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15 August 11

Significant changes designed to reduce delays in payment under construction contracts will shortly come into force

by Ann O'Connell

Lawyers in the construction field are having to focus on changes to the payment regime for contracts, which will be implemented in Scotland on 1 November 2011. (They go into effect in England & Wales on 1 October 2011.) This article takes a look at the changes, who they will affect, what they are, what has to be done and when it will all happen.

Overview

The Housing Grants, Construction and Regeneration Act 1996 was designed to provide the sector with effective and fair payment practices, and in the event of dispute, access to a quick and relatively inexpensive adjudication process.

The Local Democracy, Economic Development and Construction Act 2009, part 8 makes changes to the payment and adjudication provisions of the 1996 Act. These changes are largely technical and include:

  • extension of the 1996 Act to oral construction contracts and to those that are partly oral and partly in writing;
  • provision for the costs of adjudication;
  • provision for the adjudicator to correct an error in his decision;
  • changes to the current payment framework, including the prohibition of payments which are conditional on the performance of obligations under another contract;
  • clarification of the circumstances in which the “payer” must give notice to the “payee” if he intends to pay less than the amount in the payee’s application;
  • improvements to the provisions relating to the right of a party to whom payment is due to suspend performance of his obligations under a construction contract.

 

Who it affects

There is a wide definition in the 1996 Act of “construction contracts” and “construction operations”. The changes brought in by the 2009 Act will apply to all construction contracts entered into from 1 October 2011 in England & Wales, and 1 November 2011 in Scotland. For parties presently negotiating contracts that may not be entered into until after 1 November 2011, such contracts will require to be compliant with the new statutory provisions.

Changes to the payment regime

The 1996 Act currently provides at s 110(1) for an “adequate mechanism” for determining what payments become due under the contract and when; for a final date for payment; and for agreement of the period between the date on which a sum becomes due and a final date for payment.

The existing s 110(1) remains, but is supplemented by new subsections, (1A)-(1D).

  • Subsection (1A) provides it is not an “adequate mechanism” to make the determination of what payments are due, and when, conditional on the performance of obligations under another contract or a decision by a person as to whether obligations under another contract have been performed. This outlaws “pay when certified” provisions under another contract.
  • Subsection (1B) excludes from the application of subs (1A), obligations to make payments. Section 113 of the 1996 Act already secures that “pay when paid” clauses in a construction contract are ineffective.
  • Subsection (1C) creates a material exception to subs (1A), to allow payment in a superior contract to be dependent upon the work carried out in a subcontract.
  • Subsection (1D) provides that the giving of a “payment notice” to the payee is not an “adequate mechanism” for determining when payments become due under the contract. Therefore, a provision whereby a payment will only fall due where a “payment notice” in respect of that payment is given, is ineffective.

The 2009 Act replaces s 110(2) with new ss 110A and 110B.

In summary:

  • Section 110A(1) introduces the “payment notice”. This requires the “payer” or a “specified person” to give the “payee” a payment notice not later than five days after the payment is due or require the payee to give the payer or a “specified person” such notice.
  • Section 110A(2) provides that a payment notice is to specify the sum that the payer believes is payable and the basis on which the sum is calculated.
  • Section 110A(3) is the equivalent provision in relation to the sum the payee believes is payable and how it is calculated: the default notice under s 110B.
  • Section 110A(4) requires the payment notice to be given even if the sum involved is zero.
  • Section 110A(5) provides that if the contract is deficient, the relevant terms of the Scheme for Construction Contracts are to apply. (The Scheme will be the new amended Scheme – Scheme for Construction Contracts (Scotland) Regulations 1998 (Amendment) (Scotland) Regulations 2011.)
  • Section 110B makes provision for a “payee”’ notice in default of a “payer” notice.

Paying less?

The existing provision at s 111 of the 1996 Act, which relates to withholding notices, is replaced. The new s 111 requires the payer to pay the sum set out in the s 110 payment notice. It also makes provision for the sum in such a notice to, in effect, be challenged or revised by the giving of a type of counter notice which is to be known as a “pay less” notice.

The new s 111 includes the following provisions:

(1) The payer must pay the notified sum on or before the final date for payment.

(2) The “notified sum” is the sum set out in the payment notice given by the payer, or by the payee in the default notice or in the payee’s application where it is deemed to be a default notice.

(3) A payer may give notice of its intention to pay less.

(4) A “pay less” notice must specify the sum that the payer considers to be due on the date the notice is served, and the basis upon which that sum is calculated.

(5) Notice must be given by the prescribed period.

(6) The obligation under (1) applies only in respect of the part of the notified sum specified in the “pay less” notice.

(7) Parties may agree the prescribed period.

(8) and (9) An adjudicator may decide that an additional sum is payable, though a notice complying with s 110A(2) or (3) has been given.

(10) Payment is not due where the contract provides that if the payee becomes insolvent the payer need not pay any sum which is due, and the payee becomes insolvent after the prescribed period.

Preparing for the changes

A review of construction contracts should be carried out now to address the following:

  • payment clauses
  • due date and final date
  • payer, payee and “pay less” notices
  • conditional payments
  • suspension and adjudication provisions.

The publishers of construction industry forms of contract and appointments are working towards intimating their amendments and changes to reflect the changes brought in by the 2009 Act. JCT and SBCC have tracked-change versions of the main contracts available for purchase. This is to allow contracting parties to familiarise themselves with these and be ready for the key start dates.

The deadlines for the issue of the new notices must be strictly adhered to: the consequences of missing these are significant. Under the SBCC Standard Building Contract, the contract administrator will require to issue an interim certificate no later than day 5 after the due date. If he fails, the contractor’s application would become the “notified sum”. If he fails by day 9 to give a “pay less” notice, the contractor would be due to be paid the amount in his application by day 14.

The 2009 Act changes, although not perfect, should foster the 1996 Act aims of resolving disputes quickly, unlocking cash flow and allowing the project to continue efficiently with certainty of payment. Employers are discouraged by these changes from delaying payment or using as an excuse certification under separate contracts. If they do not operate within the terms of the 2009 Act, they leave themselves open to adjudication decisions requiring near immediate payment.

 

Ann O’Connell is an accredited specialist in construction law and a partner at bto solicitors.
 
bto are holding a workshop on 14 September to answer questions from the construction sector on contractual issues

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