Understanding the Construction Contracts Act: Statutory Features and Implications

What is the Construction Contracts Act?

The Construction Contracts Act 2002 (the Act) was introduced with the intention of standardising the legal framework for contracts in the building and construction industry. In fact, it is designed to regulate arrangements between contracting parties on individual projects, at or before the commencement of that project. The Minister of Building and Construction proposed the Act in a discussion document on contract models for the building and construction industry in New Zealand in 1998.
The stated objectives of the Act are to:

Ensure adequacy of contractual provisions;
Facilitate the timely progress of the construction work;
Avoid disputes;
Protect interests of registered subcontractors;
Simplify dispute resolution processes; and
Reduce incidence of subcontractor insolvency.

The Act imposes minimum standards in various respects. Courts, arbitrators and adjudicators must give effect to the purposes and principles of the Act when interpreting the contract. Under the Act, adjudication is intended to be used instead of the courts. The Act relies on the outcome of adjudication to be respected by the parties as binding in subsequent litigation.
Elements of the Act include:

In the absence of agreement , the statutory provisions apply
Obligations of head contractors and subcontractors concerning payment certs and provisional payments
Payment schedules
Provisions to allow notice of claim for costs
Requirements for release of retention money
Procedures for adjudication
Statutory rights to suspend carrying out of construction work
Provisions to allow subcontractors to exclude application of binding subcontracting provisions
Registration of subcontractor on the Public Register
Application to adjudication of 1-month limitation period or shorter
Provisions placing restrictions on subcontractors
Application of the Act to subcontractor
Application of the Act’s adjudication procedures to subcontractor
Breach of contract or wrongful act by the principal

The Act is applicable to the building and construction industry and set out in a manner that is readily accessible to all those involved in its operation, both clients and suppliers. It addresses long standing inequities in the industry by balancing the interests of principals and contractors through a straightforward process. It goes some way to addressing the power imbalance in the building and construction industry through the holding of money in trust and requiring the head contractor to comply with payment obligations.

The Construction Contracts Act – Key Provisions

One of the most notable provisions in the Construction Contracts Act is Section 6, which deals with payment provisions. The Act lays out the ground rules around payment and provides a contractual framework within which any construction contract is now operating. Essentially, it lays out a regime which obliges the parties to the contract to address the issue of payment timelines and the actual means of payments in as much detail as possible.
If the parties have not entered into a separate written contract, the implementation of the Construction Contracts Act will provide them with a regime within which to operate. Contractual obligations will still prevail if there is a conflict between what is set out in the Construction Contracts Act and the contractual document under which the construction works are being carried out, provided that the contract does not contain provisions which will allow either party to fail to comply with any obligations they might have under the Construction Contracts Act.
One of the reasons for the introduction of the Construction Contracts Act was to ensure that no matter how basic the contract, the parties were obligated to address the issue of payment. A core provision of the Construction Contracts Act is to ensure that the issue of payment – often the highly contentious area of any contract—was covered, in the hope that this would provide more certainty over the middle or long term.
Another key provision of the Construction Contracts Act is Section 111, the provisions around adjudication. The Construction Contracts Act provides a statutory adjudication procedure to resolve disputes in relation to construction contracts. This requires an adjudicator to act impartially and on a rapid, ex parte basis to make a decision on the amounts due to be paid.
It also provides that if the adjudicator decides that money is to be paid, then that payment must be in accordance with the adjudicator’s decision. Although any decision may be reviewed by the courts, given the nature of the adjudication decision, it would be open to the successful party to request the court to award interest on the overdue amount. The Construction Contracts Act also provides that the disputes are to be determined notwithstanding the fact that the parties may be involved in court proceedings or arbitration in relation to any matter that is the subject of an adjudication. As discussed above, the Act also sets out clear provisions around the rights of the contractor and subcontractor. This applies equally to both parties and states the circumstances in which they may withhold a payment (either in whole or in part). The Construction Contracts Act makes it clear when a payment can be legitimately withheld and sets out the procedures that the parties must adhere to as a result.

