Part II of the Housing Grants, Construction and Regeneration Act 1996 (the “1996 Act”) currently prescribes the payment mechanics for all construction contracts. The provisions of Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (the “2009 Act”) will, however, once implemented, substantially amend the position by introducing a new statutory payment procedure governed by the service of “payment notices”, “payee default notices” and “pay less notices”. It is envisaged that these provisions will come into force on 1 October 2011.
Once the provisions of the 2009 Act come into force, a construction contract must oblige either the paying party, a specified person (for example the employer’s agent or the contract administrator) or the party entitled to receive payment to serve a payment notice specifying both the sum it considers due and the basis on which that sum is calculated. Importantly, the party entitled to receive payment will now be permitted to serve a payment notice and applications for payment may constitute payment notices where the requirements of a payment notice are satisfied.
Payee Default Notices
Following the implementation of the provisions of the 2009 Act, if a construction contract places the obligation on the paying party or a specified person to serve payment notices and that party defaults, in order for the paying party to be obliged to pay the amount due and for the unpaid party’s statutory right to suspend performance for non-payment to arise, the party entitled to receive payment must serve a payee default notice.
The content of a payee default notice must satisfy the requirements of a payment notice; namely, it must specify the sum the unpaid party considers due and the basis on which that sum is calculated. A payee default notice should be served by the unpaid party as soon as possible following the failure of the paying party or the specified person to serve a payment notice by the due date given that under the provisions of the 2009 Act the final date for payment will be extended to incorporate the time taken by the unpaid party to serve a payee default notice.
It is important to note that where the party entitled to receive payment makes an application for payment which satisfies the requirements of a payment notice it is then precluded from serving a payee default notice where the paying party or the specified person fails to serve a payment notice in accordance with the terms of the construction contract.
Pay Less Notices
Under the current provisions of the 1996 Act, where a paying party under a construction contract wishes to withhold payment of any sums due to the party entitled to receive payment, it is required to serve a valid and effective withholding notice. These provisions will be repealed by the 2009 Act once implemented; paying parties will then be required to either pay the “notified sum” by the final date for payment or serve an effective pay less notice.
The 2009 Act defines the “notified sum” as the amount specified in either the payment notice or the payee default notice. The provisions of the 2009 Act only permit the paying party to pay less than the “notified sum” where it or the specified person has served an effective pay less notice. In order to be effective, a pay less notice must specify the sum that the paying party considers to be due on the date the notice is served, the basis on which that sum is calculated and be served no later than the prescribed period prior to the final date for payment. In absence of any agreement between the parties as to the length of the prescribed period, it is anticipated that the Scheme for Construction Contracts Amendments 2011 will imply a period of 7 days. There is, however, no requirement that a pay less notice must include the ground or grounds for paying less or the amount attributable to such ground as is currently a statutory requirement of a valid and effective withholding notice.
It is also important for paying parties to note that under the current provisions of the 1996 Act they are entitled to combine a payment notice and a withholding notice in one single notice provided all current statutory requirements are satisfied. This will no longer be the case once the provisions of the 2009 Act come into force and paying parties must then ensure that payment notices and pay less notices are served as separate notices.
The Department for Business, Innovation and Skills has indicated that amendments to the 1996 Act affected by the provisions of the 2009 Act will come into force in October 2011 and parties at all levels of the construction chain must familiarise themselves with the changes to the legislation. We understand that the Joint Contracts Tribunal will be publishing new JCT Contracts (2011 edition) following the provisions of the 2009 Act coming into force and that other publishers of standard form building contracts and professional appointments will follow suit.
In the meantime, parties entering into building contracts and professional appointments after the provisions of the 2009 Act come into force will either need to enter into a bespoke form of contract or incorporate specific amendments to the current standard form contracts in order to ensure compliance with the legislation and avoid the provisions of the Scheme for Construction Contracts 2011 applying in default.
For further information, please contact Jonathan Hyndman or the Partner with whom you usually deal.