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.
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
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.
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
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.
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
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.
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
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.
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.