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6 months to go: should we fear the Construction Act 1996 changes?

On 12 April 2011, the SCL held one of its regular meetings. The subject was the forthcoming changes to the Construction Act 1996, under the title “Payment under the new Construction Act: practical dilemmas“. The meeting was chaired by Tony Blackler, with Rupert Choat and John Riches speaking.

The changes to the Construction Act 1996 (in the LDEDC Act 2009) are expected to come into force in October 2011. That is less than six months away. Regular readers of PLC Construction will be familiar with the changes. (For example, see our FAQs, practice notes, checklists, standard clauses, slideshow, and blog posts).

However, we also thought you might be interested in the discussion at the SCL meeting.

The changes from the payer’s perspective

Rupert spoke from the payer’s perspective. He summarised the LDEDC Act 2009 changes in three words: overhaul, uncertainty and laughable.

Overhaul. The current system has been overhauled, which he argued will involve wholesale changes to construction contracts and payment practices.

Uncertainty. For example, what impact will the loss of the “in writing” rule have on the number of disputes, particularly over payment? Without something in writing, will parties have a contract at all or will they fail at the first hurdle because they do not know what payment terms they have or how those terms will be implied from the Scheme for Construction Contracts 1998 into their (oral or partly oral) contract? What does “the basis on which that sum is calculated” mean? (For example, it is used in sections 110A(2)(b)(ii) and 111(4)(b).)

Laughable. This was a summary of a sentiment, rather than a response to the changes prompted by particular examples.

Rupert concluded that the changes bring a downside for payers. If you want to know more about Rupert’s views, see his April 2010 paper on the changes.

Through the eyes of a sub-contractor

John’s approach expressed the world of payment from the sub-contractor’s viewpoint, both before and after the changes.

John suggested that under the current system, a sub-contractor is always waiting to be paid, rarely knows when it will be paid and often (if not always) doesn’t receive a payment notice, but does get lots of withholding notices. The onus is always on the sub-contractor to prove it is not in default (because of, for example, alleged defects) and should be paid.

John argued that things may not change much in practice for the sub-contractor under the new system, although the notice system does change with the concept of a “notified sum“, which may ensure that the sub-contractor at least knows what it should be paid. Withholding notices have become pay less notices, but John feared they will simply refer to the net sum due, not the calculation of how to get to that point.

John thought that there would be arguments over what an adequate payment mechanism is and the meaning of “basis” (just like Rupert). He also wondered what will happen to conditional payments. Ultimately, John thought the only notice that matters is the pay less notice and suggested that, despite the changes, payers may still not bother with payment notices.

Should we all be afraid?

Marie Curie once said:

“Nothing in life is to be feared. It is only to be understood.”

There was certainly a lot of fear of the changes in the SCL meeting, but we believe that, when more in the industry have had the time to read the amendments and to work out for themselves what it all means, that fear will begin to melt away. To help, take a quick look at this redline copy of the Act, as amended. Many of our materials, like this checklist, are designed to help readers get to grips with, and understand, the changes.

It is easy to overcomplicate the changes, to think that they are reinventing the wheel. They are not. It is important to understand what will change and how to draft contracts accordingly, but that is not to say the industry is faced with a blank page, starting from scratch, like it was in 1998.

Equally, the scope of what may be adjudicated has been widened (to include oral and partly oral contracts), but the underlying system of adjudication is the same.

To give one example, both Rupert and John talked about the meaning of “basis”. The issues they raised included the true meaning of “basis”, and establishing and defining thresholds for it.

However, our view is more simple. Section 110(2)(b) of the Construction Act 1996 (as it currently stands, before the amendments), in the context of payment notices, refers to the:

“basis on which that amount was calculated”.

This does not seem very different to the “basis” that will be used in future, when the LDEDC Act 2009 changes take effect (for example, section 110A(2)(b)(ii)):

“the basis on which that sum is calculated”.

There aren’t a huge number of cases on the true meaning of a payment notice and we anticipate there will be few going forward.

There is a straightforward approach

The meeting ended with Tony Bingham suggesting the new system is straightforward if you have a payee-led approach, with the contractor or sub-contractor applying for payment. On balance, we agree with Tony.

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