Blog: The ‘New’ Payment Regime in Construction
Payment in the construction industry is regulated by the Housing Grants, Construction & Regeneration Act 1996. The payment regime had an overhaul with the introduction of the Local Democracy, Economic Development and Construction Act in 2009, which amended the 1996 Act. The provisions of the 2009 Act took effect from 1 October 2011 in England and Wales and from 1 November 2011 in Scotland. The standard form construction contracts were amended accordingly, with the 2011 edition of the SBCC being published.
Taking the 2011 SBCC as an example, the interim payment process commences when the Contractor makes an application for payment. The Employer then requires to issue a payment notice in the form of an interim certificate not later than 5 days after the due date setting out the sum the Employer considers due at the due date and the basis upon which this is calculated. It should be noted that the due dates are the dates specified in the Contract Particulars. If no payment notice (interim certificate) is issued, the amount of the interim payment due will be as stated within the contractor’s application. If the Employer wishes to pay less than the due sum, the Employer requires to issue a pay less notice.
A pay less notice must be served no later than 5 days before the final date for payment. A pay less notice must state the amount considered to be due to the Contractor and the basis on which it is calculated. A similar payment regime applies at the final account stage but the final date for payment is 28 days rather than 14 days from the due date which applies to interim payments. It should be noted that it is also permissible for the Contractor to issue a pay less notice to the Employer. SBCC contracts provide for the Architect/Contract Administrator, Quantity Surveyor or Employer’s Representative or any person who the Employer notifies as authorised, to give the pay less notice. It is important for the consultant to ascertain if they have responsibility for issuing the pay less notice. If they do not responsibility for this will rest with the Employer.
The big question arises as to what happens when no pay less notice is given. The simple answer is that the Contractor can head off to adjudication and get an order for the due sum, either as set out in the payment notice or their payment application. These are known as ‘smash and grab‘ adjudications.
The courts have recently given consideration to such adjudications and whether it is permissible to run a second adjudication to determine the actual value of the work carried out, even although no pay less notice has been issued. In the case of Matthew Harding v Guy George Leslie Paice & Kim Springall, Clause 18.12 of the contract provided that the Contractor had to submit an account to the Employer and the Employer was to pay the amount properly due within 28 days. The Employer failed to make any payment and no pay less notice was issued. The Contractor went to adjudication and the Employer was ordered to pay up. A second adjudication was then raised by the Employer to determine the amount properly due. In this English Law case the Contractor sought an injunction on the basis that the dispute had already been determined. The court refused to grant the injunction as they stated that there were differences between the two notices and the case proceeded at the second adjudication.
A few weeks after the Harding decision the same judge issued a decision in ISG Construction v Seevic College. The circumstances in this case were very similar to those in Harding as a payment application had been submitted, no payment was made and no pay less issue was issued. Unsurprisingly the Contractor was awarded payment of the due sum at the first adjudication. Anticipating that they would lose the first adjudication, a second adjudication was raised by the Employer four days before the decision was given in the first adjudication to determine the sum due. This time, however, the court said that it would not allow the second adjudication as the contract allowed for final accounting. The final account process was therefore the time to deal with any overpayment.
From these judgements it appears that if the payer does not give a pay less notice on time, the notified sum in an interim application must be paid. It is therefore essential that a pay less notice is issued timeously and that it contains the correct information. Whilst the courts may allow the actual value of the work to be re-determined by adjudication in a final account situation, as per the Harding decision, it remains a risk. Would you really want to take the risk of not being allowed to have the sum re-determined? The only option to gain protection in these circumstances is to give your notices on time and ensure they are valid!