The Construction Act

The Construction Act[2] implies a payment and notice mechanism into a construction contract and provides the parties with an adjudication procedure.  Where Construction Act dates and periods are not set out in a construction contact, the Scheme[3] provides for default dates and periods.  You cannot contract out of the implied terms of the Construction Act.

What is a Construction Contact?

A construction contract is a written or oral contract under which a party is carrying out construction operations (widely defined) other than some exceptions, the main exceptions being the following.

• Drilling or mining.
• Construction of nuclear or process plants.
• Manufacture or delivery of construction materials.
• Installation of works of art.
• Construction of dwellings or extensions to dwellings for a person living in that dwelling, even if they have to move out whilst works are done or are not moving in until works are done.  However, note that the JCT home owner building contract contains contractual adjudication provisions. 

What is the payment mechanism?

The payment mechanism is very straight forward.

First you need to understand two dates.

• The date when payment becomes due (often called the due date for payment) will normally be stated in the construction contract.  If it is not stated in the construction contract, the Scheme implies periodic payments and a due date seven days after date of the relevant valuation.
• The final date for payment will also often be stated in a construction contract.  The Construction Act allows any period between a due date and final date to be agreed under a construction contract.  However it must be a set period – the period cannot be the period ending on ‘the date we agree your valuation’ or ‘the date on which we get paid by our employer’.  If a construction contract is silent as to the final date the Scheme sets the final date as seventeen days after the due date. 

Second you need to understand notices, which are vital for payment under the Construction Act.

• The person paying, the payer, must provide the person receiving payment, the payee, with a payment notice setting out the payment date, the amount intended to be paid and a breakdown of that amount in reasonable detail.  If the payer fails to provide a payment notice to the payee, the payee can provide the payer with a default payment notice.  Both are referred to as payment notices below.
• The payer is entitled to serve a pay less notice no later than a date set by reference to a period prior to the final date for payment.  This period is often set out in the construction contract.  If it is not set out in the construction contract the pay less notice must be served seven days before the final date under the Scheme. The pay less notice must state the payment date, the amount intended to be withheld and a breakdown of that amount in reasonable detail. 

If a payment notice has been provided with no pay less notice served there are two consequences.

• The payer must pay the payee the amount stated on the payment notice and the adjudicator must order that the payee be paid.
• The payee can suspend work.

What is adjudication?

Adjudication is binding but is not final.  The adjudicator’s decision can be enforced through summary judgement without any rehearing.

However, whilst the payer has to pay in compliance with the adjudicator’s decision, they can have the case reheard in the Technology and Construction Court (TCC) and here the absence of a pay less notice has no effect.  The adjudicator’s decision can then be reversed, with an order for return of the amount paid.

The problem is that there is a strong costs disincentive to a rehearing.  For a simple case a TCC rehearing will cost a party £15,000 to £20,000 (ex VAT). The TCC can make the usual costs order but the winning party is very unlikely to be able to recover all their costs. 

An adjudication decision may only be of interim effect.  A failure to serve a pay less notice does not prevent the resulting ‘overpayment’ being deducted from later payments.

Adjudication is relatively cheap. For a simple case an adjudication will typically cost a party £7,000, about £1,000 of which will be the adjudicator’s fees (ex VAT).  Note however that the adjudicator has no power to make a costs order against the losing party save for the adjudicator’s fees.

Adjudication is normally quick and easy.  For a simple case it is a 28 day procedure heard ‘on the papers’ with no oral hearing and perhaps two sets of written submissions.

Adjudication is rough and ready. Adjudicators are usually not lawyers and in our experience their decisions often seem perverse, tending to favour the smaller firms, particularly sub-contractors.  Short of a breach of natural justice their decision will be enforced, however perverse.

Using the Construction Act can be quite technical. For example under the Construction Act the adjudicator can only hear one dispute but there is a fine distinction between one complex dispute and several separate disputes. 

Attention to detail is vital

You must check the detail. The construction contract must be checked for time limits and methods of service, if there are none then check the Scheme.  Time limits and methods of service must be strictly adhered to.  Notices must be correctly drafted and must be drafted with an eye to the claims that you plan to make in the adjudication.  We strongly advise that you seek this firm’s advice or the advice of other solicitors familiar with construction contracts and the Construction Act before proceeding.

Finally, employers must not forget to serve pay less notices!

If no pay less notice is served following a payment notice the payee will win the adjudication and the payer will have to make the payment whatever the merits of withholding payment.  Many employers are caught out by failing to serve a pay less notice.

[1] Adjudication can also determine disputes on other matters, such as compensation and extensions of time but we are not dealing with that here.

[2] The ‘Construction Act’ is shorthand for Part II of the Housing Grants Construction and Regeneration Act 1996 as amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009.

[3] The ‘Scheme’ is shorthand for the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended by the Scheme for Construction Contracts (England and Wales) (Amendment) (England) Regulations 2011.