Tag: Notified Sum

The Scheme for Construction Contracts

In recent posts we have seen two pieces of Primary Legislation being referred to, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. Intrinsic to this legislation is The Scheme for Construction Contracts, a Statutory Instrument that has come into force following these acts to regulate key elements of the construction process. In this post we will examine The Scheme and its major points.

We must first remember that this legislation refers to “construction activities” as defined in the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations”.

Which leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider The Scheme for Construction Contracts. Firstly we must remember that there are a different set of regulations in place in England & Wales to those in place in Scotland. In this post we will consider the regulations as they apply in England & Wales.

The Scheme for Construction Contracts

The Scheme for Construction Contracts (England and Wales) Regulations to give them their full title apply when construction contracts do not comply with the primary legislation and either supplements the provisions of the contract where it has deficiencies relative to the requirements of the Act or replaces the contract where it is non-compliant. The purpose is to allow the contract capable of being performed (reducing the likelihood of frustration) whilst allowing regulatory control over its provisions.

The Housing Grants, Construction and Regeneration Act applies  to all contracts for “construction operations” and sets out the requirements relating to Adjudication and payment, including:

  • The right to commence Adjudication
  • To be paid in interim, periodic or stage payments.
  • To be informed of the amount due, or any amounts to be withheld.
  • To suspend performance for non-payment.
  • Disallowing pay when paid clauses.

Part 1 of the Scheme makes provision for Adjudication where the contract does not comply with the requirement and Part 2 replaces those provisions in relation to payment that do not comply.

The 2011 amendments to The Housing Grants, Construction and Regeneration Act

The Housing Grants, Construction and Regeneration Act 1996 was amended in October 2011 by the Local Democracy, Economic Development and Construction Act 2009 to close loop holes within the original legislation and as a result The Scheme for Construction Contracts was also amended to reflect the amendments. These amendments and their implication have been outlined in previous posts but can be broadly summarised as follows:

  • The act now applies to all construction contracts, even those not evidenced in writing
  • Adjudication clauses must still be in writing
  • Who will bear the cost of Adjudication can no longer be defined in the contract
  • The Adjudicator has the right to correct errors in contracts within 5 days of delivering a Determination
  • Payment dates must be set out in the contract.
  • A Payment Notice must be issued five days of the date for payment, even if no amount is due, although alternatively, if the contract allows, the Contractor may make an application for payment, which is treated as if it is the Payment Notice
  • A Pay Less Notice (previously a Withholding Notice) must be issued where it is intended to pay less than the amount set out in the Payment Notice, including the basis of calculation of the amount being paid less
  • The notified sum is payable by the final date for payment
  • Where a Payment Notice is not issued, the Contractor (or Sub-Contractor) may issue a Default Payment Notice
  • Pay when certified clauses are no longer allowed and retention release cannot be prevented by conditions within another contract.
  • The provisions around the right to suspend for non-payment have been expanded to allow costs to be claimed as well as the right to an Extension of time as consequences of any statutory suspension

These amendments apply to construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

In the next post we will look at Part 1 (Adjudication) of The Scheme for Construction Contracts and the legal requirements and in the post after that Part 2 (Payment).

The Construction Act (The amendments) Part II

In the previous post we reviewed the changes in the Construction Act as many companies still do not abide by them in their entirety. In this post we will consider these key changes in more detail.

 Contracts in writing

The most significant and far reaching effect of the 2009 Act is the removal of the requirement for construction contracts to be in writing and the Act applies to all contracts, be they wholly in writing, partly in writing and partly oral or wholly oral. This  will particularly affect Adjudication, although for Adjudicators Costs and the “slip rule” will need to be in writing to be relied on, if they are not then the Scheme will apply.

This makes it even more important that agreements (even where part standard conditions and part negotiated (oral) amendments are fully recorded in writing, even as a contract appendix. For the protection of both parties an “Entire Agreement Clause” where it is clear that the written document constitutes the whole agreement, should be included. This clause will not prevent disagreements,  but will significantly improve the position of a party arguing against an oral agreement.

