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First 12 months of the new payment provisions

In October 2011, I wrote a couple of blogs on the “simplified” Construction Act 1996 payment provisions. I concluded by saying that:

“…once the questions over the meaning of some of the amendments have been resolved, I actually think that the amendments will be quite effective at maintaining cash flow.”

One year on, I thought it was worthwhile reviewing how the new payment provisions are faring.

Limited judicial scrutiny

The new payment provisions received some criticism for their complexity, and one of the best example is section 110(1D), which I confess to having to read at least four times to grasp its meaning. Therefore, one would have thought that the new payment provisions might have been subjected to some judicial scrutiny, but not so. I am aware that the TCC dealt with a case concerning the new payment provisions in February 2012, but it was not reported. Otherwise, there doesn’t appear to have been any other cases dealing directly with the new payment provisions.

I understand that in the February 2012 case:

  • The adjudicator awarded payment due to the presence of the sub-contractor’s (the payee) default payment notice. The main contractor (the payer) had not served a pay-less notice.
  • The main contractor attempted to resist enforcement of the adjudicator’s decision on the grounds that the adjudicator did not consider its counterclaim, which included abatements for defective works, and therefore he breached the rules of natural justice.
  • The TCC found that the adjudicator did not breach the rules of natural justice because, in the absence of a pay-less notice, the “notified sum” was due and the adjudicator was therefore not required to consider the counter-claim.

This was clearly the right result:

  • Under the old payment regime, in the absence of third party certification, the amount of work done defines the sum due. Therefore, amounts can be abated despite the lack of a withholding notice (SL Timber Systems Ltd v Carillion Construction Ltd [2001] ScotCS 167).
  • Under the new payment provisions payers must pay the “notified sum”. Therefore, no pay-less notice = no abatement: simples!

In this situation, a payer’s most obvious defence is to argue that the default payment notice is deficient. Alternatively, a payer could ask an adjudicator to “open-up, review and revise” the default payment notice. Although (to borrow from Dyson J), that would “drive a coach and horses” through the intention of section 111, I wonder if it nevertheless is an available remedy.

When is an application for payment “permitted”?

One area where I think judicial guidance would be of some benefit is section 110B(4), and the meaning of “the contract permits or requires the payee…” to submit an application for payment. Imagine this scenario:

  • A main contractor employs a sub-contractor under a sub-contract that does not contain any payment provisions, therefore the Scheme for Construction Contract 1998‘s payment provisions are implied.
  • The Scheme is silent as to whether the sub-contractor can submit an application, but the sub-contractor submits an application in any event.
  • The main contractor does not issue a payment notice or pay-less notice and does not pay the sub-contractor.
  • The sub-contractor starts an adjudication claiming it is entitled to payment of the amount set out in its application, which (it says) constitutes its default payment notice under section 110B(4).
  • The main contractor argues that no entitlement to payment has arisen because the sub-contractor was not permitted or required to submit an application under the sub-contract.

So, the key issue is really whether the sub-contractor’s application can constitute the default payment notice under section 110B(4) despite the sub-contract (and the Scheme) being silent on applications. Is the sub-contractor permitted to submit an application in this situation, or must there be an express mention of applications before they can constitute a default payment notice?

And finally

I have no doubt that we will start to see a swell of cases dealing with the new payment provisions but, in the meantime, I believe that the lack of judicial scrutiny is probably an indicator that they are working well.

6 thoughts on “First 12 months of the new payment provisions

  1. The example under the Scheme is not the only circumstance when that can occur. Many standard forms and in-house contracts permit an application and so if no payment notice is given the application becomes the notified sum. The failure to a give the payment notice is then critical. We still see many contracts where the draftsmen are unaware of this point. A simple piece of drafting can protect against this and training given to the QS team not to miss an application but our experience is that this is not done.

  2. That’s a very good point Tim – some payers are clearly learning the hard way that it’s essential to issue payment notices following an application. For many QSs I think this is a bigger cultural change than the original payment provisions, but they’ll no doubt soon learn…

  3. I was recently involved in an adjudication under the 2009 Act where there were genuine and fundamental issues of defective work claimed in an application. Despite the arguments and evidence put forward there had been no payment notice or a pay-less notice and, perhaps not surprisingly, the adjudicator was having none of it and effectively awarded the full amount claimed.

  4. Peter – interesting. Clearly the adjudicator had no option other than to apply the ‘new’ payment provisions and award the full amount claimed. Whilst some ‘payers’ may consider this somewhat harsh, there is obviously nothing to prevent the paying party referring the claim on the merits concurrently – Matt’s latest blog touches on a similar theme.

  5. Jonathon,

    Did you find out what case the TCC dealt with in relation to the 2009 Act payment regime?
    I’ve carried out an element of research but unable to find anything.
    I am carrying out my thesis for construction law masters on the success (or not) of the amended s110A, s110B and s111.

    Thanks,

    Mike

  6. Hi Mike

    I am considering undertaking similar research on whether the amended act has improved cash flow and therefore the efficiency of the industry as the Latham report envisaged.

    How was the reaction to your thesis and the results for the same?

    Thanks

    Andrew

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