Continuing on the theme of commenting on the drafting of the amendments made to Part II of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) by the Local Democracy, Economic Development and Construction Act 2009 (LDEDC Act 2009), this blog considers new section 111 of the Construction Act 1996. Specifically, it looks at how section 111 operates in the event of payee insolvency.
Section 111 of the Construction Act 1996 (as amended) provides:
“111 Requirement to pay notified sum
(1) Subject as follows, where a payment is provided for by a construction contract, the payer must pay the notified sum (to the extent not already paid) on or before the final date for payment…
(5) A notice under subsection (3)-
(a) must be given not later than the prescribed period before the final date for payment…
(10) Subsection (1) does not apply in relation to a payment provided for by a construction contract where-
(a) the contract provides that, if the payee becomes insolvent the payer need not pay any sum due in respect of the payment, and
(b) the payee has become insolvent after the prescribed period referred to in subsection (5)(a).”
Therefore, subsection 111(10) says that the requirement to pay the “notified sum” may not apply in the event that the payee has become insolvent. “Insolvent” has the meaning given in section 113 of the Construction Act 1996. The two criteria (on contract terms and the timing of the insolvency) to be met before the payer can withhold payment under this section are set out in subsections (10)(a) and (b), above.
The prescribed period
The “prescribed period referred to in subsection (5)(a)” must be interpreted as the period of time falling before the final date for payment (even if not immediately before), during which a payer may serve a notice of its intention to pay less than the notified sum (a pay less notice) in respect of a payment. If the parties do not agree the prescribed period, it is set as the period “not later than seven days before the final date for payment”, by paragraph 10 of part II of the Scheme for Construction Contracts 1998 (as amended).
It might have been better for the words “not later than” in subsection 111(5)(a) to read “during”, instead, to avoid the suggestion that the “prescribed period” is simply an agreed number of days between the last date the pay less notice may be served and the final date for payment. On this reading, the Scheme would provide a “prescribed period” of “seven days”.
However, that interpretation must be incorrect because it would mean that the wording in subsection 111(10)(b) could not operate as intended, as “after the prescribed period” would, in effect, be the same as saying “after the final date for payment”.
Timing of the insolvency
The intention of subsection 111(10) appears to be that the payer should deal with the insolvency of the payee by issuing a pay less notice, where the insolvency occurs before the expiry of the prescribed period. The government’s explanatory notes to the LDEDC Act 2009 say:
“[Subsection (10)] provides that the subsection (1) requirement to pay the ‘notified sum’ does not apply where the contract allows the payer to withhold moneys upon the payee’s insolvency and the payee becomes insolvent after the expiry of the period for giving a notice of intention to pay less than this sum (pursuant to subsection (3)).”
Therefore, in the event of payee insolvency occurring before the end of the prescribed period, the payer should issue a pay less notice (where the contract allows) if it wishes to withhold payment. If the insolvency occurs after the expiry of the prescribed period, the payer should seek to rely on the provisions of subsection 111(10).
Contract terms in practice
Where does that leave the payer drafting its contract? To take advantage of the protection offered by subsection 111(10) in situations where payee insolvency occurs after the expiry of the prescribed period, paying parties should certainly consider inserting a clause to the effect that “if the payee becomes insolvent the payer need not pay any sum due in respect of the payment”. Make sure that “insolvent” has the meaning given to it in section 113 of the Construction Act 1996, rather than using any other definition of insolvency that might be provided for elsewhere in the contract.
Also remember that, for a payer to be able to use a pay less notice to withhold payment on the insolvency of the payee, where that occurs prior to the end of the prescribed period, there must be adequate provision in the contract. Section 111(4)(a) of the Construction Act 1996 requires that a pay less notice specifies “the sum that the payer considers to be due on the date the notice is served”, and the amount specified must then be paid (though it may be zero). In other words, the contract must provide that no payment is due upon the insolvency of the payee, in order for the payer to be able to specify a sum of “zero” in the pay less notice and consequently pay nothing to the payee.
One point this blog does not consider is whether section 111(10) would apply to an insolvency that occurs after the final date for payment (which, arguably, still falls within subsection 111(10)(b)) in order to relieve the payer from the obligation to make a payment that should have been, but was not paid on or before the final date for payment.