The amended Construction Act has been in effect for over six months. What impact has it had on contracts and what redress does it offer if things go wrong?
It is now over seven months since the amended Construction act came into force (and over six months in Scotland). The changes apply to contracts entered into after 1 October 2011 (1 November in Scotland). So, what impact have the changes had to date?
The first thing to acknowledge is that the current economic climate has weakened the bargaining position of most firms in the industry. Consequently they are not raising issues on non-compliance. Nonetheless I have been getting some feedback.
The major problem is that bespoke contracts have not been amended and outdated editions of JCT contracts are invariably used. Only the 2011 edition JCT contracts comply with the new act. NEC3 contracts are less of a problem. An addendum of amendments published by the NEC applies to contracts entered into after 1 October 2011. The NEC will be incorporating this addendum in a revised NEC3 to be published in the autumn.
You cannot change an act of parliament by contract. Lawyers who do should be struck off
The amended act introduces a payment notice procedure that defines the amount to be paid at the final date for payment. Some have questioned the continuing relevance of the statutory requirement that all contracts have an adequate mechanism for payment. This is still relevant to the timing of payment, that is when payments become due. Many bespoke contracts flout this requirement.
For example: “Payments will become due once the payer is satisfied that all the documentation supporting the application for payment has been received and is in order.”
This is not an adequate mechanism for defining when payment is due. That is the most basic requirement of all and is critical in asserting other statutory entitlements relating to payment. When reading a new contract, check when the due dates are.
The concept of “adequate mechanism” is also relevant to a new provision introduced last year. Section 110(1A) states that the requirement for an adequate mechanism is not satisfied where a contract makes payment conditional on performance of obligations under another contract. While this provision is primarily aimed at “pay when certified” clauses, the wording is wide enough to outlaw cross-contract set-off. As yet, contract drafters have not appreciated this since cross-contract set-off is still fairly common.
The amended act gives added potency to the right of suspension. There is now a right to reasonable costs and expenses incurred over the period of suspension. Contracts can be further extended to include time taken for demobilisation and remobilisation. It seems that some contract drafters are, again, “toying” with the notice requirements.
The legislation requires that seven days’ notice is given of the payee’s intention to suspend any or all of his obligations under the contract. Some contracts are now stating that the notice period should be 42 days or even longer. You cannot, by contract, amend an act of parliament. If lawyers are doing this they should be struck off.
It seems that the greatest efforts to undermine the revised legislation are focused on reducing exposure to the operation of the default procedure. If the contract requires the payer to issue the initial payment notice and he fails to do so, the default procedure kicks in. If the payer has already issued an application for payment, that will take effect as the default notice. Some contracts are omitting references to applications for payment. Others are calling them “requests” for payment. Using a different name will not make any difference. But there is a new clause: “Applications for payment shall not have any contractual effect.” The drafters of this provision have forgotten one thing. An application for payment has statutory effect in that it will become the default payment notice in the absence of the payer’s notice.
The outlawing of “pay when certified” and similar conditional payment provisions has had a significant impact upon the traditional clauses governing the release of sub-contract retentions. For example, the second half of a sub-contract retention will not be released until a certificate of making good has been issued under the main contract. Where sub-contract drafters have omitted this type of provision they have tended to extend retention release times to two, three or even more years after practical completion. At least now there will be an end date.
Finally, are we seeing the back of the so-called Tolent provisions by which the referring party in an adjudication has to meet all the other side’s costs, win or lose? There has been much discussion on whether new section 108A outlawed Tolent clauses or perpetuated them. However, Mr Justice Coulson in Leander vs Mulally & Co Ltd (2011) assumed that Tolents would “automatically be invalid” under the revised act.
It is too early to be certain of the impact of the amended act but, thus far, feedback I have received has been positive. Non-payment can be addressed promptly and the right of suspension can be quickly exercised (and to greater effect).
Professor Rudi Klein is barrister and chief executive at SEC Group