The Construction Act 2009 Are you ready?

Richard WadePartner, Head of Construction

richard.wade@bllaw.co.uk

21 September 2011

A short history …

Sir Michael Latham “Constructing the Team” (1994) 30 recommendations made; two adopted:-– adjudication – payment

Housing Grants (Construction and Regeneration) Act 1996“The Scheme”Some limited adoption (in practice) of other recommendations (such as project bank accounts)

The Construction Act 1996

Two key recommendations of LathamIntroduction of mandatory provisions for payment and dispute resolution via adjudicationTwo perceived effects– Improved cashflow (including outlawing of “pay when

paid” clauses)– Quicker and cheaper means of resolving disputes– But ….

Never “recession tested”

The Construction Act 2009

Amends the 1996 Act

March 2004: Gordon Brown (as Chancellor) announces review of Construction Act against background of continuing payment problems

Formal consultations in 2005 and 2007

Local Democracy, Economic Development and Construction Act 2009 (Part 8)

The key features of the new Act

Removal of requirement for construction contract to be in writing

Potentially significant amendments to existing provisions for payment

Minor amendments to adjudication provisions

Contracts other than in writing covered

RJT Consulting Engineers v DM EngineeringRJT Consulting Engineers v DM Engineering (2002) (2002)

Carillion Construction v Devonport Royal DockyardCarillion Construction v Devonport Royal Dockyard(2003)(2003)

Section 107 repealed: oral or oral/partly written contracts within scope of Act

BUT provisions relating to adjudication (eight “compliance points”) must be in writing to comply with s108

AMENDMENTS TO PAYMENT PROVISIONS

PAYMENT The Weakness in the 1996 Act

Section 110(1)(a) Contracts must have adequate mechanism for determining what payments become due and when

This is essential for operating ss.111 & 112 (withholding and suspension)

Likelihood that majority of contracts do not have adequate mechanism

‘Scheme’ not helpful: just contains list of what may be included in interim payments together with due dates and final payment dates

Two instances identified in new Act– Where due payment date determined solely by provision

of notice of sum due to payee (s110(1D)); or

– Where payment conditional upon performance of obligations (or decision relating thereto) under another contract (s 110A)

What falls short of ‘Adequate Mechanism’ (under LDEDC)?

Principle underpinning Adequate Mechanism – Revision of Payment Notices

Payer must pay notified sum on or before the final date for payment (s111)

New provisions for payment notices (ss110A and 110B)

‘Notified’ Sum

The sum specified in notice issued by:– payer– payee– payee (where payer fails to issue notice)

Notices must comply with new s110A – replacing s110(2) requiring payer to issue payment noticeIf payer fails to issue, payee may issue ‘default’ notice (s110B)Notices to be issued no later than five days after payment due dateAmount of sum considered due must be stated together with basic calculation

Payer’s Failure to Issue Notice

Payee can issue notice instead but final date for payment extended from expiry of five days – Note: potential impact on cashflow

But final date for payment intact if payee issues application before payment due date (provided such application is required/permitted by contract)

If contract not Act-compliant paragraph 9 of new Scheme applies giving payee similar redress

Notice to pay less

Payer can issue notice of intention to pay less than notified sum – s111(3)

Notice must indicate sum payer considers due on date notice is served and basis of calculation

Must be given no later than the “prescribed period” before date for payment

Payment Procedure Example one

Payer/payee to issue notified sum

Notified sum to be discharged

(on/before final day for payment)

5 days

Payment due date

Final Datefor payment

Payment Procedure Example two

Payer/payee issues

notified sum

Payer issues “Pay Less”

Notice

Reduced notified sum discharged

5 days Prescribedperiod

Final datefor payment

Payment duedate

Payment Procedure Example three

Payer fails to issue notified sum

Payee operates default

procedure

Extended by

3 days

5 days 3 daysFinal date for

paymentPaymentdue date

‘Conditional’ Payment – the end of ‘pay when certified’?

“Adequate mechanism” requirement not satisfied where:-– payment made conditional on performance of

obligations under another contract or decision by any person as to whether such obligations have been performed

(New sub-section 110(1A))

Conditional Payment (cont.)

Will 110(1A) actually outlaw pay-when-certified clauses?

Will 110(1A) conflict with current s113?

Pay-when-paid exemption in s113 not removed

Other Changes

No requirement to pay sum due where payee became insolvent after prescribed period and contract permits payer not to pay sum due in this event (Melville Dundas –v- Wimpey)

Improvement to suspension (s112) allowing payee:-

– (a) to suspend work only in relation to part (or all) of works and;

– (b) to recover reasonable compensation for “costs and expenses reasonably incurred” during suspension

AMENDMENTS TO ADJUDICATION PROVISIONS

Timetable

Currently; time runs from referral being sent or received?

New Scheme (para7(3)); adjudicator to notify parties of date Referral received – time runs from receipt

Slip Rule

replacement of case law; Bloor v Bowman (2000)New s108(3)(A)Contracts must include provisions that adjudicator has power to correct and clerical/typographical error arising by accident/omissionLack of clarity about time for correction (except where new Scheme applies – para 22A)

Costs in Adjudication

New s108A

Agreement allocating “costs relating to the adjudication” ineffective unless made in writing after giving notice of intention to refer the dispute to adjudication

This also refers to the fees and expenses of the adjudicator

Tolent clauses to be disallowed - TCC had begun to address in Yuanda v WW Gear (2010)

Verdict?

Improvement in payment provisions but complexities remain; still “lean” towards payer?

Abolition of s107 (written contracts) welcome

Abolition of Tolent clauses welcome

Single adjudication procedure advocated in some quarters but is this too intrusive into freedom of contract?

Progress

Final amendments made to Bill during 3rd reading in the Lords on 29 April 2009

Received 2nd Reading in the Commons 1 June 2009

Committed to a Public Bill Committee 1 June 2009

3rd Reading in the Commons 13 October 2009

Act of Parliament (following Royal Assent) 12 November 2009

Into force on ….. 1 October 2011!

The Construction Act 2009 Are you ready?

Richard WadePartner, Head of Construction

richard.wade@bllaw.co.uk

21 September 2011