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Building Blocks of Construction Law series

Overview of the Housing Grants, Construction and Regeneration Act 1996

What is the Construction act?

Here Sara Cunningham, an Associate in our Construction, Engineering and Projects Team, gives an introduction to Housing Grants, Construction and Regeneration Act, also known as the Construction Act, including a brief overview of the key rights and obligations provided by the Act, payment notices, an application of the Scheme and a brief review of the adjudication process.

For more information, please contact Sara Cunningham or your usual Charles Russell Speechlys contact.

Transcript

In this webinar we will cover some of the key points of the Housing Grants, Construction and Regeneration Act, also known as the Construction Act, including a brief overview of the key rights and obligations provided by the Act, payment notices, an application of the Scheme and a brief review of the adjudication process.

The Construction Act was designed to aid cash flow in the construction industry and bring about quick resolution of disputes. It grants certain rights and obligations to a party to a construction contract.

So, starting first off with what does the Construction Act actually apply to? This is addressed in Section 104 of the Act. Essentially the Act applies where there is a construction contract for the carrying out of construction operations. The Act applies to oral or partly oral contracts as well as written contracts and will also include most consultant appointments. The meaning of what is and is not a construction operation for the purpose of the Act is dealt with at Section 105. Examples of some non-construction operations include the extraction or drilling of oil and gas, installation or demolition of steel work for the purposes of power generation and the manufacture or delivery to site of building or engineering components or equipment. In addition to the Act not applying to construction operations, there are also some specific exclusions from the Act, for example where there is a contract for the works to the residence of an individual homeowner, under Section 106 of the Act, this is not covered; and there are also some exclusion orders included within the Act which exclude specific contracts from the remit of the Act, for example a PFI contract, finance agreement and development agreements are usually all excluded from the Act.

If the Construction Act applies, there are a number of rights which cannot be excluded. We will address some of these in more detail on the next slides but a summary of these non-excludable provisions are on the screen. Just running through these quickly:

  • Under Section 108 of the Act, each party under a construction contract has a right but not an obligation to refer dispute to adjudication.
  • Under Section 109 of the Act, the party performing the works has a right to payment by instalments except where there is a short-term contract.
  • Under Section 110 of the Act, the contract must identify a due date and a final date for payment.
  • Under Section 110A of the Act, the party performing the works has a right to receive notice of payment from the paying the party not later than five days after the payment due date.
  • Under Section 111(1) of the Act, the payer must pay the notified sum by the final date for payment.

The only exception to this is under Section 111(10) of the Act, where the payee has gone insolvent at the last day when the paying party could have issued his pay less notice and the final date for payment. However, to allow the payer to rely on this clause, the contract must expressly state that the payer is not required to make payments where the payee has become insolvent.

  • Under Section 111(3), if the paying party intends to pay less than the sums set out in the payment notice or, in its absence, the default notice issued by the PAYE, then the paying party must issue a pay less notice. The pay less notice must be given before the final date for payment in order for the paying party to avoid having to pay the amount notified in the payment notice.
  • Under Section 112 of the Act, if payment has not been made by the final date for payment, the party performing the works has a right to suspend performance of the works for non-payment and can seek payment of his costs associated with suspending the works.

A key feature of the Act also prohibits conditional payment provisions. This means that any pay when paid clause or pay when certified clause is unenforceable in a construction contract unless it is a pay when paid clause which applies where the paying party has not been paid which applies where the paying party has not been paid due to upstream insolvency. The reason for this is to prevent a party up the line from relying on circumstances relating to its own contract to delay a payment under a separate contract. For example, the fact that an employer has not complied with its certification obligations to a main contractor cannot be used by the main contractor to deny payment to the subcontractor.

We will now have a brief look at payment notices, which when not issued properly cannot often lead to disputes and a party issuing what has become known as a smash and grab adjudication. A smash and grab adjudication is the term used to describe an adjudication seeking payment on the narrow ground that the contractual payment mechanism has produced a notified sum and this has not been paid. This typically occurs where the payee makes an application for payment, the paying party fails to serve a valid payment notice or pay less notice before the final date for payment and the payee then commences an adjudication claiming the sums stated as due in its payment application on the narrow basis that no payment notice or pay less notice was served. The actual value of the works becomes irrelevant for this purpose.

So what is a payment notice? A construction contract must provide for the payment notice to be given by the payer, a specified person, ie specified in accordance with the contract, for example the contract administrator, or by the payee itself. Under Section 110A(2) of the Act, to be valid a payment notice must specify the sum that the person giving the notice considers to be due or have been due at the payment date in respect of payment and the basis on which that sum is calculated. Even if the sum considered due is zero, a payment notice must still be given in the required form. When considering the timing of such notices, careful consideration should be given to the timings of such notice and the date for payments under the contract.

You will also hear the term “a default notice”. If the paying party fails to issue a payment notice within five days of the due date, the payee may issue a notice in default at any time stating the amount considered to be due and the basis for calculation. If a payee’s notice in default is issued, the final date for payment will be postponed by the length of time between the payer or specified person should have given the payment notice and the date the payee gave its notice in default. There is a positive obligation on the payer to pay the notified sum on or before the final date for payment, whether that is in the form from the paying party, the specified party or the payee itself. However, the paying party or a specified person can also issue a notice of intention to pay less or a pay less notice before the final date for payment. The pay less notice must specify the sum that the person giving the notice considers to be due on the date the notice is served and the basis on which that sum is calculated. This notice must be given not later than the prescribed period before the final date for payment specified in the contract or the Scheme.

