Publish date

26 February 2024

Payment provisions and the Construction Act

The infamous phrase in the 1994 Latham Report that “cashflow is the lifeblood of the construction industry”, and the backdrop of high rates of contractor insolvencies at that time, sets the scene for the legislative interventions which remain at the heart of payment obligations in construction industry.

As well as setting non excludable minimum standards that construction contracts must adhere to in terms of rights for interim payments, they also introduced the statutory right to adjudicate construction disputes, by which those rights may be rapidly enforced. The core objective was to promote and protect cashflow.

Payment provisions are arguably one of the most important elements in any construction contract, and must be carefully considered by both parties when negotiating and performing a construction contract.

In this article, we will be providing an overview of the payment provisions in construction contracts and a summary of the requirements set under the relevant legislation.

The Legislation

The key legislation governing payment provisions in construction contracts (and creating the right to adjudicate construction disputes) is:

  • The Housing Grants, Construction and Regeneration Act 1996 (commonly referred to as the “HGCRA 1996” – referred to as “the Act” throughout this article)
  • The Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649) (referred to as “the Scheme” throughout this article)
  • The Local Democracy, Economic Development and Construction Act 2009 (LDEDCA 2009) came into force on 1 October 2011 and amended many of the provisions of the Act and the Scheme (and applies to contracts entered into on or after 1 October 2011).

What contracts are covered under the Act?

The Act  is purposefully drafted to be of wide application, with section 104 of the Act defining construction contracts as including:

(1)(a) the carrying out of construction operations; (b) arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise; (c) providing his own labour, or the labour of others, for the carrying out of construction operations’

(2) References in this Part to a construction contract include an agreement—(a) to do architectural, design, or surveying work, or(b) to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape, in relation to construction operations.”

“Construction operations” are defined further in s105 of the Act. There are also some activities/contracts that will fall within the exclusions of the Act.

In the case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd, the court was required to determine whether or not a collateral warranty was caught within the definition of a ‘construction contract’ under the definition of s.104 of the Act. The court held that in this particular case, and in line with ordinary contractual interpretation and despite there not being any specific payment provisions, the wording of the actual document had to be treated as a construction contract in compliance with the Act. It was significant that in this case the agreement stated that it was for the “carrying out of construction operations”.

This  case stands as an example of the wide interpretation that will be given to the applicability of the Act, and highlights the importance of seeking advice to determine if yours is a construction contract under the Act.

The requirements under the Act

Generally speaking, parties are free to negotiate and agree their own payment terms (i.e. when payment is due, how often it is due, the amounts payable etc.) but the Act mandates that any payment terms must comply with the minimum standards mandated by the Act. Compared with other areas of commerce, it is an strikingly interventionalist piece of legislation.

By way of brief overview, some of the key requirements of the Act include:

  • Unless the contract is under 45 days’ duration, the payee is entitled to payment by instalments, stage payments or other periodic payments (HGCRA 1996, s109)
  • The contract must provide an “adequate mechanism” for determining what payments become due and when, and must provide a final date for payment (HGCRA 1996, s110)
  • The contract must provide for the giving of a payment notice after the due date (s110A)
  • If the payer fails to give the required payment notice, the payee can serve its own notice in default (HGCRA 1996, s110B)
  • The payer must pay the notified sum in the payment notice, unless it serves a “pay less” notice within the prescribed period before the final date for payment (HGCRA 1996, s111)
  • The payee can suspend all or part of its obligations in the event of non-payment upon seven days’ notice (HGCRA 1996, s112).

Having set those key requirements, the Act goes on to create a statutory right for parties to construction contracts to refer disputes to adjudication. As our colleagues explain here, adjudications frequently proceed on what is commonly referred to as a “smash and grab” basis, where a party has failed to serve valid notices on time or at all, and becomes liable by default for the sum applied for by the contractor

The Scheme

In the event that the contractual payment provisions does not meet any or all of the above key requirements, the relevant provisions of the Scheme will be implied into the contract and override the non-compliant terms, to the extent required to make the contract comply with those requirements.

These provisions are found in Part II of the Scheme which includes (but is not limited to) incorporating terms for an adequate mechanism for determining when payment is due, and setting the dates of the final date for payment and by which payment notices and pay less notices must be served.

Potential implications of non-compliance

The case of Lidl Great Britain Ltd v Closed Circuit Cooling Ltd trading as 3C considered a number of issues, including a dispute that arisen as to whether the requirements of section 110(1)(b) of the Act were complied with. A key issue in that case was that the final date for payment of each application was dependent upon issue of a VAT invoice by the party applying for payment, once a valuation had been issued in response to the payment application.

The Judge found that to comply with the Act, the final date for payment must be set so that it occurs within a set period of time from the due date and it cannot be dependent on another intervening event – in this particular case, the submission of a VAT invoice.

The consequence was that the offending terms of the contract the parties had been working to were held to be void, and once the provisions of the Scheme were incorporated into the contract to make it compliant with the Act, the effect was that the paying party had missed the deadlines to issue its notices.

This exemplifies the importance of taking advice to ensure that compliance with the Act is carefully considered when negotiating and entering into the contract, and how a failure to ensure compliance with the Act had a fundamental impact on the outcome of the payment dispute that arose.

If you have any questions about the topics raised in this article, please get in touch.


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