In September, JCT will be publishing a new 2011 suite of main contracts and sub-contracts which comply with the provisions of the new Construction Act.

It is essential for all employers, contractors and sub-contractors to familiarise themselves with the changes that will be made in the 2011 suite of contracts.

JCT has already released track-changed versions of its forthcoming 2011 contracts. Here, we outline some of the key changes to two of the most popular new contracts, JCT Design and Build 2011 (“D&B”) and JCT Standard Building Sub-Contract 2011 (“SBSC”).

Payment Notices

Under D&B, the Employer is required to give a Payment Notice not later than 5 days after the due date for payment. Payments become due on the date the Employer receives the Contractor’s Interim Application, and the final date for payment is 14 days later.

Under SBSC, it is now optional for the Sub-Contractor to make a Payment Application. The Contractor is required to serve a Payment Notice not later than 5 days after the due date for payment, regardless of whether the Sub-Contractor submits a Payment Application or not.

For all new JCT contracts, Payment Notices must specify the sum which the payer considers to be due and the basis on which that sum has been calculated.

Default Notices

Under D&B, if the Employer fails to serve a Payment Notice, the amount due to the Contractor becomes the amount claimed in the Interim Application (subject to any Pay Less Notice served by the Employer). There is no express provision allowing the Contractor to serve a “default notice” if the Employer fails to serve a Payment Notice not later than 5 days after the due date. However, strictly speaking there is no need for the Contractor to serve a “default notice”, because it has already submitted its Interim Application indicating the sum it expects to be paid and the basis on which that sum was calculated.

Under SBSC, if the Contractor fails to serve a Payment Notice not later than 5 days after the due date, the amount specified in the Sub-Contractor’s Payment Application automatically becomes due (subject to any Pay Less Notice served by the Contractor).

However, submitting a Payment Application is optional and it may be that the Sub-Contractor has not made a Payment Application. In this case, if the Contractor fails to submit a Payment Notice, the Sub-Contractor is then required to submit a Payment Application setting out the sum it considers to be due and the basis on which that sum was calculated (effectively a “default notice”). The final date for payment is then postponed by the number of days that pass between the date the Contractor should have served the Payment Notice and the date the Sub-Contractor makes the “default” Payment Application

It is clear that Sub-Contractors will need to act quickly to submit “default” Payment Applications if they want to avoid the final date for payment being postponed. It is possible that Contractors could deliberately fail to serve Payment Notices with the intention of delaying the final date for payment. Sub-Contractors may therefore find it preferable to submit Payment Applications before the due date for payment so that this situation does not arise.

Pay-Less Notices

If the payer (the Employer/ Contractor) wants to withhold monies from the payee (the Contractor/Sub-Contractor), both D&B and SBSC require the payer to serve a Pay Less Notice no later than 5 days before the final date for payment. The Pay Less Notice must specify the sum which the payer considers to be due to the payee and the basis on which that sum was calculated. This requirement will be included in all new JCT contracts.

Service of Notices

Both D&B and SBSC confirm that even if the amount due to the payee is nil, the relevant Payment Notices and Pay Less Notices must still be given anyway.

In addition, D&B states that Payment Notices and Pay Less Notices may be served on the Employer’s behalf by anyone who has been notified to the Contractor as being authorised to do so. There is a risk here that failure to give the Contractor proper notification of an authorised person could potentially cause the notice served to be invalid. SBSC does not include this provision and all notices must still be served by the Contractor.

Retention

The new Act prohibits any contractual provision which links payment to an event occurring pursuant to an upstream contract. As a result, JCT has had to make significant changes to the way retention is dealt with in its Sub-Contract.

The release of the first half of the retention is still triggered by practical completion of the Sub-Contract Works, but the release of the balance of retention is now no longer triggered by the end of the Rectification Period under the Main Contract. Instead, the parties must agree a “Retention Release Date”. If all defects in the Sub-Contract Works are completed at the Retention Release Date, then the balance of the retention is released to the Sub-Contractor on the date for the next interim payment (or, if there are still defects, retention is released once these defects are remedied by the Sub-Contractor).

JCT has also introduced the concept of a “Minimum Retention Amount”, which is similar to the concept of the “retention free amount” used in Option X16 of NEC3 contracts. If the total retention would be less than the Minimum Retention Amount, then no retention is deducted. Once half the retention is released, if the remaining amount falls below the Minimum Retention Amount, all remaining retention must be released to the Sub-Contractor.

It remains to be seen whether these provisions will alter the way retention operates in practice. Contractors could simply specify a Retention Release Date which corresponds with the expiry of the Rectification Period under the Main Contract to avoid having to pay retention before their own retention is released. There is also nothing to stop the parties from agreeing that the Minimum Retention Amount is zero, rendering this new provision ineffective. Nevertheless, these changes to JCT do allow Sub-Contractors to take more control over their retention.

Final Payment

JCT has also had to alter the Final Payment provisions of SBSC so that they are no longer linked to the issue of the Final Certificate under the Main Contract. Instead, the Final Payment is now due 2 months after the later of either (a) the date the final balance of the retention is released to the Sub-Contractor or (b) the date the Contractor issues its statement of the calculation of the Final Sub-Contract Sum.

Suspension

All new JCT contracts will allow the Contractor/Sub-Contractor to suspend “any or all of his obligations” for non-payment.

The Contractor/Sub-Contractor also has the right to recover a “reasonable amount in respect of costs and expenses reasonably incurred”. However, these costs are no longer recoverable as part of a loss and expense claim. Instead, the right to recover costs is included in the suspension clause, meaning that the test for claiming costs arising from suspension is different, and possibly more onerous, than the test for claiming “direct loss and expense”. However, it seems that JCT has made this change to ensure compliance with the exact wording of the new Act.

Want To Find Out More?

Hawkswell Kilvington is presenting a series of half-day seminars in October 2011 which will include a detailed explanation of the changes being made by JCT in the 2011 suite of contracts. For more details, including how to book, please visit our Seminars page.