The Construction Act - answer to the recession seminar

The Construction Act 2009
- the industry’s answer to the
recession?
Richard Wade
Partner, Head of Construction

17 June 2009

Forecasts for Construction;
CPA Report – Autumn 2008
Construction output to decline by 7% in next 3 years
– return to growth in 2011 at earliest
Housing starts in 2012 will be below 2007 levels
Fewest private housing starts in 60 years
“dramatic fall” in industrial buildings; future prospects
for commercial development “exceedingly poor”

© Blake Lapthorn 2009

“These forecasts are without doubt the gloomiest we
have produced since compiling this information and
have been downgraded from just three months ago to
show the sharpest downturn since 1991. The
prospects for the industry over the next few years are
very precarious. Therefore it is critically important
that the government maintains its spending plans in
order to deliver the much needed investment in our
schools, hospitals, infrastructure and other public
sector investment.”
- Michael Ankers, Chief Executive, CPA


The early ’90s revisited?

Sir Michael Latham “Constructing the Team” (1994)
30 recommendations made; 2 adopted:-
– adjudication
– payment
Implementation of Housing Grants (Construction and
Regeneration) Act 1996
Review of 1996 Act by BERR; amendments likely to
be implemented in 2009


The Construction Act 1996

Two key recommendations of Latham
Introduction of mandatory provisions for payment and
dispute resolution via adjudication
Two 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 …?

Proposals to amend the 1996 Act
March 2004: Gordon Brown (as Chancellor)
announces review of Construction Act against
background of continuing payment problems
Original proposal was for an RRO
Formal consultations in 2005 and 2007


Inception of the new Act

Draft Construction Contracts Bill published for
consultation in July 2008
Included in Queen’s Speech, December 2008
Revised Bill receives 1st Reading in the House of
Lords
on 4 December 2008 (some changes from original
draft)
Provisions contained in Part 8 (Construction
Contracts) of the LDEDC


“Our amendments….will create greater certainty and
clarity of cash flow for all in the construction supply chain”
(emphasis added).

Baroness Andrews in 2nd Reading debate
in House of Lords on 17 December 2008


The twin objectives

The new Act makes potentially significant
amendments to existing provisions for:-
– Payment
– Adjudication


Amendments to payment provisions


Payment: the current weakness

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)


Payment: the current weakness

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


New proposed Section 111

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


‘Notified’ sum
The sum specified in notice issued by:
– payer
– payee
– payee (where payer fails to issue notice)
Notices must comply with new s110(A) – replacing
s110(2) requiring payer to issue payment notice
Contracts to indicate which party to issue notices
Notices to be issued no later than five days after
payment due date
Amount 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)


Notice to pay less

Payer can issue notice of intention to pay less than
notified sum
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: option 1

Notified sum to be
discharged
Payer/payee to
issue notified sum (on/before final
day for payment)

5 days

Payment due Final Date
date for payment



Payer/payee Payer issues Reduced
issues Reduction notified sum
notified sum Notice discharged

5 days Prescribed
period
Payment due Final date
date for payment



Payee operates Extended
Payer fails to issue
default by
notified sum
procedure 3 days

5 days 3 days
Final date for
Payment
payment
due 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(1)A]


Conditional payment (cont.)

Will 110(1)(A) actually outlaw pay-when-certified
clauses?
Will 110(1)(A) 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 to
recover reasonable compensation for “costs and
expenses reasonably incurred” during suspension
Payee can suspend any or all of his contractual
obligations


Amendments to adjudication
provisions


Removal of requirement for contracts to be
in writing
RJT Consulting Engineers v DM Engineering (2002)
Section 107 repealed: oral or oral/partly written
contracts within scope of Act
BUT provisions relating to adjudication (8
“compliance points”) must be in writing to comply with
s108


Slip Rule

New s108(3)(A)
Contracts must include provisions that adjudicator
has power to correct and clerical/ typographical error
arising by accident/omission


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


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?


Current 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
Act of Parliament in 2009?


If you have questions on this or other related topics, please contact:
richard.wade@bllaw.co.uk
Blake Lapthorn is an English law firm regulated by the Solicitors Regulation
Authority under SRA number 448793 whose rules can be accessed via
www.sra.org.uk
This presentation is protected by copyright and is not a substitute for detailed
advice on specific transactions and problems and should not be taken as
providing legal advice on any of the topics discussed.
A full list of our partners is available on our website at
http://www.bllaw.co.uk/about_us/a_to_z_of_partners.aspx or at any one of our
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The Construction Act - answer to the recession seminar

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