TeCSA guide on the amendments to the construction act made by the Local Democracy, Economic Development and Construction Act 2009
APPLICATION OF THE ACT
• Extension of the Act to oral and partly oral contracts
• S.108(3A) – statutory slip rule
• S.108(A) – Adjudication costs
• The Act applies to my contract. What are the rules on payments?
• What happens if my contract does not comply with the Act?
• Who notifies the amount due for payment, and how?
• I am the payer – I do not agree that the sum in the notice is due. What do I do?
• What happens if the payer has not sent a notice to pay less and still doesn’t pay?
The position under the Scheme for Construction Contracts
INTRODUCTION TO THE AMENDMENTS
1. The Local Democracy Economic Development and Construction Act 2009 (“LDEDC”) has introduced changes to the law regarding adjudication and payment provisions under construction contracts. For contracts entered into on or after 1 October 2011 the Housing Grants Construction and Regeneration Act 1996 (“HGCR Act) as amended by the LDEDCwill apply to adjudications and payments under “construction contracts” as defined in the HGCR Act. In this Guide theHGCR Act as amended by LDEDC is referred to as the “Act”.
2. Clearly, these changes will impinge on most of the domestic situations that TeCSA members get involved with on a daily basis. This Guide is designed to provide a helpful and insightful introduction to the amended primary and secondary legislation which members will find a useful first port of call. Clearly, it is not designed as a substitute for careful consideration of how these provisions may apply in the circumstances of a particular case
3. The process of identifying and implementing appropriate changes to the Construction Act has taken approximately seven years to complete and TeCSA has been closely involved with the process throughout, initially as part of the pan-industry team advising Sir Michael Latham on suitable areas for change and then as part of the Construction Umbrella Bodies Adjudication Task Group tasked with informing the amendment process through the various consultations carried out by the government department tasked with this matter and the drafting of the draft primary and secondary legislation.
4. Having been through the various stages of the process with the primary legislation, it was enacted as part 8 of theLDEDC but was not to come into force until approval by Parliament of the necessary revisions to the Scheme for Construction Contracts. Following a consultation in 2011 on the Scheme, the statutory instruments amending that document were duly tabled and ultimately approved by both Houses on 5 September (House of Commons) and 7 September (House of Lords) . As a result, insofar as it affects the HGCR Act, the legislation was brought into force from 1 October 2011 by commencement order .
5. Further information about the amendment process can be found at www.bis.gov.uk/policies/business-sectors/construction/construction-act-r....
APPLICATION OF THE ACT
Extension of the Act to oral and partly oral contracts
1. As originally enacted, section 107 of the HGCR Act provided that Part 2 of the 1996 Act only applied to contracts which were “in writing”. For contracts entered into before 1 October 2011, that pre-condition still applies. There is a body of case law as to what is meant by ‘in writing’; readers of this Guide may find it helpful to refer to the 2002 Court of Appeal judgment in RJT Consulting v DM Engineering and commentaries on that case. In essence however, for a contract to be ‘caught’ by the Act, all its terms (even trivial and non-material ones) must be in writing.
2. The LDEDC has changed the original legislation so that for contracts entered into on or after 1 October 2011 the contract does not have to be in writing for the Act to apply. The payment and adjudication provisions in the Construction Act (as amended) will apply to all qualifying construction contracts – whether wholly in writing, partly in writing or wholly oral.
3. This is a major change in direction for the Act. However, its significance should not be overstated. A great many disputes will not turn on the existence or otherwise of a disputed contractual term. For most parties, particularly those using standard form contracts, or those with predominantly written contracts, life will go on as before. Parties will only notice a difference if a claim is based on a disputed oral term or an oral variation of the written contract.
4. For representatives of parties to disputes that do involve disputed orally agreed terms, there are a number of practical issues to consider. It falls to the parties to give the adjudicator all the right information and tools to resolve the dispute fairly.
5. Firstly, the parties will need to be precise when putting in their referrals or responses. Those who make sure that their submissions and evidence give proper particulars of their case in favour of an oral term and how it was agreed – by whom, to whom, what was said, when etc and other corroborative evidence – will stand a better chance than relying on generalised assertions. Making very early requests for particulars can also be effective in highlighting the strengths and weaknesses of the parties’ respective positions
6. The parties should give active consideration to whether a hearing is necessary to resolve the existence of disputed oral terms and should ensure that the adjudicator understands the correct English common law approach to establishing contractual formation and certainty of terms.
