Unexpected results – payment in construction contracts


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Property is an industry that is well used to statutory regulation, so it should not necessarily come as a surprise to learn that contracts for construction work are also subject to legislation. The law makes significant changes to the rules relating to payment and dispute resolution to what might normally be expected. As a construction contract can be thought of as one for the supply of goods (bricks, timber, steel …) and/or services (bricklaying, carpentry, design work…), this can catch people out – especially those who only occasionally commission construction work.

The Housing Grants, Construction and Regeneration Act 1996 (Construction Act) applies to all construction contracts which are agreed in writing, including agreements for architectural, design or surveying work and for “construction operations”, which is very widely defined. Among other things, the Construction Act requires that construction contracts include certain provisions for payment and dispute resolution – and these terms will be implied if the contract does not explicitly contain them.

In a normal contract for goods and services, the supplier might send an invoice after the goods and services have been supplied. If the purchaser is dissatisfied with what has been provided, it might refuse to pay or there might be a negotiation about the amount of the invoice that should be paid. Typically there is no fixed timetable that must be followed. Under a construction contract, however, the Construction Act says that, if the employer wishes to pay less than has been claimed, it has to give a notice (known as a “withholding notice”) stating how much it intends to pay and how this has been calculated. This must be done within the time limits specified in the contract. A failure to issue a withholding notice, in time or at all, means that the claiming party is entitled to be paid the full amount claimed – even if this amount is incorrectly calculated, or if the employer has a valid set-off or counterclaim.

Where the employer has not issued a withholding notice in time, the contractor or consultant who is waiting to be paid does not have to negotiate or bring a claim in court for the money. Another of the innovations introduced by the Construction Act was a high-speed dispute resolution procedure called “adjudication”, whereby an independent person (often a surveyor or legal professional) can be appointed to resolve a dispute within 28 days of the referral by the claiming party. In payment claims where a withholding notice has not been served in time or at all, the adjudicator will have no option but to order payment in full. Such an order will be enforced by the Technology and Construction Court of the High Court via a fast-track enforcement procedure.

The strict payment regime that the Construction Act creates, coupled with the high-speed enforcement mechanism of adjudication, can be a very unpleasant “double whammy” for those who do not often deal with construction contracts, and who are therefore unfamiliar with the rules under which the construction industry has to operate. These provisions cannot be excluded (though they can be slightly improved) and the procedures favour the claiming party if the employer does not adhere to the letter of the payment provisions in the contract. Even if there is a valid set-off or counterclaim available, the employer will be out of pocket whilst a separate claim is pursued. To avoid falling into these traps, it is important to obtain clear advice about the terms of a construction contract and consider retaining a suitably experienced project manager who can monitor the project and respond appropriately when payment applications are received.

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