Fraser Hopkins: Building for the future requires a firm contract

Published on 01/10/2008 20:18

SHORT in words but big in impact – that is what to expect from the Construction Contracts Bill that will re-write the adjudication and payment provisions in the Housing Grants, Construction and Regeneration Act 1996. It has been in the making since 2004, and the question is: has it been worth the wait?

The first major change is that the previous requirement for contracts to be "in writing" before the act applied to them, has been dropped. So why the dramatic change in approach? The act is not sufficiently clear on whether all contract terms need to be in writing, or just the essential elements (naming the parties, work scope, price and duration).

This issue was considered in RJT Consulting Engineers Ltd v DM Engineering Ltd, and the Court of Appeal held that, for the act to apply, it was necessary for all terms of the contract to be in writing.

This excluded several contracts from the act's protection and flew in the face of its original intention. Part-written-part-oral contracts are common in the industry.

The bill addresses this by extending the act's application to contracts that contain verbal and written elements. The exception, however, is that certain terms, such as the adjudication provisions, must be in writing, so a completely verbal contract will still not be covered by the bill.

The second area of significant change is to payment, where the emphasis is on improved cash flow.

The bill sees an end to the requirement of the employer to issue payment notices. In practice, this has been ignored with certifiers treating the certificate, or marked-up valuation, as the "notice".

This will be replaced by a notice issued either by the "payer" or a "specified person" setting out the amount it considers to be due (together with the basis for its calculation) within five days of the payment due date.

The critical point to note is that, where the payer does not issue a notice in time, the payee can, at any time prior to the final payment date, issue its own notice setting out the sum it considers is due and basis of its calculation, and this will be the payment due. This places a real obligation on the client to ensure its design team complies with timescales. If they don't, the consequences will be that sums which may be disputed fall due for payment.

The act prohibited "pay when paid" clauses in contracts except where the third-party payer became insolvent, and in Durabella Ltd v J. Jarvis & Sons Ltd the court took the view that pay-when-certified provisions were an "adequate" mechanism' for payment under the act. But these have proved extremely unpopular with sub-contractors, for the obvious reason that they often have little knowledge of when certificates are issued under contracts they are not a party to. They also have no control of when applications for payment are made by the main contractor.

The bill addresses this by outlawing any contract term that makes payment conditional upon a decision made under another contract. This will have implications for the PFI/PPP sector, where pay-when-certified provisions have long been used in the contracts between the project company, as employer, and the contractor.

The rationale for their use is that the employer is a shell company, only good for what it gets from the public-sector client and, accordingly, wants to avoid any liability to the contractor greater than can be recovered up the contractual chain. Importantly, on projects commenced after the bill becomes law, any pay-when-certified provision in a contract will have no effect, meaning contract drafters now face the task of coming up with a solution to fill the gap that will protect those funding such projects.

The same is true outside the PFI/PPP sector, as various building contracts contain provisions that will need to be revised to ensure compliance.

Whether this bill redresses any imbalances between the various parties, only time will tell.

&#149 Fraser Hopkins is a senior associate at Dundas & Wilson.