Payment Under The Construction Act
Specialist Contractors Entitlement To Payment Under The Construction Act
The basic payment rules introduced by the Construction Act and the 2009 amendments are:
- The right to payment by instalments.
- An ‘adequate mechanism’ for determining what sums are due and when, and linking to the ‘performance of obligations’ or ‘decisions’ under ‘another contract’ does not constitute an ‘adequate mechanism’.
- Prior notice of sums due and ‘the basis on which that sum is calculated’.
- ‘Pay when paid’ clauses to be ‘ineffective’ (except in the case of insolvency of a third party upon whom payment depends).
- Prior notice of intention to pay less than (i.e. ‘set-off from’) the Notified Sum setting out ‘the basis on which that sum is calculated’.
- Right to suspend work (by not less than seven days’ notice) for non-payment of the ‘Notified’ sum.
Where one or more of these minimum requirements are not met, and/or no agreement has been reached on the terms, the relevant parts of the Scheme for Construction Contracts, come into operation as a ‘default’ mechanism.
The Act leaves the parties ‘free to agree’ the amount of any instalments or periodic payments, the mechanism for determining this, the intervals at which such payments become due and the intervals between the ‘due date’ and the ‘final date’ (i.e. the latest date by which payment must be made). This allows Contractors to use their ‘muscle’ in order to impose longer payment periods than are fair and reasonable.
The Local Democracy Economic Development and Construction Act 2009 (“LDEDC”) introduced changes to the law regarding payments under construction contracts for contracts entered into on or after 1st October 2011.
Stage Payments For Specialist Contractors and Subcontractors
The Act (see section 109 HGCR Act) entitles the payee to stage payments for any work under the contract unless:
- the contract states that the duration of the work is to be less than 45 days; or
- the parties agree that the duration of the work is estimated to be less than 45 days.
Due Dates and Final Dates For Specialist Contractors and Subcontractors
Every construction contract must provide an adequate mechanism for determining what payments become due under the contract, and when, and provide a final date for payment of any sum that becomes due. The parties are free to agree the due dates for payment and how long the period is to be between the date a sum becomes due and the final date for payment (see s110).
Payments cannot be made conditional on the payer receiving payment from a third party (see s113), unless the third party paying the payer is insolvent (the Act defines what constitutes insolvency for the purposes of this provision).
The LDEDC has also prohibited payments being made 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. Therefore, a Contractor cannot make payments to his sub-contractors conditional on the Employer certifying his own payments as being due under the main contract.
What happens if my contract does not comply with the Act?
If the contract does not provide an adequate mechanism for determining when payments become due and the final date for payment the ‘Scheme for Construction Contracts’ applies. The Scheme is discussed further below.
Who notifies the amount due for payment, and how?
The LDEDC has introduced a new payment regime. Previously only the payer could serve a notice stating how much he was due. Under the new provisions the contract can specify who gives the notice of what is due. It can be:
(i) the payer; or
(ii) another “specified person”, this might be a Project Manager or Contract Administrator for example; or
(iii) it could be the payee who gives the notice.
The notice must be given not later than 5 days after the payment due date. In each case it must state the sum the person giving the notice considers to be due or to have been due at the payment due date and the basis on which the sum is calculated (see s110A).It is ‘immaterial’ that the sum due is zero, a notice must still be given.
If the payer or the specified person is supposed to serve the notice under the contract and he does not, then the Act provides that the payee can serve a notice instead, stating the amount he considers due and the basis on which that is calculated (see s110B).
Default Payment Notice
Importantly – if the contract permits or requires the payee (prior to the date on which the payee’s notice is required to be given) to notify the payer or a specified person of the sum that the payee considers will become due on the payment due date and the basis on which that sum is calculated, and the payee gives such notification, e.g.in the form of a payment application, then this is to be regarded as the payee’s notice and becomes what has come to be known as the ‘default payment notice’ and the payee cannot give another notice.