Payment Issues

The amendment at Part 8 of the 2009 Act affect all Construction Contracts in England, Wales & Scotland when they came into force on 1 October 2011 in England & Wales and 1 November 2011 in Scotland. The primary aims of the amendments were to:

  • To make Adjudication more accessible to resolve disputes
  • To introduce clarity and certainty in relation to payment
  • To introduce a fair payment mechanism
  • To improve the right of Contractors to suspend their works for non-payment

The fundamental changes to the payment mechanism are:

  • Conditional Payment clauses are abolished
  • Changes to the Payment Notice regime, including a requirement for the Payee to pay the notified sum
  • Introducing new rules on Payless Notices
  • New rights for Contractors who suspend their services for non-payment
  • Allowing clauses to be included in Construction Contracts allowing the Employer to Withhold Payment without notice in the event of a contractors insolvency

We will now examine these fundamental changes and look at what the 1996 Act required and how this has been amended.

The Payment Notice

Previous position

In the 1996 Act an “adequate mechanism” for determining the sum due for payment and its payment date (known as the “Due Date”) was required. Further the payee had to give notice, not later than 5 days after the due date, detailing:

  • The amount of the payment made or proposed to be made
  • The basis on calculation of the amount

There was no effective sanction for failure to comply with the notice requirement and the Act was ambiguous if no payment notice was issued as there was no certainty to what sum was due under the contract.

2009 Act

 Construction contracts require a payment notice to be given for every payment provided for by the contract, not later than five days after the payment due date. The 2009 Act further defines the due date as “the date provided for by the contract as the date on which the payment is due”.

The contract must provide for the payment notice to be given by the payer, a “specified person” specified in or determined in accordance with the contract or by the payee itself. The notice must specify:

  • The sum considered to be due or to have been due at the payment due date in respect of the payment; and
  • The basis on which that sum is calculated.

Even if the sum considered due is zero, a payment notice must still be given in the required form.

Whilst not a sea change from the previous position they key changes that need to be considered are:

  • The payment notice no longer need to be issued by the Employer and  can be issued by specified persons such as the architect or engineer, or the payee may be required to issue the notice
  • The notice must simply state the sum which is “considered” due and the basis of calculation. This prevents duplication and takes into account any set off, abatement or any other deductions which may be withheld; and
  • A sanction has been introduced where there is a failure to issue a payment notice and a significant greater risk faced by parties that fail to issue payment notices. This risk is that the payee may now issue a notice in default stating the amount considered to be due and the basis for calculation.

If the deadline has passed and a payment notice has not been given, the payee may give the payer a payment notice – known as a ‘payee’s notice in default’ – at any time, stating the amount it considers due and the basis for calculation. If the contract provides for an application for payment and the application is made, that will automatically be regarded as a payee’s notice in default.

If a payee’s notice in default is issued, the final date for payment will be postponed by the length of time between when the payer or specified person should have given the payment notice and the date the payee gave its notice in default.

These changes are important because there is a positive obligation to pay the notified sum, which may be the value of an application under the contract

 Requirement to pay notified sum or less

 Previous position

A party to a construction contract could not withhold payment after the final date for payment of a sum due unless it has given an effective notice of intention to withhold payment (the “’withholding notice”).

To be effective the withholding notice needed to specify:

  • the amount to be withheld and the ground for withholding payment; or
  • Where there is more than one ground, each ground and the amount attributable to it.

The withholding notice had to given not later than the ‘prescribed period’ before the final date for payment, as agreed by the parties. Where a date had need been agreed then the default would be the requirement of The Scheme for Construction Contracts, making the period seven days.

Crucially a payment notice could act as a withholding notice, as long as it meets the requirements detailed above.

2009 Act

 The amendment in the 2009 Act creates a positive obligation on the payer to pay the ‘notified sum’, to the extent not already paid, on or before the final date for payment.

The previous regime of withholding notices has been abolished and the “notified sum” is now a key concept. This sum is the sum stated in the payment notice, which can be issued by the paying party, the specified third party or the payee. This notice can also be the notice in default and in almost all cases this will be the application for payment. If no payment notice is issued, there is a positive requirement to pay the sums set out in the application if the contract allows or requires the making of an application.

This change allows the paying party (or a specified person) to issue a notice of intention to pay less, known as the “Payless Notice” before the final date for payment or where specified in the contract the final date to issue a “Payless Notice. The “Payless Notice” must specify:

  • The sum that the person giving the notice considers to be due on the date the notice is served; and
  • The basis on how the sum is calculated.

