Money, money, money: a look at payment issues in construction contracts

The final in our series of January refreshers looks at payment, specifically at the terms of the Construction Act, payment disputes, and what happens in the event of insolvency.

The Construction Act

The Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009 – better known as the Construction Act  – represents the cornerstone of the law in respect of construction contracts. The Construction Act is supported by the 1998 and 2011 iterations of the Scheme for Construction Contracts (England and Wales) Regulations.

Under the amalgamated legislation, construction contracts (as defined by section 104 of the Construction Act) are required to contain certain provisions in respect of payment. Every contract must:

  • Entitle parties to stage payments;
  • Provide a mechanism for determining what payments are due and when; and
  • Require parties to give payment notices in respect of each payment.

Failure to include the above will see the provisions of the Scheme imported into your contract instead. It is not possible for parties to a construction contract to contract out of these requirements.

In respect of the third bullet point employers are familiar with the requirement to issue a payment notice and/or pay less notice. Employers must take care to ensure that such notices, particularly pay less notices, are served within the required time periods. A failure to issue one or both of the notices within the required timescales will result in the amount applied for becoming due and payable on the final date for payment.

In light of the above, contractors and employers alike would do well to bear in mind the following guidance:

  • Whilst it’s important for payment provisions to align with internal invoicing/finance requirements, you should be careful not to fall foul of the Construction Act as a result of the same;
  • Be sure that the address to which invoices or payment applications are required to be sent are monitored (i.e. an application will not sit in an inbox whilst the project manager or QS is on leave for 2 weeks!);
  • Remember that time periods are based on clear – as opposed to working – days (although bank holidays are usually excluded); and
  • Be aware when using the JCT suite of contracts that the final account process differs depending on the form in use. Understand who is responsible for preparing the final statement under your particular form of contract and within what timeframe.

Payment Disputes

The courts continue to be kept busy with payment disputes, hardly surprising in an industry where cash flow is king.

As a rule, the court tends to resolve disputes by taking a literal approach to contract interpretation. This was demonstrated recently in Amey v Aggregate[1], a case in which the subcontractor undertook additional work and a dispute arose as to the amount payable. Here, the judge noted that he would not “rewrite the parties’ bargain”, underlining the need for watertight and unambiguous drafting.

In Bennett v CIMC MBS[2], standard form JCT payment provisions were replaced by five “Milestone payments” triggered by certain contractual events. CIMC disputed their validity. At first instance it was held that two Milestone payments were not compliant with section 110(a) of the Construction Act and as such all five should be disregarded. The Court of Appeal, however, despite agreeing that the two Milestone payments were not compliant with the Construction Act, noted that the Act was not intended to delete workable and agreed payment regimes bar in exceptional circumstances. This was not the case here and the appeal was allowed.

In one of the most important (and perhaps controversial) cases relating to payment provisions in recent times – S&T v Grove[3] – the Court of Appeal held that:

  • employers are entitled to bring a ‘true value’ adjudication despite failing to issue a pay less notice (good news for employers); but
  • section 111 of the Construction Act obliges a party to a ‘smash and grab’ adjudication to have paid out in full prior to bringing a subsequent ‘true value’ adjudication.

Unfortunately – for commentators at least – the case was settled prior to being heard in the Supreme Court. Last week, however, the Society of Construction Law organised a mock trial involving the Counsel who would have appeared had the trial gone ahead. Grove was narrowly deemed to have won (56%-44% as voted by the audience), reflecting the Court of Appeal’s verdict.

Insolvency

When faced with an insolvency or potential insolvency scenario it is important to:

  • Seek legal advice early;
  • Familiarise/re-familiarise yourself with the termination and notice provisions of your contract;
  • Appreciate that there is a difference between administration (such as under a Company Voluntary Arrangement) and liquidation (such as under a Creditors’ Voluntary Liquidation).

Contractors should be aware that in the event of employer insolvency, retention money is not ring-fenced and, as such, they are likely to lose out to creditors. Whilst legislation was proposed to introduce a retention deposit scheme to assist contractors, political momentum has faltered. Contractors and subbies should be sure to carry out due diligence on their employers when asked to agree to retention payments and, in any event, be wary of doing so.

It is equally important for employers to consider the issue and treatment of the retention in their contracts. Specific drafting amendments are required in most standard form contracts to enable the employer to retain the retention in a contractor insolvency scenario.

Both contractors and employers should be aware that most standard form contracts provide for a specific final post-insolvency accounting process. Parties should not simply apply the normal final account process.

Lastly, and most importantly, employers should not assume that if a contractor has a claim against them such a claim is simply erased by insolvency. The position in respect of claims and payment will depend very much on the specifics of the insolvency. For further information on this and the latest case law in this area please refer to our Sharpe Focus article: The Show Must Go On! Managing Main Contractor Insolvency Issues.

This represents the end of our series of January refreshers. If the series has peaked your interest in a particular topic, you may be interested in reading the Sharpe Pritchard Construction Law Review 2018/2019 for a more detailed look at the most important cases of the past 24 months.

[1] Amey LG Ltd v Aggregate Industries UK Ltd [2019] EWHC 3488 (TCC)

[2] Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Limited) [2019] EWCA Civ 1515

[3] S&T (UK) Ltd v Grove Developments Ltd [2019] EWCA Civ 2448

Posted in Construction, Construction contracts, Oliver Slater, Rachel Murray-Smith.