Starting construction works in the UK? Get familiar with the payments’ provisions under UK legislative framework!

Lord Denning: ‘There must be a cash flow in the building trade.

It is the very lifeblood of the enterprise’[1].

This article summarises the payment provisions under Part II of the Housing Grants, Construction and Regeneration Act 1996 (‘Act‘), as amended by the Local Democracy, Economic Development and Construction Act 2009 (‘LDEDC’).

For the past 22 years, the overall impact of the Act on the construction industry has been remarkable. As Sir Jackson highlighted ‘The payment regime and adjudication regime which that legislation introduced now play a critical role in the functioning of the construction industry… Overall the payment regime and the adjudication regime have been successful’[2].

The Act applies to most construction contracts, although some contracts such as the ones with residential occupier or where the works relate to mineral extraction or power generation are excluded.

In a construction contract, one party usually undertakes to carry out a defined work (referred in the Act as (‘Payee’)) while the other party undertakes to make payment (referred to as (‘Payer’)). Whilst the Act gives the parties to a construction contract the freedom to agree the sum to be paid, when to be paid, and any procedure to facilitate payment, it introduces changes of some importance to the construction industry.

• It imposes a statutory set of contractual provisions which in default take effect as implied terms of the contract concerned.

Section 114 states that where a construction contract does not comply with the requirements of the Act in relation to adjudication and payment, the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649), as amended in respect of construction contracts entered into after 1 October 2011 statutory scheme (‘Scheme’) will apply.

• It gives an entitlement to stage payments.

A party to construction contract which is more, or agreed to be estimated at more, than 45 days is entitled, by virtue of section 109 of the Act, to payment by instalments, stage payments or other periodic payments for any work under the contract. The parties are free to agree the amounts of the payments and the intervals or the circumstances in which they become due.

• It makes provision for the date when payments under a construction contract became due.

Section 110 of the Act states that a construction contract (1) shall provide an adequate mechanism for determining what and when payments become due; and (2) and shall provide for a final date for payment in relation to any sum which becomes due.

• It deals with the need to give various notices during the project life cycle with the aim of proactively highlighting any payment’s issue and allowing early measures to deal with them effectively.

Section 110A to section 111 state that the contract must provide for a notice, which specifies the amount due and the basis of the calculation, to be given by either party (or by the Payer’s representative) to the other. The notice should be clear and unambiguous that it is  a payment notice.

If the Payer, or its representative, fails to provide the notice then the Payee is entitled to submit its notice instead. In which case the final payment date will be pushed back by the amount of time taken by the Payee to submit its own notice.

In the absence of an agreement as to the time of the notice submission, the Scheme will apply and the notice shall be given within five days of the payment due date.

The Act allows the Payer to correct the calculated amount in the payment notice by issuing a pay less notice. The pay less notice should set out the sums deemed due, should clarify the basis of calculation and should be submitted within the agreed period of time. In the absence of an agreement, the Scheme will apply and the pay less notice should be submitted seven days before the final payment date.

• It provides a right to suspend performance for non-payment.

Section 112 of the Act entitles the Payee to suspend performance if the Payer fails to pay the sum due.

• It prohibits conditional payment provisions.

Section 113 prohibits conditional payment on the performance of another contracts, such as the commonly known “Pay when Paid” clauses.

Whilst the HGRCA benefits praised by Sir Jackson are undeniable, many in the industry still argue that poor payment practices are increasingly impacting the construction industry. The rate of insolvency is still peaking, and the number of payments’ litigations is increasing.

The construction industry is in need, now more than ever, of a legislative intervention to further improve the payments practices.

I have called upon my decade’s long international experience in the construction field and highlighted several improvements that I will be sharing with you in the next article.

[1] Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] A.C 689
[2] S & T (UK) v Grove Developments [2018] EWCA Civ. 2448

Author:

Hamza Sekkar

Partner & Director of Legal Engineering

 If you have any queries, please contact me on h.sekkar@sterlingstamp.com

Interested in Public Private Partnerships Check our article about: Public-Private Partnerships