Construction Act changes finally come into force

From the 1 October 2011 the long awaited changes to the Housing Grants Construction and Regeneration Act 1996 ("the Construction Act") will come into force.

Richard Millard has been looking at the main changes the Act is introducing and in the first of two articles he looks at the very important changes to Payment Mechanisms and the rquirement to have a contract in writing. A second article will look at the changes made to the adjudication process.

 The Payment Mechanism: Payment Notices and Pay Less Notices

The payment mechanism under construction contracts and the terminology used have changed. The Act still confers a right to payment by instalments, stage payments or other periodic payments unless the duration of the works is less than 45 days.

The main changes however revolve around Payment Notices and the introduction of a Payment Default Notice and the change from Withholding Notices to Pay Less notices.

(i) Payment Notice and Default Payment Notice

Up until now there has not been a penalty attached to failing to give a payment notice by the required date stating the amount that is due to be paid and how it has been calculated. Where payment becoming due under a contract is dependent or conditional upon a certification process this can lead to a situation where a sub-contractor is left in limbo – if the value of the works have not been certified then money was not due and they could not suspend their works. They would have to encourage the main contractors or employer to value and certify the amount due and if that was not achieved they might refer the dispute to adjudication.

That has now changed. A payment notice can now be given by the payer, a specified person (such as an architect, engineer or contract administrator) or by the unpaid party (the sub-contractor).

If a payment notice is not given then a default payment notice can be issued. Where the unpaid party has submitted an interim application for payment, that can constitute a default payment notice.

The effect of the change is that if a payment notice is not issued under the contract within the prescribed period the amount claimed as due in an interim valuation will become the amount due (or the notified sum under the new terminology) and will be payable subject to the service of a pay less notice.

(ii) Pay Less Notice

Where a paying party wants to hold back some money for a reason, such as contra charges or LAD’s, under the old legislation it would serve a withholding notice no later than the prescribed period before the final date for payment of the amount that was due.

Withholding notices have been replaced by “Pay Less” notices.

A Pay Less notice must set out the sum considered to be due on the date the notice is served and include the basis of the calculation.

It must be served no later than the prescribed period before the final date for payment. The sum referred to in the pay less notice may be zero.

One difference is the requirement to set out the grounds for withholding money has been dispensed with and only the calculation of the amount to be paid is shown. One must assume that some description must be attributed to any amount being deducted in a calculation to identify what it relates to.

None of the changes affect the fact that interim payments are interim. That is, in the normal course of events on a project, if the paying party does not serve a pay less notice regarding one regular payment, it could serve a pay less notice relating to the next payment giving a recalculation of sums due. A paying party does not lose the right to serve a pay less notice by not serving it on the first occasion that it could have done so (unless, for example, the parties have agreed that an earlier interim payment was binding).

For a more detailed look at the changes from the position under the existing legislation and the new legislation please have a look at the Table which can be accessed by clicking on the link.

Contracts in Writing

Until now the Construction Act only applied to construction contracts where the agreements between the parties were in writing or evidenced in writing. Oral contracts were not covered and the payment mechanism and the statutory right to adjudication did not apply to oral contracts.

The requirement that the agreement must be in writing or evidenced in writing has been abolished. The Construction Act will now apply to all construction contracts whether they are in writing, partly in writing or made verbally.

For more information about the changes to the Construction Act or any issue arising from a construction contract please contact Richard Millard on 01908 689382 or by email at rmillard@geoffreyleaver.com