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When is an inadequate mechanism an adequate mechanism under the Construction Act 1996?

According to Edwards-Stuart J in the TCC, it may be when there is an implied term.

In what might have been an unremarkable situation, Edwards-Stuart J has given what some would describe as a remarkable judgment. I refer to Manor Asset Ltd v Demolition Services Ltd, as discussed by John Hughes-D’Aeth last week.

Quick payments

In brief, the parties to a construction contract had varied the terms of that contract so that payments would be made within 72 hours. So far, so unusual but unremarkable.

However, construction law connoisseurs will already be wondering how they agreed to fit all the necessary notices into that time frame.

An adequate payment mechanism?

In fact, that was the problem. They didn’t refer to the notices. As such, my first instinct as I began to read through the judgment was that this was a case where the court would find that there was no “adequate mechanism” for payment under section 110(1)(a) of the Construction Act 1996.

As it happens, the court quoted the relevant parts of the statute, but did not go on to make that finding.

Even having read the rest of the judgment, I remain attracted to my first instinct: if you don’t have time and space in your contract for a mandatory payment notice and a pay less notice, then a court could easily decide that you were trying to circumvent the Construction Act 1996, rather than comply with it. (Feel free to compare my instincts against those of the court. See, for example, paragraphs 56 and 57 of the judgment.)

In my view, both notices need to be covered. This makes John’s post all the more interesting when he asks whether a construction contract has to include provision for a pay less notice.

Too much implication?

It certainly makes me uncomfortable to contemplate a world where, instead of implying in necessary elements from the Scheme for Construction Contract 1998, the court implied its own term. That means parties could have, in a single construction contract’s payment mechanism:

  • Express terms agreed by the parties.
  • Implied terms from the Construction Act 1996.
  • Implied terms from the Scheme for Construction Contracts 1998.
  • Other implied terms.

This compounds a situation that can already be confusing, particularly for lay parties.

An aside on prescribed periods

My first instinct also conflicts with the court’s decision that a prescribed period (for giving a pay less notice) could be “nil”. Section 111(5)(a) requires a pay less notice to be given:

“…no later than the prescribed period before the final date for payment.”

For me, the natural meaning of this is that the prescribed period must be a meaningful period, even if only one day, yet here the court merely found that the necessary notices needed to follow in the correct sequence.

If a period can be nil, is that a period at all? To me, that seems like the absence of a period.

Conclusion

All in all, I would have preferred to see a finding that, despite the parties’ good intentions, they did not agree an adequate mechanism, so the necessary terms from the Scheme would be implied in to their contract and applied. I accept that this has the bizarre consequence of preventing the parties operating a quick cash-flow mechanism, but that result does not follow from the hoped-for speed of their payment mechanism, but from its deficiencies.

While that will not be what they wanted, if they had instead wanted to prohibit pay less notices, I think (although John may disagree) that the Act and the Scheme’s necessary terms could have been implied. For me, the gaps in what the parties agreed seem closer to omitting a compulsory step than to a situation where business efficacy demanded an entirely new implied term, especially in an extreme timeframe.

In the meantime, this is the only TCC decision I am aware of that addresses this situation head-on. I hope it is not the start of a series of findings around new implied payment terms. Arguably, coming on top of the Construction Act 1996 and the Scheme for Construction Contracts 1998, that would be bad for certainty and therefore bad for the industry.

Practical Law Iain Murdoch

One thought on “When is an inadequate mechanism an adequate mechanism under the Construction Act 1996?

  1. Iain

    I have to say that my initial (and indeed lasting) instinct is the same as yours.

    Doing justice to the specific circumstances, and seeking to give effect to what the parties were trying to achieve, is on its face laudable. But when it comes at the expense of certainty, perhaps less so. The Judge has clearly thrown a few large spanners at us construction lawyers.

    Dan

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