On 1 October 2011, construction law underwent arguably its biggest shakeup since the Construction Act was introduced in 1996. In this article, Michael Axe summarises the key changes to the statutory rules governing payment under construction contracts.
For over a decade, the Housing Grants, Construction and Regeneration Act 1996 (more commonly referred to simply as the Construction Act 1996) has governed the way in which parties to construction contracts are paid, as well as setting out their rights when a dispute over payment arises. However, on 1 October 2011 in England and Wales (and 1 November 2011 in Scotland), many of the key terms of the Construction Act 1996 were amended by the “catchily-titled” Local Democracy, Economic Development and Construction Act 2009.
What is a “Construction Contract”?
It is not always a simple matter to determine whether a contract is a “construction contract” within the meaning of the Construction Act 1996. It is, however, an important question to determine, as a contract which is a “construction contract” will be subject to certain statutory rules imposed by the Act.
In very general terms, the Act defines a “construction contract” as an agreement for:
a) “the carrying out of construction operations”;
b) “arranging for the carrying out of construction operations by others”; and/or,
c) “providing his own labour, or the labour of others, for the carrying out of construction operations”.
This definition is also specifically stated to include an agreement “to do architectural, design or surveying work” and/or “to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape”.
With such a widely drafted definition, it is not unusual for disputes to arise after parties have entered into a contract about whether the contract is, for the purposes of the Construction Act 1996, a “construction contract”.
Oral Agreements
Importantly, under the “old rules” (i.e. those in effect prior to 1 October 2011) a “construction contract” had to be an agreement “in writing”. However, the “new rules” (i.e. those in effect from 1 October 2011) repealed the section of the Construction Act 1996 which imposed this requirement, meaning that “construction contracts” can now include contracts which are partly or wholly oral agreements.
This is likely to mean that far more agreements will be deemed to be “construction contracts” (and therefore subject to the provisions of the Construction Act 1996) from 1 October 2011 than was the case previously.
Old Rules or New Rules?
Another key point for parties involved in construction work to remember is that the amendments do not have retrospective effect. This means that whilst a construction contract entered into on or after 1 October 2011 will be governed by the amended Construction Act 1996 (i.e. the “new rules”), a construction contract dated 30 September 2011 or earlier will be governed by the unamended Construction Act 1996 (i.e. the “old rules”), even if a dispute does not arise under that contract until well after the change over date of 1 October 2011.
A further complication potentially arises when sub-contracts are involved, as if the main contract (i.e. between the Employer and Main Contractor) is dated prior to 1 October 2011, but the related sub-contracts (i.e. between the Main Contractor and the various Sub-Contractors) are dated post 1 October 2011, then two different sets of statutory rules will apply to the same construction project. This would potentially result in the Main Contractor seeking payment from the Employer under the provisions of the “old rules”, while the Sub-Contractors rights are governed by the “new rules”.
In such circumstances, the parties may want to consider agreeing to amend the main contract to bring it in line with the “new rules”, to avoid inconsistencies in payment terms between different parties working on the same construction project.
Other Key Rule Changes
The amendments to the Construction Act 1996 cover a wide range of issues, but arguably a common theme for many of the changes is that they appear to be designed to prevent paying parties from using their own delays and defaults to frustrate the payment timetable set out by the Act.
Some of the key subjects dealt with by the amendments include:-
- The obligations on both the paying party and the receiving party in relation to applications for payment and payment notices;
- The replacement of “withholding notices” with “pay less notices”;
- The rights of the receiving party to suspend work for non-payment, including the right to recover reasonable costs relating to the suspension and the right to have a reasonable extension of time to allow for remobilisation;
- The restriction of the paying party’s ability to link payment under one contract (e.g. the sub-contract) with certification under another contract (e.g. the main contract);
- Changes to the paying party’s right to withhold payment in the event of the receiving party’s insolvency;
- Changes to the Rules governing the parties’ right to refer disputes to adjudication, including affirmation of the adjudicator’s (common law) ability to correct obvious mistakes, and confirmation of the parties’ ability to contractually agree that the adjudicator can allocate his/her fees and expenses as between the parties.
Forewarned is Forearmed
It is vital that all parties involved in construction projects are aware of the amendments to the Construction Act 1996. Not only has the Act itself been amended, but the related Scheme for Construction Contracts 1998 was also amended on 1 October 2011, and the relevant standard form contracts of organisations such as the Joint Contracts Tribunal (“JCT”) and the Institution of Civil Engineers (“ICE”) are also being updated to reflect the statutory amendments.
It is equally important that individual parties amend and update their own terms and conditions, and ensure that all construction contracts concluded after 1 October 2011 are fully compliant with the new construction rules.
For more information on this or any other construction law issues, please contact Michael Axe by emailing Michael or by calling him on 08450 990045, or speak to your usual contact in the Commercial Disputes Team.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.
