The long-awaited amendments to the adjudication and payment provisions of the "Construction Act" will come into force on 1 October 2011 in England and Wales and 1 November 2011 in Scotland.  The provisions of the Local Democracy, Economic Development and Construction Act 2009, along with corresponding amendments to the Scheme for Construction Contracts (which are yet to be published), will apply to all construction contracts entered into after the relevant commencement date.  Employers, contractors and consultants should take note.

Key changes: Payment mechanism

  • 1. Each time a payment is to be made, a payer, or specified person (employer's agent etc.), or payee (where the contract so provides), must serve a notice specifying the sum to be paid and how it is calculated no later than five days after the payment due date, even where sum due is zero.
  • 2. If the payer fails to issue a payment notice within five days, then the payee may serve a notice stating the sum it believes to be due and how it is calculated.
  • 3. The amount set out in the payer/payee notice becomes the "notified sum". If the notice is issued by the payee under 2 (above), then the final date for payment is postponed by the number of days by which the notice was delayed in issue.
  • 4. If the payer intends to pay less than the notified sum, then he must issue a pay less notice.  This notice replaces the current withholding notices, and must specify the sum to be paid and how it is calculated.  Unless the parties agree otherwise, the notice must be served seven days before the final date for payment (17 days from the date that payment becomes due), failing which notified sum must be paid.

Key changes: Adjudication

  • 1. "Construction Contracts" will no longer need to be "in writing" for the Act to apply.  The statutory provisions relating to adjudication, payment and suspension will therefore also apply to construction contracts that are oral or are only partly in writing.
  • 2. Contractual provisions for Adjudication must be in writing, failing which the Adjudication provisions of the (amended) Scheme will apply.
  • 3. Effect is given to the "slip rule", which allows an Adjudicator to correct any clerical, typographical or arithmetical errors in his decision, provided that he does so within five days of his decision.
  • 4. Any agreement as to the allocation of the parties' Adjudication costs is of no effect, except where made after commencement of Adjudication.

Further changes: of particular note for employers

  • 1. The 2009 Act confirms that contractual provisions allowing a party to withhold payment of sums due in the event of the payee's insolvency are valid.

Further changes: of particular note for contractors / sub-contractors

  • 1. "Pay when certified" clauses in sub-contracts are outlawed, as are clauses making payment conditional upon performance under another contract or upon a third party decision upon such performance.  There is an exception for first-tier PFI sub-contracts (for example, the main construction sub-contract).
  • 2. Section 112 of the 1996 Act is amended to allow partial suspension of performance for non-payment.  The Act further allows a party exercising the right to suspend to recover its reasonable costs.  This will likely include mobilisation / demobilisation costs.

If you have any queries on this note, please contact one of our partners (Iain Drummond, Kevin Taylor, David Anderson, Euan McLeod and Lynne Scott on 0131 228 9900), or e-mail: construction@shepwedd.co.uk.

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