Friday, September 12, 2008

The draft Construction Contracts Bill 2008

The main amendments to the draft Construction Contracts Bill 2008.

Summing upThe case: The draft Construction Contracts Bill 2008.The issue: Potential amendments to the statutory provisions for adjudication andz payment in construction contracts.The implication: Refer to the Department for Business Enterprise & Regulatory Reform website for a copy of the draft Construction Contracts Bill and details of where to submit comments by Friday 12 September 2008.

Ten years after the coming into force of the Housing Grants, Construction and Regeneration Act, the department for Business Enterprise and Regulatory Reform has published its draft Construction Contracts Bill setting out the proposed amendments to the Construction Act.
Comments are invited upon the drafting contained within the Bill by not later than 12 September 2008. The key amendments, which will be introduced by the new legislation, are as follows.

Section 107 of the 1996 Act, by which the provisions of the Act are applicable only to contracts evidenced in writing, will be repealed. In March 2002, in the case of RJT Consulting-v-DM Engineering, the Court of Appeal interpreted Section 107 to the effect that all the terms of the contract were required to be in writing for it to be subject to the provisions of the Construction Act. At a stroke, unscrupulous contractors had found an opportunity to step outside the whole regime. The new provisions will mean that a construction contract that is oral or partly oral will now be covered by the Act.

At the outset it was imagined that adjudicators would be unable to deal with disputes within the strict timescales required if they were also to be expected to identify the underlying terms of the contract in the absence of clear written terms. The undeniable success of adjudication has caused many to believe that this is no longer a problem.

Contractual provisions in relation to adjudication will continue to require to be made in writing, otherwise the Scheme for Construction Contracts will prevail.

New Section 108A

A proposed new Section 108A will render ineffective any contractual provision that seeks to allocate the costs of adjudication between the parties, unless the agreement is made after the appointment of the adjudicator. This will bring an end to clauses that required subcontractors to pay both parties costs in the event of an adjudication with the main contractor, whether the subcontractor won or lost.

The proposed amendments to the Act will also clarify the provisions in relation to pay when paid clauses [are] in construction contracts. Some contract drafters have attempted to bypass these provisions by using pay when certified clauses. These will be ineffective.

The most difficult area for the new legislation concerns the proposed amendments to the payment and withholding notices. The proposals are to discard the Section 110 and 111 payment and withholding notices as currently laid down in the Construction Act and replace these with entirely new notice requirements. The changes are quite significant and considerable debate as to the proper interpretation of these provisions can be expected.

Section 110A changes

The new Section 110A will require either the paying or the payee party to give a payment notice setting out the sum due and the basis upon which that sum is calculated. The payment notice is to be given not later than five days after the payment due date. Where the paying party is required to give a payment notice and it fails to do so, the payee party may issue a payment notice in default. The amount set out on the payment notice (and this will include the payees payment notice issued in response to a default of the other party) becomes the notified sum and the payer must pay the notified sum on or before the final date for payment.

Section 110A will remove the rather clumsy wording in the current Section 110 where the payment notice is required to identify the amount due or the amount that would have become due if no set-off or abatement was permitted by reference to any sum claimed to be due.

Although the proposed wording contained in the draft Bill is silent on this point, it seems clear that the intention of this change is to ensure that the notified sum is not limited simply to a valuation of the works. The notified sum under the new Section 110A will also take account of any cross claims to which the paying party considers itself entitled.

In other words, where the paying party considers it is entitled to reduce the amount otherwise due, for example for works not carried out in accordance with the contract, or to recover monies owed from the payee party, the notified sum will take account of these adjustments. Expect some agonies here.

The new Section 111 establishes the requirement for the paying party to pay the notified sum unless the payer or certifier gives notice of an intention to pay a lesser amount, in which case the basis for the calculation of that lesser amount must be given.

Although it is no longer described as a withholding, it appears that the new Section 111 will nevertheless give the paying party a second opportunity to consider and apply cross claims. Expect some more agonies here.

Given that the government now seems to have resolved all of the policy considerations that have been so extensively debated since the review was announced in 2004, it now seems likely that these provisions will find their way onto the statue books during the course of next year.