On Monday the Local Democracy, Economic Development and Construction Bill reached the committee stage of the House of Lords where it should receive intense scrutiny. The Bill is expected to be enacted by the end of this year and to affect only contracts entered into after that date.
So far the only proposed amendments to the Bill’s changes to the Construction Act (“the Act”) have come from Lord O’Neill (from the government’s benches but in it seems his capacity as the Specialist Engineering Contractors Group’s president). They will not necessarily be made but indicate the extra measures that are being proposed, principally in favour of subcontractors and those further down the contractual chain. His proposals will shortly be debated and are as follows:
1. Require all payments under construction contracts governed by the Act to be triggered by a payee’s notice, in respect of which the payer will have a single opportunity to notify the payee if it intends to pay less. If the payer fails to give a valid notice on time (for whatever reason) he must pay the amount in the payee's notice. The proposed changes go further in requiring the payer’s notice:
(a) to be given no later than 14 days after the payment due date. Currently parties to construction contracts may agree that the payer may give a notice a day, say, before the final date for payment giving the payee little notice of a deduction from the amount it is otherwise expecting.
(b) to state the "precise reasons" for paying less.
The government ruled out proposals similar to these during the Act’s review process. However, the Bill presently requires the payer’s notice to state "the basis on which the sum is calculated" which case law suggests requires a fair amount of substantiation.
In addition, Lord O’Neill suggests removing the Bill’s provision allowing a payer to withhold if the payee became insolvent after the deadline for giving the notice (even though it was impossible for the payer to give his notice based on the payee’s insolvency).
2. With regard to the Bill’s ban on preconditions to payment based on matters happening under other contracts, Lord O’Neill proposes extending the range of matters to which the ban will apply.
3. Remove the insolvency exception to the ban on pay when paid clauses. The government ruled this out from the earliest stages of the Act’s review.
4. Empower payees to require the payer to provide in respect of payments "adequate security" ("including bank guarantees and bonds" but not, it seems, a parent company guarantee) at any time after a construction contract is concluded (even if it does not provide for security to be given). Otherwise the payee may suspend (after a seven day warning notice) until the security is given.
Such a change to the Act was not consulted upon during its review process. It would have significant implications in terms of the cost of obtaining security not to mention administering requests. It is drafted as a strict obligation so the payee would be entitled to suspend if the payer was unable to obtain the security for whatever reason.
5. Remove any requirement that any part of construction contracts should be in writing in order for the Act to apply. The Bill requires to be in writing only adjudication agreements that provide for rules other than the Scheme to govern adjudications (failing which the Scheme’s adjudication rules will apply).
6. Require all construction contracts to include the adjudication rules in the statutory Scheme that accompanies the Act. Such a change would prevent some Construction Act avoidance devices that would otherwise survive the Bill’s enactment. In January 2006 the government seemed to rule out legislating on this saying: “The industry may wish to consider whether to bring its own standard adjudication procedures more closely into line with one another”. This has not happened, although the JCT did adopt the Scheme in its 2005 suite of contracts.
7. Remove any right to withhold payment of an adjudicator's decision given under a construction contract governed by the Act. Currently withholding is possible in limited circumstances.
Unfortunately, there is still no sign of an amendment to prevent the Bill banning equivalent project relief provisions, which are standard to - and an important aspect of - PFI/PPP subcontracts.
For more on the Bill, please see our previous Law-Nows. Given its importance to the industry during these troubled times we will continue to follow closely its parliamentary passage.
