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

Latest News

The New Construction Act – Avoiding the Pitfalls

November 2, 2011 | Construction, Construction Contracts

On 1 October 2011, the Construction Act 1996 was amended by the provisions of the Local Democracy, Economic Development and Construction Act 2009, introducing significant changes to payment, suspension and adjudication.

The amended Construction Act now applies to all new construction contracts entered into on or after 1 October 2011, whilst the original Construction Act 1996 continues to apply to all construction contracts entered into before that date.

As a result, we are currently in a transitional period where both the original 1996 Act and the amended Act apply. The vast majority of businesses in the construction sector will find that for months or even years to come, some of their contracts are governed by the original 1996 Act and some are governed by the amended Act.

Learning to apply the new provisions of the amended Act to some contracts whilst continuing to comply with the original 1996 Act in relation to other contracts is likely to cause a great deal of confusion. Construction firms will need to be prepared and well organised to avoid this.

Here, we outline some of the common pitfalls which may arise during the transitional period and how you can avoid them.

Get up to date

It is essential to update your standard terms and conditions to comply with the amended Act. If you fail to do so, the payment provisions in new contracts which you enter into will be replaced by the provisions of the amended Scheme for Construction Contracts. It is unlikely that the provisions of the Scheme will meet the needs of your business or protect your contractual position.  

When entering into standard form contracts, ensure you are entering into an up to date version. For example, if you enter into a JCT 2005 contract now, the payment provisions will not comply with the amended Act and the Scheme will apply instead. The only way to avoid this would be to draft bespoke amendments to the JCT payment provisions to bring them up to date. However, it would be easier to enter into a new JCT 2011 contract instead.

It also important to remember that that if you use standard schedules of bespoke amendments to standard form contracts, your bespoke amendments may also need updating. In particular, schedules of amendments designed for use with JCT 2005 contracts may no longer be suitable for JCT 2011 contracts.

Be aware of the problem areas

The existence of the two Acts is likely to be particularly problematic in a number of cases:

  • Sub-Contracts entered into after 1 October under a Main Contract entered into before 1October 2011. This is likely to cause confusion for the Main Contractor, as its contract with the Employer will be subject to the original 1996 Act, but it must pay its Sub-Contractors in accordance with the amended Act.
  • Novation agreements. There is case law which suggests that if a contract which is entered into before 1 October is novated after 1 October, the amended Act will apply to the novated contract. It remains to be seen whether this case law will be upheld if the issue arises in the TCC again.
  • Contracts let under existing schemes like P21+. Even if the scheme itself was created before 1 October, the formation of a new contract under the scheme after 1 October means the amended Act will apply.
  • Call-off contracts let after 1 October 2011 under framework agreements entered into before 1 October 2011. If each call-off contract is a separate new contract, call-off contracts let after 1 October will be subject to the amended Act.

If you are uncertain as to which Act applies to your contract, you should seek legal advice. It will be necessary to look at the contract documents to determine the date the contract was entered into. In cases of real uncertainty, it may potentially be appropriate to comply with both Acts, for example by issuing both a ‘withholding notice’ and a ‘pay less notice’ when deducting payment.

Mixing old and new

During the transitional period, companies must be very careful not to confuse the provisions of the two Acts. It will be essential to ensure all staff members who deal with payment receive proper training on the differences between the two Acts and procedures which apply under each.

The following table summarises some of the key differences between the two Acts.

  

Original 1996 Construction Act

 Amended Construction Act

Scope
  • Only applies to construction contracts which are in writing.  
  • Applies to all construction contracts, whether or not they are in writing (including oral contracts).
Payment   
  • The contract must specify a due date and a final date for payment.
  • The payer must give a notice not later than 5 days after the due date specifying the amount of the payment proposed to be made and the basis on which it was calculated.
  • The payer must issue a withholding notice prior to the final date for payment if it intends to deduct payment from the payee.

 

 

  • The contract must specify a due date and a final date for payment.
  • The contract must allow either the payer or the payee to give a notice not later than 5 days after the due date specifying the sum considered to be due and the basis on which that sum was calculated.
  • If the payer is supposed to give a payment notice and fails to do so, the payee is able to specify the sum which is due.
  • The payer must issue a pay less notice prior to the final date for payment if it intends to pay less than the sum which is due.
Suspension
  • The payee may suspend performance of its contractual obligations if a sum properly due has not been paid in full.
  • At least 7 days’ notice of suspension must be given.
  • An extension of time can be given for the period of suspension.

 

  • The payee may suspend performance of ­any or all of its obligations.
  • At least 7 days’ notice must still be given.
  • The payee is entitled to recover the reasonable costs and expenses arising out of suspension.
  • An extension of time can be given for both the period of suspension and the period of re-mobilisation.
Adjudication
  • The construction contract should include all the provisions set out in section 108 relating to adjudication. If it does not, the Scheme will apply.
  • There is an implied “slip rule” which allows adjudicators to correct errors in decisions.
  • Tolent clauses are allowed, but in light of recent case law, it is not clear whether they will be enforced.

 

 As before plus:

  • The construction contract should contain a provision allowing the adjudicator to correct clerical or typographical errors in the decision.
  • The parties may include a provision which confers power on the adjudicator to allocate his fees and expenses.
  • It is unclear whether Tolent clauses will be enforceable, although the amended Act was intended to prohibit them.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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