On 1 September 2016 a key change to the Construction Contracts Act 2002 (Act) comes into force. Design, engineering and quantity surveying for construction projects will now be 'construction work' under the Act. This has important implications for consultants, their insurers and those engaging consultants in the construction sector.
Prior to 1 September, the Act only applied to contracts for physical construction work. From 1 September, contracts for design, engineering and quantity surveying relating to construction projects (construction consultancy services) will be construction contracts to which the Act applies. There are no definitions of what design, engineering and quantity surveying actually means, so there will be grey areas at the margins. For example, is the role of an engineer to a construction contract 'engineering' for the purpose of the Act?
The Act provides for a payment regime aimed at maintaining cash flow for participants in the sector and also an adjudication regime for resolving disputes in relation to construction contracts.
The change from 1 September 2016 will mean that:
- Conditional payment provisions (commonly referred to as 'pay when paid' clauses) in contracts for construction consultancy services will be unenforceable.
- Default payment provisions will apply to contracts for construction consultancy services, unless the relevant contract provides for mechanisms for determining key matters regarding payment.
- Construction consultants will have the option of issuing 'payment claims' under the Act and the process under the Act will apply. In order to qualify as a payment claim, the claim will need to meet the requirements of the Act (including being accompanied by the prescribed form explaining, among other things, the process for responding to a claim and the consequences of not responding).
- Importantly, clients that dispute a payment claim will need to respond using a payment schedule in accordance with the Act.
- If the client does not respond to a payment claim with a payment schedule within the relevant timeframe under the Act, the full amount becomes due and payable. In these circumstances, the client generally has no option but to pay the full amount claimed and resolve any disputed amount subsequently.
- Any clauses in contracts for construction consultancy services dealing with disputed invoices will need to be read as subject to the requirements of the Act.
- Construction consultants will now have a statutory right to suspend work in the event that payments due in accordance with the Act are not paid by the due date.
- Consultants will need to consider both their own position as service providers and as a client to their sub-consultants whose work now may also be covered under the Act.
The Act imposes a dispute resolution regime known as adjudication, which any party to a construction contract can use to resolve disputes. It is sometimes described as a 'quick and dirty' process as there are relatively short time frames for dealing with claims. It is an interim process in the sense that other dispute resolution procedures (such as court proceedings or arbitration) will also apply and ultimately can override any adjudication determination. Court enforceable adjudication determinations were originally able to be made only in respect of payment disputes. However, following a change to the Act on 1 December 2015, parties have been able to seek court enforceable determinations in relation to any breach of the terms of a construction contract.
The change from 1 September 2016 will mean that:
Further changes to the Construction Contracts Act
- Adjudication will be available to resolve disputes in relation to contracts for construction consultancy services (both to claims made by, or against, consultants).
- This includes disputes about whether the consultant has exercised all due care and skill, or has breached any other terms under the contract. There are concerns that disputes of this nature may not be well suited to determination through an adjudication process.
- Adjudication claims may be bought any time within the limitation period under the Limitation Act 2010. The 10 year long-stop dates for claims under the Building Act 2004 will also apply.
- Consultants should be ready to respond to adjudication claims, including confirming how their insurance arrangements will respond to a notice of adjudication and any steps that should be taken with the insurer to respond to the claim.
From 31 March 2017, a further change to the Act will take effect to implement a new trust regime that will apply to retentions held under construction contracts. Regulations to the new regime are yet to be released, which will include the minimum amount of retentions to which the regime will apply. There are a number of issues with the proposed regime, some of which will hopefully be resolved by the regulations. We will keep you posted.
For further information, please contact any member of our construction team below.