Payment provisions under the “New Construction Act”

1st October 2011 heralded the implementation of the “New Construction Act”. If you have entered into a construction contract after that date then you will be operating under the new Act.

If it was hoped that the new Act would simplify and regularise payment procedures, then we believe it has failed. The provisions of the new Act are extremely complicated and it appears to us, not properly understood by a large part of the industry. However, if you are the party who is seeking to be paid, there are real opportunities now to take a tactical advantage. In this article, when we refer to “Employer” we mean the paying party and the “Contractor” is the party seeking payment.

Under the new Act the amount to be paid to a Contractor is the amount of a “Payment Notice” (whatever the figure stipulated). Under the old Construction Act many Employers did not bother with payment notices at all. However, they must do so now if they want to avoid the trap created by the new Act.

Under the new Act there are effectively two types of notices that can be issued by the Employer in relation to the amount due, “Payment Notices” and “Pay Less Notices”.  The two key dates that govern the issuing of either of these notices are the “Payment Due Date” (effectively the interim valuation dates under the contract) or the “Final Date for Payment” (the actual date on which payment has to be made). A Payment Notice stipulating the amount going to be paid, must usually be issued by the Employer within 5 days of the Payment Due Date. If he does not do so then the Contractor can issue a Default Notice stipulating the amount he considers to be due. At this point the Employer gets a final chance to rectify the position by issuing a Pay Less Notice (stating the amount he will pay) but this must usually be done not less than 7 days before the Final Date for Payment. If he does not do so, then the Default Notice is the amount that becomes due. There will be no defence to a claim for this amount should the Contractor commence an Adjudication.

However, and to highlight the complexity of the new Act, any Pay Less Notice must certify the amount due under the contract at the date of the Pay Less Notice. This could be a considerable time after the Contractor’s application for payment and the Contractor may have done more work and be entitled to more money by then. In those circumstances the course of action for the Employer may be just to pay the amount of the Default Notice/application and correct the position on the next Payment Notice (provided that he issues one!). 

Please also note that the new Act prohibits “pay when certified” clauses. A main contractor cannot therefore say to a subcontractor that a retention will not be released solely because the certificate of making good has not been issued under the main contract. The only real way for the main contractor to protect his position is to extend the retention release period under his own contract.

Holmes & Hills Solicitors acts for across the South East and East Anglia which operate in the construction industry, advising on construction contract disputes.