healthcare update - issue 14
The Local Democracy, Economic Development and Construction Act 2009 - putting you on notice!
The Local Democracy, Economic Development and Construction Act
2009 became an Act on 12 November 2009 and although there is
currently no commencement date for the provisions of part 8 which
relate to construction contracts they may well come into force by
the end of the year.
The Act applies to construction contracts which are contracts
for the carrying out of construction operations and makes
substantive changes to the current law, the Housing Grants,
Construction and Regeneration Act 1996, rather than replacing it
wholesale.
Summary of the key changes
- It now applies to unwritten as well as written contracts
- Adjudicators are now able to correct clerical and typographical
mistakes in their judgments
- “Tolent” clauses which state that the party bringing the
adjudication would in any event bear both parties’ costs as well as
the adjudicator’s have been outlawed and (broadly) parties may now
agree that the adjudicator can decide who pays his fees and
costs
- Payment clauses which make payment conditional on the
performance of obligations under another contract are ineffective –
so pay when certified clauses and similar are ineffective. There is
an exception which allows two parties to a construction contract to
make payment under their contract conditional on a third party
performing construction operations whether as a sub-contract or
otherwise
- A party may now suspend performance of just some rather than
all of their obligations in the event of non-payment, a refinement
to the current law
- If a party suspends their performance because of non payment
they may also recover the costs of suspension and re-mobilising as
well as obtaining extra time to recommence following payment
- A contract may state that if the payee becomes insolvent then
payment may be withheld, and if the payee becomes insolvent when it
is too late to serve the Notice of Intention to Pay Less then
payment may still be withheld despite this – otherwise he has to
serve the notice
- The Secretary of State has the discretion to provide that some
or all of the Act will not apply to certain types of contract
however, it should be noted that it is not yet clear which ones, if
any, these will be
Payment notices
A significant change under the new Act is that to the
contractual payment mechanisms and the notices to be served. If the
new regime is not understood, and the relevant notices not served
then the paying party will be caught out.
The Act requires that under the construction contract no later
than 5 days after the payment due date either the payer or a third
party (most likely to be the contract administrator) is to give a
‘Payment Notice’ which specifies the sum which they consider is
payable as at the payment due date and explains the basis on which
it is calculated. The notice still has to be given even if the
amount in question is zero. The parties may also agree, unlikely,
that the payee may give this payment notice.
If the party who is supposed to give the notice defaults in
providing it then the other party may give it. The sum which is
then payable under the contract is the sum stated in the Payment
Notice.
What is important is that if the payer/third party do not serve
a compliant notice the payee’s application for payment can stand as
the notice and the notified sum is the sum which is due to be paid
under the contract.
The difference from the current regime is that while presently a
similar notice should be served under s. 110 of the existing act
there isn’t an effective sanction if it is not served. Also, unlike
the new Act the current act does not state that the sum payable
under the contract is the amount stated in the payment notice or
that the payee can serve a notice if the payer fails to do so. The
present default position tends to be that the sum payable is the
sum properly due under the appointment or the building contract –
such as the JCT. This will change when the Act comes into
force.
If the payer does find himself in default of the Act’s payment
notice requirements and believes that a lesser amount is payable
then in order for him legitimately to pay less he has to serve a
‘Notice of Intention To Pay Less’. As with the Payment Notice this
has to specify both the amount which the payer considers to be due
on the date the notice is served and the basis on which that sum is
calculated. This has to be served no later than the prescribed
period (in default seven days) before the final date for
payment.
The difference between the Notice of Intention to Pay Less and
the current withholding notice is that the latter is only required
to specify the amount to be withheld and the ground(s) for
withholding – not the amount to be paid and the basis on which it
is calculated.
Conclusion
The new era of ‘austerity’ heralded in the emergency budget
launched on the 22 June means that there will be pressure to
significantly postpone new construction projects. However, with the
implementation of the new Premises Assurance Model pre-existing
building commitments and those building works necessary to bring
premises up to ‘standard’ are likely to be sanctioned. In an era
when every penny will count, and operations become subject to
greater audit scrutiny whether under PAM or otherwise, NHS Trusts
need to be on the ball when it comes to their contractual
arrangements, and to be aware of the changes which the Act will
make when it comes into force to avoid being caught out.
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The content of this update is provided for the purposes of
general interest and information. It contains only brief summaries
of aspects of the subject matter and does not provide comprehensive
statements of the law. It does not constitute legal advice and does
not provide a substitute for it.