However as with the “withholding notice” it must be given not later than the prescribed period before the final date for payment.

Another further change is in insolvency situations where the notified sum need not be made if:

  • The contract allows withholding of sums due in cases of insolvency: and
  • The insolvency occurs after the expiry of the time for giving the counter notice.

However this is not a statutory right and the contract must contain an appropriate clause to benefit from this provision.

 Suspension for non-payment

 Previous position

 Previously a party who is entitled to payment the right to suspend performance of its obligations under the contract if:

  • The sum due is not paid in full by the final date for payment; and
  • No effective notice to withhold payment has been given.

The party wishing to use this right has to give the other party at least seven days’ notice of its intention to suspend stating the ground or grounds for suspension. The right to suspend comes to an end when the other party pays the amount due in full. However there was no entitlement in the Act itself to recover your loss and expense where you suspended for non-payment. To have this right the contract needed to be amended to give effect to this entitlement.

Crucially any period of suspension under this right was disregarded when calculating the amount of time taken to complete the contract for the purposes of delay damages, so in effect could have the double whammy effect of putting you in breach of your obligation to complete by a particular dat or suffer Liquidated and Ascertained Damages.

2009 Act

 The right of suspension now arises where there is a requirement to pay the notified sum and that requirement has not been complied with.

The party wishing to suspend will now be able to suspend performance of any or all of its contractual obligations. This new entitlement to partial suspension of contractual obligations means that suspension is not limited to the actual construction obligations, but could go beyond and suspend the right to insure the works or suspension of works on only crucial areas or with certain sub-contractors, thereby negating programme delays if possible.

Where the right to suspend is exercised, the other party will be liable to pay a reasonable amount in respect of the costs and expenses reasonably incurred by the suspending party as a result of exercising this right and this is a Statutory Right enshrined in the Act.

Further, crucially the time period during which performance is suspended in pursuance of or in consequence of exercising the right of statutory suspension is disregarded when computing the time to complete work is any period.

 Conditional payment clauses

Previous position

 Under the 1996 Act provisions which make payment conditional upon receipt of payment from a third party (‘pay when paid’ clauses) are not prohibited and allowed payment to be conditional on other events, such as ‘pay when certified’ clauses, where payment is conditional on a certificate being issued under another contract.

This had the implication of effectively causing a Sub Contractor to become exposed where a dispute (that he was not party to) existed between the Employer and Contractor.

2009 Act

 Conditional Payment clauses are now invalid where they are conditional upon:

  • Performance of obligations under another contract; or
  • A decision by any person as to whether obligations under another contract have been performed.

This is to prevent a party up the line from relying on circumstances relating to its own contract to delay payment under a separate contract. By way of an example; if the Employer has not complied with its certification obligations to the Contractor, this cannot be used by the Contractor to deny payment to a Sub Contractor.

 There is however an exceptions in relation to management contracting or equivalent project relief arrangements, where the Contractor simply acts as a conduit. An example would be Public / Private Partnerships where a Special Purpose Vehicle (SPV) company is created with the sole purpose of procuring the project. This SPV has no assets and is not intended to have any liability unless it is first paid.

Due to concerns that the 2009 amendments would outlaw equivalent project relief provisions in subcontracts in Public / Private Partnerships, orders have been made which protect certain of these arrangements in respect of contracts entered into after the act came into force.

The Orders means that provisions in Tier 1 first tier PFI Public / Private Partnerships Sub Contracts which make payments in such contracts conditional upon obligations being performed in other contracts (such as providing certificates and ‘pay when paid’ clauses) will be effective.

Although in reality this is a loophole that will have to re-visited in the future. We will also examine Public / Private Partnerships in greater detail at a later stage.

 

At a practical level in day to day operation of contracts the fundamental changes are:

  • Notices are crucial, bearing in mind that if there is no payment notice the other party can serve a notice of default or rely on its own application for payment;
  • The paying party will then have to pay whatever has been notified unless a valid notice of the intention to pay less has been served; and
  • Payment clauses have had to be redrafted to reflect the changes

Sadly in far too many cases the changes that have been effected have not been communicated effectively in large organisations and while the necessary clauses have been changed to make compliant contracts, for fear of strike down clauses, on a day to day basis many do not provide the necessary documentation.

Yet even more concerning is despite this, many still do not enforce their rights.