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Industry Updates

Construction Contracts Act 2013

02 Aug 2013

The Construction Contracts Act 2013 (the "Act") was enacted on 29 July 2013. This is going to have a major impact on the Irish construction industry and the approach to both payment and dispute resolution in the industry will be radically different when it is commenced. This Act applies to construction contracts entered into after such day as the Minister for Public Expenditure and Reform may by order appoint so will not apply until a commencement order is made.

The extent of the impact should not be underestimated and there are many potential pitfalls for the unwary. When equivalent legislation was introduced in the UK there was a lot of upheaval in the industry.

There is no doubt that this legislation will give rise to many queries; some of which are discussed below. One disadvantage, in comparison with the UK, is that Ireland has no specialist construction court to answer the many queries that will arise.

This note is based on the most recent version of the Bill available but it is possible that the Act, when finally published, may contain some minor differences. This note reviews:

(a)  the applicability of the Act;

(b)  the impact on the payment regime; and

(c)  the impact on dispute resolution.

Applicability of the Act

The Act will apply to all construction contracts entered into after a particular date – the date has not yet been confirmed.  It will not apply to contracts entered into before that date or projects that have started construction before that date (even if the contract has not been signed).

The concept of a "construction contract" is very broadly defined and relates to virtually every conceivable form of construction operation (including construction, alteration, repair, maintenance, extensions and demolition or dismantling).

The legislation also applies to all contracts which are ancillary to a "construction contract". The legislation will, therefore, apply to:

(a)  Main contracts;

(b)  Sub-contracts;

(c)  Sub-sub-contracts;

(d)  Architectural appointments;

(e)  Project manager appointments;

(f)  Quantity surveying appointments;

(g)  Engineering appointments;

(h)  Archaeological appointments;

(i)  Interior and exterior decorating appointments;

(j)  Landscaping appointments.

This is not an exhaustive list.

The Act will not apply to any of the following activities in the construction area:

·  Construction contracts with a value of less than 10k;

·  Construction contracts for a private dwelling with a floor area of less than 200m2 where the person intending to live in the dwelling is party to the contract;

·  Contracts for the supply of materials, equipment, components, plant or machinery only.

It is important to note that you cannot opt out of the legislation. If the contract meets the criteria in the Act then it automatically applies.

If the contract does not include provisions which comply with the Act then the provisions of the legislation are automatically incorporated into the contract. Alternatively, if the contract includes provisions which conflict with the Act then the Act will take precedence over the conflicting provisions. 

Impact on the Payment Regime

There are a substantial number of changes to the payment regime which will require both standard forms of construction contract and bespoke forms that are currently used by both contractors and sub-contractors to be amended. There are two reasons for amending the terms and conditions. First, to avoid provisions which conflict with or do not meet the requirements of the Act. Secondly, to have a set of terms and conditions that provide maximum protection to contractors or sub-contractors whilst, at the same time, staying within the confines of the legislation. 

No pay when paid

The first substantive change is that pay when paid is not permissible (save where one of the parties to the contract is in an insolvency process). For example, in a sub-contract arrangement, payment to the sub-contractor cannot be stated to be conditional upon payment being received by the contractor from the employer. If the contract has a provision that makes payment conditional on the actions of a third party elsewhere then that provision is ineffective. The question that then arises is whether pay when certified is acceptable. It is likely that pay when certified clauses will be permissible on the current wording assuming the contract has been drafted appropriately.

How much and when

The second substantive change is that any construction contract must contain "adequate mechanisms" for (i) determining how much money is due under the contract; and (ii) determining exactly when that money is due. The question that will then arise is – what constitutes an "adequate mechanism"? There is a good deal of case law in the UK on this. There are many bespoke forms of contract currently circulating within the Irish construction industry, all with different approaches to the payment regime, and each one of those forms will come under scrutiny to ascertain whether they contain "adequate mechanisms".

In the event that the contract does not contain "adequate mechanisms" and does not adequately identify how much money is due and when that money is due then the legislation imposes a mechanism for making these determinations. It is worth noting that the Act differentiates between main contracts and sub-contracts in this context. In particular, the legislation allows for employers to agree/impose periods of time for paying the main contractor which periods exceed the periods noted in the schedule. However, with sub-contracts, the periods for payment noted in the legislation are to be considered as maximum periods and the parties are only free to agree periods for payment that are shorter than those noted in the Act. This is obviously far from ideal for main contractors who may end up funding construction projects during the currency of the project. 

Payment Claim Notice

The third substantive change is the introduction of an entirely new concept – the payment claim notice. For the avoidance of any doubt, invoices in the format that they are currently issued, are extremely unlikely to constitute a valid payment claim notice.

There is no obligation on any party to a construction contract to issue a payment claim notice but it is inevitable that virtually all claims for payment in the future will attempt to follow the format of a payment claim notice; so as to obtain the benefits that follow from issuing such a notice (see below). For contractors and sub-contractors alike, whatever procedures are currently used for applying for payment should be replaced with the payment claim notice or be amended to incorporate the issuing of a payment claim notice.

