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We are having some fairly vigorous discussions over payments with the contractor on one of our projects, during which he told us that the payment provisions in the contract do not comply with a new "Construction Act" and are "illegal". We were very surprised by this as we used a standard JCT building contract. Is the contractor correct?

Answer

Part II of the Housing Grants, Construction and Regeneration Act 1996 (commonly referred to as the "Construction Act") has been amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009. Whether your contract complies with the amended Act depends on the edition of the contract that you used and when it was entered into. The amended Act applies to all construction contracts entered into from 1 October 2011 onwards. The JCT has produced new 2011 editions of its contracts, all of which comply with the amended Act: the previous 2005 editions, revised in 2009, do not comply with the amended Act and, since 1 October 2011, should not be used.

If your contract was entered into on or after 1 October 2011 and is not a 2011 edition (or has not been specially amended for compliance), then it will not comply with the amended Act. This does not make it "illegal": "illegality" means that something is contrary to the criminal law, and the amended Construction Act is a civil measure, and is not criminal law.

The amended Act requires construction contracts to contain slightly different payment provisions to those previously necessary:

  • the ban on "pay when paid" clauses is widened to catch clauses which make payment conditional on performance under another contract
  • the requirement for a "payment notice" to be issued by or on behalf of the employer within five days of the "due date" for payment is beefed up: the contract must cover the possibility that such a notice is not issued by allowing for the contractor to issue a default notice. This can be by making the contractor's application for payment the "default notice", which will apply unless a subsequent payment notice is issued by or on behalf of the employer;
  • payment notices must specify the amount considered due on the due date for payment, and the basis on which that sum is calculated;
  • "withholding notices" become "pay less notices" and, rather than setting out the amounts proposed to be withheld and the grounds for withholding, must now specify the reduced amount that is considered due and the basis on which that sum is calculated
  • in the event of non payment, the contractor can now suspend part or all of its obligations; and
  • in the event of suspension, the contractor is now entitled to loss and expense as well as an extension of time.

The changes are relatively minor, but it is important that contracts comply with these new rules. Failure to do so will result in imposition of the "Scheme for Construction Contracts". This has been amended to reflect the above changes.

This article first appeared in Professional Housebuilder in June 2012.

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