7. As a footnote to this, it should be noted that certain important contractual provisions required by the Act, such as provisions relating to a contractual adjudication scheme, will continue to need to be in writing if they are to have contractual force. For example, under the new s.108(3A) the contractual adjudication regime will need to provide in writing for the adjudicator to have the power to make corrections. Otherwise the contractual provisions in respect of adjudication will fall away in their entirety and the Scheme will apply.
8. Lastly, the removal of s107 will not solve the problem of dealing with cases where there is arguably no contract at all – e.g. many letter of intent/battle of form cases. These will still be jurisdictional ‘threshold’ issues that will need to be resolved to establish whether the right to rely on the payment or adjudication provisions arises.
1. The changes to the adjudication provisions in the Act, for contracts entered into after 1 October 2011, are twofold. Firstly, the LDEDC introduces at s.108(3A) of the Act, a statutory ‘slip rule’, expressly entitling adjudicators to correct certain types of errors in their decisions Secondly, new s.108(A) sets out the extent to which the parties can agree to allocate responsibility between themselves for the costs of adjudication. Both these changes are discussed below.
S.108(3A) – statutory slip rule
2. New subsection (3A) of the Act requires the parties to provide in their contract that the adjudicator has the power to correct a ‘clerical or typographical error in his decision arising by accident or omission’. The provision must be in writing but imposes no timescale for making the correction. If the contract does not contain such a provision, the new Scheme will replace the entire adjudication provisions in the contract by default. The new Scheme does include such a provision, requiring corrections to be made within 7 days.
3. In England and Wales (but not in Scotland), for contracts entered into prior to 1 October 2011 a similar right exists through common law: in Bloor Construction v Bowmer & Kirkland  EWHC 183  BLR 314. it was held there was an implied term of the construction contract that an adjudicator could correct ‘an error arising from an accidental error or omission or to clarify or remove any ambiguity in the decision…providing this is done within a reasonable time and without prejudicing the other party’.
4. It remains to be seen whether s.108(3A), which is restricted to ‘clerical or typographical’ errors, would include errors of arithmetic.
S.108(A) – Adjudication costs
5. The HGCRA was silent on the question of costs of the parties and of the adjudicator’s fees. For contracts entered into after 1 October 2011, new section 108A now addresses this issue. Save for two exceptions, agreements about costs of an adjudication are ineffective. The two exceptions are:
a. Firstly, the construction contract may provide in writing that the adjudicator is to have power to allocate his or her fees and expenses as between the parties
b. Secondly, the parties can agree, after a notice of adjudication has been served, to allocate their respective legal, expert and other costs of that adjudication in a particular way, either by giving the adjudicator power to allocate these as part of his decision, or on some other basis.
6. Parliament’s aim in drafting the amendments was to remove the disincentive to adjudication caused by contract provisions that imposed the costs on one party – particularly Tolent clauses after Bridgeway Construction Ltd v Tolent Construction Ltd , where the referring party was always required to pay the respondent’s costs and the adjudicator’s fees whatever the decision of the adjudicator.
7. The new s.108A has received a considerable amount of press coverage in the months leading up to 1 October 2011. This has largely revolved around whether the drafting achieves Parliament’s clear aim as summarised above. On one view, it is possible to interpret s.108A as providing to the contrary so that, so long as the construction contract includes in writing a term which allows the adjudicator to allocate his fees and expenses between the parties, the parties are able to make any other agreement on costs they like.
8. The point was raised during the House of Commons report stage on 13 October 2009 parliamentary debates of the Bill. The former construction minister Nick Raynsford MP stated:
‘I have heard some representations made that it could still leave a lacuna whereby a contract could be devised that included exactly such a provision for the adjudicator to be entitled to payment of reasonable expenses but that might separately seek to impose a condition about other costs, including the legal costs of the parties…being met by one party. I am assured that that is not the case, but I would welcome reassurance from the Minister that there is no scope for such a lacuna in the provisions which would allow the good intentions of the Governments’ provisions to be bypassed. I hope that she will be able to give me that assurance.’
9. The Minister gave the assurance .
10. For contracts entered into prior to 1 October 2011 containing ‘Tolent clauses’, these are to be construed in light of the existing common law and in particular the judgment in Yuanda v WW Gear where the Court held that such clauses did not comply with the HGCR Act because they acted as a fetter on the right to adjudicate.
