In this article we explore the basic payment regime under the JCT DB 2011, and highlight the key changes from the JCT Design and Build Contract 2005. We then consider common amendments to the standard form.
Basic Payment Regime
The basic JCT DB 2011 payment regime is as follows:
- The contractor makes an application for payment setting out the sum he considers due to him on, or before the due date for payment agreed between the parties. If the contractor makes the application after the agreed due date, then the due date is postponed to the day the employer receives the application for payment.
- The employer considers the application and issues a Payment Notice not later than five days after the due date. The Payment Notice sets out the sum the employer “considers to be due at the due date … and the basis on which that sum has been calculated”. This is the employer’s first opportunity to object to the contractor’s application for payment. If the employer fails to serve the Payment Notice within these timescales, the contractor’s application for payment becomes the Payment Notice.
- The employer must pay the amount set out in the Payment Notice before the final date for payment unless it serves a Pay Less Notice. The final date for payment of an interim application is 14 days after the due date. The final date for payment of the last payment is one month after the later of the end of the Rectification Period, the date of the last Notice of Completion of Making Good, or the submission of the final statement.
- The Pay Less Notice is the employer’s second opportunity to object to the contractor’s application for payment. It must be served not later than 5 days before the final date for payment. It must set out “both the sum that the employer considers to be due at the date the notice is given and the basis on which that sum has been calculated”.
- If the employer fails to pay the contractor the amount set out in the Payment Notice (as amended by any Pay Less notice) by the final date for payment, the contractor has the right to suspend all or part of its works until such payment is made.
- Interest is payable on late payments at 5 per cent above the base rate of the Bank of England.
Main changes from the 2005 contract
The payment provisions of the JCT DB 2011 account for most of the changes from the 2005 version. These changes reflect the amendments to the payment obligations in the Housing Grants, Construction and Regeneration Act 1996, which came into force in October 2011. For those of you who are familiar with the JCT 2005 forms, the new 2011 design and build payment process may not at first glance appear overly different to the previous regime. However, the devil is in the detail.
For example, a “Pay Less Notice” has replaced the “Withholding Notice”. The requirements of the two notices are different:
- The Withholding Notice under JCT DB 2005 had to set out “any amount proposed to be withheld or deducted from the amount due, the ground or grounds for such withholding or deduction and the amount of withholding or deduction attributable to each ground”.
- A Pay Less Notice must set out “both the sum that the employer considers to be due at the date the Notice is given, and the basis on which that sum has been calculated”. The employer must now explain how he calculated what he is paying, rather than what he intends not to pay. Commentators have also suggested that explaining the “basis” of a decision may require a greater level of detail than the “grounds” previously required.
It is currently unclear how the courts will choose to treat these differences, and whether judges will expect more detail in Pay Less notices than they would have accepted for a Withholding Notice. Until the courts hear the first case on this issue, the employer should look to comply to the letter with the information required for the Pay Less notice as set out in their contract. Where the contract does not specify, the employer should comply with the wording of the Act.
Where the employer has failed to make payment by the final date for payment, the contractor now has the right to choose between suspending the whole of the performance of its works or part only. The right to partially suspend performance could be useful for contractors, where a full suspension of its performance would be too commercially damaging for a contractor to want to adopt that stance.
Possible amendments to the standard form
As is common with standard form contracts, parties may wish to make changes to the standard wording.
The new payment process is now more complex. The employer may need more time to process payments, as a 14-day turnaround time in the contract is not generous. The employer may therefore wish to extend the period between the application and the due date, by 14 or 28 days.
Another area of concern for employers is the application for payment becoming the Payment Notice. The contract can be altered to avoid this, by requiring the contractor to serve a separate notice called a Default Payment Notice instead of relying on its application for payment. This alerts the employer that it has failed to serve the Payment Notice and that it may need to serve a Pay Less Notice.
The interest rate for late payments is also often changed from 5 per cent over base rate to, say, 2 per cent over base rate. Given the current low savings and borrowing rates, 5 per cent over base rate is often felt to be punitive; rather than putting the payee in the position it would have been in had the payment been on time.