Payment Provisions In Construction Contracts

When the amendments to the Housing Grants (Construction and Regeneration) Act 1996 ("the Construction Act") were introduced by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 ("the New Act") it was not entirely clear how the changes in the payment provisions section would impact on the behaviour of parties to construction contracts. In the year since our last Annual Review the first wave of case law relating to these amended provisions has been reported. The message appears relatively clear; employers, get the payless notice process wrong at your peril. However, as is so often the case when new law develops, even relatively clear legal principles often give rise to spin off issues, and questions.

Jonathan More provides a practical guide through the relevant cases.

The statutory requirements

First, a brief reminder of the relevant statutory provisions.

Payment notices

In its original form the Construction Act set out that the payer had to give notice specifying the amount of the payment made or proposed to be made, and the basis upon which the amount is calculated. There was no obvious consequence for failing to comply with this requirement, indeed, as it was only the employer who could issue such notices it seemed to duplicate the certification process common in most construction contracts, and was often simply ignored.

The New Act amendments require construction contracts to provide that a payment notice is issued for every payment provided for by the contract. The sum contained in a payment notice is "the notified sum". The person whom issues the notice is dictated by the contract, and can be either the payer, a "specified person" as dictated by the contract (i.e. the Architect or Contract Administrator) or by the payee itself. The notice must specify:

(i) the sum that the person giving the notice considers to be due or to have been due at the payment due date in respect of the payment; and

(ii) the basis on which that sum is calculated.

Note the basis of the figure in the notice is what is considered to be due.

There is now a consequence for failure to issue a payment notice as required; the payee may issue a "default" payment notice stating the amount considered to be due and the basis for calculation. This amount is contained in the payment notice, or the "default" payment notice, is the notified sum.

These changes are important because the New Act requires that the payer is under an absolute obligation to pay the notified sum subject to whether or not a payless notice is issued. There is no language requiring this sum to be "proper value", the sum simply has to be "notified".

Payless notices

Previously there was a mechanism for a payer to avoid paying a sum due if there were grounds to do so by issuing a notice of intention to withhold payment.

The New Act amendments mirror this very closely, the key change being the obligation on the payer to pay the "notified sum" if no payless notice is issued.

A payless notice must state the sum considered to be due on the date the notice is served and the basis on which that sum is calculated, and must be issued within the requisite time requirements in the contract.

The key legal principles from case law

As a result of the recent case law, reviewed in more detail below, the following principles will be applied to payment provisions in construction contracts:

(i) In respect of interim payment applications, and absent fraud, where no valid payless notice has been issued, the contractor will be entitled to the amount applied for irrespective of the true value of the work carried out.

(ii) An application for payment following termination of a contract, is distinguished from the above principle either:

on the basis that the contract provides for a proper valuation of work post-termination and not simply a notified sum, or that, as a consequence of the contract termination, the next application for payment will be the final one, with no further interim applications or payments due. (iii) To qualify as a valid payment notice, an application for payment should:

be clearly stated as being a formal application for payment and put the payer on proper notice, and comply with the contractual requirements and timetable for making an application for payment. (iv) Even in cases where a valid payless notice has not been issued there may be sufficient unusual circumstances which may restrict enforcement of an adjudication...