REUTERS | Toby Melville

The “simplified” Construction Act 1996 payment provisions (part 2)

Last week I considered some of the issues that might arise from the prohibition on pay-when-certified provisions and the new payment and default payment notices. This week, in the second part of the Adjudication Society panel debate, I consider pay less notices and suspension.

New section 111 and pay less notices

Under the old payment regime, in the absence of third party certification, the payer can still challenge the sum due even in the absence of a withholding notice. This is because it is not the payee’s application or invoice that determines the sum due but the amount of work done (SL Timber Systems Ltd v Carillion Construction Ltd [2001] ScotCS 167). (This is often described as an abatement defence.)

The panel was asked for their views on whether this will still be the case under the new payment regime. That is, could a payer challenge the sum due to a payee where an effective pay less notice had not been given?

The majority view was that payers will no longer be able to challenge the sum due because section 111 (as amended) states that payers must pay the “notified sum” which is the sum stated in a notice (as defined by the Act), and not the value of the works undertaken.

Personally, that looks like a loop-hole closed and I consider that this could be one of the biggest impacts of the new payment provisions. I have adjudicated a number of disputes where main contractors were entitled to rely on SL Timber v Carillion to challenge the sum due even when they had failed to issue a withholding notice. It appears that such a defence will no longer be available.

However, as one of the panellists pointed out, payers will still be able to challenge the sum due on the grounds that a payee’s default payment notice issued under section 110B is deficient, in particular it might not specify “the basis on which that sum is calculated”. The panel agreed that this is likely to be a fertile ground for disputes under the new provisions.

Giving a pay less notice

A member of the audience raised the point that section 111(4) states that a pay less notice must specify the sum the “payer considers to be due on the date the [pay less] notice is served”. Given that a pay less notice may be issued some weeks after the due date for payment, the sum the payer considers due might, conceivably, be more rather than less. Confused?!

The same point was also made at a recent meeting of the Arbrix Construction Group that I attended. The general view at both meetings was that, given that section 111(3) refers to the payer giving notice of its “intention to pay less than the notified sum”, the wording of section 111(4) is only relevant where the payer wishes to pay less than the notified sum. After all, if it wishes to pay more, there will be no need for a pay less notice!

The debate also touched on the question of the detail required for a pay less notice to comply with the requirements of section 111. The general view was that there should be as much detail as possible, but that it may be acceptable for payers to refer to previously issued documents. In my view, the prize for the best analogy goes to Rudi Klein who urged us all to think back to our school days and what our maths teachers drilled into us – show your workings out!

Suspension on the increase?

When asked whether there is likely to be an increase in payees suspending performance of their obligations as a result of the amendments to section 112, the panel agreed that there was, although there were some differences over the extent of the increase.

Most agreed that the ability to partially suspend obligations and the right to payment of costs and expenses arising out of a suspension will give payees greater confidence to suspend, and this in turn will result in an increase in the number of suspensions.

However, some limiting factors were mentioned, for example the damage to relationships and the practical consequences of suspending (including potentially having to pay labour to stand idle or delays to the commencement of other projects).

What obligations are suspended?

One of the members of the audience raised an interesting question concerning what “obligations” could be suspended under section 112(1).

One of the panellists made the point that a payee might be able to suspend its obligation to insure the works. However, it was stressed that caution must be exercised when suspending obligations required under statute, for example those extending to elevators, gas safety and so on.

Another panellist also made the point that construction professionals also need to think about the consequences of any suspension. For example, if a construction professional suspends its obligations to undertake inspections over an unpaid fee of, say, £5,000, but this causes £500,000 of delay damages, could this land the construction professional in “hot water” with its professional body or PI insurer?

In my view, an increase in the number of suspensions might result in a consequential increase in the number of adjudications. For example disputes might arise over:

  • The question of whether the payee complied with the notice provisions in the contract.
  • What costs and expenses the payee is entitled to recover.
  • What extension of time, if any, the payee is entitled to.

A very interesting question that the panel addressed is what costs and expenses a payee will be entitled to recover under section 112(3A):

  • Will this section be interpreted narrowly so that a payee is limited to recovering only those costs and expenses directly related to the suspension, for example the cost of removing plant from site and returning it?
  • Alternatively, will it be interpreted widely so that all costs and expenses arising out of the suspension are recoverable, for example the costs of a site agent for the entire period of delay.

Some of the panel leaned towards the narrow interpretation, but others anticipated that these provisions will be treated like a traditional loss and expense claim. Only time will tell, but it will certainly be another fertile ground for disputes.

To summarise

The new payment provisions have received some negative press due to their complexity and unfortunate drafting. However, 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. Of course, there’s every possibility that I’m wrong and I’ll be back talking about further revisions in a couple of years…

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