The purpose of a payment claim notice is to provide the recipient with sufficient information so that they can understand why any payment is being sought. The idea is that when a recipient has that information then the recipient can decide whether the money is due and pay it or, alternatively, can use the information to provide, in turn, a detailed explanation as to why the money is not due.

The legislation provides that a valid payment claim notice must contain:

(a) Details of the amount being sought;

(b)  The period, stage or activity to which the payment relates;

(c)  The "subject matter" of the claim; and

(d)  The basis upon which the amount sought has been calculated.

One obvious question that arises is what is meant by the "subject matter" of the claim? The party seeking payment will obviously need to provide details as to what work was carried out but the question is how much detail is required.

To be valid the payment claim notice must be issued within five days after the payment claim date; this is a date that will need to be identified in the contract.

Withholding notice

Assuming a payment claim notice has been issued, the onus then switches to the paying party. The paying party must consider the payment claim notice and decide whether (i) the full amount claimed is going to be paid; or (ii) whether any of the amounts claimed is going to be contested. If the paying party decides that any of the amount claimed in the payment claim notice is going to be contested then the paying party must issue what in effect is a "withholding notice". The single biggest question that will have to be grappled with when the Act becomes operative is whether the failure to issue a timely and compliant withholding notice means that the party seeking payment is entitled to payment in full of the amount claimed without there being any right of defence, set off or abatement. The Act is silent on this issue. Again, this is an area where there is an abundance of case law in the UK but, unfortunately, the wording of the UK legislation and the Irish legislation is different. Despite the differences, the position adopted in the UK will be highly informative. 

For a withholding notice to be valid it must comply with all of the following:

(a)  It must be issued not later than 21 days after the payment claim date;

(b)  It must identify how much it is proposed will be paid (even if zero) and explain the basis for calculating that amount. Any amount that is noted to be paid must be paid by the payment due date;

(c)  It must provide reasons for any difference between the amount to be paid and the amount claimed; and

(d)  If any of the reasons include a claim for breach of contract or any other claim, then the notice must provide details as to when the loss and damage occurred, particulars of the loss and damage and a breakdown of the loss and damage as against any particular item claimed.

A further question that will arise is what happens if a withholding notice is issued that complies with most, but not all, of the legislative requirements?

Impact on Dispute Resolution

Any party to a construction contract will have the right to refer a dispute "relating to payment" to adjudication "at any time". The words "at any time" mean exactly what they say. Therefore, if the parties to a construction contract have agreed a multi-tiered dispute resolution process (i.e. 1. conciliation, 2. mediation, 3. Adjudication; and then 4. arbitration) either party may still proceed to adjudication at any time. For example, if you were in the middle of a mediation process it is perfectly acceptable to commence adjudication proceedings.

While the right to refer a dispute to adjudication is limited to referring disputes "relating to payment" this, in practice, will encompass most disputes that arise in the construction industry and for example, disputes relating to delays, extensions of time and defects. One question that may arise is whether disputes "relating to payment" encompass disputes where particular forms of declaratory relief are sought.

Crucially, the decision of an adjudicator, which decision must be rendered within either 28 or 42 days of the process commencing (absent agreement to the contrary from both parties), will be binding on the parties until either an arbitrator or court says otherwise (previous versions of the legislation did not provide for the decision to be binding). This means that if an adjudicator decides that a sum of money is due from one party to another then that money must be paid immediately. If the money is not paid then the adjudicator's decision should be capable of summary enforcement in the same way as a court order would be enforced and the Act contains specific provisions to that effect. This means that adjudication is a powerful dispute resolution tool. When an adjudicator decides that money is due and owing then, absent any procedural or jurisdictional breaches, the adjudicator's decision can only be overturned by an arbitrator's award or a court order (both of which are lengthy processes).

While the Act suggests that adjudication should be treated as a flexible user-friendly process, experience in the UK suggests the opposite. The sheer number of decisions issued by the UK Technology and Construction Court on various aspects of adjudication testifies to the complexity and technicality of the process; the process is the equivalent of an intensive arbitration process but without discovery. There are many ways in which parties can fall foul of jurisdictional or procedural problems. 

Action list for contractors and sub-contractors

(a)  Amend any in-house terms and conditions of contract to avoid conflicting terms and maximise payment protection.

(b)  Prepare a pro forma "payment claim notice" that is compliant and incorporate this within the payments process.

(c)  Put in place procedures to ensure that "withholding notices" are issued when required.

(d)  Prepare a pro forma "withholding notice" that is compliant. The consequences of not issuing a withholding notice when required are dire.

(e)  Implement an early warning system for disputes.

(f)  Ensure that document control systems work properly and effectively.

(g)  Gain a better understanding of the adjudication process – what is allowed and what is not allowed.

Maples and Calder will host a series of workshops on the Act for those with some level of familiarity with the legislation. 

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