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Ask the team: is the Scheme missing some payment terms?

My client, a sub-contractor, is working under an oral construction contract and wants to get paid. I know that the Scheme for Construction Contracts 1998 applies, but reading the Scheme by itself leaves me with unanswered questions about the payment process. What am I missing?

The Construction Act and the Scheme

Since 1 October 2011, in England and Wales, Part II of the amended Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) has applied to all construction contracts, whether they are in writing, partly in writing, or entirely oral.

If a construction contract does not provide for certain terms, the Scheme for Construction Contract 1998 steps in to fill the gaps. Regarding adjudication, the statutory mechanism of the Scheme applies on an “all or nothing” basis. Regarding payment, the Scheme can “fill the gaps”. This post focuses on payment.

(All our references to paragraphs are to the paragraphs of Part II of the Scheme, as amended. All our references to sections are to sections of the Construction Act 1996, as amended.)

Simple contract with nothing in writing

If two parties (for example, a main contractor and sub-contractor) have a simple construction contract, with nothing in writing, they could still have agreed all the key payment terms verbally. However, we assume that, while they have agreed what work is to be done (a specification), when (a start date and planned finish date) and how much it will cost (a price), they have not agreed any other terms.

We also assume that the works will be carried out over 45 days or more, allowing the sub-contractor to apply for stage payments (section 109).

Does the Scheme set out everything you need on payment?

Using the Scheme, the parties can determine:

  • The sum the payer should pay in a stage payment (paragraph 2).
  • When a stage or final payment becomes due (paragraphs 4 and 5).
  • On the face of it, the final date for payment (paragraph 8).
  • That the payer should give the payment notice (paragraph 9).
  • The timing of any pay less notice (paragraph 10).
However, the Scheme does not (for example):
  • Set out what to do if the payer does not give a payment notice.
  • Repeat the statutory definition of the notified sum or the statutory obligation to pay the notified sum on or before the final date for payment (section 111).

Example: payee’s default notice

If our sub-contractor wants to get paid its first stage payment, it should first make a “claim” (paragraph 4). Following that:

  • If the claim falls seven or more days from the end of the first 28 day period referred to in the definition of “relevant period”, the due date for payment falls when it makes that claim (paragraphs 4 and 12).
  • Paragraph 2 sets out what is due.
  • The contractor “must” give a payment notice five days after the due date (paragraph 9).
If the contractor takes no action, and does not give a payment notice, the Scheme does not expressly provide for the sub-contractor to give a default notice. The Scheme’s implied terms (which form part of the parties’ sub-contract) “require” the contractor to give the payment notice. If it fails to do so, the sub-contractor may give a default notice (section 110B). By doing so, the final date for payment is delayed by the number of days from when the contractor should have given its payment notice to when the sub-contractor actually gives its default notice. Without doing so, there is arguably no “notified sum” that the contractor must pay, so:
  • The final date for payment will be 17 days from the due date (paragraph 8), plus the number of days after the date the contractor should have given its payment notice (due date plus five days) that the sub-contractor gives its default notice (section 110B).
However, if the sub-contractor was “permitted” under the Scheme to notify the contractor what it was due before the contractor’s payment notice, things may be different. If the sub-contractor gave details of the sum it considered would fall due on the due date and the basis of that calculation, then the sub-contractor would not have to give a default notice (section 110B(4)). (Arguably, the Scheme must allow for the sub-contractor’s “claim” to include those details.) In which case:
  • The final date for payment will be 17 days from the due date (paragraph 8).
In other words, the final date for payment (and whether the sub-contractor has to serve a default notice) may depend on whether the sub-contractor’s initial claim gave sufficient details.

Missing a trick?

We will leave it to you to decide whether the Scheme doesn’t go far enough. Whatever your view, if you are dealing with an oral contract or a written contract with missing pieces of the payment jigsaw, remember to read the Scheme and the Act together.

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