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Construction Act amendments receive Royal Assent

On 12 November 2009 the Local Democracy, Economic Development and Construction Bill (LDEDC Act 2009) received Royal Assent.  When the Act comes into force it will amend the Construction Act 1996.  The key objectives of the amendments were to improve the operation of construction contracts, particularly with regards cash flow and adjudication.

Briefly, the amendments to adjudication provisions include the introduction of a statutory slip rule for adjudicators’ decisions; and the restriction of the parties’ right to agree who will pay the costs of the adjudication until after the notice of adjudication has been given; and although construction contracts will no longer need to be in writing adjudication clauses will need to be documented.

The amendments to payment provisions in contracts include: -

The requirement that all construction contracts include an “adequate mechanism” for payment is still in place but the Act will prevent payment in a construction contract from being linked to obligations included in other contracts – for example terms which link payments owed by the main contractor to a sub-contractor to certification by the employer of the main contractors works – so called “pay-when-certified clauses”.  In effect this is likely to mean that contractors extend the time in which to pay subcontractors to ensure that they are in receipt payment owed to them under the main contract.  This prohibition will not extend to contracts where the works are to be carried out by a third party, for example if a management contractor is employed.

The amended Act will reverse the current focus is on withholding notices and make payment notices a key element of the contractual relationship; the construction contract must require either the payer or the payee to issue a payment notice for every payment provided for in the contract not later than five days after the due date – even where the amount of the payment is zero.  This should set out the sum due and the basis upon which that was calculated.

If the contract provides that the payer should provide the notice, and the payer fails to do this, the payee must instead issue a notice and the payees’ rights are restricted until he does this: he cannot suspend the contract, nor is the payer obliged to pay until the payee has issued a default notice.  Once the default notice has been issued by the payee the payer must pay the amount outstanding – alternatively the payer may issue a counter-notice indicating that he intends to pay less than the amount in the default notice.

The Act will strengthen the payees’ right to suspend the contract.  A party will be permitted to suspend part or all of it obligations where a payment notice has been issued but the payer has failed to pay by the final date for payment.  This right is subject to the giving of seven days notice to the party in default of the intention to suspend and stating the grounds upon which the suspension will take place and the right ceases when payment is made in full.  When the right is exercised the party in default will be liable to pay to the party exercising the right a reasonable amount of costs and expenses incurred by that party as a result of the exercise of the right.  Contractual time limits to complete works affected by valid suspension will be extended to allow for the period of suspension and any delay suffered as a consequence of the suspension.

It remains to be seen when these amendments will come into force, The Scheme for Construction Contracts Regulations 1998 must be amended before this can take place, and the government has indicated that it may begin the consultation process on this early in 2010.