More than three years after the initial draft of the Construction Contracts Bill 2010 was first introduced as a Private Members Bill by Senator Feargal Quinn on 12 May 2010, the Construction Contracts Act 2013 has now been enacted. A commencement date is yet to be fixed. This introduces statutory adjudication and will hopefully improve cash flow in the construction sector.
The aim of the legislation is to increase clarity and certainty as to payment on construction projects and to introduce adjudication for the resolution of payment disputes. The key provisions of the Act are as follows:
The scope of the Construction Contracts Act 2013 is wide. It applies to contractors, subcontractors, engineers, architects, project managers, interior designers and those involved in ‘construction operations’ over a certain value (€10,000). The term ‘construction operations’ is widely defined in the Act and includes activities ranging from scaffolding to routine painting and decoration, as well as repair and maintenance.
The term ‘construction contract’ is also widely defined and the Act will apply to both written and oral contracts and to letters of intent, where contracts are based on standard terms and conditions, and those supplemented by oral agreements.
The main exclusions include: contracts which have a value of not more than €10,000; general supplies of component parts and materials are not covered by the Act unless the contract also provides for their installation; contracts concerning owner/occupiers of a private residence up to 200 square metres; and a construction contract governed by a public private partnership arrangement.
The Construction Contracts Act 2013 provides for a new statutory payment regime, which introduces a right to interim or periodic payments and a final payment and requires an adequate mechanism in a contract for determining what will become due and when.
Default provisions are provided for, which automatically apply in the event that no adequate mechanism is provided in the contract and requires the payee to give a ‘payment claim notice’ to the payer of what is to be paid and how it is calculated not later than five days after the payment date. The payer may not withhold monies unless it has given a response (akin to a pay-less notice) to the payment claim notice, stating the amount it intends to withhold from the sum due and the grounds for doing so not later than 21 days after the payment claim date as specified in the contract or the Schedule.
Payees may suspend performance when the amount due is not paid by the final date for payment. Importantly, there is a prohibition on contractual terms that make payment dependent upon the payer being paid from another source (‘pay when paid clauses’).
Parties to whom the Act applies will need to be cognisant of the fact that if the contract does not provide for an adequate mechanism for payment then the statutory default payment provisions will apply. In the UK, similar legislation also provides that construction contracts must include an ‘adequate mechanism’ for payment and UK caselaw as to what constitutes an ‘adequate mechanism’ will prove helpful. Those involved in making payments which fall under the Act need to ensure that their administrative system is adapted appropriately in order to comply with the new payment procedure.
- Prohibition of ‘pay when paid’ clauses
The purpose of a 'pay when paid' clause commonly used in the construction industry was to absolve the contractor from liability to pay the subcontractor until it had been paid by the employer. The effect of such a contractual clause was to allow the contractor to pass the risk of default by the employer to its subcontractors further down the construction chain. The use of these clauses is now prohibited by section 3(5) of the Act. The only exception to this prohibition is in the event that there is a connected insolvency event in a construction contract.
This means that if the employer is solvent, a ‘pay when paid’ clause in a contract between contractor and subcontractor will not permit the contractor to withhold payment from the subcontractor.
However, unlike in the UK, this clause does not go so far to prohibit clauses that make payment conditional on other events, such as 'pay when certified' clauses – where payment is conditional on a certificate being issued under another contract. While the legal validity of such terms may be questionable in practice, engineers and architects acting for employers have been required to observe them.
- Suspension for non-payment
Those who are not being paid in full now have a new statutory right to suspend work under the Act, provided proper notice and particulars are given. The provisions appear to entitle a payee to suspend performance ofany or all
of its contractual obligations related to the work. It remains to be seen whether this right to suspend will be limited to the actual construction obligations or also, for example, extend to suspension of the right to insure the works or suspension of works in related areas connected with the payment in dispute.
Partial payment will not suffice to render suspension unjustified. It will be important to make sure that any seven-day advance notice is clear and served in accordance with the Act’s requirements.
Works can be suspended, but only up until such time as where the payment dispute is referred to adjudication or where full payment has been made of the amount due. Consideration will have to be given to the fact that contracts may also need redrafting to allow payees to suspend in accordance with their entitlement under the Act and possibly to obtain an extension of time and reasonable costs and expenses for both suspension and re-mobilisation periods.
The Act expressly states that the period of suspension is to be disregarded for the purposes of contractual time limits. To ensure that the contract provisions and time for completion are not thwarted by the operation of the Act, a review of current contractual conditions is strongly advised.
The Act also introduces, for the first time, a statutory adjudication procedure for the settlement of payment disputes. Either party will be entitled to refer a payment dispute under the contract to an adjudicator, who will be required to reach a decision within 28 days (which period may be extended by a further 14 days by agreement between the parties).
Unlike in the UK, adjudication under this Act will only apply to a payment dispute. The Act does not specifically define what constitutes a payment dispute and it is noted that it is stated in the Act to be “any
dispute relating to payment”. It will be interesting to see how this will operate in practice and if guidance is given in the Code of Practice concerning payment disputes once the Code is published.
The Act stipulates that the adjudicator’s award is binding until overturned by another formal process. This is in line with its UK counterpart. The parties are obliged to comply with the decision of the adjudicator, even if they intend to pursue court or arbitration proceedings. This will assist in avoiding any delay to payment. Indeed, the Act provides for a further right to suspend in circumstances where one party fails to discharge (within seven days) any amount due pursuant to the decision of the adjudicator.
The decision of the adjudicator can be relied upon by any of the parties in such legal proceedings thereby removing any implied confidentiality or ‘without prejudice’ protection as would say apply to the mediation process. No doubt this will have an influence on a decision by a party on whether to refer the matter on to arbitration or to the courts, given that it is likely that a court or arbitrator would be reluctant to interfere with the adjudicator’s decision unless justified in the circumstances.
In fact, the Act expressly allows the adjudicator to use his or her “initiative in ascertaining the facts and the law
”, if he or she so wishes. An adjudicator's decision will be binding even if it is wrong and the Act expressly provides that an adjudicator may not reconsider or re-open any aspect of the decision. It is therefore important to ensure that parties agree all important terms and conditions in your contracts clearly and in advance in order to minimise the potential for any payment dispute arising at the outset.
Construction Contracts Act 2013 Analysed
It is very important to consider and be aware of the provisions of this Act, particularly if parties are entering into contracts now and in the very near future, which come within the ambit of this important legislation. Where parties are acting in an advisory capacity, it will be important to advise clients appropriately. The provisions of the Act apply irrespective of whether a contract is agreed orally, or even if the contract is stated to be governed by law other than Irish law. Additionally and importantly, any clause purporting to exclude the application of the Act will be ineffective.
Beale and Company acts for engineers and professional indemnity insurers, handling claims arising out of projects ranging from one-off residential developments and surveys to major building, infrastructure and civil engineering projects. For more, contact Tara Cosgrove on +353 (0) 1 775 9505 or at firstname.lastname@example.org or Mary Smith at email@example.com. Both are located in the company’s Dublin office. Its London and Bristol offices have experience in dealing with claims and adjudication under the UK Act.