Construction Act changes could ease payment pain
Published: 02 August, 2011
The revised and updated Construction Act, due to come into effect in October, should have a positive impact on payment practices — but there are some downsides too, says Rob Driscoll.
It was an historic time for the industry when the Housing Grants, Construction & Regeneration Act 1996, better known as the Construction Act, was implemented in 1998. It seemed to mark a turning point in the battle contractors had been waging over fair payment.
However, as with much legislation, it was far from perfect — in fact, it was something of a fudge as the industry had to compromise over a number of key issues to get the legislation through the Parliamentary process.
Happily, the act has now been revised following persistent prompting from the HVCA and other like-minded industry groups. The result is a beefed-up piece of legislation that tackles some of the worst practices of clients who withhold payment — particularly at a time when some of the worst malpractices of the last recession (onerous contract conditions, Dutch auctions etc.) have reared their heads again.
It is particularly in the area of retentions and ‘set-off’ payments where contractors should see a very welcome improvement in the ‘new’ Act. It also provides a more flexible approach to oral contracts and better control over payment notices and mechanisms. However, the new act will probably create even more complex legalistic arguments and has not sorted out big problems around the cost of adjudication.
The old act included a legal requirement for an adequate mechanism stating what payment becomes due and when. The new act clarifies ‘adequate’ by stating that payment mechanisms will be considered inadequate if payment is conditional upon either the performance of obligations under another contract or a decision as to whether obligations under another contract have been performed.
This is big news for sub-contractors because it will, effectively, eradicate pay-what/when-certified clauses that prevent sub-contractors from ever knowing when they are likely to receive the second half of retention payments. These clauses make the release of retentions conditional upon the release of certificates of making good of defects under the main contract — often upstream of where a building-services contractor is working and beyond his control.
This amendment should improve cash flow by getting rid of what has come to be known as the ‘silent discount’. This amendment should also outlaw the crippling practice of cross-contract set-off, which allows the paying party to set-off sums owed to it by the contractor against sums it owes under other contracts or even parts of the same contract.
The new act has also strengthened the hand of contractors when it comes to suspending work due to lack of payment.
Under the existing legal framework, if a contractor did not receive payment by the final due date and was not formally told why, he could suspend work on seven days written notice. The contractor was entitled to a commensurate extension of time, but not to the costs of suspension, which meant it was often not commercially viable to use this right.
The amended act now allows the recipient contractor the right to claim a reasonable amount for ‘costs and expenses reasonably incurred’ over that period of suspension.
In the case of oral contracts, or contracts which are partly oral or partly written, the legislators have also made progress. In the past, some adjudication processes were undermined by challenges in which one party would argue that the contract was not ‘wholly evidenced in writing and so the act did not apply. By allowing some contracts to be all or partly oral, the act has made the system fairer.
This is a welcome approach because few contracts in the building-services sector are entered into properly. Many are, at least partly, oral. However, this will still probably lead to initial arguments by both sides, consuming both time and cost, about what the terms of an oral or partly oral contract are and if a binding contract actually exists. Some critics would argue that the new act has swapped one set of legal challenges for another.
There has also been progress on ‘default notices’. The old act used to provide that the paying party had to issue a notice within five days of the due date for payment. There is now a broader requirement for the contract to specify who will issue this notice. As there was previously no sanction for not issuing a payment notice, the innovation is that if the payment notice is not issued, the contractor can immediately issue a default payment notice.
The introduction of third-party adjudication was a major advance for the old act, but it foundered over the thorny issue of who paid the costs. Sadly on this aspect of the law, the revisions have made the situation worse and possibly undermined this whole mechanism.
On the basis that adjudication was always supposed to be a quick and cheap method of resolving disputes over relatively small sums, the industry unanimously requested that clauses requiring the party calling for adjudication to pay the other side’s costs, win or lose, be outlawed.
Attempts to clarify this situation in the amended act have actually created a situation that actively encourages the type of clause which will make adjudication commercially untenable for SMEs which cannot, even if they win, afford the disproportionate cost of the other side’s bill. To date, Government has, quite outrageously, refused to change its position on this mistake, despite pressure from the HVCA and others.
The new act undoubtedly heralds a new era of legislative protection for the building-engineering-services sector by, if nothing else, at least outlawing payment mechanisms that are conditional upon events outside sub-contractors’ influence.
However, the downside is that the once user-friendly legislative framework has been made more complex and legalistic, so contractors will probably need to call on the services of legal specialists before being able to take advantage of some of the new provisions.
*Rob Driscoll is deputy head of the HVCA’s commercial and legal department.
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