Construction solicitor Abbie Chisnall and trainee construction solicitor Jess Munday take a look at the complexities of payment in construction contracts.
Whether by way of a written contract or verbal agreement, it is important to ensure that the payment provisions for the work being carried out are made clear between both parties.
Specific to Construction, in the absence of a contract/adequate payment provisions, the Scheme for Construction Contracts 1998 (as enacted) (the “Scheme”) can be relied upon. This means that where there are gaps in the agreed payment terms, or the payment provisions within the contract are non-compliant, the Scheme steps in.
This isn’t to say that it is one or the other, a contract or the Scheme; if you have a contract and only certain elements of it are unclear, the Scheme can be implied in part. In Bennett (Construction) Ltd v CIMC MBS Ltd (formally Verbus Systems Ltd) [2019] EWCA Civ 1515, it was decided that the Scheme can be applied in piecemeal. Therefore, if any of the below stages of the payment process are not properly defined, the Scheme can step in.
An Application for an Interim Payment would usually set out the total amount applied for to date, less the total sum paid to you to date and, furthermore, a breakdown of the works carried out during that period (i.e., a month).
The reason being, cumulative applications demonstrate a rolling total to your client and at any given time, should a dispute arise, a third party could take a specific point in time and see the value of the works carried out less any sums you have paid to date.
By way of an example:
Section 110(1) of the Construction Act 1996 requires every construction contract to have an adequate mechanism for determining what payments become due under the contract and when those payments become due (section 110(1)(a), Construction Act 1996).
Usually, a contract calculates the Payment Notice and Final Date for Payment by using the due date as a reference point. It doesn’t matter when the Due Date is set for, its main significance is being the enabler for all other dates in the payment schedule to be calculated from. Many people mistakenly think that the Due Date is the date money lands in your account, this is not the case. The Due Date draws a line in the sand and is the date that other dates are calculated from.
Pursuant to Paragraph 9 of the Scheme, a payment notice must be no later than five days after the payment due date and must specify the sum due on the due date, and the basis on which that figure has been calculated. This figure can be zero. If there are provisions for a payment notice within the contract, the Scheme is automatically implied.
Some contracts will permit contractors to issue a Default Notice, should the paying party fail to issue a Payment Notice. The Final Date for Payment is then extended by the number of days between when the client should have submitted the Payment Notice and when the contractor issued the Default Notice.
In the event that a Pay Less Notice isn’t issued, the Notified Sum becomes the figure specified in the Default Notice.
A pay less notice is an opportunity for the paying party to notify the unpaid party that they intend to reduce the amount that they wish to pay. The contract will often specify the final day in which a pay less notice can be issued. If the Scheme is to be relied upon in place of the contract, a pay less notice cannot be submitted any later than seven days before the Final Date for Payment.
However, simply submitting a Pay Less Notice doesn’t make it valid. It must satisfy the following:
Do be aware that some contracts will permit a payment notice to become a pay less notice and so even if not specifically labelled a pay less notice, it may still be valid.
Final date for payment
Recently, in the case of Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 (TCC), it was decided that the Final Date for Payment must be linked to the Due Date, rather than to a trigger event such as submitting an application / an invoice in lieu of an application for payment.
If the contract does not specify the Final Date for Payment in line with the above, then the Scheme will be incorporated, and the Final Date for Payment will be 17 days from the Due Date by default.
Upon the lapse of the final date for payment, the Notified Sum (the amount due to you) becomes payable. The sum will be dependent on the figures specified in either the application for payment, the payment notice, the default notice – if the contract permits or requires – or the pay less notice.
Payment schedules
What happens when a payment schedule runs out? You cannot rely on the Scheme; it does not automatically get implied in the same way as above.
Case Law is very definitive on this point and concludes that once a Payment Schedule runs out, unless the parties agree an extension, strictly speaking, you are not entitled to make further Interim Applications and instead would need to wait until the Final Account, as shown in Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (TCC).
In this scenario, it is extremely important to obtain written confirmation that both parties agree to extend the payment schedule on the same terms, or failing that, specify the new payment schedule.
Payment in construction contracts is a very complex area and can result in costly disputes if misunderstood. As you will see from the above, there are many dates and procedures that need to be adhered to, to ensure that you get paid or only have to pay what you believe should pay.
If you would like to discuss any part of payment structures or contracts, our specialist construction law lawyers can assist you. Holmes & Hills Construction Division also offers training regarding payment provisions.
Call us on 01206 593933 today to speak with one of our expert construction law solicitors. Or complete the form below.
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