not reflecting the realities of how payment cycles generally
operate in the industry. The Construction Act provides that the client under a construction contract should issue a payment notice not later than five days after the date on which a payment becomes due from him under the contract. The notice needs to specify the amount (if any) of the payment made or proposed to be made, and the basis on which that amount was calculated. However, non-compliance with this provision has no detrimental effect so, at present, the requirements are rarely followed to the letter.
The 2009 Act aims to remedy this by linking payment notices with withholding notices: establishing a regime of notices and counter-notices which, it is intended, will improve transparency as to the amount the payer intends to pay at the outset of the payment cycle (the new concept of the “notified sum”). The new regime seeks to address the issue by providing that if the payer (or specified person) fails to serve a S110A notice, then the payee may provide a payment notice. The “notified sum” here is the amount specified in the payee’s “default” notice and the client is obliged to pay this amount unless a withholding notice is served. The crux of the change is that the 2009 Act requires the payer to pay the notified sum to the payee, unless an effective withholding notice has been issued within the agreed or prescribed period.
Construction and engineering contracts often require the architect or engineer to give the required payment notice. The 2009 Act allows a “specified person”, named in the contract, to issue a notice on behalf of the payer in the new S110A. In practice, many standard-form contracts will use their existing payment mechanisms to ensure that an interim certificate complies with the new provisions.
The drafting is not straightforward; the aim is to improve cash flow, but it appears the administrative burden on clients and contractors will certainly increase. Payment notices are likely to become an essential part of the procedure for payment.
Delayed payment
The 2009 Act contains measures to prevent payments to sub-contractors being delayed by operations carried out under other contracts. This is intended to address the problem of payments to sub-contractors being determined by certificates issued under an upstream contract, which may also cover work done by others.
Prohibition of pay when certified clauses
The Construction Act requires construction contracts to include an “adequate payment mechanism” for determining the amount and due dates of payments. The courts have held that a certificate issued by a third party (such as an architect or engineer) under a different construction contract constitutes an adequate payment mechanism.
Section 113 of the Act prohibited pay when paid clauses, except where the third party is insolvent. The 2009 Act extends the range of prohibited conditional payment clauses to pay when certified provisions.
Whilst this change clearly benefits sub-contractors, it will force main contractors to fund more payments to sub-contractors. Banning pay when certified clauses in construction contracts will have an impact on the risk profile of PFI projects and, at least in the short term, make the funding of PFI deals more difficult, as banks struggle to assess how the additional risks can be managed.
Suspension
If a contractor has not been paid in full by the final date for payment, he is entitled, under the Construction Act, to suspend the whole of the works. The 2009 Act seeks to add flexibility to this rather rigid response to non-payment by giving the contractor the right to suspend part of the works. A party who validly suspends work because of non-payment will, under the new provisions, also be entitled to (a) reasonable costs and expenses arising from the suspension and (b) not only an extension of time covering the period of the suspension, as now, but also any additional time spent “in consequence of the exercise” (eg re-mobilisation).
time to revieW ArrAngements?
The changes to the Construction Act will not become law until 2011 at the earliest. Even so, those who will be affected by its provisions ought to start thinking now about the possible impact on their businesses. When the 2009 Act comes into force, it will not be retrospective. This could catch parties unaware. For example, a main contractor may have some sub-contractors employed under the “old” rules and some under the “new”, on a single project.
If you would like to discuss the issues raised in this Briefing, please contact our Engineering & Construction Group:
Bruce Bentley Partner t +44 (0)114 283 3457 [email protected]
graeme Bradley Partner and Group Head t +44 (0)121 262 5880 [email protected]
ed Cooke Partner t +44 (0)20 7796 6514 [email protected]
Cecily davis Partner t +44 (0)20 7796 6445 [email protected]
stephen hallerPartner t +44 (0)20 7796 6217 [email protected]
stuart Jordan Partner t +44 (0)20 7796 6100 [email protected]
daniel Jude Partner t +44 (0)151 237 4716 [email protected]
Julie morrissy Partner t +44 (0)114 283 3003 [email protected]
robert norris Partner t +44 (0)121 262 5956 [email protected]
gareth parry Partner t +44 (0)141 305 5377 [email protected]
Jim pinsent Partner t +44 (0)151 237 4728 [email protected]
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