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Master the art of payment – get your Act together

It pays to exploit the Construction Act. By Hamish Lal

Lord Denning’s well-known description of cashflow as the “lifeblood” of the construction industry has never seemed more apt than in this economic climate. Contractors of all tiers need to ensure maintenance of cashflow and payment.

It helps to know how to exploit the Construction Act to the full. A draft has been published of the Construction Contracts Bill which will introduce ‘payment notices’, ‘payee notices’ and ‘notified sums’ as well as broadening the rights to suspend work.

Here are some tips on using the Act:

Insist on payment notices. It is important to know what you are going to be paid. Section 110(2) of the Act requires contracts to provide for the employer to issue a notice specifying the amount of the payment made or proposed to be made, and the basis on which that amount was calculated.

If the contract does not so provide, the Scheme for Construction Contracts will apply. Although there is no direct sanction for failure to comply, a strongly worded letter from the contractor demanding the issue of a payment notice may act as a ‘pre-warning’.

Require clarity in withholding notices. The Act also requires that effective notice be given of intention to withhold payment. A withholding notice must specify the amount to be withheld and the ground for withholding, and where a variety of grounds apply the amounts attributable to each ground must be set out. Aedas Architects v Skanska [2008] CSOH 64 demonstrates that the courts may not always require detailed apportionment, but the judge noted the need for clarity when interim payments are withheld and a minimum level of compliance is required.

Suspend. The right to suspend performance is a valuable threat which can be exercised where sums are not paid. No employer wants to incur the delay and disruption of the works being suspended, therefore even a threat of suspension can be effective in encouraging employers to make payment. The new bit of the Construction Act will assist because it will make the non-paying party liable to pay the suspending party a “reasonable amount in respect of costs and expenses reasonably incurred” as a result of suspending.

Adjudicate. If you are being denied money that you consider is due, the best option may be to adjudicate. Where there is a concern about the solvency of the paying party, a timely and effective adjudication may be the difference between securing payment and ending up in the queue of creditors.

Hamish Lal is a London construction and engineering partner at Dundas & Wilson