R&N Newsflash: Construction Act 2009 - Good News or Bad ?

Here it is at last, the “Construction Act 2009” will come into force on the 1 October 2011.  Is it good news or bad news?
Let’s start at the beginning! It will apply to all construction contracts that are entered into on or after this date, and brings significant changes to the current regime in respect of payment and adjudication. Will it stop disgruntled parties running off to the Technology and Construction Court on matters of law in an attempt to delay payment? Will the cash flow? That’s the idea.

The introduction of this new legislation follows an extensive period of consultation by the Government on how to improve payment practices in the construction industry. It is therefore imperative that you are aware of the changes that are contained in the Construction Act 2009 and how it will affect your business.

Adjudication

There are mixed views on Adjudication. The intention of Adjudication was to keep projects and cash flowing. Yet, the TCC was busy dealing with issues on whether all material terms were recorded in writing, and of course other arguments. The main change that will impact on adjudication is that the scope of the Construction Act has been widened to include oral contracts, thereby removing jurisdictional challenges based on contracts not being in writing, or evidenced in writing. Is this a step in the right direction? I am not convinced, even allowing for the fact that Adjudicators are experienced and quite often senior barristers. I expect that there will be further disputes in proving that an oral contract exists, and what terms were agreed by the parties, and by whom.

Payment

We now have a Payment Notice, which should state the amount to be paid, and the basis for its calculation. There is no sanction if the paying party fails to issue the payment notice. This has now changed. If the party making payment (referred to as the “Payer”) fails to issue a payment notice within 5 days of the due date, then the application for payment may serve to be the payment notice by default. In this case, the payer will have to pay the notified sum, as contained in the application by the final date for payment.

We will also have a “pay less notice” in lieu of a withholding notice, which has to be served by the payer before the final date for payment. The content of a pay less notice requires careful consideration. The pay less notice allows the payer the opportunity to give notice of his intention to pay less than the notified sum, and must be served within a prescribed period before the final date for payment. Here, the payer must specify the amount he considers is due on the date the pay less notice is served. This affords the payer a second opportunity to value the works, whereas previously he could only notify the amount he intended to withhold from the amount due under the contract.

All parties will need to have terms of payment, understand them and then follow them! Good news or bad?!

Suspension rights

Under the old Act, a party could walk off site in the event of non-payment, subject to serving the correct notices. There were many cases on whether the contract had been repudiated. The threat often worked!

The Construction Act 2009 gives additional rights in respect of suspending the work for non-payment. These additional rights mean that the contractor now has the right to suspend part or all of his obligations under the contract, not just all. If the contractor elects to suspend the works, the contractor is now entitled to the payment of a reasonable amount in respect of costs and expenses he incurs as a result of the suspension.

Who does this Affect?

Employers, subcontractors, consultants all need to take action now. We all need to understand the new rules and revise procedures. Contracts need to be updated. Standard forms must comply. And this applies to Consultants too.

Actions

Have a written contract and understand and follow the terms. But, we all know, construction projects are not perfect. There will be sub-contracts, variations, extras and other terms not in writing. Take minutes of meetings, circulate them, use email to record an agreement, use standard forms where parties can tick boxes to confirm an action. Letters of Intent will help avoid such issues, but ensure their scope is limited, capped in value and include key terms.
There will be problems and I expect an initial flurry of litigation. My view is that it is a step in the right direction, although I am not convinced on adjudicating oral contracts! Do you think it has gone far enough? Residential contracts anyone?


For further information on the Construction Act 2009 and any construction issues, contact Peter Hastings 01603 666001 or ph@rogers-norton.co.uk.