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Preparing for the New Construction Act – 10 Things You Must Know

July 25, 2011 | Construction

The New Construction Act comes into force in October 2011, leaving contractors, sub-contractors and consultants with less than 3 months to prepare for the changes to payment, suspension and adjudication.

Parliament has confirmed that the new Construction Act will come into force in October 2011, giving consultants, contractors, sub-contractors and employers a deadline of less than 3 months to prepare for the changes which the new Act will bring. Preparation for the implementation of the new Act is now a priority for all construction companies. In this bulletin, we outline the key issues which you should be thinking about.

 1.  Amending your contracts

The provisions of the new Act will apply automatically to all new construction contracts formed in October 2011, with the amended provisions of the Scheme “filling the gaps” in contracts which do not comply with the new Act. Nevertheless, most companies will want to amend their bespoke contracts, sub-contracts and consultant appointments to expressly reflect the provisions of the new Act. Payment provisions in particular will require substantial amendment. Contracts can be amended either by issuing completely new updated versions of contracts or by creating schedules of amendments to be incorporated into newly formed contracts.

 2. Understanding the requirements for pay less notices

References to “withholding” notices in contracts will need replacing with “pay-less” notices. Crucially, the information required to be given in a “pay-less” notice (i.e. details of the sum proposed to be withheld and the basis on which that sum was calculated) will differ from the information which was to be included in a “withholding notice”. It is important to get this right to ensure that your “pay-less” notices are compliant with the new Act.

 3.  Dealing with default notices

Payees will be able to serve “default” payee notices if the payer fails to serve a payment notice within the required timescale prescribed by the contract. This could prove problematic for payers as the service of a “default” notice by the payee causes the final date for payment to change, potentially creating confusion.  However, it is important to note that a “default” notice can only be served in circumstances where the payee has not already submitted an application for payment prior to the date for service of the payment notice. Since it is very common for contracts to stipulate that the payee must submit an application for payment to the payer prior to service of the payment notice, it may well be that service of “default” notices by payees is relatively rare in practice.

 4.  Reviewing the release of retention

Conditional payment provisions will no longer be permitted, meaning that any contract containing a “pay when certified” payment mechanism will need altering. In addition, provisions for the release of retention will need reviewing, as it will no longer be permitted for the release of retention to be triggered by an event occurring pursuant to an upstream contract.

 5.  Increasing your protection when the payee becomes insolvent

New rights under the Act allow for the contract to permit the payer to refuse to make payment of sums due if the payee becomes insolvent after the date a “pay-less” notice was due to be served, even if no “pay-less” notice has been issued. This is likely to be a popular new addition to many contracts as it provides additional protection for the payer in insolvency situations. However, in order to benefit from this right it needs to be drafted into the contract.

6.  Wider rights to suspend

Suspension provisions will need to be amended to make it clear that the payee is now entitled to suspend performance of any or all of its obligations under the contract, and to recover its reasonable costs and expenses arising out of the suspension. In an attempt to control this extended freedom to suspend for non-payment, it may become more common to increase the period of notice which the payee is required to give before suspending its obligations (the statutory minimum is 7 days).

 7.  Changes to adjudication

The new Act is intended to outlaw “Tolent clauses” which require the referring party to pay the responding party’s legal costs, although there has been some debate about whether the wording of new section 108A does effectively prohibit the use of Tolent clauses. Nevertheless, it was quite clear that Parliament intended to outlaw Tolent clauses when it created the new Act and on this basis construction companies may decide that now is the time to remove such clauses from their contracts. Contracts containing bespoke adjudication procedures should also be amended to include the “slip rule”, which allows adjudicators to correct clerical or typographical errors in their decisions. The slip rule will be included in the updated Scheme for Construction Contracts and therefore no amendment will be necessary for contracts where adjudication is governed by the Scheme.

 8.  Getting to grips with changes to standard form contracts

The changes created by the new Act will also necessitate amendments to standard form contracts. JCT has already issued track-changed versions of its new 2011 suite of contracts, with final versions of the same due to be published in September. NEC will be publishing amendments to its existing contracts on its website in September. Users of both contracts will need to review and familiarise themselves with these changes before the Act comes into force.

 9.  Tendering

Any contract you are currently preparing or reviewing, whether bespoke or standard form, may be subject to the provisions of the new Act if it is not entered into until after 1 October 2011. If this is likely to be the case, it may save time and money if you negotiate the terms of prospective contracts with the provisions of the new Act in mind.

 10.  Internal training

The payment provisions of the new Act represent a substantial departure from the current regime. Potential traps for the unwary could include:

  • Serving a traditional “withholding notice” instead of a new “pay-less” notice and inadvertently breaching the requirements of the new Act.
  • Failing to appreciate that a payee’s “default” notice postpones the final date for payment and consequently failing to issue a “pay-less” notice within the correct timescale.

It is crucial to ensure that all employees involved in the payment process are up to speed on the changes and how these will be incorporated into the contracts which your business regularly uses.

It may be useful to agree new company procedures for payment best practice and even produce precedent “payment” notices and “pay-less” notices so you can be confident that everyone in your organisation will be complying with the provisions of the new Act.

How we can help

Hawkswell Kilvington offer the following services in readiness for the new Construction Act coming into force:

  • Contract Reviews: for a fixed fee we will review your construction contracts, sub-contracts and consultant appointments to identify the provisions which will require altering and make the necessary amendments to ensure compliance with the new Act.
  • Bespoke In-House Training:  for a fixed fee our expert speakers will provide practical advice and guidance on the provisions of the new Act and what it means for your business, at your own location and focusing on your own specific conditions and procedures.

 For more information, please contact Jonathan Hawkswell at jhawkswell@thkp.co.uk

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.

Wakefield Office

17 Navigation Court
Calder Park
Wakefield
West Yorkshire
WF2 7BJ
Tel: 01924 258719
Fax: 01924 257666
enquiries@hklegal.co.uk

London Office

28 Queen Street
London
EC4R 1BB
enquiries@hklegal.co.uk