Don't pay the price

The Construction Act 2011 brings in some important changes in relation to payment and adjudication. Registered providers and local authorities should take note, says Patricia Nathan-Amissah.

Procuring housing developments on any scale involves building contracts and professional terms of engagement for consultants. Over the years the law has, in relation to construction contracts between commercial parties, imposed rights and obligations on the parties which can be expressly covered in the contracts (albeit within certain statutory boundaries in some cases). However if there are no express provisions then there are statutory terms imposed on the parties which can result in traps for the unwary.

Who needs to be aware of these changes?

Registered Providers (“RPs”) and local authorities (as employers) and the employer’s agents, contract administrators and project managers engaged by them, need to be aware of these changes particularly in relation to payment obligations and the right to withhold payment.

The Construction Act – a brief background

By way of background, in March 2004, the then Chancellor Gordon Brown proposed a review of the payment and adjudication provisions in the Housing Grants, Construction and Regeneration Act 1996 (known in the construction industry as the ‘Construction Act’).

The Construction Act came into force in 1998 to facilitate better payment practices in the industry. After many years of consultation the Construction Act was amended on 1 October 2011 by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (for brevity referred to as the ‘LDEDC Act 2009’ in this article).

In relation to payments the amendments bought in by the LDEDC 2009 make the following changes:

• Abatement as a defence to a claim for non payment can no longer be relied upon where a timely reduction notice has not been served by the payer
• Where an employer does not issue the relevant payment notice (confirming the amount due), contractors and professional consultants can now take control of the payment process. Previously, they had to wait to adjudicate on the employer’s failure to pay or advise non-payment
• Conditional payment clauses, including pay when certified clauses, are now outlawed
• Adjudication costs clauses need to be examined to ensure they are not probibited under the Construction Act
• You can now include a clause in construction contracts which allows the Employer to rely on the new Section 111(10) so that the RP is not required to make payments where the contractor/consultant has become insolvent.

The Construction Act 2011 changes

The new payment structure for construction contracts consists of:

• Payment Due Date: usually triggered by a payment application, valuation, assessment date or invoice.
• Payment Notice: usually issued by the Employer (and must be separate from the pay less notice referred to below).
• Payers’ Reduction Notice: (sometimes referred to as a pay less notice) issued by the Employer.
• Final Date for Payment: the last date by which payment must be made (not to be confused with the due date above).

The new provisions require Payment Notice to be given even if the sum due is zero.

Looking in detail at each of the above in turn:

Payment Notice (Section 110A)

• The contract may specify that either the payer, the payer’s specified person (for example an RP’s architect, contract administrator or engineer) or the payee may issue the Payment Notice
• The Payment Notice must be issued within five days of the Payment Due Date
• The Payment Notice must set out the sum considered to be due, even if it is zero, and the basis of calculation. This is the ‘notified sum’.

Default Payment Notice (Section 110B)

• If the payer/payer’s specified person fails to serves its Payment Notice within the five days after the Payment Due Date, the payee may serve a Payment Notice after the lapse of that period. This is an important point for RPs to note. We have seen many updated forms of contract which do not expressly include this right but the savvy contractor or consultant will know it has this right under the Construction Act
• The final date for payment is then extended by the time that has elapsed between expiry of the five-day period referred to above and the issue of the payee’s default notice. This actually gives the payer more time to pay!

The changes mean that the construction industry can no longer avoid serving payment notices – one of the main aims of the reforms. Parties will no longer be able to combine a payment notice and what is currently known as a withholding notice into one notice. RPs should ensure their project managers, architects/contract administrators and employer’s agents are fully aware of these provisions. A failure to comply could result in the RP being liable to make a payment which it does not consider to be due.

Reduction Notices (Section 111) (Pay Less Notice)

• This replaces the existing withholding notice. If the payer wishes to pay something ’less’ than the notified sum, the payer must issue a Reduction Notice
• The Reduction Notice must be issued within the period prescribed under the contract or, in the absence of a prescribed period, the period prescribed by the Scheme (currently seven days before the final date for payment). This has not changed from the existing Construction Act.

The Reduction Notice must be served where the payer intends to rely on set-off, counterclaim or abatement against the sums claim.

The Scheme for Construction Contracts will apply to non-compliant contracts (or to the deficient areas of the contract). Consequently, this Scheme has also been updated to reflect changes in the LDEC Act.

Remember, Remember…

If you are an RP using  printed forms of building contract published by the JCT or NEC or similar  these prior to the Construction Act changes need to be amended to reflect the post 1 October changes.

If you are an RP with your own bespoke forms of contracts then these will need to be reviewed and updated.

Patricia Nathan-Amissah, is a solicitor at Charles Russell. She can be contacted on 01483 252638 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..