The Local Democracy Economic Development and Construction Act 2009 (“LDEDC”) has introduced changes to the law regarding payments under construction contracts. For contracts entered into on or after 1st October 2011 the Housing Grants Construction and Regeneration Act 1996 (“HGCR Act) as amended by the LDEDC Act will apply to payments under “construction contracts” as defined in the HGCR Act. In this Guide the HGCR Act as amended by LDEDC is referred to as the “Act”. This Guide explains how payments are to be dealt with in construction contracts entered into on or after 1st October 2011 and highlights what has changed.. Flowcharts are also appended to help explain the new payment process under the Act. It is hoped that this guide will be of assistance to you, but please note this is not intended to be comprehensive and is not a substitute for professional advice.
The law stated in this Guide applies to contracts entered into on or after 1st October 2011.
The Act applies to my contract. What are the rules on payments?
This section explains the payment process that now applies under the Act.
The Act (see section 109 HGCR Act) entitles the payee to stage payments for any work under the contract unless:
• the contract states that the duration of the work is to be less than 45 days; or
• the parties agree that the duration of the work is estimated to be less than 45 days.
Due dates and final dates
Every construction contract must provide an adequate mechanism for determining what payments become due under the contract, and when, and provide a final date for payment of any sum that becomes due. The parties are free to agree the due dates for payment in their contract. The parties to the contract are also free to agree how long the period is to be between the date a sum becomes due and the final date for payment (see section 110 HGCR Act). The concept of due and final dates for payment which was introduced by the HGCR Act has been retained by LDEDC.
Payment conditional on other events
Payments cannot be made conditional on the payer receiving payment from a third party (see section 113 HGCR Act), e.g. the main contractor cannot agree that his sub-contractor is only paid when the main contractor is paid by the employer. This is unless the third party paying the payer is insolvent (the Act defines what constitutes insolvency for the purposes of this provision).
LDEDC has also prohibited payments being made conditional on the performance of obligations under another contract or a decision by any person as to whether obligations under another contract have been performed. Therefore a main contractor cannot make payments to his sub-contractors conditional on the employer certifying his own payments as being due under the main contract.
What happens if my contract does not comply with the Act?
If the contract does not provide an adequate mechanism for determining when payments become due and the final date for payment the “Scheme for Construction Contracts” applies. The Scheme is discussed further below.
Who notifies the amount due for payment, and how?
LDEDC has introduced a new payment regime. Subject to a “pay less notice” as described below being validly given, payment is made of the sum notified as due. Previously only the payer could serve a notice stating how much he thought was due. Under the new provisions, for every payment provided for by the contract, the contract can specify who gives the notice of what is due. It can be:
(i) the payer; or
(ii) another “specified person”, this might be a project manager or contract administrator for example; or
(iii) it could be the payee who gives the notice.
The notice must be given not later than 5 days after the payment due date. In each case it must state the sum the person giving the notice considers to be due or to have been due at the payment due date and the basis on which the sum is calculated (see section 110A HGCR Act).
It does not matter if the sum due is zero, a notice must still be given. This should be kept in mind during the defects liability period of a contract. If your contract provides for payments to be due monthly until the end of the period for rectification of defects after practical completion a notice needs to be sent each month during the rectification period to say that nothing is due.
If the payer or the specified person is supposed to serve the notice under the contract and he does not, then LDEDCprovides that the payee can serve a notice instead, stating the amount he considers due and the basis on which that is calculated (see section 110B HGCR Act).
If the contract permits or requires the payee (prior to the date on which the payee’s notice is required to be given) to notify the payer or a specified person of the sum that the payee considers will become due on the payment due date and the basis on which that sum is calculated and the payee gives such notification, for example in the form of a payment application, then this is to be regarded as the payee’s notice and the payee cannot give another notice.
However, if there is no such earlier payee notice and the payee serves a notice under section 110B (2) then the final date for payment is pushed back by the number of days between the notice that should have been given and the payee’s notice. For example: the payer should have given the notice on the 15th of the month, he does not, so the payee sends his own notice on the 18th. The final date for payment is later than it would have been if the payer had given the notice in accordance with the contract.
The amount in the notice given (whether by the payer, payee or specified person) must be paid on or before the final date for payment, unless a notice to pay-less or other exception applies.
I am the payer – I do not agree that the sum in the payment notice is due. What do I do?
In order to withhold monies from the payee, the payer (or the specified person) must serve a “pay-less” notice (this used to be known as a “withholding notice”) see section 111 HGCR Act. The pay-less notice must:
• specify the sum the payer considers to be due on the date the notice is served; and
• the basis on which that sum is calculated.
