In 2011 you will probably recall receiving a plethora of information about the amendments to the Construction Act1 (the “Act”) particularly the resulting “new” payment regime. There was a flurry of activity leading up to the enforcement of the new provisions with many employers amending their existing company standard forms to ensure all new construction contracts entered into post 1 October 2011 complied with the Act.
Although these amendments have now been firmly enshrined in company (and industry) standard terms for some time, it would appear there are still some glitches in administering the “new” payment regime. This year alone, we have been contacted by a number of employers who were utterly flummoxed by their contractor’s audacity in demanding the full amount of a payment application (and this was irrespective of whether the amount claimed was inflated and/or included claims for incomplete works) simply because the employer had failed to comply with the payment notice requirements.
Whilst it will be a bitter pill for employers to swallow, the crux of the matter is that, unless the employer issues a payment notice and/or a pay less notice in accordance with the terms of the contract (or in the absence of contractual provisions, the Scheme for Construction Contracts2) the whole amount claimed by the contractor will become payable.
So, what does the Act require and what must employers do to ensure they are not ambushed by such demands from contractors?
The Act requires construction contracts to provide an “adequate mechanism” to determine:
- what payments (both interim and final) become due;
- when the payments become due; and
- the final date for payment of any sums.
At first blush, it all seems fairly simple stuff, but this “adequate mechanism” is complicated by detailed requirements as to the issue of various prescribed notices (‘payment notices’, ‘default notices’, ‘pay less notices’, etc.) at specific times (by reference to ‘due dates’ and ‘final dates’ for payment), with a multiplicity of variants dependent upon the particular circumstances of each case (in particular the procedures expressly provided for in the contract and the extent to which the statutory scheme applies by default).
Unfortunately my editor’s constraints will not permit here any attempt at a detailed exposition of those requirements. Hopefully however it will serve as sufficient warning to employers merely to point out that where an employer does nothing following receipt of a valid application by the contractor for payment, and in particular if such employer fails to serve a ‘pay less’ notice within the prescribed time period, the sum set out in the contractor’s application will be the sum due and payable on the final date.
Proper deployment of ‘pay less’ notices are crucial from an employer’s perspective. However, to be effective they must contain prescribed information. The employer must be explicit as to the total amount due (even if the employer considers that to be zero) and how it arrived at that conclusion. They must also be served within prescribed time limits.
Employers must resist the natural temptation instead to negotiate and engage in e-mail exchanges with the Contractor to try and sort out disputed items. Such exchanges will be insufficient to constitute valid pay less notices.
The failure to adhere to the payment provisions will have significant implications for Employers. Employers should ensure suitable management procedures, practices and methods are in place to ensure that those administering the contract on their behalf issue correctly formulated payment and/or (as the case may be) pay less notices and that they are issued in time. Employers may want to consider some of the following practical points:
- Ensure your contract terms clearly set out an “adequate mechanism” of payment.
- If necessary, provide training to those administering the contracts so they are familiar with the contract terms and the time for service of each payment notice.
- Do not get sucked into informal negotiations or discussions about specific items with the Contractor in lieu of serving the prescribed notices. Keep an eye on the contractual time frame for when such notices should be served.
- Check that each payment notice and pay less notice complies with the requirements of the Act. It may be useful to set up sample payment notices and pay less notices.
- Ensure all notices are served in accordance with the contract terms.