Contract Does Not Provide For ‘Payee’s Notice‘ (Interim Application)
If there is no provision in the contract for a payee notice (interim application) then the payee can serve a notice under section 110B (2) and the final date for payment is pushed back by the number of days between the notice that should have been given and the payee’s notice.
The amount in the notice given (whether by the payer, payee or specified person) must be paid on or before the final date for payment, unless a notice to pay less has been served by the payer.
In order to withhold monies from the payee, the payer (or the specified person) must serve a “pay less” notice (this used to be known as a “withholding notice”) see s111. The pay-less notice must:
- specify the sum the payer considers to be due on the date the notice is served; and
- the basis on which that sum is calculated.
This is slightly different to the old withholding notices and has arguably made matters worse for the subcontractor, as the most rudimentary of details are taken to comply with the requirement to state ‘the basis on which that sum is calculated’
Once again it is irrelevant if the sum the payer thinks is due is zero; the notice must still be served. The parties can agree in the contract how long before the final date for payment a pay less notice must be given, but if they do not agree this then the period in the Scheme for Construction Contracts applies (7 days before the final date for payment).
The Right To Suspend Performance
If there is no valid notice to pay less given by the payer and the payment is not made fully by the final date for payment, then the payee is entitled to suspend performance of part or all of his obligations under the contract (see s112). Previously the whole of the works had to be suspended, but now the payee can choose to suspend only part if necessary.
The payee has to give the payer 7 days’ notice of his intention to suspend work stating the ground or grounds on which he is suspending. Once the payer makes the payment in full the right to suspend ceases and the payee could be in breach of contract if he does not then resume work.
The payee is entitled to an extension to any contractual time limit whilst the payee’s obligations are suspended. The LDEDC has also introduced the right for the payee to claim from the payer the reasonable costs and expenses incurred as a result of the suspension – this might include remobilisation costs for example.
The Scheme for Construction Contracts
The Act provides that the relevant provisions of the Scheme will apply where a contract fails to comply with certain specified provisions of the Act.
The Scheme applies where the parties to a relevant construction contract fail to agree:
- the amount of any instalment or stage or periodic payment for any work under the contract, and/or
- the intervals at which, or circumstances in which, such payments become due under that contract.
If the parties do not provide an adequate mechanism to determine what payments are due and/or when they are due, the Scheme provides as follows:
A payment becomes due on the later of:
- the expiry of 7 days following the “Relevant Period” (if the contract does not specify a relevant period or one cannot be calculated by reference to the contract then this period is 28 days; or the making of a claim by the payee.
Final Date for Payment
If the parties have failed to provide for the final date for payment of sums due the Scheme states that the final date for the payer to make payment is 17 days after the payment due date.
Construction contracts must provide for notices of payment to be given. If they do not, then the Scheme states that the payer must give the payee notice no later than 5 days after the payment due date. The notice must state:
- the sum the payer considers to be due or to have been due at the payment due date; and
- the basis on which the sum is calculated.
It does not matter if the sum he considers due is zero, a notice must still be given. And although the Act itself allows parties to agree that the payee can give the notice, or that another third party specified in the contract can give the notice, the Scheme only refers to the payer giving this notice.
Paying less than the notified sum
If the payer intends to pay less than the sum notified in the payment notice, he must serve a pay less notice. If the parties have failed to agree the period in which that notice must be served the Scheme provides that the notice must be given no later than 7 days before the final date for payment.
Pay When Paid
The Scheme will also automatically apply if the parties have stated that payments are conditional on the payer receiving payment from a third party (which is prohibited by the Act unless that party is insolvent) but have failed to provide any other terms for payment.
It is vital to realise that the Act applies equally to your subcontractors or sub-sub-contractors, (even the labour only ones) and you must therefore take care to ensure your own contracts comply with the Act. Similarly, you must ensure that you comply with your obligations as regards payment and pay less notices.
Whilst the payment mechanisms introduced by the Act, and amended by the LDEDC might seem complicated, they have introduced vital provisions to protect you. Therefore, you should always be very wary when Contractors offer you their own terms and conditions, or seek to amend the Standard Form contracts such as JCT and NEC.
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