The new Construction Act comes into force in October. Here’s a guide to what’s changing in terms of payment practices

Some important changes to the Construction Act are set to come into force on 01 October 2011. Employers, contractors, subcontractors and consultants should all be taking action now to get ready.

Over the past 13 years or so we have all got used to payment notices and withholding notices. People soon realised that there were no consequences if payment notices were not given. It took parliament rather longer than expected to do anything about it, but now they have. They have also made some changes to adjudication.

Under the new rules, if you are making payments under a construction contract, failure to issue timely payment notices is no longer a safe option. If you don’t notify the other party of how much you are going to pay when you should, they can now tell you how much you should pay (if a payment application has already been made this can be relied on). You then have a further opportunity to give a notice but if you fail to do so, you will have to pay the amount stated by the other party.

You will also need to change your “withholding notices” into new-style “pay less notices”.

Everyone should now be ensuring they understand the new rules and revising procedures to make sure they do not get caught out. The legislation also requires that construction contracts (which include consultant appointments as well) give effect to the new rules. You will need to make sure that your contracts are updated and that any standard forms you use have been updated to comply.

If your contracts do not comply, the non-compliant terms will be replaced by those in the Scheme for Construction Contracts (which has itself been amended). In these days when cash flow and aligning payment periods in the contractual chain are more important than ever, the imposition of the terms in the Scheme would be a very unwelcome headache.

The original Construction Act prohibited “pay when paid” clauses. People in the industry soon worked out that, if they could not make payments due from them dependent on receiving payment from their employer, they could make them dependent on certification of those payments. That loophole will also close and “pay when certified” clauses will become unlawful (except in management contracts). Setting a due date for payment date by reference to the date when a notice is given will also be prohibited.

The right to suspend for non payment is also being bolstered. There will be a right to suspend part of your obligations, in addition to the existing right to suspend completely. If you exercise the right to suspend you will be entitled to the cost of doing so and to an extension of time.

On the adjudication front, a big change is afoot. To date the statutory right to refer disputes to adjudication has been limited to contracts in writing. The courts have made it clear that this means all the terms must be in writing.

That limitation is being swept away and there will be a right to adjudicate however the contract was made. Issues as to whether a contract exists and as to what are its terms are notoriously difficult. This will pose a new set of challenges for adjudicators and no doubt, more outings in court. It has never been more important to make sure you put proper written contracts in place.

The government intended to ban clauses which make one party liable for the costs of adjudication regardless of the outcome. The common consensus is that they made quite a mess of drafting these provisions which do not appear to work. Another one for an early court date, I think.

Mark Clinton is a partner and head of construction and development at Thomas Eggar