JCT contracts and the Construction Act

The Local Democracy Economic Development and Construction Act 2009 has now been brought into force. This means the new payment terms in the Act
will apply to all contracts entered into from 1 October 2011 and in Scotland one month later. Parties are negotiating now on contracts that won’t be signed up until 1 October and beyond. So the bodies that publish the standard form contracts must now revise and publish their conditions to bring them into line with the new Act.

JCT is ahead of the pack on this as it has published a change tracked version of JCT 2005 - JCT 2011 - showing the changes it intends to make to, among other things, its payment terms for traditional and design and build contracts. These are available from September, officially launched 15 September.

While there are no shock changes to the payment regime in JCT - applications for payment have been retained and timescales for payment remain identical to those which existed previously - there are number of key areas of change that reflect the changes brought in by the new Act.

The payment regime under a JCT 2011 design and build contract will be as follows:

• Contractors may make interim applications (previously referred to as applications for interim payment) setting out the amount they consider due and the basis on which that sum is calculated (Clause 4.8)
• The due date where the contract provides for periodic payments is the later of the specified date for the interim application or the date the employer receives that interim application (Clause 4.8.2)
• The final date for payment remains 14 days from the due date
• No later than five days after the due date, the employer must issue a payment notice setting out the sum it considers due at the due date and the basis of that calculation (Clause 4.9.2). The provisions up to this point are not dramatically different from those that exist at present; it is those that follow where the major changes that the new Act will implement are evident.
• If the payment notice is not given strictly on time or is deficient (for example, it does not set out in adequate detail the basis for the sum stated to be due), then the amount due will be the amount in the contractor’s interim application (Clause 4.9.3). This is a significant change to the rules.
• The sum in the interim application will be the sum that the employer must pay unless it has issued a pay less notice five days before the final date for payment (Clause 4.9.3 and 4.9.4).
• A pay less notice is issued where the employer considers a sum other than the notified sum (that is, the sum in the payment notice or - in its absence - the interim application) is due. It must state the sum due as at the date of service of the notice and the basis for the sum (Clause 4.10.2)
• The pay less notice replaces the withholding notice but is considerably wider in scope.
• Unlike a withholding notice, a pay less notice can deal with value as well as any deductions or counterclaim. So a pay less notice may remedy the absence of a payment notice by stating what is due. It may also include deductions for liquidated damages or other forms of withholding.
• A payment notice and a pay less notice have to be issued even where the sum due is zero (Clause 4.10.4).
• In the case of the final (as opposed to interim) payments, the due date is one month after the end of the latest rectification period: the notice of completion of making good defects or date of submission of the final statement. The final date for payment is 28 days after that (Clause 4.12).
• If a contractor becomes insolvent after the date for issuing a pay less notice has expired, the employer need not make payment (Clause 8.7.3). This provision implements the new Clause 111(10) of the new Act and applies because Clause 8.7.3 also provides that on insolvency the employer need not pay any sum that has become due.

Other changes to the JCT form include making any contractor’s offence under the Bribery Act a ground for termination. Rights on suspension are increased as the contractor may suspend on seven days’ notice all or any obligations - the concept of partial suspension is new (Clause 4.11.1). The contractor may now claim reasonable costs (Clause 4.11.2).

Although not yet published, additional changes to those contained within the JCT main contract provisions will have to be made to the JCT standard subcontracts. This is because the new Act will introduce a ban on pay-when-certified provisions. This will affect the release of retention under subcontracts.

What about other standard forms? The NEC is expected in August. The sooner the better, as it will take some time for parties to get used to these changes.

Lindy Patterson is a partner in Dundas Wilson

This article was originally published under the title: A tough act to follow