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Prohibiting conditional payments under the amended Construction Act

To pay or not to pay, that is the question…

Not surprisingly, there have been quite a few blogs on this site over the last several months on 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). Many of these have focussed on ambiguities in the drafting of the new provisions as much as the substance the new law itself – see, for example, The “not so great” section 108A debate. It seems we lawyers cannot help but engage in a bit of Parliament bashing, horrid lot that we are.

I’m afraid that this blog continues on that theme, but aims to look at how Parliament’s intention is now shaping practice on the ground. It considers the changes to section 110 of the Act and, specifically, how they affect payments to those actually carrying out the work on some PPP or PFI projects.

Section 110

It’s helpful to set out just one section from the Construction Act 1996 (as amended). Section 110 begins:

110 Dates for payment

(1)  Every construction contract shall-

(a) provide an adequate mechanism for determining what payments become due under the contract, and when, and

(b) provide for a final date for payment in relation to any sum which becomes due.

The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment.

(1A) The requirement in subsection (1)(a) to provide an adequate mechanism for determining what payments become due under the contract, or when, is not satisfied where a construction contract makes payment conditional on-

(a) the performance of obligations under another contract, or

(b) a decision by any person as to whether obligations under another contract have been performed.”

Prohibiting conditional payments

The newcomer here (which took effect for construction contracts dated on or after 1 October 2011 in England and Wales) is subsection 110(1A), which is targeted to prohibit “pay-when-certified” or “pay-when-entitled” clauses. An example of such a clause is an “equivalent project relief” (EPR) provision, which seeks to restrict payments under a construction contract to the amounts (if any) received “up the chain” on a PFI or PPP project. The intention of subsection 110(1A) was to ensure that the cash found its way to the bottom of the chain.

(Alongside subsection 110(1A), all three governments introduced the 2011 Exclusion Orders, which allow a pay-when-certified clause in a construction contract between the project company and the construction sub-contractor. However, the Exclusion Orders do not allow pay-when-certified below that tier of contracts.)

While the movement of cash may be the end result of subsection 110(1A), it could be a long time before sub-contractors (commonly referred to as sub-sub-contractors in the realm of PFI) see those funds. The market has reacted to the subsection by providing in construction contracts that payments, rather than being “conditional” on payment up the chain, will be made on a specific date (potentially years in the future, depending on the contract).

With contractors reluctant to expose themselves fully to the risk of having to pay a sub-contractor long before they receive (if ever) payment from the awarding authority (the situation which gave rise to EPR in the first place), these long periods before payment may be here to stay. In the event that the authority decides not to make the payment to the contractor (or decides to pay less), even after the expiry of the long period and consequent payment to the sub-contractor, the market is also taking to “claw-back” provisions to recoup sums from the sub-contractor.

A possible solution?

It seems unfortunate that those sub-contractors (including PFI or PPP sub-sub-contractors) the LDEDC Act 2009 was intended to protect will have to wait such a long time for payment.

However, on one analysis of the whole of section 110 of the Construction Act 1996 (as amended), it may be possible for a construction contract to provide for a “long-stop” date for payment, with provision for earlier payment when the contractor is entitled to be paid by its client.

While subsection 110(1A) provides that this would not be an adequate mechanism for setting the due date for payment, the Construction Act 1996 says nothing about setting the final date for payment of any amount that becomes due by reference to such circumstances. Subsection 110(1) states that “The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment”. The “adequate mechanism” is only a requirement of subsection 110(1)(a), which relates to the due date for payment alone.

On this view, a contract could provide that the final date for payment of a sum due to the sub-contractor is the earlier of, for example:

  • The date 18 months after the due date for payment.
  • The date 7 days after the date upon which the contractor becomes entitled to payment from its client.

If payment is not certified under the main contract (or under the PFI project agreement), the contractor is afforded the protection of the “long-stop” date (though no further protection, meaning “claw-back” provisions remain advisable). If the contractor becomes entitled to a payment from its client before the long-stop date, then the payment is brought forward and the sub-contractor is better off.

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