| Date | 15 August 2007 |
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| Judgment | 2nd Consultation on proposals to amend the Construction Act |
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| The Issue | Proposed changes to the payment provisions within the Construction Act. |
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| Implication |
The revised payment framework will improve communications between the parties and will also enable better cash flow through the contractual chain. |
printLast month I outlined proposed changes to the adjudication provisions found within Part II of the Construction Act. These proposed changes formed part of a much wider review of the workings of the Act and are contained within a consultation document issued in June 2007 by the DTI and the Welsh Assembly Government. In this article, I will consider the proposed changes to the payment provisions as currently found in Sections 110, 111, 112 and 113 of the Act. The proposals detailed in the consultation document regarding payment have their origins in an earlier consultative exercise in 2005 called “Improving Payment Practices in the Construction Industry” which in turn followed on from a comprehensive review of the Act in 2004 by Sir Michael Latham. In essence, the proposed amendments to the payment provisions of the Act are made with the objective of:
Critical to the effective operation of the revised payment provisions in Sections 110, 111 and 113 of the Act is the clear understanding by all parties of what the term ‘sum due’ means. The consultation document proposes providing a statutory definition of this term. Where a third party certifies (i.e. by an architect or an engineer) then the position is clear - the ‘sum due’ is the amount shown in the certificate. However, in many contracts without certificates, the current position on what the ‘sum due’ will be is less than clear. The consultation document proposes that where the payer has issued a payment notice, this amount becomes the ‘sum due’ (which can then be the subject of a withholding notice). Where a payment notice is not issued, the ‘sum due’ will be the amount claimed by the payee. The sponsors of the consultation document hope that clarity on what constitutes the ‘sum due’ (in instances where certificates are not issued) will allow a payee greater certainty as to when it can suspend performance under Section 112 of the Act for non-payment of the ‘sum due’. The consultation document says that payment notices are issued for only about 40% of all payments made in the construction industry. This may partly be due to the fact that currently there is no sanction on the payer for the failure to issue a payment notice. On the other hand, there is also uncertainty as to the circumstances in which a payment notice has to be issued. Apart from notifying a payee of a payment to be made (unless it is the subject of a withholding notice), the obligation to issue a payment notice continues even where no payment is due as a result of abatement or set-off under the contract. It is proposed that the Act will be amended to make it clear that a payment notice is always required if a payment would have become due under the contract but for non-compliance with the contract, abatement, set-off etc. Additionally, there are proposals in the consultation document to prohibit the use of ‘pay-when-certified’ clauses within construction contracts. Currently Section 113 prohibits ‘pay-when-paid’ clauses in an attempt at improving cash flow down the contractual chain. After the Act came into force, clever drafters of contracts replaced ‘pay-when-paid’ clauses with ‘pay-when-certified’ provisions. The effect of passing the burden of non-payment to subcontractors and others however is largely the same. This situation was recognised in the decision of Justice Jackson in the Midland Expressway Limited v Carillion Construction Limited case. It may well be that the days of ‘pay-when-certified’ clauses were numbered in any case. Main contractors will not welcome this proposal although I have a feeling that clever drafters of contracts will henceforth be busy devising payment periods for subcontractors well in excess of payment periods under the main contract. Finally, the consultation document proposes changes to the wording of section 112 of the Act with the objective of improving the right of a payee to suspend performance in the event of non-payment. It is considered by the DTI and the Welsh Assembly Government that there are disincentives in the current Act which prevent payees suspending performance. It is proposed that the payee be compensated for the reasonable losses caused by the suspension of performance and any subsequent remobilisation. Consequently, it is argued that the right to suspension will be more accessible and effective.
CJ-0732
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