A quick guide to the Construction Act 1996 changes

There’s no getting away from the fact that the changes to Part II of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996, also known as the HGCRA), to be made by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (LDEDC Act 2009), are important. However, while some things will change, many things will stay the same.

You can’t afford to ignore the amendments, and while I won’t try to pick up on all the detailed issues that might arise, here are six golden rules to help you operate on a day-to-day level in contracts, in disputes, and on site:

1. The changes only affect contracts entered into (dated) 1 October 2011 or later

The changes to the Construction Act 1996 are in force from 1 October 2011 in England and Wales, and 1 November 2011 in Scotland (the effective date). They apply to contracts entered into on or after the effective date. Any contract dated before the effective date will remain be subject to the current Construction Act payment and adjudication rules, even if a payment is made or the adjudication begins after the effective date.

2. Follow the payment process

If you’ve entered into a construction contract, you will never be without payment terms. Unless you cover all the bases for yourself, the Scheme for Construction Contracts 1998 will apply, whether you like it or not. On 1 October 2011, the Scheme will change too, to work with the amended Act.

The payment mechanism under the Construction Act 1996 (as amended) will be similar to the mechanism under the Construction Act 1996 (as enacted) and will often look something like this:

• Application for payment (by the contractor, sub-contractor or professional consultant)
• Due date for payment
• Payment notice (from the paying party)
• If required, a pay less notice, which used to be called a withholding notice (from the paying party)
• Final date for payment
• If required, notice of intention to suspend (from the unpaid party).

As always, the devil will be in the detail, but this process will be familiar to anyone used to current construction contracts. However, do check your contract and the amended Construction Act the first few times you need to issue a statutory notice. For example, your usual form of withholding notice may not include how the sum you plan to pay has been “calculated”, as required by the amendments.

3. Understand the enhancements to the right to suspend

If you haven’t been paid what you are due under a construction contract, and the final date for payment has passed without a pay less notice, you have a statutory right to suspend performance of your obligations under your contract. You must give written notice to the paying party. At least seven days notice is required.

Under the Construction Act 1996 (as amended), this right remains, but the position has improved for the unpaid party. Under a construction contract dated on or after 1 October 2011, you may suspend “any or all” of your obligations. Previously, you could only suspend all of your obligations. If you do suspend, you must be:

• Paid the reasonable costs and expenses of suspending for non-payment (which may also include the costs of going back to site)
• Given more time to complete your obligations (this is no longer limited to the period of suspension itself).

4. Oral contracts and back of an envelope agreements

One change that will affect both disputes and payments under a construction contract is the repeal of the restriction that meant only contracts “in writing or evidenced in writing” counted as construction contracts. In other words, a deal in a meeting, a phone call, an email, or a letter (in fact anything that English or Scottish law allows to form a contract) could create a construction contract.

This is a new area bound to lead to disputes, some of which will end up in the Technology and Construction Court (TCC). However, to help avoid this:

• Remember that many things can create a contract, not just a signed and formal-looking piece of paper
• Consider changing any standard pre-contract minutes of meetings forms and pre-contract correspondence so that they expressly say “subject to contract”
• Enter into contracts in writing, as quickly as possible, so that (if there is a dispute) you won’t have to look through documents or rely on witnesses’ recollection of what was said and done to determine the terms of your contract
• Stop and think before you agree an oral variation to a written contract. For example, can you set out the agreed amendment in an email or something more formal instead?

5. Adjudication will mostly stay the same

While its not possible to predict the outcome of future court cases with any certainty, it would seem sensible to expect the landscape of adjudication to remain broadly familiar. The major change is opening up adjudication to oral and partly oral contracts. This is a change in scope, not a change in procedure.

On this point, one extra tip: to avoid an expensive legal argument if nothing else, don’t try and include a so-called Tolent clause in your construction contracts, requiring one party to pay all the legal costs of an adjudication.

6. Keep calm and carry on

While some current practices may stay the same, some of the details must change for contracts entered into after 1 October 2011. It is worth getting to grips with the changes to the Construction Act 1996 now. It’s one of the key pieces of legislation affecting the construction and engineering industry, and it hasn’t really changed for the last 12 years.

This article was produced by PLC Construction