Changes to payment provisions
At the moment if you do not believe that money is owed to a contractor then to avoid making payment, it is necessary to serve a Withholding Notice. The timeframe for service of a Withholding Notice varies but it is often within 14 days after the date payment falls due. This only applies if the contract is in writing. This will continue to be the position for contracts entered into before 1 October 2011.
For construction contracts entered into after 30 September 2011, there will be a new regime in place and it will apply to all construction contracts whether they are in writing or verbal.
The new provisions provide:
- That the paying party, which will normally be you, or the receiving party (depending on the contract but it will normally the paying party) is to serve a Payment Notice not later than five days after the due date for payment.
- The receiving party (ie, the contractor) may serve a Default Notice if the Payment Notice is not served.
- The sum stated in either the Payment Notice or, if none is served, the Default Notice, is known as the Notified Sum.
- Unless as the paying party you serve a Pay Less Notice then the Notified Sum must be paid. The time frame for service of a Pay Less Notice will be similar (but not the same) to the time frame for the current Withholding Notice.
One of the key dangers lies in failing to serve a Payment Notice. If that happens and the contractor then serves a Default Notice and the deadline for service of a Pay Less Notice is missed, then the amount stated in the contractor's Default Notice must be paid. To prevent this happening, it will be good practice to ensure that there are procedures in place so that a Payment Notice is always served in time.
Also beware; a Pay Less Notice is different from a Withholding Notice. There are different requirements as to what must be included in each notice.
At the moment adjudication applies to construction contracts provided that they are in writing. From 1 October 2011 it will apply to all construction contracts whether they are written or oral. To avoid adjudications on what the terms are, always ensure your contracts are in writing.
There are other changes coming into effect on 1 October 2011, which will also affect the way the construction industry works which you should know about.