If you are engaging a contractor under a construction contract, even for a one-off project, you must ensure that you precisely follow the payment terms in your contract, no matter what the circumstances!
Most commercial construction contracts must provide for interim payments. If yours does not, then payment terms will be imported by statute. And for every interim payment, there must be a mechanism for determining what sum becomes due, the due date and the final date for payment.
The default position under statute is that the start of the cycle is triggered by the Contractor submitting an application for payment. Not later than 5 days after the due date, the Employer (or, in other words, the business engaging the contractor) will issue a payment notice to the Contractor. The payment notice will detail the sum the Employer considers to be due and the basis on which that sum is calculated.
However, if the Employer fails to submit a payment notice, the Contractor can submit its own payment notice (payment notice in default), stating the sum the Contractor considers to be due. If the Contractor has already submitted an application for payment, then this can “self-execute” as its payment notice in default, provided it is properly put together.
The Employer is allowed a second bite at the cherry, as he can serve a further notice (“a pay-less notice”), which has the effect of providing a new sum that becomes due by the final date for payment, overriding the Contractor’s payment notice in default.
If the Employer fails to serve either its payment or pay less notice, and the Contractor has submitted a valid application for payment, then the Contractor is entitled to the full amount set out in its application for payment, even if that amount does not reflect the true value of the works.
An Employer then refusing or failing to pay the full amount of the application for payment, will risk exposing himself to what has become known as a “smash and grab” adjudication. This describes an adjudication (which is a fast-track, 28 day dispute resolution procedure designed specifically for the construction industry) in which the Contractor seeks to recover full payment of an interim application where no payment notice or pay less notice has been served by an Employer. The adjudicator is not permitted to assess the actual value of the works and must award the Contractor payment in full, even if the true value of the work carried out by the Contractor is significantly less than stated in the application. This award can be enforced in the Courts via a fast track procedure. In an industry of low margins where the importance of cash flow is paramount, this option can be very attractive for Contractors.
Although a series of recent decisions by the Courts have begun to limit the scope of “smash and grab”, for example, by making it harder for Contractors’ applications to “self-execute” as payment notices in default, the simplest way to avoid one as an Employer remains good project management and ensuring that you follow the payment rules in the contract to the letter.
If you are an Employer under a construction contract, a contractor or otherwise and have any queries in relation to the above, then please do not hesitate to contact the writer George Boddy.