Contractual Protection Under the Construction Contracts Act

The Construction Contracts Act (the "Act") provides added protection for or guarantees a fair deal to a party in certain low balance construction agreements. The Act creates a right to progress payments, which is paid under a fixed price contract, based on the value of work completed. This right means that the contractor or subcontractor has an additional protection. They can request that their contract and all subcontracts include a clause that requires the payment for work. Payment must be made within 21 days of a progress bill being submitted to an employer. Contractors also have the right to suspend their work if progress payments are not made to them. All they have to do is give two days’ notice that they will suspend their work until payment is made. The Act also provides contractors and many subcontractors with the right to submit a Construction Disputes Act ("CDA") or Arbitrators Act (the "Arbitrators Act") complaint to a court against an employer, contractor or subcontractor that has not fulfilled their requirements to pay. The Act requires a judge to order the parties into mediation if either party appeals under the CDA, because the Act mandates alternative dispute resolution ("ADR") before a dispute is taken to trial. If the alternative resolution is unsuccessful, a judge will then hear the dispute. If there is no evidence to support the claim, the judge will decide on the matter. The Act also respects the right for contractors and subcontractors to litigate; they have the ability to file six different Construction Disputes Act ("CDA") claims. While the Act does encourage arbitration through the five other types of CDA claims listed above, the six CDA claims are not reliant on arbitration utilising the Construction Disputes Arbitration Act ("CDAA"). Therefore, a party can utilize the Civil Procedure Rules when bringing either of the listed CDI claims. If a dispute becomes too difficult to be resolved by ADR, a party can use the Civil Procedure Rules, which would result in a trial. According to the Act, all adjudicators’ decisions are not enforceable in a court of law. The judges will dismiss any action for enforcement. To enforce a decision returned by an adjudicator, contracting parties must refer the matter back to court. The courts will assist parties to make an application to get the decision enforced. This way, the unfavourable or unfair adjudicator’s decision is to be heard by the court. The Act has created a streamlined version of the adjudication process. Since adjudication is a less formal and expensive process, it is designed to give the courts the ability to consider and determine matters in a fair and just manner. The Act provides a binding process, should a judge enforce a decision returned by an adjudicator.

The Effect of the Act on Construction Disputes

One of the most significant impacts of the Construction Contracts Act has been the manner in which it has positively influenced the resolution of construction disputes. In the main, adjudications and other alternative methods of dispute resolution should now be quicker, fairer and more comprehensive than before the Act came into force.
The Act has improved the process of adjudication itself. The introduction of a timetable for appointment of the adjudicator and the conduct of adjudications ensures that there is a fixed date by which an adjudication will be determined. This may be four weeks after the referral is lodged depending on the timetable set but clearly should be well within the 42 day period prescribed by the Scheme. Some adjudicators have adopted a 21 day timetable with a view to bringing an end to the adjudication within three weeks. Adjudicators now have little room for manoeuvre and must adhere strictly to the timetable. In my experience, if there are delays in progress on the part of any of the parties, adjudicators are more willing to impose a specified period of time by which the party responsible must rectify the situation or they will have their decision set aside. There is often the initial "grace period" of a few days after the referral but there is no doubt that adjudicators are more inclined to terminate adjudications that are dragging on rather than trying to find a way to complete them.
From the perspective of the parties involved in the adjudication, the Act has removed the perceived risk that, if there is any uncertainty in the law or the facts, an adjudicator will effectively constrict themselves by making derogatory comments in their determination. In some adjudications, it is accepted by the parties that the adjudicator will be in error and that there is no scope to challenge the matter subsequently. However, it seems to be the case that in many instances the parties previously felt constrained from having an honest discussion as to the effect that a determination would have both on their case and the future relationship between the parties. Now that comments made during the dispute resolution process are not admissible in subsequent proceedings, adjudicators seem to be more free to express their thoughts (some consider this to be the compelling of the adjudicator to perform a role which is somewhat outside the bounds of their professional code of practice). Whatever the position, the parties seem to welcome the opportunity to be open with the adjudicator about the nature of the dispute and what impact the determination will have.

