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Construction contracts are facing significant changes when the Housing Grants, Construction and Regeneration Act 1996 amendments come into force in 2011.
The most controversial change is that construction contracts will not need to be in writing. Oral contracts or those only partly in writing are now open to adjudication. This expands the protection provided by the Act, but could make adjudication more contentious. If there is nothing on paper, the adjudicator is likely to find it more difficult to establish what the terms of the contract were and which party is in default.
The ban on ‘Pay When Paid’ will be strengthened in the new Act. The current ban on linking payment to certification of the amount to be paid under the main contract is extended to ensure that payment cannot be linked to performance or a decision made under another contract. What it means is that a subcontractor cannot be forced to wait for payment until a certain stage is reached under the main contract.
Payment notices will be tightened. If the payer is required to provide a payment notice and he fails to do so within five days of the due date, the payee may provide the notice instead at any time after this. This will postpone the final date for payment by the same number of days between when the notice should have been given by the payer, and when the notice is actually given by the payee.
The payment notice will have to state the amount that is due and how it has been calculated. If the payer does not show how the sum has been calculated then the other party can submit its own notice. Payment notice must still be provided even if there is nothing to be paid.
The current system of withholding notices will be replaced. Instead there will be a “Notified Sum” to pay. This can be the amount notified by the payer or by the payee if the payer has not issued a valid notice. The payer has the right to challenge the other party by notifying his intention to pay less than the notified sum.
The notified sum must state the amount considered due and the basis of calculation. If both parties have contractually pre-agreed that no payment will be made if the payee becomes insolvent, then the payer may refuse to pay a notified sum if the payee becomes insolvent after the prescribed period for a withholding notice - on or after the final date.
The new legislation will mean that companies can recover suspension costs if they have to suspend work because of non-payment. The defaulting party will have to pay the costs and expenses incurred by a payee who suspends under the new Act. This would mean that reasonable costs such as redeploying staff or removing equipment by the suspending party could be recovered.
No clause which claims to allocate adjudication costs will be effective unless the adjudicator is given the power to allocate costs between the parties. The only exception will be when the parties agree to such an arrangement after the appointment of the adjudicator and when it is in writing.
The aim of these changes to the Housing Grants, Construction and Regeneration Act 1996 is to help improve cash flow to businesses within the construction industry, and deal with disputes as and when they arise.
It is wise to ensure you are prepared to review and change construction contracts to incorporate these significant amendments from spring 2011.
Rob Langley is head of the construction and engineering group at Watson Burton LLP. Contact Rob via email at robert.langley@watsonburton.com or by telephone on 0191 244 4300. |