34.4.1 This Act came into force in May 1998 and affects Contracts with construction-type obligations (including maintenance). It gives Construction Sub-Contractors certain rights e.g. to receive staged payments according to work completed, and sets out a fast track dispute resolution procedure.
34.4.2 It is not possible to contract out of the Act so its effect should be considered in relation to each contract in a PF2 project. Relevant privately financed contracts (at head contract level) are specifically excluded, however, from the Act's application by virtue of Article 4 of the Construction Contracts (England and Wales) Exclusion Order 1998 (and Article 4 of the Construction Contracts (Scotland) Exclusion Order 1998). To come within the exclusion the project must fulfil the conditions set out in that Article for example the contract should state that it is a project applying similar principles to the former Private Finance Initiative. It may also be useful for the Contract to clarify which other conditions it fulfils to qualify as being excluded from the application of the Act.
Required drafting to enable a contract to come within the exclusion is as follows:
34.1 Housing Grants, Construction and Regeneration Act
This Contract is entered into under a project applying similar principles to the former Private Finance Initiative. This Contract is excluded from Part II of the Housing Grants, Construction and Regeneration Act 1996 by operation of paragraph 4 of the Construction Contracts (England and Wales) Exclusion Order 1998. The Contractor acknowledges that the operation of the Housing Grants, Construction and Regeneration Act 1996 upon any Project Document shall not affect the Parties' rights or obligations under this Contract.
34.4.3 This exclusion is not generally considered to extend to PF2 Sub-Contracts. The result of this is that there is a risk that the Sub-Contractors are entitled to rights as against the Contractor (under the Act) (e.g. to receive a staged payment) to which the Contractor is not entitled as against the Authority (as the Act does not apply at this level).4 The Contract should not be amended simply to conform with the Project Documents which are governed by the Act.
34.4.4 To the extent the Act applies to a PF2 Sub-Contract,5 the Authority may be asked to accommodate reasonable approaches that are designed to deal with the effects of the Act, recognising that different Contractors and advisers will take different approaches to the issue. The Authority should, however ensure that its position is commercially the same as it would be were the Act not to apply to the PF2 Sub-Contract concerned. It should be borne in mind that if any Sub-Contractor of the Authority is involved in maintenance services which could come within the meaning of "construction contract" under the Act, then that contract may be subject to the Act.
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4 Contractors will be aware that "pay when paid" provisions (in relevant "construction contracts" under the Act) are rendered unenforceable by the Act. A well-managed Contractor should in any event be able to structure and run its Sub-Contracting arrangements so as to avoid payment mismatches occurring. Mismatches with the Contract on payments of construction price to the builder should not arise, since these are funded by the Senior Lenders (and equity) and are not funded through the Contract. There are some areas however where equivalent payments may be made under the Contract as under the subcontracts; these may cover payments for Compensation Events, payments for variations, termination payments, and payments of Unitary Charge relating to hard services. For these matters the Contractor will need to ensure that its notice periods are such that it can give notices and receive relevant confirmations or certificates or payments under the Contract in sufficient time for it to give its own confirmations or certificates or payments under its Sub-Contracts. It may also agree with its Sub-Contractors to pursue, if required, the equivalent issues under its head contract or allow the Sub-Contractor to do so as its agent or, in the event of a common dispute, it may agree that the written joinder provisions of Clause 34.2(g) should apply. Contractors should note Article 2 of the Construction Contracts (England) Exclusion Order 2011, does provide an exemption from the "pay when certified" provisions but for "first tier PF2 sub-contracts" only.
5 See section 104 of the Act for the definition of a "construction contract" to assess the extent to which the Act applies to a PF2 Sub-Contract.