This is slightly different to the old withholding notices as the notice now has to say what is due, rather than the amount to be withheld which should make it clearer to the parties what the payer is actually intending to pay.
Again it is irrelevant if the sum the payer thinks is due is zero; the notice should still be served.
The parties can agree in the contract how long before the final date for payment a pay-less notice must be given. If they do not agree this in the contract then the period in the Scheme for Construction Contracts applies (7 days before the final date for payment).
What happens if the payer has not sent a notice to pay less and still doesn’t pay?
If there is no valid notice to pay-less given by the payer and the payment is not made fully by the final date for payment, then the payee is entitled to suspend performance of part or all of his obligations under the contract (see section 112 HGCR Act). Previously the whole of the works had to be suspended, but now the payee can choose to suspend only part if necessary.
The payee has to give the payer 7 days’ notice of his intention to suspend work stating the ground or grounds on which he is suspending. Once the payer makes the payment in full the right to suspend ceases and the payee could be in breach of contract if he does not then resume work.
The payee can claim an extension of time to any contractual time limit for the amount of time that work is suspended.LDEDC has also introduced the right for the payee to claim from the payer the reasonable costs and expenses incurred as a result of the suspension – this might include remobilisation costs for example.
THE SCHEME FOR CONSTRUCTION CONTRACTS
The parties to a contract may agree by consent that the Scheme applies. In addition, the Act also provides expressly that the relevant provisions of the Scheme will apply where a contract fails to comply with certain specified provisions of the Act.
The Scheme applies where the parties to a relevant construction contract fail to agree:
• the amount of any instalment or stage or periodic payment for any work under the contract, and/or
• the intervals at which, or circumstances in which, such payments become due under that contract.
The Scheme provides that the amount of any payment by instalment will be the difference between the amount that has already been paid or is due for payment from the commencement of the contract to the end of the “Relevant Period” (see below) and the following amounts:
1. an amount equal to the value of any work performed; and
2. where the contract provides for payment for materials, an amount equal to the value of any materials manufactured on site or brought onto site for the works; and
3. any other amount or sum which the contract specifies is payable.
The amount calculated cannot exceed the difference between the contract price and the aggregate of the instalments which have become due.
To calculate the value of the work performed the valuation or certification process in the contract (if there is one) will be used. If the contract does not provide for a process to calculate the value then the payee will be entitled to the cost of the work along with overheads and profit – this might be more than the payer was intending, so it would be preferable to the payer to have a valuation or certification process in the contract.
Dates for payment
If the parties do not provide an adequate mechanism to determine what payments are due and/or when they are due, the Scheme provides as follows:
A payment becomes due on the later of:
• the expiry of 7 days following the “Relevant Period” (if the contract does not specify a relevant period or one cannot be calculated by reference to the contract then this period is 28 days; or
• the making of a claim by the payee.
Final payment (in the case of contracts estimated at the outset to be longer than 45 days duration)
The final payment payable i.e. the difference, if any, between the contract price (the final sum due under the contract) and the total of any stage payments which have already become due under the contract, becomes due on the later of:
(a) the expiry of 30 days following completion of the work; or
(b) the making of a claim by the payee.
If the contract is not longer than 45 days in duration (and the payee is therefore not entitled to stage payments) then the payment under the contract also becomes due the later of 30 days following completion or the making of a claim by the payee.
Any other payment under a construction contract which is not caught by the above payment mechanism becomes due on the later of:
• the expiry of 7 days following the completion of the work to which the payment relates; or
• the making of a claim by the payee.
Final Date for Payment
If the parties have failed to provide for the final date for payment of sums due the Scheme states that the final date for the payer to make payment is 17 days after the payment due date.
Construction contracts must provide for notices of payment to be given. If they do not, then the Scheme states that the payer must give the payee notice no later than 5 days after the payment due date. The notice must state:
• the sum the payer considers to be due or to have been due at the payment due date; and
• the basis on which the sum is calculated.
It does not matter if the sum he considers due is zero, a notice must still be given.
Although the Act itself allows parties to agree that the payee can give the notice, or that another third party specified in the contract can give the notice, the Scheme only refers to the payer giving this notice.
Paying less than the notified sum
If the payer intends to pay less that the sum notified in the payment notice he must serve a pay-less notice. If the parties have failed to agree the period in which that notice must be served the Scheme provides that the notice must be given no later than 7 days before the final date for payment.
The Scheme will also automatically apply if the parties have stated that payments are conditional on the payer receiving payment from a third party (which is prohibited by the Act) but have failed to provide any other terms for payment.