Construction Act 2009 – What you need to know – Part 1 – Payment

The Local Democracy, Economic Development and Construction Act 2009 finally came into force on the 1 st October 2011; so, by now, it should be on the radar of everybody contracting within the construction industry, whether employer, contractor or sub-contractor.

The Construction Act 2009 makes a number of changes to the operation of construction contracts; including important amendments to the payment provisions set out in sections 110 and 111 of the Housing Grants, Construction and Regeneration Act 1996.

Key Features:-

  1. Payment under a Construction Contract cannot be conditional upon the performance of obligations under another contract (or upon decisions as to whether such obligations have been performed). The new act effectively prevents ‘pay when certified’ clauses, in addition to the previously outlawed ‘pay when paid’ clauses.
  2. Payment Notices (Payer and Payee) – Notice given by Payer or Payee (depending on specific contract requirement) for each pay period, stating the amount due to the Payee at the relevant Payment Due Date and the basis upon which it has been calculated. This is referred to as the Notified Sum.
  3. Notice to Pay Less – Notice given by Payer to pay less than the Notified Sum. A Notice to Pay Less (or pay less notice) must be served by the Payer not later than the Prescribed Period before the Final Date for Payment and must confirm the sum the Payer considers to be due at the date the notice is served (rather than on the Payment Due Date) and the basis of the calculation.

Points to Remember:-

  1. For each and every pay period under a construction contract, a payment notice (Payer or Payee) will need to be issued within 5 days of the Payment Due Date, specifying the sum due for that period (Notified Sum).
  2. It will be impossible for a Payer to avoid making a payment by failing to value or certify completed work, as the Payee will be entitled to serve its own Payee Notice in lieu of a Payer Notice.
  3. A Payer must pay the Notified Sum as contained in the relevant Payment Notice, unless it serves a valid Notice to Pay Less.
  4. A Notice to Pay Less than the Notified Sum must value the sum due at the date the notice is served, rather than the Payment Due Date. This can mean that additional sums will be due if a later Payment Due Date has already passed.
  5. It is possible for either the Notified Sum or the sum given in a Notice to Pay Less to be zero; however, the basis upon which the zero sum is calculated must be included.

Guidance for Payers:-

  1. BE AWARE OF, AND PAY ATTENTION TO, DEFAULT CONTRACT TIMINGS:

a) The default pay period under the Scheme for Construction Contracts is 28 days, therefore, a valuation, notice and payment will be required on a monthly basis unless an alternative period is agreed;

b) The default Payment Due Date under the Scheme for Construction Contracts is 7 days from the end of the pay period. The relevant Notice must be given within 5 days of the Payment Due Date.

c) The default final date for payment under the Scheme for Construction Contracts is 17 days from the Payment Due Date. The default Prescribed Period is 7 days.

  1. IF DEFAULT CONTRACT TIMINGS LEAD TO AN UNMANAGEABLE ADMINISTRATION BURDEN, ENSURE THAT THEY ARE EXPRESSLY ALTERED.
  2. CONSIDER WHETHER THE CONTRACT SHOULD PROVIDE FOR NOTICES TO BE PROVIDED BY THE PAYER OR PAYEE:

It is not necessary for the contract to require notices to be provided by the Payer; therefore, it may be appropriate in some circumstances for the Payee to be required to do so. Alternatively, the Payee can be required to provide a notification of the sum it considers to be due, prior to the date the Payer Notice must be given.

  1. DON’T GET CAUGHT OUT BY THE NOTICE TO PAY LESS REQUIREMENTS:

A Notice to Pay Less must value the sum due for completed work at the date the notice is served (rather than on the Payment Due Date of the payment notice). This means that account must be taken of any Payment Due Dates that have subsequently passed by the time the Notice to Pay Less is served. If no further Payment Due Dates have passed, then the relevant sum will be that due at the Payment Due Date of the Payment Notice. The Notice to Pay Less will be invalid if the wrong period is valued.

Guidance for Payees:-

  1. ALWAYS ISSUE A COMPLIANT PAYEE NOTICE:

Unless the contract prevents it, the issue of a section 110A (3) compliant notice prior to the date the Payer Notice must be given, will ensure that the Payer is required to make a payment by the final date, regardless of whether a Payer Notice is provided.

  1. BE AWARE OF, AND PAY ATTENTION TO, DEFAULT CONTRACT TIMINGS:

a) The default pay period under the Scheme for Construction Contracts is 28 days, therefore, a valuation, notice and payment will be required on a monthly basis unless an alternative period is agreed;

b) The default Payment Due Date under the Scheme for Construction Contracts is 7 days from the end of the pay period. The relevant Notice must be given within 5 days of the Payment Due Date.

If you are concerned or want to learn how ORJ Solicitors can help you and your Construction business – Please contact Mike Smyth on mike.smyth@orj.co.uk or call him on 01785 223410. To view our website please go to Construction Adjudication