Construction Contracts Act broadened

Posted on August 22, 2016 in Commercial (Tags: Building, Commercial Law, Construction, Construction Contracts, Property Law) Commercial.jpg

Changes to the legal environment governing construction contracts which come into force on 1 September 2016 will see the scope of the Construction Contracts Act (CCA) broaden to include design, engineering and quantity surveying work. These changes are brought about by extending the definition of “Construction Work” to include design, engineering and QS work. For the consultants themselves, this will have some advantages as it will bring them within the payment protections of the CCA but it will also render them subject to the adjudication process. Designers include architects, architectural designers, interior designers and landscape designers. Professionals operating in these various disciplines will need to review the contractual documentation they use when engaging clients and consider the extent to which their liabilities have increased under the legislation, whether they have adequate insurance to cover their liabilities and look at adopting new terms.

As part of the extension of the Act to these professionals, the definition of “Construction Site” has also been changed to include land where construction work is intended to be carried out, but has not yet started. This will enable all contracting parties to utilise the CCA even if physical construction work has not yet begun.

Construction Contracts Act Broadened

What are the particular ramifications for parties under the new regime?

Professionals which fall within the new definition of “Construction Work” should include payment provisions similar to those in construction contracts which reflect the formal payment claim and payment schedule process under the CCA. Now that there is little distinction between residential and commercial contracts in the Act, thought will have to be given to contracts which are directly with private individuals rather than companies who are accustomed to operating under the regime.

Parties will need to be prepared for the “quick and dirty” adjudication process which forms part of the CCA. This has been designed to avoid delays in payment pending definitive determination of litigation. There is only a five working day time frame after receiving an adjudication claim for a response to be served. This time frame can be extended by the adjudicator in certain circumstances which depend in part on whether the agreement was entered into before or after 1 December 2015.

Contractual claims against consultants based on their duty to exercise reasonable skill and care can be quite complex and requiresuse of specialists to provide evidence. In some case disputes will be historic with the damage claimed only arising recently which may cause difficulties in finding appropriate information. Dealing with such disputes in the context of a CCA adjudication process will be very difficult. In most case professional indemnity insurance will be in place which in itself complicates matters. The insured party must notify the insurer of the claim immediately usually via broker. Typically the insurance company will nominate specialist legal counsel who would then have to review the claim. It may that the relevant policy exclusions apply and cover is denied. This will impact on who conducts the adjudication process and in the meantime the insured has to be careful not to take steps to prejudice the insurer.

It would be sensible for consultants to look at their contractual documentation and take the opportunity to review it given the number of recent changes to the statutory environment. Where the agreements are directly with consumers, changes to relevant consumer legislation may also impact on the enforceability of certain provisions of the agreements.

Retention funds

A further change brought about by the amendment to the Construction Contracts Act is a new regime with regard to retentions in commercial construction contracts which comes into effect on the 1st of April. The risks to contractors posed by retentions were demonstrated in the recent collapse of Mainzeal where retentions held by Mainzeal pending final completion of works were used to finance the company’s working capital and were ultimately lost in the ultimate collapse of the company. The new regime requires retention monies to be held on trust by the payer. One of the limitations of the proposed regime is that the funds do not have to be paid into a separate trust account and can be commingled with other money. This raises problems of a legal nature as traditionally, mingling of trust property and non-trust property is a hallmark of a failed trust.

There are other practical issues which may arise with the proposed regime. What if the project is being funded from a debt facility (as is usually the case) in which case the drawdown of funds will usually only be the net amount of any progress payment? The amount “retained” then becomes part of the undrawn balance of the remaining bank facility which means there is no actual money for the trust to attach to.

It is possible that parties will arrange for funds to be held in solicitors’ trust accounts as is the case with other property transactions to give greater comfort to contractors, which should not breach the prohibition on contracting out.

Sally Peart