Non-Compliance and Other Issues of the Act

Failure to comply with the Act can have devastating consequences for principals, contractors and subcontractors. For example, absent a right to serve a payment claim, a principal may be unable to recover construction work carried out by a subcontractor without having first been served with a claim for that work by the subcontractor under the Act. Equally, a subcontractor who fails to serve its payment claim in strict accordance with the timeframe and requirements of the Act may be left with no further recourse despite having carried out work. Under the Act, the onus is on the party serving the payment claim to ensure that it meets the requirements set out in the Act, and it is incumbent on the receiving party to comply with the Act.
Some of the compliance issues which tend to arise are: Despite the strict provisions of the Act, it is important to note that where a dispute arises with regards to whether a payment claim has been made compliant with the Act, the Court will look at the wording of the payment claim and the Order sought by the claimant and assess whether a reasonable recipient would know the nature of the claim. In this regard, the Act provides, as a defence to a failure to comply with a substantial condition , a party may still have a defence to the claim if it is subsequently found that a reasonable recipient of the payment claim would know the nature of the claim, and would not suffer any prejudice if the payment claim was considered valid. A party seeking to claim under the Act should ensure that it satisfies the requirements of the provisions in the Act, and pay careful attention to the strict compliance requirements set out in the Act if it wishes to rely on the Act. A claimant wishing to rely on the defence to substantial compliance should carefully consider the relevant facts surrounding both the payment claim and the provisions of the contract and seek appropriate legal advice given that the substantive rights of claimants under the Act hinge on strict compliance. The Act is designed to promote speedy cash flow within the construction industry and is not intended to be used as a tool for dispute resolution. Recourse to the Act should only be made where appropriate. While the procedure for serving payment claims under the Act is an efficient process, complying with the requirements of the Act is onerous and non-compliance has severe consequences which must be dealt with carefully so the desired results are achieved.

Developments and Anticipated Changes

There have been calls to reform the Construction Contracts Act for a number of years now, particularly following the recommendations of the Construction Contracts Review Group 2018 ("The Review Group"). In its publication titled "A Review of the Construction Contracts Act 2013" (the "Review") which was published in December 2018, the Review Group highlighted the need for the introduction of legislation to implement protection measures for contractors in relation to all public sector projects, rather than limiting the same to the construction of healthcare projects only.
A private members Bill amending the Construction Contracts Act was published in the Seanad on 19 December 2019 for initial consideration, however this has not yet progressed to a Bill before the Dáil. It is unlikely that it will come to fruition prior to the general election in February 2020 given the current political uncertainty.
The Government’s intentions in relation to the Review Group’s recommendations are indicated in the draft Bill which is currently out for consultation, however given the speed at which the changes are to be made, it is likely that much will depend on the outcome of the general election.
In addition to this, The Office of the Director of Public Prosecutions (the "ODPP") is requesting a review of the maximum penalties under Section 6 of the Act which provides a maximum penalty of €5,000 or imprisonment for a term not exceeding six months or both. The ODPP notes that there may be a case for amending Section 6 to increase the maximum level of the fine to match legislative provisions of more recent times.
Some industry developments may also prompt a wider rethink in relation to the protection measures available under the Act.
For example, as the public procurement market continues to develop and the use of new forms of contract grows to include employer designed contracts with new payment processes, there may be less appetite for the risk of adjudication and litigation that can arise from the operation of the existing Act and its associated procedures. Practitioners are already aware of claims up to €1 million being pursued at adjudication and commentary has been made in relation to the wide net that is cast by the mechanism.
In light of its expansion, and the potential issues that can arise as a result, the protection measures provided for under the Act may be better suited to address the changing procurement landscape in the public sector.

Conclusion

The Construction Contracts Act 2013 introduced significant legislative changes for the construction industry in Ireland. In particular, these changes apply to construction projects where the construction contract was entered into on or after 25 July 2016. The Act imposes strict deadlines on decision making and adjudications for cases under the Act. This has changed the landscape of construction contracts in Ireland as it now provides for interim payment entitlements or deductions, and a rapid method of addressing disputes.
In summary , the main features of the Act are:
The Act will impact on all procurement and contractual arrangements between employers, contractors and sub-contractors in the Republic of Ireland and whilst the introduction of the Act is for domestic purposes, it should also be noted that:
The Act is likely to become a hot topic over the next few years as contractors and employers seek to navigate through the procedures introduced by the Act and benefit from the protection and security which it will provide.