Fundamental changes are being proposed to the legislation which governs construction contracts and statutory adjudication - The Housing Grants, Construction and Regeneration Act 1996, (the Construction Act).
The Local Democracy and Construction Bill is due to have its third and final reading in the House of Commons on 13 October 2009. If approved, the provisions are likely to come into effect in early 2010.
The Bill proposes changes to three key areas:
Unwritten Contracts
Currently, the Construction Act only applies to contracts made in writing. The proposed changes will repeal this provision, so that contracts made orally (either in whole or in part) will also be covered. This will mean that for the first time, oral contracts will be subject to the provisions relating to statutory adjudication.
The adjudication of oral contracts may however produce new problems. If there are no contractual terms on paper, it is likely to be very difficult for an adjudicator to determine what the terms of the contract were and which party is in default. The adjudicator may have to determine the terms of an oral contract based on which parties’ evidence he prefers. Given the inability to appeal an adjudicator’s decision, this may lead to a greater number of aggrieved parties.
It is still, of course, best practice for all contract terms (including variations to the contract) to be agreed and evidenced in writing. It is still surprising how many large scale contracts are conducted entirely on oral contracts.
Unfair Costs Clauses
Currently the parties to a construction contract are free to agree between themselves how costs should be dealt with if the matter is referred to adjudication. If one party is in a strong bargaining position, it can impose conditions at the tender/contract drafting stage that the party referring a dispute to adjudication (usually the weaker party) must each parties’ costs of the adjudication regardless of the outcome (often referred to as a “Tolent Clause”).
The new provisions will outlaw this practice and make Tolent Clauses ineffective.
New Payment Mechanism
The Bill also proposes a new mechanism for dealing with interim payments. It will be mandatory for every construction contract to contain provisions requiring either the payer or the payee to serve a notice specifying what it considers to be the amount due under an interim payment and the basis on which the sum is calculated. The amount specified in the notice may be challenged by the other party by serving a notice of intention to pay less than the notified sum.
The new payment machinery is, however, still complex and parties will need to ensure that deadlines are properly adhered to. There has been much criticism of the drafting of the new provisions and it is likely that disputes will occur as contractors and sub-contractors get to grips with the new provisions.
The Bill also provides that if a party suspends performance for non-payment of a sum, it can now claim a reasonable amount in respect of the costs and expenses incurred in exercising that right. This should mean that a party can claim the costs of removing people and plant off a site when it has not been paid.
Conclusion
The proposed changes have broadly been welcomed by the construction industry as a further attempt to improve cash flow for businesses and deal with disputes when they arise.
Standard construction contracts will need reviewing and amending to reflect the changes once implemented.
Steeles Law’s Construction Team
Steeles Law’s Construction Team act for and advise those connected to the industry on contracts, and how to avoid, manage and resolve construction litigation matters. The team acts for both public and private sector clients.
Recent instructions have included acting for a sub-contractor on two significant claims; one was for the sum of £2.2 million due under a final account and another which comprised of a number of adjudications with a counterclaim estimated at £650,000.