Turning now to the Scheme under the Construction Act. To the extent that a contract does not contain certain payment and adjudication provisions as discussed earlier, then the relevant provisions of the Scheme under the Construction Act will apply. The Scheme supplements the Construction Act and provides fallback provisions where the Contract itself does not include the necessary payment and adjudication provisions.

As a quick recap, any construction contract must include the following payment terms:

  • an adequate mechanism for determining what payments become due under the contract and when those payments become due;
  • a final date for payment;
  • a valid payment notice must be given not later than five days after the payment due date by the paying party or a specified person, failing which the unpaid party may give a default payment notice; and
  • finally, the paying party must make payment of the notified sum by the final date for payment unless a valid pay less notice is served.

If a construction contract does comply in full or in part with these payment provisions, the payment provisions of the Scheme are implied. If a construction contract does not contain any payment rules whatsoever, all of the payment provisions provided in the Scheme will be implied in full into the contract.

If a construction contract complies in part with the payment rules required by the Act, then:

  1. the payment provisions that comply with the Construction Act will continue to take effect;
  2. any missing payment provisions will be implied into the contract by the Scheme; and
  3. any non-complying provisions will be replaced by the relevant payment provisions in the Scheme.0

Just as a reminder, if a construction contract contains a pay when paid clause, then that clause is ineffective and the payment provisions will be replaced by the payment provisions in the Scheme.

The next slide provides a brief outline of the payment timings where the Scheme is applied. As you can see on day one payment becomes due on the later of seven days after expiry of the relevant period, ie the period specified under the contract or where no period is specified, instalments are due every 28 days under the Scheme or the making of the claim by the payee. Not later than five days after the date on which the payment becomes due a notice specifying the amount of payment must be issued. Day 10 a notice of intention to pay less than the sum notified must be given seven days before the final date for payment, and the final date for payment is 17 days from the payment due date.

The last two slides deal with the process of adjudication. Adjudication could be a topic in itself, however, the purpose of the next two slides is to give you a general overview of statutory adjudication under the Act.

As explained earlier, the Construction Act provides that every party to a construction contract has the right to refer any dispute under the contract to adjudication. Parties to a construction contract cannot contract out of adjudication. Every construction contract must therefore include an adjudication procedure, failing which the adjudication provisions in the Scheme are implied in full.

Any adjudication procedure under a construction contract must include or must allow a party to give notice at any time of his intention to:

  • refer a dispute to adjudication;
  • provide a timetable with the object of securing the appointment of the adjudicator and referral of the dispute to him within seven days of such notice
  • require the adjudicator to reach a decision within 28 days of the referral or such longer period as agreed between the parties;
  • allow the adjudicator to extend the period of 28 days for his decision up to 14 days with the consent of the party by whom the dispute was referred;
  • impose a duty on the adjudicator to act impartially and enable the adjudicator to take the initiative in ascertaining the effects and the law.

A few points to note when considering adjudication:

  1. It is important to check whether the contract you are dealing with is pre or post 1 October 2011. For contracts entered into between 1 May 1998 and 30 September 2011, Section 107 of the Construction Act previously required a construction contract to be in writing in order for either party to have the statutory right to refer a dispute to adjudication. However, for contacts entered into on or after 1 October 2011, Section 107 was repealed and it is no longer necessary for the contract to be in writing in order for either party to have the right to refer a dispute to adjudication.
  2. The next point to be aware of is the adjudicator has no power to award costs to the parties. For contracts entered into on or after 1 October 2011, the adjudicator has the power to apportion his fees between the parties but each party will still remain jointly and severally liable for payment.
  3. Another point to be aware of is the decision of the adjudicator is a matter of contract and is binding only until the dispute is finally resolved by other means. For example, by litigation or arbitration or by agreement.
  4. The final point is if the unsuccessful party fails to comply with an adjudicator’s decision, then the usual route it is to enforce this by application for summary judgment in the Technology and Construction Court. A helpful summary of this process is set out in the TCC Guide which can be found online. Hearings for enforcement of an adjudication decision are usually listed quite quickly as enforcement proceedings are in essence a fast track procedure.

The final slide outlines the adjudication procedure under the Scheme. The general process is shown on the flowchart on the screen. This is as follows:

  • the referring party gives written notice for adjudication to the other party to the contract;
  • the referring party identifies the adjudicator who may be named in the contract or appointed by the nominating body named in the contract;
  • within seven days from the notice of adjudication, the referring party serves a referral notice on the adjudicator and every party to the dispute;
  • a response is then issued along with any further submissions from the parties permitted by the adjudicator; and
  • finally, the adjudicator is required to reach a decision no later than 28 days after the referral notice or 42 days after the referral notice if the referring party consents or such longer period as the parties may agree.

That now brings us to the end of this webinar. It was a quick canter through the Construction Act. However, hopefully this provides a brief overview of the key points to be aware of.

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