Reforms to statutory payment provisions
21/06/2011
By Chris Whittington, Consultant and Head of Construction & Engineering.
Major changes to the Construction Act 1996 are currently due to come into force in October 2011.
Significant changes will affect the payment provisions contained in Sections 110 - 112 of the Construction Act, which are the focus of this article. There will also be changes to adjudication provisions. A key change is that in order to be a qualifying construction contract, that contract no longer has to be in writing. This could well have ramifications for the application of the new payment provisions.
- ‘Paid when certified’ provisions will essentially be ineffective.
The provision remains under s.110 that a construction contract shall provide an adequate mechanism for determining what payments become due and when and must provide a final date for payment. Currently ‘pay when paid’ clauses are ineffective except where caused by an insolvency up the line. That much remains the same, but now ‘pay when certified’ provisions will become ineffective (unlike the current position). There will be certain exceptions to this, for example for management contracting. Further, any attempt to make the due date for payment dependent upon when the payer gives a payment notice will be ineffective.
- Provisions for payment notices have been expanded.
One of the main changes to the provisions for payment notices is that in addition to a requirement that the payer gives notice not later than five days after the due date (which must state the sum the payer considers due and the basis on which that sum is calculated), in default the payee may now give such a notice.
If, as with most standard form contracts, the contract provides that the payee may make an application for payment, that application shall stand as the payment notice if the payer fails to issue one. That application by the payee will be regarded as compliant with the provisions of the Act.
This could be significant for the payee in circumstances where the sums being applied for are running ahead of the sums to be certified. However, clearly the payer can recover the situation if they serve a valid pay less notice in time, or if they deal with the situation in a subsequent interim payment (if there is one).
- The ‘withholding notice’ will become ‘pay less notice’.
The withholding notice is to be abolished and replaced with a pay less notice, still under s.111. This section is now called ‘Requirement to pay notified sum’. It requires the payer to pay the notified sum on or before the final date for payment. It now enables the payer to give a notice of their intention to pay less than the notified sum. The notice must specify the sum that the payer considers to be due on the date the notice is served and the basis on which that sum is calculated.
There is no longer a requirement that if less is to be paid, the notice must state what the grounds are for the reduced payment, and if there is more than one ground, each ground and what element of the reduction applies to each ground. There is therefore currently some concern as to what “basis on which that sum is calculated” will mean, and whether this will lead to much less detail being required in order for a such a notice to be effective (for example, if only stating the net sum due, and not the supporting calculation).
Whether this will have any adverse impact on the payee in practice remains to be seen. Arguably there is no difference in effect regarding payment notices, as the current provision requires the notice to state the “basis upon which the amount was calculated” (to be changed to “basis on which that sum is calculated”). In terms of pay less notices, it will be whether “basis” will equate to “ground” and the current further requirements where there is more than one ground.
- The right to suspend for non-payment has been enhanced.
The right of a payee to suspend in default of full payment by the final date remains, and seven days’ notice must still be given. However, the changes mean that the payee may suspend “any or all of his obligations” - previously the payee could only suspend all of the obligations. This could provide a powerful tool for contractors who will be able tactically to pick and choose what work is suspended.
Further the Act will provide that the party in default is liable to pay a reasonable amount in respect of costs and expenses reasonably incurred as a result of the payee exercising this right. This may also include the costs of re-mobilisation and return to site. In addition, the Act will now widen the current entitlement to an extension of time to cover any time spent as a consequence of exercising the right of suspension, namely the actual period of suspension. This should therefore include the time spent re-mobilising.
Summary
In summary it will be interesting to see what difference these changes make. There are some enhanced rights, which will be useful to contractors. However in terms of the payment and pay less notices, the wording of the Act will be much more verbose and complicated, and one is left wondering ‘If it ain’t broke…’