The challenges of being paid


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This article was previously published in the July/August edition of Civil Engineering Surveyor.

For further information, please contact David Weare, Partner, Fladgate LLP (dweare@fladgate.com)


 

Over the last 18 months there have been about a dozen cases before the Technology and Construction Court on the issue of payment in construction contracts. All these cases arose from the same fact, namely a failure to put in place the appropriate paperwork in response to an application for payment.  It is surprising that the payment parts of construction contracts continue to cause such difficulties when the underlying legislation has now been around for 20 years.  Why has there been an increase in payment related disputes and what can paying parties do to challenge payment claims where the required paperwork has not been served?

Background

This year marks the twentieth anniversary of the passing of the Housing Grants, Construction and Regeneration Act 1996 which has been an important part of the legislation affecting the construction industry in Great Britain. The legislation, as amended, is commonly known as the “Construction Act”.

An important part of the Construction Act relates to payment in construction contracts. The legislation makes it compulsory for relevant construction contracts in Great Britain to incorporate interim payment arrangements, which include provisions relating to dates for payment and the issue of notices where a payer objects to paying the amount claimed.  The intention is to improve cash flow to the supply chain by the inclusion of an adequate payment mechanism.  These arrangements are familiar to many working on British construction projects where the service of payment and pay less notices can be routine.  However, this is an area where many projects continue to go wrong with the cause of disputes almost always being a failure to serve compliant notices within time.

Impact of changes

The recent strand of payment related construction law cases arises from a combination of two factors. The first is the changes to the original legislation introduced by the Local Democracy, Economic Development and Construction Act 2009.  Those changes confirm that where a payer fails to serve its notices on time, an automatic right arises to payment in full of the sum claimed.  Although similar provisions existed in the 1996 Act, it is only since the amendments, with their emphasis on the sum being notified as the sum now due, that this has become such a point of controversy.

Whilst the 2009 amendments were further intended to improve cash flow, in some cases they appear to be having the opposite effect by actually encouraging disputes. The reason for this is that under the Construction Act as amended, there is now more at risk as a consequence of a failure to serve the appropriate contractual notices, which often results in the sum claimed being the amount now due.

Contractual versus valuation assessments

The second factor is confirmation now received that the distinction between a contractual assessment of an amount due, based on an analysis as to whether or not a pay less notice has been served within time, and an assessment of the value of the account, based on the various valuation items, continues to apply following the 2009 Construction Act changes. Whilst this distinction existed for some time, parties now appear encouraged, as a consequence of the higher stakes, to take further action when they are on the receiving end of a decision that the amount claimed is the sum due in the absence of a pay less notice.

It is now not uncommon in these circumstances for the losing party, immediately or upon receipt of an adjudicator’s decision requiring payment of an amount due, to refer a further dispute to adjudication about the value of the work that was the subject of the interim application.

Adjudicator’s decisions must be complied with in the order in which they are made, even if an earlier decision is overtaken by one issued later.  In practice, this can mean that a successful party’s entitlement to enforce a decision in a first adjudication can be overtaken by the obligation to comply with the second decision.  This tactic can have the consequence of preventing payment of sums awarded in the first adjudication, frustrating the very purpose that the Construction Act was intended to achieve.

Practical advice

Payment in construction contracts is an area of increasing complexity. However, there are some practical measures that can be taken to avoid the pitfalls that befell the parties in the recent run of cases.

If you are the payer:

  • Serve compliant pay less notices.
  • Where compliant notices have not been served in time, consider whether a valuation assessment of an amount due might be available. In some situations, commencing further proceedings on the value of the account may be the only option available.
  • Check the dates in the contract to ensure the application has been raised at the agreed interval. There is no obligation to make interim payments other than on the agreed dates, even where the works are delayed. However, making payments other than at the agreed intervals can create a precedent for later applications.

If you are the payee:

  • Check whether a valid pay less notice has been served in response to the application for payment.
  • Whilst a payee may seek a decision in its favour in the absence of a pay less notice having been served, the payee should be mindful that the payer might seek in response a valuation assessment of an amount due, and there is now an increased risk of this.
  • Make sure that the claim has been properly notified and that the payer is aware of what is being submitted. It is also important to make sure that the document is clearly an application for payment. Ambiguous terminology when submitting such applications is to be avoided.

There will no doubt be more developments in this area and further cases are inevitable. However, following the advice above should assist parties when responding to payment claims or when seeking payment for work carried out.

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