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The New Construction Act – Are You Prepared?
July 6, 2011 | Construction
Important Changes to Payment Provisions
The new Construction Act is due to come into force in October 2011 and all contractors, sub-contractors, consultants and employers should prepare for how the new Act will affect their business.
The Construction Act 2009 (the “new Act”) is due to come into force in October 2011.
The new Act will significantly amend the existing provisions of the Construction Act 1996 (the “1996 Act”). All new construction contracts entered into after the Act comes into force must comply with the provisions of the new Act.
The industry will need to begin preparing for the implementation of the new Act now in order to be familiar with how the Act works when it comes into force. Indeed, projects which are currently at tender stage may well be subject to the provisions of the new Act.
Regular users of standard form contracts will need to aware of the changes which are being made to those contracts to secure compliance with the new Act. JCT has already issued track-changed versions of its 2011 suite of contracts and intends to publish the full suite of new contracts in September 2011. NEC does not intend to publish its contract amendments until the new Act comes into force.
In addition, companies who use their own bespoke terms and conditions will need to ensure that these contracts are updated to reflect the provisions of the new Act.
Here, we outline the most significant changes which will affect all new construction contracts formed after the new Act comes into force.
The changes to the existing payment provisions under the 1996 Act are extensive and anyone who is involved with the payment process should become familiar with the changes as soon as possible. Below we use the example of the “Employer” and the “Contractor” to illustrate how the new Act will work in practice.
“Payment notices” and “pay-less notices”
The basic principles of payment will remain the same, with the parties still free to agree on the due date and final date for payment. However, the new Act introduces the concept of the “payment notice” and the “pay-less notice”.
A typical contract will require the Employer to issue a “payment notice” not later than 5 days after the payment due date, specifying the sum it considers to be due to the Contractor and the basis on which that sum was calculated. A “payment notice” must be issued even if the sum due to the Contractor is zero. The Employer must pay the Contractor the amount set out in the “payment notice” (called the “notified sum”) unless the Employer issues a “pay-less notice” specifying the sum it considers to be due to the Contractor and the basis on which that sum is calculated.
It is particularly important to note the difference between a “withholding notice” and a “pay-less notice”. “Pay-less notices” must set out the sum considered to be due and the basis on which that sum was calculated. They may need to contain more detailed financial information and calculations than “withholding notices”. Failure to issue a proper “pay-less notice” could potentially amount to a breach of the provisions of the contract and/or the new Act.
The new Act introduces the “default notice”, which can be issued by the Contractor when the Employer fails to serve a “payment notice” within the specified timescale. The “default notice” must specify the sum which the Contractor considers to be due and the basis upon which that sum was calculated. The Employer must then pay to the Contractor the sum set out in the “default notice”. However, the Employer is still able to serve a “pay-less notice” if it does not agree that the Contractor is entitled to the sum set out in the “default notice”.
Where a “default notice” is issued, the final date for payment is postponed by the number of days delay before the “default notice” was issued. For example, if the “payment notice” was supposed to be served on the 15th of the month, and the “default notice” was served on the 20th of the month, the final date for payment would be postponed by 5 days. From the Contractor’s perspective, this means that default notices must be served as quickly as possible to avoid prolonging the payment periods under the contract.
“Default notices” will present a potential risk to any company which makes downstream payments to other contractors. If a “default notice” is issued and the Employer does not agree with the sum specified in the “default notice”, it is imperative that a “pay-less notice” is served. Failure to do so will mean the Employer must pay the Contractor more than it intended to. For this reason, it is likely that many construction companies will introduce contractual provisions which strictly control how a “default notice” must be presented and served, so that “default notices” do not go unnoticed.
The “payee-led” payment process
The new Act also introduces a new, optional, “payee-led” payment process. Under this procedure, the Contractor issues the “payment notice” specifying the amount it considers is due and the basis on which that sum was calculated. The Employer must then pay the “notified sum” set out in the Contractor’s “payment notice”, although the Employer is still entitled to issue a “pay-less notice” if it wishes to withhold payment. Under this regime the Contractor does not have the option of issuing a “default notice”, as the Contractor has already indicated how much it expects to be paid.
It is important to note that the “payee-led” process must be specifically incorporated into the contract and will not automatically be triggered by the submission of an application for payment by the Contractor. Nevertheless, it may become common to expressly state in contracts that the Contractor’s application for payment does not constitute a “payment notice” pursuant to the “payee-led” regime.
The “payee-led” process represents quite a significant departure from the widely used system where the Employer notifies the Contractor how much it intends to pay. It seems unlikely that this new process will become popular.
Changes to retention and “pay when certified” clauses
The new Act will prohibit any clause in a contract which provides that payment is conditional on the performance of obligations under another contract. This means that “pay when certified” clauses in new contracts will not be valid.
Significantly, this new provision is expected to outlaw clauses in contracts which state that the release of retention is conditional on the issue of a Certificate of Making Good Defects (or similar) under an upstream contract. Any company using bespoke contracts will need to review their retention provisions to ensure they are not in breach of the new Act. Going forward, contractors should expect to see the release of retention linked to events occurring under their own contract, giving them more control over the release of their retention.
The changes to payment provisions which will take effect when the new Act comes into force are quite significant. Everyone involved in the construction industry should prepare now for the implementation of the new Act.
Hawkswell Kilvington will be presenting a series of half-day seminars throughout October 2011 which will focus in detail on the new Construction Act. More details on the seminars, including how to book places, will be released shortly.
This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please do not hesitate to contact one of our specialist construction lawyers.