Payment provisions revisited - the new regime for Construction Contracts

The story so far...

17 December 2009

The story so far...
In 1996, in an attempt to address some of the systemic issues within an industry plagued by late payments and insolvency, the government enacted Part II of the Housing Grants, Construction and Regeneration Act. The HGCRA applied to all construction contracts entered into after 1 May 1998 and was supported by the Scheme for Construction Contracts and the Scheme for Construction Contracts (Scotland), which provide provisions to be read into a construction contract if the actual contractual provisions fail to meet the requirements of the HGCRA. However, due to continuing concerns about the consequences of unreasonable delays in payment, more than a decade after the original Act was passed, the Local Democracy, Economic Development and Construction Act 2009 (LDEDCA), which amends Part II of the HGCRA, received Royal Assent on 12 November 2009. The new amendments will come into force on a date or dates to be appointed by the Secretary of State and Welsh and Scottish Ministers, and will apply only to construction contracts entered into after the appointed dates (the unamended HGCRA will continue to apply to earlier contracts).

Developers, contractors and other parties to "construction contracts" can easily fall foul of the detailed provisions of the HGCRA and the Schemes for Construction Contracts. If a construction contract does not meet the payment requirements of the HGCRA, relevant provisions from the Scheme will be read into the contract, and if a developer is not familiar with the Scheme he may find that he has failed to comply with timescales or other notice requirements relating to payment. 

Unfortunately, the amendments introduced by LDEDCA do little to simplify this complex area of law. It will be essential for anyone involved in operating the payment provisions of a construction contract to familiarise themselves with the new provisions before they come into force, and for developers to ensure that their template documentation is revised to comply with the new requirements. 

Application of the Act and the Amendments
The HGCRA (and the new amendments) apply to "construction contracts". The definition of a construction contract is detailed and wide, covering contracts for a range of work and design beyond pure construction. Although the HGCRA definition required construction contracts to be in writing, the new Act (with limited exceptions) abandons this requirement. 

Given the range of contracts to which the HGCRA and the new amending Act apply, their relevance extends not only to contractors and developers but also, for example, to landlords engaged in refurbishing an asset, or tenants whose fit out includes the painting or decorating of premises. The provisions and restrictions in relation to payment will be particularly relevant if there is a desire to co-ordinate payment obligations under the "construction contract" with the receipt of funding from third parties e.g. tenants' contributions.

The HGCRA Payment Provisions
The HGCRA contains specific rights and obligations in relation to payment. Under the Act, every construction contract is required to provide

  • an adequate mechanism for determining what payments are due under the contract and when; and
  • a final date for payment of any sum which becomes due. 

There are also detailed requirements in relation to issuing payment notices, and a prescribed procedure to be followed if a party intends to withhold payment. To the extent that a contract does not comply with the requirements of the HGCRA, the provisions of the relevant Scheme for Construction Contracts apply.

Changes to the Payment Provisions
While the requirement for an adequate mechanism for payment remains the same, the provisions relating to payment notices will change significantly for construction contracts entered into after the LDEDCA comes into force. 

Key changes to the payment provisions include:

  • the replacement of the existing payer notice requirement with the option to provide for a notice to be issued by either the payer or the payee, including specific provisions where the payer is supposed to issue the notice but fails to do so;
  • a statutory obligation to pay the "notified sum" on or before the final date for payment, unless (1) the contract provides that the payer need not pay if the payee becomes insolvent and (2) the payee becomes insolvent after the prescribed period for issuing the notice of intention to pay less (see below);
  • a requirement to issue a notice even where the value of the "notified sum" is zero. (For example, if a construction contract provided for monthly payments and allowed for the final release of a retention by requiring monthly assessments throughout the defects liability period, the payer would still have to give a payment notice every month until the retention was released); and
  • the replacement of notices of withholding, which specify the amount being withheld, with notices of intention to pay less, which will specify the sum that the payer considers is due to be paid on that date (even if that sum is zero).

The HGCRA outlawed "pay-when-paid" provisions (e.g. where a contractor makes his obligation to pay his sub-contractor conditional on him first receiving payment from the employer), except in certain situations where the third party, on payment by whom the contract is conditional, is insolvent. LDEDCA will extend this prohibition to "pay-when-certified" provisions (i.e. provisions that determine what payments are due and when by reference to the performance of obligations under another contract or a decision by any person as to whether obligations under another contract have been performed). The theory is that this will further reduce delays in sub-contractors being paid but some sceptics argue that it will instead simply lead to employers agreeing longer final dates for payment.

What if you get it wrong?
The provisions merit careful consideration before any decision is taken to withhold money or pay less. If the correct requirements are not complied with within the correct timescales, a notice may be ineffective and could potentially result in the payer having to pay the full amount claimed and then trying to claim it back later on.

Suspension for Non-payment
LDEDCA also extends the right to suspend performance for non-payment. Under the new provisions, contractors and consultants will be able to suspend part, rather than all, of their performance. In addition, a suspending party will also be entitled to reasonable costs and expenses and an extension of time to reflect the consequences of suspending performance – i.e. this could allow a contractor time and money in relation to demobilisation and remobilisation periods and costs, in addition to the actual period and costs of suspension itself. In statutory terms these additional rights are significant, however many standard form building contracts already provide for the contractor recovering loss and expense and being granted an extension of time to cover the consequences of proper suspension, and only time will tell whether the new statutory provisions lead to the use of suspension for non payment becoming more prevalent as a remedy.

If and when Part 8 of the new LDEDCA comes in to effect, developers and contractors will need to familiarise themselves with the new provisions, and ensure that their template construction contracts are revised accordingly. It is understood that the JCT intend to produce a Revision 3 of their standard form contracts once the new legislation comes into force, and it can be expected that SBCC will do the same in respect of the Scottish standard forms. Nevertheless, there may be a delay in the publication of the new revisions and it may be necessary to amend existing forms in the interim. Once revised standard forms are published, it will be important to ensure that the updated versions are used in order to comply with this increasingly complex legislation.