In the absence of a formally signed document, a contractor may presume that he is on the back foot if any contentious issues arise. However, if their arrangement meets the requirements of a ‘construction contract’ as defined within the The Housing Grants, Regenerations and Construction Act 1996 (‘the Construction Act’), they could still have a safety net to fall back on.
A construction contract under the Construction Act will provide a contractor with the benefits of all the rights (and obligations) that come with it, and entitle them to:
- The right to be paid in accordance with a determined payment mechanism
- The right to be paid even if the person paying them has not been
- The right to suspend works (following a seven day notice period) if payment due has not been paid
The Construction Act sets out what types of agreement will constitute a construction contract and outline how such contracts are subject to statutory provisions. The amendments made to the Act in 2011 assist in ensuring greater protection throughout the chain. Understanding how your contract is recognised in the eyes of the law can go a considerable way to prevent conflict from arising, and in turn avoid a potential dispute situation.
Do I have a ‘construction contract’?
Section 104 of the Construction Act defines a construction contract as an agreement:
- For the carrying out of construction operations (directly by the contractor or by third parties such as sub-contractors)
- Providing labour (again, one’s own or other’s) for the carrying out of construction operations
The definition of a construction contract is wide and is inclusive of contracts with construction professionals such as architects, engineers, landscape designers, and others providing advice related to construction operations.
What is a ‘construction operation?’
Construction operations also have a wide definition, and can be found in Section 105 in the Construction Act, and includes work concerning construction; alteration, repair, maintenance, demolition, forming land or roads, installation of buildings and even the cleaning of buildings and structures in many circumstances.
A construction operation must form part of the land. There is a large amount of case law that demonstrates instances where an operation is considered to form part of the land, and when it does not.
A general rule of thumb is that if items can be removed, or are attached to the ground by bolts, then this is not considered to be a construction operation. This is by virtue of the fact that they do not form part of the land.
There are some exclusions to this definition, for example the drilling for and extraction of oil or gas, nuclear processing or power generations. Other examples include contracts for manufacturing and delivery contracts for plants and machinery that do not also relate to the installation of these components and artistic works.
If works fail to fall comfortably within the description of ‘construction operations’ in the Construction Act, it is worth considering the excluded operations list in full.
A “Battle of the Forms”
The terms must also be clear and certain in their language. In a situation where the parties to the contract have tried to enforce their own terms in a ‘battle of the forms’, the Courts (of Appeal) have found that a contract does not exist because it is not clear which terms apply.
A binding Letter of Intent and a collateral warranty may also constitute a construction contract for the purposes of the Construction Act.
Contracts for land acquisition will not constitute a construction contract, and for contracts that relate only in part to construction operations, the Construction Act will apply to those parts only.
Obligations to pay
The Construction Act entitles each payee under a construction contract to receive payment in stage payments (unless the contract period is less than 45 days). For this to be in effect, you must ensure that your contract complies with the Act.
The Construction Act also requires that every construction contract provides an adequate mechanism for determining what payments become due under the contract and when, and provide for a final date for payment in relation to any sum that becomes due.
The Act goes on to say that a mechanism for determining what payments become due, and when, is not satisfied where a construction contract makes payment conditional on the performance of obligations under another contract, or a decision by any person as to whether obligations under another contract have been performed.
The implication of this requirement is that construction contracts that include payment terms which are conditional on either payment being made, or the completion of works under another contract, will not satisfy the requirements of the Construction Act and this includes provisions relating to the release of retention.
In the event that a so-called ‘pay when paid’ clause is included in a construction contract then the relevant provision of Part 2 of The Scheme for Construction Contracts will apply.
Contractors frequently include provisions such as ‘retention will be released on completion of Making Good Defects’ irrespective of the fact that such clauses would fall foul of the Construction Act, and many of these go unchallenged. Contractors should be wary of reliance on such clauses as the implications could be serious.
Right to Suspend for Non-Payment
The Construction Act also implies a right to suspend into construction contracts where a payment provided for by the contract has not been paid on or before the final date for payment. The act provides that the party to whom the sum is due have the right to suspend any or all of its obligations under the contract to the party with the obligation to pay. The suspending party must give 7 days’ notice of their intention to suspend stating the reasons for suspension. Upon payment of the sums properly due under the contract, the right to suspend ceases.
What does this all mean for me?
Being able to determine whether a construction contract has been entered into as defined in the Construction Act, and having a good understanding of the terms implied into that contract at statute can help to provide increased security to contracting parties. This is particularly useful where parties have contracted on simple terms.
If you're interested in any of the topics raised in this article, or for further information, please contact Stephanie Leeder. Alternatively, you can call to speka to one of the team on 0115 9888 777.