23 Sep 2011
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Rush on to sign contracts to beat new construction laws

Firms rush to sign up construction contracts before the new construction laws take effect, explains Steven Hayward, solicitor at IBB Solicitors.

The pending amendments to the Construction Act 1996 (“the Act”) brought in by the Local Democracy, Economic Development and Construction Act 2009 will take effect on 1 October 2011 in England and Wales, and 1 November 2011 in Scotland. Companies in England and Wales now have just a few days to get their contracts in place if they wish to avoid the new rules.

Some companies have been rushing to agree deals to beat the deadline because there is no transitional period. Simply, if the contract is not in place by 1 October 2011, the new rules will apply. This is likely to create difficulties with:

larger projects – some contracts on larger projects will be in place and subject to the existing rules, whereas contracts entered into after the deadline (say sub-contracts further down the supply chain) will be subject to the new rules. It will be a headache administering this; and
frameworks – the new rules will apply to contracts called off after 1 October 2011 and so the previously agreed contracts may need to be re-written to comply.

From a cynical point of view, companies with stronger bargaining power may also want to complete their contracts before the deadline so that they can impose more restrictive payment clauses on smaller companies. I refer here to the pay-when certified and pay-when-notified clauses which are currently permitted, but will be prohibited under the new rules.

Much has been written about the changes to the Act and their impact on the construction industry but by way of a quick recap (i) the Act will apply to written and oral contracts (ii) a modified payment regime will apply (iii) the payee’s right to suspend is bolstered and (iv) existing barriers to adjudication have been removed (minor changes have also been made to the adjudication rules).

These amendments are aimed at improving cash flow down the supply chain. This is achieved by prohibiting payment practices that link payment down the chain with payment higher up the chain, and by enabling a payee to exert more pressure when payments are late. With delayed payment crippling the construction industry, these measures are welcomed by many.

On the flip side, under the new rules, the new payment regime is likely to create an administrative burden. There will also be an increase in costly adjudications as a result of oral contracts being brought within the remit of the Act (an adjudicator will need to determine what the terms of the disputed contract are before even considering the merits of the case). Therefore, it is still important to ensure that contracts are in written form.

Finally, companies should note that if deals are to be agreed after 1 October 2011 and they fail to comply with the new rules, then the revised rules contained in the Scheme for Construction Contracts will apply, by default. It is therefore imperative that companies become familiar with the new rules as soon as possible if they cannot beat the 1 October deadline.

steven.hayward@ibblaw.co.uk