Cassandra Byrne and Jarleth Heneghan write that construction contracts will have to be reviewed in the context of the new Act and its changes will be wide-ranging for the construction and engineering industries
Civil

 

Cassandra Byrne, senior associate, and Jarleth Heneghan, partner, William Fry Projects and Construction Department

Recent construction legislation in Ireland presents new roles and responsibilities for engineers using construction contracts. One such piece of legislation, the Construction Contracts Act 2013, was enacted on 29 July 2013. The Act is one of the most significant pieces of legislation in recent years for the industry and is likely to bring new dynamics to the way construction contracts are used.

The Act applies to construction contracts and seeks to regulate payment arrangements between parties on construction projects. It will, for the first time in Ireland, introduce a statutory dispute resolution mechanism for construction contract disputes, through adjudication by an independent third party.

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The Act is expected to commence following publication of commencing legislation by the Minister for Public Expenditure and Reform. Construction contracts entered into after the commencement date must comply with the provisions of the Act. The legislation is broadly modelled on UK’s Housing Grants, Construction and Regeneration Act 1996 (HGCRA) and some of the changes set out in UK’s Local Democracy, Economic Development and Construction Act 2009.

The Act applies to agreements to carry out or procure construction operations. Broadly defined, this includes a comprehensive list of works or advices, ranging from temporary to permanent on construction, alteration, repair, maintenance, extension, demolition or dismantling of works ranging from buildings, road-works and utilities, to scaffolding and landscaping and painting.

The Act also applies to agreements to provide professional services ancillary to construction including engineering, architectural, design, surveying, or project management services.

Where an agreement relates to construction operations as well as other matters, the Act applies only to that part which relates to construction operations. The legislation will apply irrespective of whether parties to a construction contract attempt to limit or exclude its application and/or where the applicable law is Irish or otherwise.

EXCLUSIONS FROM THE ACT

Cassandra Byrne

The Act excludes, in summary, contracts:

  • with value below €10,000;
  • between a State authority and its partner in a public-private-partnership arrangement;
  • relating to a residential dwelling with a floor area not greater than 200 sqm and where one of the parties will occupy the property as their residence;
  • of employment nature; and
  • relating to manufacture or delivery of building or engineering components or equipment, materials, plant or machinery (except where for installation).

Engineers, particularly where acting as contract administrators, will need to be aware of the payment provisions of the Act as they will affect the payment mechanisms of standard and bespoke construction contracts. The Act imposes statutory obligations and prohibitions on parties in relation to payments and provides rights for parties seeking payment.

Construction contracts must now provide for the amount of interim and final payment mechanisms or for an ‘adequate mechanism’ to determine when payments become due and in what amount. The Act does not define what an adequate mechanism is and it will be interesting to see how this is interpreted.

There are many forms of construction contracts incorporating different payment regimes. A payment mechanism will need to allow the parties to know in advance firstly, that a payment will be in a certain amount (whether fixed in advance or to be determined by reference to a predetermined formula or method of measurement); and secondly, that the payment will be made at a certain point in time or on the occurrence of a particular event.

In the absence of an adequate mechanism in the contract, the Act sets out a default mechanism that will apply to determine such payments.

PAYMENT CLAIM NOTICES

The Act requires the issue of payment claim notices within specified periods. In respect of each payment due under the construction contract, a notice must be given within the specified period by the paying party. The form of the notice must specify:

  • the amount of payment;
  • the period or activity to which the payment relates;
  • the subject matter of the claim; and
  • the basis of its calculation.

The payment claim notice must set out in sufficient detail why the payment is being sought. In turn, this allows the paying party to determine whether the amount is in fact due or not.

If the other party contests that either the whole or part of the amount sought is due and payable, it cannot withhold the payment or part payment unless they have issued a response to the payment claim notice (like a withholding notice).

This written notice must be issued within 21 days after the payment claim date and must contain certain information, including:

  • the amount which the paying party is proposing to pay;
  • basis of calculation for the amount being claimed;
  • reasons for any difference between the amount to be paid and the amount claimed;
  • details on any loss or damage occurred, and a breakdown of the loss or damage where claiming breach of contract

The Act prohibits terms that make payment conditional on certain events, e.g. ‘paid when paid clauses’ or conditional payment clauses which allow one party to defer payment unless or until the other party has been paid by a third party. Such provisions are generally passed down to other parties, notably sub-contractors and/or suppliers.

The Act introduces a new, limited statutory right to suspend performance under a construction contract for non-payment subject to certain requirements including the service of notice on the defaulting party. This notice should specify grounds for suspension and must be served at least seven days before the suspension is due to begin. Where engineers are administering contracts, they will need to be mindful of when valid suspension can be exercised and associated cost and extension of time issues addressed in accordance with the Act.

ADJUDICATION

Jarleth Heneghan

Engineers, particularly addressing early dispute issues as contract administrator, need to be aware of the new dispute resolution procedure introduced by the Act. Under the Act, either party can refer payment disputes arising under a construction contract to adjudication at any time. There are no limits on claim values and the right applies notwithstanding any dispute resolution process prescribed by the contract.

Importantly, the Act provides for short timelines for dispute resolutions. Adjudicator’s decisions must be reached within 28 days of referral, or 42 days with the referring party’s consent.

The adjudicator’s decision is binding on both parties, pending the dispute being resolved through agreement, arbitration or litigation. Alternatively, the decision would be binding with both parties’ agreement. Adjudicators must act in good faith and impartially and can be appointed by agreement of the parties or from a panel selected by the Minister.

Parties must comply with adjudicator’s decision whether or not they object to it and continue to pursue the matter through arbitration or litigation if no agreement can be reached. Parties bear their own legal and other costs in connection with the adjudication. Given that the timescales are short, adjudication is generally considered less expensive than prolonged litigation.

Currently, many standard-form construction contracts generally prescribe conciliation followed by arbitration in dispute resolution clause. It will be interesting to see, in time, how these are affected by the introduction of adjudication.

Construction contracts will have to be reviewed in the context of the Act and its changes will be wide-ranging for the industry. Parties (including engineers providing design services or acting as contract administrator) will need to familiarise themselves with the Act and seek legal advice on drafting and applying its provisions to construction contracts particularly in the context of cashflow, payments and dispute resolution issues.

Cassandra Byrne is a senior associate (FCIArb, accredited mediator) and Jarleth Heneghan is a partner (FRICS, FSCSI, FCIArb, CEDR accredited mediator, MCIOB) in William Fry’s Projects and Construction Department, Dublin.

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  Cassandra Byrne, senior associate, and Jarleth Heneghan, partner, William Fry Projects and Construction Department Recent construction legislation in Ireland presents new roles and responsibilities for engineers using construction contracts. One such piece of legislation, the Construction Contracts Act 2013, was enacted on 29 July 2013. The Act is one of the...