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Payments in Construction Contracts – how the law is trying to create a fairer system

Posted on 21st October, 2019

This week solicitor, Angie Papprill is talking about construction and the law.

The law has come on in leaps and bounds over the last decade to regularise, improve and impose a fairer payment system within the construction industry.

What is in place already?

The most recent was in fact implemented as long ago as 2011 when the Construction Act was amended, and the Scheme brought into force, yet I frequently come across contractors who are unfamiliar with how and when these laws may benefit them.  Briefly these include;

Contracts – Previously contracts were only protected by the old Construction act if they were documented in writing which, as many traders will know, is often not how things work in practice and more likely than not there tends to be a verbal or partially verbal element to their contracts.  This requirement has now been abolished allowing the protection of the provisions to extend further within the industry.

Access to Adjudication – Adjudication is faster and cheaper than most other forms of dispute resolution so is a more suitable mechanism for construction contract disputes to be determined as it allow the contract works to continue with minimal interruption.  Formerly it was only available if there was an express term in your contract allowing for it.  Now this right is automatic under the Scheme.

Payments – The amendments altered provisions to allow the party being paid to issue a default payment notice in the event the paying party fails to issue a payment notice, allowing the process for payment to continue even when the paying party does not engage with it.  It also provides a positive obligation to pay what is known as the Notified Sum under the payments mechanism and sets a deadline for the paying party to issue a PayLess Notice before the final date for payment if they are going to seek to reduce this figure.  In absence of payment of a Notified Sum or a valid Pay Less there is no defence to an Adjudication in the interim and payment can be recovered swiftly.

Suspension right and costs – The rights of suspension have also been improved and, subject to the preconditions and notices, a party who has not been paid the Notified Sum can suspend their works, or any part of the same, and they are also entitled to recover their reasonable costs and expenses flowing from such suspension from the party in breach as a matter of law.

Abolished Conditional Payments – A very useful amendment is the prohibition of “pay when paid” clauses.  Often main contractors may try to impose terms which hold their subbies at bay by telling them that they cannot make a payment to the Subbie until they have received a payment under the main contract or had part of their contract works certified under the main contract for example. Any provision which purports to make a payment under one contract conditional upon something under another contract, for example the main contract, will be invalid.  If this means that there are no payments terms applicable, then the Scheme will step in.

The Scheme is essentially a set of terms which are implied in any commercial construction contract where there are no contract terms agreed expressly, or the contract terms agreed are incomplete or any of them are invalid.

  • It will fill in the gaps to ensure all required terms are present in all commercial construction contracts.
  • It provides for interim payments when works last more than 45 days and implies a frequency of such payments in absence of agreement.
  • It sets out dates and requirements for payment notices, default payment notices and pay less notices in absence of alternative agreed provisions.

So, what is next? Retentions

The insolvency of Carilion resulted in many contractors unexpectedly finding themselves out of pocket by thousands of pounds of retention and it was enough, in some instances, to destroy several smaller businesses altogether.

On the back of this a further element of reform has been suggested by Peter Aldous MP in January 2018. He proposed the Construction (Retention Deposits Scheme) Bill before parliament.

This is intended to place retentions into an independent and secure trust fund, akin to the tenancy deposit scheme which is in place for deposits paid by tenants when renting residential properties.  The scheme is envisioned to act as a protection from insolvency further up the chain, so in the future events like the collapse of Carillion ought not to have the consequential devastating impact on subcontractors.

The Scheme however is also planned as a mechanism to refer any disputes to adjudication relating to the release of retention.  This will hopefully reduce the difficulties commonly experienced by contractors trying to after recover retention payment after the expiry of the relevant period.

The proposals have well received and supported and now all it needs is fine tuning and implementation.

Unfortunately, Parliament have been rather districted with Brexit and leadership challenges and so the second reading has been postponed time and time again and has not yet been rescheduled.  With any luck it will be on the agenda in the not so distant future.  Watch this space.

Angie Papprill, Solicitor

T: 01642 356 500


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