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Is this a hard Act to follow?

Proposed changes to the Construction Act could create new disputes over payments, says Chris Parker

It’s been a long time since Sir Michael Latham chaired the Chancellor’s review of the Construction Act – four years, in fact.

So long that the Chancellor has changed his job and the DTI has changed its name to the Department for Business Enterprise and Regulatory Reform (BERR).

That is not all that has changed. The aim of the review was to suggest changes to the Act that would improve cashflow and reduce disputes.

Changes were to be made following a broad consensus and introduced by way of a Regulatory Reform Order (the legislation enabling a minister to amend legislation in order to cut red tape). BERR has now brought forward draft primary legislation for consultation before it is put before Parliament in the next session.

The draft clauses – particularly those relating to the new payment notice provisions – have not received broad consensus.But will the proposed changes improve cashflow and reduce disputes? Was it worth the wait?

It will now be mandatory for every construction contract to contain provisions requiring either the payer or the payee to serve a notice specifying what it considers to be the amount due (s110A(1)), although there appears to be no bar to a construction contract containing provisions for both notices.

The person serving the notice must do no more than stipulate its own subjective assessment of “the sum [it] considers to be due… and the basis [presumably any basis] on which that sum is alculated” (s110A).

The amount specified in such notice may be challenged or later amended provided that a written notice in the correct form is served within the stipulated time.

Payment of sum

If unchallenged, the amount originally specified becomes the “notified sum”. The payer then assumes an obligation to pay the notified sum (s111) by the final date for payment specified in the contract.

Will the changes improve cashflow and reduce disputes if things do not go to plan? Consider what happens if a subcontractor’s application that does not comply with the contract is received late – because, say, the works have not been properly measured. A payer would naturally assume that it may safely be disregarded, albeit that the payer ought to communicate that to the payee.

But in the absence of a valid notice disputing such amount, this late, non-compliant application will, most likely, automatically become a payee’s notice once the time for service of a counter notice has elapsed.

The re-submission of that same non-compliant application would certainly qualify as a ‘good’ payee’s notice (under s110B(2)) after such time has elapsed. If a valid counternotice is served, the final date for payment may be delayed (s110B(4)), but this is of little assistance because the contractor will, no doubt, already have made its application under the main contract – absent the subcontractor’s application.

The upshot is that a contractor could assume a statutory obligation to pay, in circumstances where the subcontractor’s own
non-compliance has hampered the contractor from ascertaining the correct amount due and has prevented him from obtaining funds to meet that commitment. That would probably come as a surprise to both payer and payee.

This could equally be a problem for an employer that receives a non-compliant or late application, thereby making it difficult for him to draw down external funding to meet these new commitments imposed by statute.

It is difficult to see how the introduction of a statutory entitlement to payment based upon the subjective view of one party – whether the payer or the payee – of what is due will ultimately improve cashflow.

Furthermore, a builder on site trying to administer a contract containing these notice provisions is likely to become very confused and ultimately, this confusion will lead to additional payment disputes.

It is also certain that the Bill, if enacted in its current form, will introduce significant burdens since employers and suppliers alike (including consultants) will need to amend the contracts they use; this at a time when the house building sector is struggling.

So, was it worth the wait? I suspect only for those that work in the dispute resolution side of the industry.

Chris Parker is a solicitor at Taylor Woodrow.

HOW PAYERS ARE COMPENSATED

It is possible that a patently ‘incorrect’ amount could become payable simply because an appropriate notice has not been served in time. In this event, how is the payer compensated?

  1. The Bill gives no entitlement to interest on the ‘excess’ amount. Can the payer recover this ‘excess’ amount in an adjudication? The Bill caters for the payee’s recovery of an underpayment. But it is silent as to the payer’s entitlements.

  2. And what if a payee suspends performance on the strength of non-payment of the full amount? Section 112(3A) appears to grant a statutory entitlement to loss and expense, but what of the costs incurred by the payer for what could subsequently be shown to be an ‘unjustified’ suspension?

  3. The Bill has also attempted to clear up the confusion as to whether an amount specified in the notices currently served under the Act must take account of an abatement of the amount due or a set-off/deduction from the amount due. It has done so by simply using the phrase: “the sum due”, which presumably means the sum due ascertained in accordance with the terms of the contract.

This makes it very unclear as to how or indeed if an amount deductible from the sum due can be accounted for in these statutory notices.

If liquidated damages are expressed in the contract as a deduction from the sum due – which typically they are – there is nothing to allow for this deduction in a payer’s notice.