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Payment Under a Construction
Contract: Clarity at last

Payment Under a Construction Contract: Clarity at last

January 9, 2015
Construction Client

For those in the know in the construction sector, the Housing Grants Construction and Regeneration Act 1996 is the first port of call when dealing with entitlements to payment under a construction contract. The Local Democracy, Economic Development and Construction Act 2009 introduced radical new rules about payment. The new rules overhauled the old rule of the 1996 Act. They took effect from 1 October 2011 in England and Wales and from 1 November 2011 in Scotland.

Generally, the old rules required construction contracts to contain certain provisions about how and when payments would be assessed and made. Crucially, they required notice to be given if the payer intended to pay less than the sum otherwise due. The notice had to be on time; contain particular information; and be served correctly.

The new rules do not change these general principles. However, the new rules change the details of what a construction contract must say, and what happens if it does not; what notices must be given when; and what happens if such notices are not given.

To the extent that the contract does not comply with the rules, old or new, a Scheme for payment is imposed by law. In particular, the Scheme is referred to if the contractual payment mechanism is deemed ‘inadequate’.

If only life were that simple. Under the old rules, failure to give notice of the intention to pay less than the sum otherwise due, did not prevent the payer from challenging what the actual sum due was. There have been differences of opinion on the extent to which the new rules change this position.

Put into the language of the learned stakeholder in the construction sector, the argument has been about the extent to which there is any way out of paying the Notified Sum, if a valid and effective Pay Less Notice has not been served. Many a complex argument has been advanced. Perhaps we now have an answer:

In a recent dispute between ISG Construction Ltd and Seevic College, ISG made a valid application for interim payment of £1.1 Million, under the contract. Seevic wanted to pay less than the sum applied for. It felt that about £315k was actually due at about that time. However, Seevic did not issue valid and effective notices. ISG asked an adjudicator to order Seevic to pay the £1.1 Million. Seevic knew that it was in difficulty. How could it now challenge the application by ISG, so that it only needed to pay the sum it considered actually due, if it had not given the correct notices?

Seevic asked the same adjudicator to find that the value of the work done by ISG up to a date two days later that ISG’s date was £315k.

Inevitably, the parties ended up in the Technology and Construction court.

The court held that Seevic must pay ISG £1.1 Million, even if that was not the actual value of the works, because Seevic did not get the necessary notices out on time. Seevic’s claim that the works valued £315k two days later was irrelevant, because the contract did not give Seevic any right to repayment, outwith the payment mechanism of the contract.

The court noted that the contract provided for final accounting at its end. That was the time when overpayment would be dealt with.

Remember that the mechanism under the contract had to comply with the new rules. So the court’s decision may be taken as stating that under the new rules: if the payer does not get its Pay Less Notice out on time, the notified sum must be paid, regardless.

This is a valuable decision to anyone involved in payment under a construction contract. The principles, which the court upheld must apply equally to payer and payee. Notices must be issued on time and contain the correct information, compliant with the payment mechanism of the new rules. If not, the right to payment or the right to pay less, may be lost.

We did say that “Perhaps we now have the answer”. One obvious issue may remain:

The mechanism for payment under the new rules applies as much to final payments, as it does to interim payments. There would appear to be no mechanism under the new rules, to reclaim a previous overpayment. It is likely that the notice to pay less, cannot seek repayment. It cannot be a negative number.

The JCT contracts deal with this situation by allowing the contract administrator to state who the payer and the payee is, in respect of the final account.

There may be arguments about whether the Scheme does the same. Our view on the current law is that it does.

But what if your contract contains provisions, which are held to be adequate relative to payments to the contractor, yet do not include a mechanism for repayment?

Think of the scenario where the contractor issues his quote, stating only that payment of percentages of the price will be made at certain stages. So what payments of the price become due under the contract and when is clear.

Does the absence of a repayment mechanism necessarily mean that the provisions are inadequate? Or will the view be taken that this is tough on the employer? He should have ensured that the contract did contain a repayment provision. You may end up having to make an overpayment and have no right ever to get this back.

The message must be that if you are engaging in construction work, make sure you get your contract right.

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