Practical Law

Why is the payment mechanism important?

The primary purpose of the PBA is to protect cash flow to sub-contractors, especially in the event of contractor insolvency. As I pointed out last week, PBAs confer no direct benefit on the employer or contractor. This means that employers are only likely to adopt a PBA if it is easy to operate in practice. Regrettably, the JCT-style PBA does not pass this test.

Payments into the PBA

The JCT wording is confused as to when payments are made into the PBA. Clause X.3 of the Enabling Provisions requires the employer to make payment “in such time so as to provide cleared funds not later than the final date for payment”. This is presumably what the JCT intends and is confirmed in clause 3.2.1 of the PBA Agreement, although it is unclear why the obligation is repeated here. NEC Option Z3 is much clearer and more logical in this respect.

However, clause 2.2 of the PBA Agreement states that monies due are to be paid into the PBA “as and when such monies become due for payment in accordance with the terms of the Building Contract”. The concept of monies “becoming due for payment” is not used in the JCT Standard Building Contract, 2005 Edition (Revision 2 2009) (SBC05). Does it mean the date of the interim certificate, the final date for payment or some other date? The position is not helped by clause 3.1.2 of the PBA Agreement, which states that the PBA Agreement will take precedence over the building contract in the event of conflict.

Note also that clause X.3 requires payments to be made earlier than would otherwise be the case. As we all know from personal experience, banks typically take several days to clear funds, so a diligent employer will need to make payment up to a week before the final date specified in the building contract if he is to be sure of complying with the terms of the PBA Agreement. To counter this, will employers simply extend the final date for payment?

Withholding of monies

The PBA is unclear as to the position if the employer wishes to withhold from payments due. SBC05 provides two routes for the employer to pay less than the amount stated in an interim certificate (clauses 4.13.3 and 4.13.4), which reflect sections 110 and 111 of the Construction Act 1996. Confusingly, these are not mirrored in the PBA documentation.

For a start, clause X.4 of the Enabling Provisions refers to the employer notifying the contractor that he intends to pay less than the amount set out in the contractor’s application, and identifying how the reduction is to be allocated between sub-contractors. This wording reflects the proposed revisions to sections 110 and 111 set out in the Local Democracy, Economic Development and Construction Bill, which is currently going through Parliament. However, there is no guarantee that it will become law in its present form. Meanwhile, anyone using the Enabling Provisions with SBC05 will find that the two are inconsistent.

Turning to the PBA Agreement, clause 2.4 deals with the situation where the amount deposited by the employer in the PBA is less than the amount “authorised by the Account Holders for payment to” the contractor and sub-contractors. However, it does not state what this “authorisation” comprises. We can guess that it refers to the amount notified by the employer as mentioned above. However, can it really be said that an amount which is the subject of a disputed withholding notice is “authorised” by the contractor? Moreover, clause 2.4 envisages a pro rata allocation of deductions as between the contractor and sub-contractors, which seems to contradict clause X.4. This is all very confusing and needs tidying up before the PBA documentation is finalised.

Conclusion

While a few public sector clients – under pressure from the Office of Government Commerce – have adopted PBAs in their contracts, there is as yet little evidence of private sector employers doing so. The JCT’s ham-fisted attempt to incorporate PBAs is unlikely to inspire many of them to incur the cost and administrative effort involved in doing so.