The Construction Acts – what are they and what do they actually do?

I am fairly confident that every contractor or sub contractor will at some stage be told “its in the Construction Act” and equally sure that none of those contractors or sub contractors has ever seen or read the Construction Act.

There are a small number of Acts and Regulations that together are known as the Construction Acts and that offer vital protection to contractors and sub contractors.

The most important of the acts is the Housing Grants, Construction and Regeneration Act 1996.

This act introduced minimum contractual standards in construction contracts .In particular,

1.    The act outlawed most “pay when paid” provisions in construction contracts.

2.    The act provided for a right to stage payments for contracts that were expected to take more than 45 days to complete.

3.    The act provided that construction contracts had to have an adequate mechanism for payment and were to provide a final date for payment for any sums that might fall due under the contract.

4.    The act required that the Payer was to serve a Notice of Withholding if it intended to withhold sums from the sums due to the Payee.

5.    The act provided that a Payee had the right to serve a notice of its intention to suspend the performance of its obligations under its contract in the event it was not paid sums that were properly due to it.

6.    The act was intended to apply to commercial contracts and did not apply to contacts made with owner occupiers or in respect of property that was intended to be the future residence of a contracting party.

The provisions of the act were implied into all construction contracts when the agreement between the parties did not provide for them.

Unfortunately, the provisions of the act only applied to agreements made in writing and that meant that verbal agreements did not attract the protection of the act.

The act introduced the new adjudication procedure. This provided for quick, inexpensive and effective dispute resolution. The procedure was designed to take 28 days (rather than the 12months or more of court proceedings), be enforceable and importantly neither party could claim its legal costs from the other. A small contractor could therefore take proceedings against a Main Contractor without the fear of a crushing costs bill if it lost the proceedings. 

The Scheme for Construction Contracts (England and Wales) Regulations 1998 added to the 1996 Act.

The regulations provided a scheme for the appointment of an Adjudicator where the written contract failed to do so and set out both the Adjudicators powers and the manner in which the adjudication was to be conducted.

The second part of the regulations provided detailed provisions setting out when contractors could make applications for payment and when those applications should be paid.

The “Scheme Rules” as they are known were to be implied into all written construction contracts in so far as the contracts did not have an adequate mechanism for payment.

The 1996 act was amended by The Local Democracy, Economic Development and Construction Act 2009 which made a number of changes to the earlier act.

The provisions of the 1996 act were extended to verbal contracts.

The act provided additional powers for an Adjudicator to correct his decision when published and clarified the circumstances in which the parties could give an Adjudicator the power to award legal costs between the parties.

The act provided that payment terms providing that a payment will be due upon the completion of an obligation in a superior contract, or a decision by a person whether obligations in a superior contract have been performed was not an adequate payment mechanism. This provision ended the payment of retentions when the Main Contractor was issued with a Certificate of Making Good and Sub Contractors waiting for the Employer to certify the Main Contractors work before they got payment.

Most importantly the 2009 act brought in the Payment Notice and Pay Less Notice regime. Under the 1996 act a Payer could issue a Withholding Notice against an application. If no notice was served the Payee was entitled to the sums that were properly due to it but would have to prove that the sums it claimed were properly due to it

Under the 2009 act the Payer has to issue a Payment Notice setting out its valuation of an application it has received (the notified sum). If it does not do so the Payee is entitled to the full amount of the application unless the Payer serves a Pay Less Notice setting out what sum it intends to pay less than the notified sum and the basis on which that sum is calculated.

The obligation is now on the Payer to react to an application and if it fails to do so the Payee can demand payment of its application.

Finally, the Scheme Rules were reviewed and amended in 2011. The amendments took into account the changes in the law in the 2009 act and made a number of textual changes to the 1998 Scheme Rules.

The Construction Acts are the source of fair and reasonable construction contracts in England and Wales and every contractor should have some knowledge of their terms in order that he knows what he is entitled to in his agreements for work.

David Jackson, National Legal Consortium, www.nlcuk.net