Payment provisions in the Construction Act


Long awaited amendments to the Construction Act will reinforce the requirement for companies to pay up. Many will welcome the new provisions. However, for those at the top of the chain, failure to comply could have serious consequences on the delivery of much needed waste facilities. Sean McCay reports.


Sean McCay partner and head of construction and engineering, Pannone


T 8 December 1 2011


HE AMENDMENTS to Part 2 of the Housing Grants Construction and Regeneration Act 1996 are now in force and will affect all construction contracts entered into after 1 October 2011 in


England and Wales (and after 1 November 2011 in Scotland). While the original Act made some headway


in addressing late payments, the amendments have significantly tightened up the payment provisions required by the Act. The amendments state that contracts no


longer need to be in writing for the right to adjudicate to apply. In addition, Tolent type clauses are prohibited and companies now have the right to suspend the whole or part of the work and claim damages as a result of failure to make payment of sums due.


Payment provisions The new provisions are certainly a radical departure from the old ones and now apply to all payments under a contract, whether from an employer to contractor or vice versa. Under the provisions, payment notices


must now be issued by the paying party, a specified person, for example a third party contract administrator, or the receiving party. Contracts must also state who is to issue the payment notice. If the paying party disagrees with the sum


applied for in the payment notice then it must issue a pay less notice. This is similar to a


s111 withholding notice under the old regime. However, unlike the withholding notice, failure to issue a pay less notice will mean the sum in the original payment notice becomes the amount that the payer must pay to the receiving party. An employer can no longer argue in adjudication that the amount applied for in the payment notice does not represent the true value of the work. Furthermore, if the contract provides that


the paying party must issue a payment notice but fails to do so, then the receiving party may issue a default notice. The default notice will then stand instead of the original payment notice. By the final date for payment, the sum detailed in the payment notice, or the pay less notice, must be paid to the receiving party. If construction contracts do not contain


provisions which comply with these requirements then the provisions of an amended scheme for construction contracts apply.


Course of action The provisions are designed to increase cash flow to contractors and subcontractors lower down the supply chain by making it difficult to lawfully withhold payments that are due. However, for those who find themselves


struggling to get paid, they can pursue two courses of action. First, if the recipient has not received payment, they could issue notice that if payment is not made within seven days it will suspend all or part of its contract obligations and make a claim for damages for disruption and prolongation. This will obviously be a savage blow to the


payer as it would likely cause critical delay and expose it to potential damages; not only from the aggrieved sub-contractor but also


from its employer further up the supply chain for prolongation to the project. The second option would be to begin


adjudication. However, this is probably a longer and less practical route at an interim stage because, although the aggrieved party is likely to win, it could take up to 35 days for the argument to reach that stage. That said, the apparent impossibility of


defending an adjudication for failure to make a payment where no pay less notice has been served, means that the paying party should pay up more promptly; which will have a positive impact on cash flow. On the flip side, however, cash flow for


the paying party could be severely damaged because it is no longer an option to keep the contractor/subcontractor at arms length. Often companies use failure to pay on


time to effectively obtain credit on favourable terms, safe in the knowledge that there may be grounds for defending any claim. However, for those who find themselves in


adjudication without having issued a pay less notice, or in a situation where the aggrieved contractor/subcontractor has suspended work, it is now almost certain to cost them dearly.


Be prepared To avoid such expensive disruptions there are a number of options the employer/main contractor can take to avoid the pitfalls of the new payment provisions. First, try to make sure your contracts


operate on the basis that you issue the payment notice and not the receiving party. This puts you in control of the payment


notice and means that even if you fail to issue a pay less notice you have less exposure than you might otherwise.


www. r e c y c l i n gwa s t ewo r l d . c o . u k Also, it is essential that you have systems


in place to issue payment notices on time otherwise the receiving party may issue a default notice. If this happens you may then have to issue a pay less notice if you disagree with the default notice’s valuation. If your contract states that the receiving


party issues the payment notice, make sure you have the systems in place to issue pay less notices when required. The consequences are dire if you fail to do so where you disagree with the payment notice. When faced with a suspension notice,


always consider making a payment unless your position is ‘bombproof’. Suspension of works by the receiving party can imperil your ability to achieve milestone dates in your main contract. Of course, it is worth remembering that you can always attempt to rectify any overpayment - which occurs by failure to issue a pay less notice in the first place - by an accurate valuation in the next payment cycle. For contractors and subcontractors who


are often the receiving party, it is imperative that they follow the procedures in the new provisions to ensure they receive payment. For example, if the paying party has failed


to issue a payment notice, it is essential the contractor/subcontractor then issues a default notice otherwise they will not be entitled to anything. If they intend to suspend work because of late payment, they must make sure the relevant contractual/statutory notices have been issued. This is a very powerful weapon, but if you


do not get the correct notices in place you cannot use it. Even worse, it could backfire spectacularly as unlawfully downing tools can lead to claims for damages and potentially put you out of business.


& WA S T E W O R L D


RWW Recycling


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