This free document summarises the UK legislation which requires contracts for construction operations to contain certain terms including those relating to payment, suspension and adjudication. The law was originally passed in 1996 and changes came into effect on 1 October 2011.
CONSTRUCTION CONTRACTS IN THE UNITED KINGDOM
There is legislation that applies to contracts for “construction operations” within the UK. Broadly speaking, this covers all contracts involving building operations, both new buildings and maintenance or repairs of existing buildings, within the UK. The main exception is construction work for residential occupiers. The law applies not just to building contracts but also to contracts appointing an architect, engineer or other professional consultant in relation to a construction project as well as to specialist contractors.
This legislation was first enacted in Part 2 of the Housing Grants, Construction and Regeneration Act 1996. Changes were made in Part 8 of the Local Democracy, Economic Development and Construction Act 2009, effective from 1st October 2011. For convenience this note refers to the legislation as “the Construction Act” and we deal with the law as at 1 October 2011.
The Construction Act contains certain mandatory provisions relating to payment and adjudication as a means of resolving disputes. This now applies whether the contract is made orally or in writing or a mixture of the two.
Sections 109 to 113 of the Act deal with payment.
Where the duration of a contract is likely to be 45 days or more, a construction contract must provide an adequate mechanism for determining what payments become due under the contract, when they become due and contain provision for a final date for payment of each sum becoming due. For example, a contract may state that interim payments become due on 1st of each month for work carried out in the previous month, the contractor should submit a payment notice within 5 days of the due date and the final date for payment is 28th of the month.
Points to note are:
It is illegal for a construction contract to contain a “pay when paid” clause – i.e. a provision which makes payment under the contract conditional upon the payer receiving payment from a third party. In other words, a main contractor cannot make payment to a subcontractor conditional upon payment being received from the employer under the main contract.
“Pay when certified” clauses in construction contracts are also outlawed: it is not permitted to make payment conditional on performance of obligations under another contract.
- The contract must have a requirement for a notice to be issued within 5 days of the due date, specifying the amount due at the due date and the basis on which that amount is calculated. The contract can require the payer, a third party (e.g. the project manager) or the payee to give this notice and the notice must be given even if the amount due is zero.
- If the contract requires the payer or some other person (e.g. the project manager) to give the payment notice and they fail to do so, then the payee can give the notice. But the payee should do this as soon as possible as any delay will cause the final date for payment to be postponed. So, if no payment notice has been issued by the employer within the 5 day period from the due date, and the contractor only serves their own payment notice a week later, the final date for payment will be postponed for a week.
Withholding of payment
Section 111 makes it illegal for a party (usually the employer) to withhold any amount from a payment which has become due unless within a specified period before the final date for payment, that party has given an effective notice of its intention to pay less than the amount shown in the payment notice. The “pay less” notice must state the amount the payer intends to pay and “the basis on which that amount is calculated”.
The period within which the pay less notice is to be given should be specified in the contract.
For example a contract may state that if the employer intends to pay less than the amount specified in the payment notice, it must give a “pay less” notice to the contractor at least 3 days before the final date for payment and that notice should specify the amount it intends to pay and the basis on which this amount is calculated.
The right to suspend performance of a contract is given to a party who has not received full payment of the amount which has become due by the final date for payment and no pay less notice has been given. In those circumstances, the payee must give 7 days’ notice of its intention to suspend performance, and if payment is made within that period, the right to suspend ceases. There is no need to give this right of suspension expressly in the contract as it is covered by the wording of the legislation.
Other points to note are that the payee:
- may suspend some or all of their obligations
- will be able to recover the reasonable costs and expenses resulting from the suspension
- will get an extension of time for the period of suspension plus any consequential delay.
Section 108 of the Construction Act contains provisions which give any party to a construction contract the right to refer a dispute arising under the contract to adjudication. The section states that a party can give notice at any time of their intention to refer a dispute to adjudication and the timetable must be designed to secure the adjudicator’s appointment and the referral of the dispute within 7 days of the notice, with the adjudicator’s decision within 28 days from referral. This 28 day period may be extended by 14 days with the consent of the referring party or for any other period by agreement between the parties.
The adjudicator must act impartially and be able to take the initiative in ascertaining the facts and the law.
The adjudicator’s decision will be binding (and must be implemented) until a dispute is finally determined by legal proceedings, arbitration or agreement. Some contracts will state that if the adjudicator’s decision is not challenged within a specified period, the adjudicator’s decision shall be final and binding.
It is not possible to contract out of these provisions and if the contract is silent on adjudication, there is a statutory scheme – the Scheme for Construction Contracts – which will apply.
Thus, even if the contract is silent, a party to a contract to which the Act applies can require that a dispute is referred to adjudication.
Since 1 October 2011, there are three other points to note:
- It is not permissible for the contract to specify how the costs of an adjudication are to be allocated between the parties. A provision referring to the allocation of the costs is ineffective unless (if it is in the contract) it gives the adjudicator power to allocate his fees and expenses between the parties or it is agreed in writing after an adjudication notice has been given by one of the parties. This is intended to outlaw the practice previously adopted by some main contractors of having a deterrent clause in the contract making the subcontractor liable for both parties’ costs in the event of adjudication, regardless of the outcome.
- If a “pay less” notice is referred to adjudication and the adjudicator decides that more than the amount in the notice should be paid, the additional amount must be paid within 7 days of the adjudicator’s decision.
- The contract should contain a provision allowing an adjudicator to correct a clerical or typographical error in his decision. If it does not, then the Scheme for Construction Contracts (2011) will apply, and the adjudicator will have this power anyway.
There are a number of organisations which will appoint an adjudicator and which have adjudication rules which are compliant with the Construction Act. These include most of the main professional bodies – RIBA (Royal Institute of British Architects), RICS (Royal Institution of Chartered Surveyors), ICE (Institution of Civil Engineers) etc.
For example, an adjudication clause may say:
Either party may refer a dispute arising out of this Agreement to adjudication by giving notice to the other party. The adjudicator, if not appointed by agreement between the parties, shall be appointed by the President of the Institution of Civil Engineers on the application of either party. The adjudicator shall act impartially and be free to take the initiative in ascertaining the facts and the law. The adjudicator shall be required to reach a decision within 28 days of referral or such longer period as the parties may agree. The adjudicator shall have power to correct a clerical or typographical error in his decision.
The adjudicator’s decision shall be binding on and implemented by the parties and, unless either party gives notice to the other within 60 days from the date of the decision that it intends to challenge the decision, the decision shall be final and binding on the parties and shall not be subject to any further legal proceedings.
It should be noted that the Construction Act is so written that if a construction contract does not comply with the Act, the contract will, in effect, be supplemented by the (statutory) Scheme for Construction Contracts. This sets out details of provisions with respect to payment by instalments and adjudication which will take effect in those circumstances.
Our documents are prepared for international as well as domestic UK use and not all of them contain provisions which are compatible, or fully compatible, with the Construction Act. These notes are designed to assist purchasers of our contracts who wish to use the documents within the UK. The law is quite complex and these notes summarise the main points as well as include some illustrative wording, but our notes are not comprehensive and legal advice should be obtained when drafting a construction contract.
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