REUTERS | Toby Melville

The “simplified” Construction Act 1996 payment provisions (part 1)

In my last blog I talked about the repeal of section 107 of the Construction Act 1996 (which came into force on 1 October 2011). However, while the repeal of this section and the other amendments to the adjudication provisions are interesting, in my view, it is the changes to the payment provisions that will have a more significant impact on the industry:

  • On employers, contractors and sub-contractors as they try to grapple with the various different notices that now have to be given.
  • On lawyers, adjudicators and judges dealing with the inevitable payment disputes that will arise. 

I’m not alone in this view and last week the Adjudication Society held a panel debate to discuss the new payment provisions and some of the problems that we might encounter. I sat on the panel so I thought I’d share some of what was discussed. Also on the panel were John Bradley of Reynolds Colman Bradley LLP and the Contractors Legal Group, Chris Ennis of Davis Langdon, Rudi Klein of the Specialist Engineering Contractors’ Group and the regular PLC contributor, Lynne McCafferty of 4 Pump Court.

This week I’m going to consider the prohibition of pay-when-certified provisions and the new payment notices. Next week I will move on to pay less notices and suspension.

I’ve assumed that you’ve all read the very useful PLC practice notes on the changes so won’t explain them here (and I also fear some of you might switch off before getting to the end if I try to explain them…).

Pay-when-certified, etc

There was a general consensus amongst the panel that we are likely to see an extension of payment periods as a result of the prohibition of pay-when-certified clauses in section 110(1A), particularly where final payments are concerned. One of the panellists expressed the view that the prohibition on such clauses might therefore be an “own goal” for payees. However, another panellist made the point that, at least payees will have certainty as to when they will receive payment, even if payment periods are extended.

Payment notices

The question was raised as to whether payees realise that, in the event that a payer fails to issue a payment notice under section 110A(1)(a) and the payee fails to issue a default notice under section 110B(2), the payer will not be obliged to make payment.

One of the panellists made the point that this situation is unlikely to arise as most contracts provide for the payee to make an application and therefore this will become the default payment notice under section 110B(2). The payee’s right to payment will therefore have arisen.

However, what happens if the payee’s application is deficient, for example it fails to state the “basis on which that sum is calculated”? Surely the payee is back in the situation where the payer is not obliged to make payment? Another panellist made the point that it’s not clear that the payee will not be entitled to payment because the payer’s original failure to issue the payment notice will be a breach of the contract.

Personally, I think that this might catch a few payees unaware, but they will soon get used to it. If I was a payee, I would submit an application for payment and, if the payer failed to submit a payment notice, I would also submit a further default notice just in case…

Specified person

Another interesting question that was raised was, in the event that a contract provides for a “specified person” to issue a payment notice and he or she fails to issue an effective notice, could this expose the “specified person” to any liability to the payer?

The general consensus of the panel was that this is unlikely as its doubtful the payer would suffer any loss as a result of the “specified person’s” failure. In particular, the failure could simply be corrected at the next payment. Even if the payee becomes insolvent before the next payment, it is not certain that the “specified person” would be liable because there is a question of causation. That it, was the loss caused by the “specified person’s” failure to issue an effective payment notice or the payer’s failure to issue a pay-less notice?

Next time…

It’s pay less notices and suspension next week but, in the meantime, I think it is fair to say that the new payment provisions have received somewhat of a 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.

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