The newly awaited Construction Act came into force in October 2011 so with a few months’ water under the bridge, how is it affecting contractors? Specialist solicitor Rebecca Dibb offers some practical advice on how the revised Act could help smaller businesses deal with powerful developers.

Rebecca, who advises clients involved in construction litigation and dispute resolution, explained: “We work with sub-contractors, contractors and developers so we’re well practiced at applying construction regulation from both sides of the fence.

“The amendments to the Construction Act were bought in following extensive industry consultation by the Government on how to improve payment practices (among other issue) in the construction industry. Generally speaking, the new legislation favours of the smaller party. This means it’s well worth small and medium sized businesses ensuring that they are fully aware of the remedies now available to them.”

The major changes under the Act can be summarised as follows:

1. Adjudication

Under the previous incarnation of the Construction Act the 28 day adjudication process which is designed to resolve disputes between contractors and developers relatively quickly, was only available to disputes under written contracts. The revised Construction Act now allows adjudication to be applied where there is a verbal contract in place.

Previously “tolent” clauses required a party referring a dispute to adjudication to pay all the legal costs of the adjudication. This made it very difficult for contractors and, to a larger extent sub-contractors, to bring adjudications due to the cost risks. The new act prohibits tolent clauses and is very likely to increase the number of adjudications taking place in relation to construction projects.

Rebecca commented: “Verbal contracts are very common in the construction industry so this change is likely to mean more cases are heard by adjudicators. While the process is speedy, it’s probably fair to say that adjudication has always had a bit of a reputation for ‘rough justice’ and with more cases being heard this way, some feel this reputation may become more prevalent. However, previously, in the absence of the option of adjudication, disputes under verbal contracts have been dealt with through litigation which is incredibly time consuming for all involved and potentially very costly for both parties.”

2. Payment

The previously commonly used ‘pay when certified’ clause, which meant contractors or sub contractors were only paid once payment on another contract was certified, was blamed by many for cash flow issues within the construction industry.

The new amended Act responds by outlawing the clause. Contracts must have an ‘adequate mechanism’ to ensure payment. The payer or the payee must issue a payment notice specifying the amount of the payment due and detail how the sum was calculated. There is a positive obligation on the payer to pay the notified sum. If a party wishes to withhold payment they must now issue a ‘Pay Less Notice’, rather than a withholding notice, otherwise, the notified sum must be paid.

Rebecca commented: “The new payment system is designed to improve the cash flow through the industry, but it is vital that both developers and contractors are fully aware of the details of the systems to ensure they aren’t at risk of unknowingly contravening the Act. We’d recommend that all parties review the payment provisions contained in their contracts and familiarise themselves with the new payment procedures and notices.”

3. Suspension of works

In cases of non-payment by developers, contractors have historically had the right to give seven days’ notice and suspend works. However this right was often difficult in practice for contractors as they were obliged to suspend all work on a site, were often liable for remobilisation costs and were bound by the original programme agreed.

Under the amended Act, as long as the correct procedures are followed, contractors now have the flexibility to choose to suspend all or some of their activities on site in the case of non-payment. They also have the right to claim back reasonable costs for de-mobilisation and remobilisation and other expenses of the suspension and they are entitled to an extension of time to the agreed programme.

Rebecca commented: “This really strengthens the hand of contractors who aren’t being paid properly. However it’s important that they understand and follow the correct procedure to ensure they remain on the right side of the law.”

Although the amended Act is now in force, experts predict that the transition period will last for twelve to eighteen months. “The consultation period for this Act was seven years so there’s been a lot of speculation about the effects it will have on the industry, but it’s only now it’s in force that a clear picture will emerge”, Rebecca commented.

“Generally speaking, there’s a lot in the Act that is designed to assist smaller players - typically contractors and sub contractors. This is why we’d recommend businesses spend some time getting familiar with rights and obligations the new Act brings, particularly with regards to adjudication and payments. Of course we are always happy to provide more formal advice as and when required – our familiarity with the construction industry means we are perfectly placed to do so.”