In contracts where the parties are entitled to interim
payments, under Section 109, they are free to agree (a) the amounts of such
payments (b) whether instalments are to be made and (c) the intervals (payment
cycle) in which the payments are due. Under Section 110 of the 1996 Act every
construction contract must provide an adequate mechanism for determining (a)
what payments become due and (b) when they become due and (c) a final date for
payment of any sum that becomes due. The length of the payment cycle is 28 days
or duration specified in the contract. If
the contract does not comply with the provisions in the act, then a series of
default rules termed as the ‘1998 Schemes’ within the Act are applicable in
England and Scotland. In addition, the Act provides for the service of various
notices1 during a payment cycle which are to identify the
amounts which may or may not be paid. The purpose of these notices is to highlight at an
early stage whether there will be any disputes in relation to payment and
thereby allow steps to be taken to deal with them as soon as possible.
in the course of the payment cycle are listed below;
periodic payments become due at the time set out in the contract, if the
contract does not provide for such a time, then the 1998 Scheme provides that
the due date is seven days after the end of the last payment cycle or the
making of the claim by the payee. Under Section 110 of the Act, following the
due date, the contract must provide that a payer is to serve a ‘payment notice’
which must be (a) served not later than 5 days after the payment due (b)
identify the amount to be paid and (c) state the basis for the amount. Payment
ought to be made by the final payment date unless the Employer has served a
‘withholding notice’, which must be served not later than prescribed period
before the final payment date or seven days before the final date for
payment. The section 112 of the act also
provides a right to suspend the works in the event of non-payment by payee.
enactment of Part 8 of the ‘Local
Democracy, Economic Development and Construction Act 2009’ (LDEDC) amends
payment cycle of the 1996 Act, these form the amended provisions. The
amendments have affected the (a) determination of payments due (b) notices
relating to payment and (c) requirement to pay notified sum. A payment cannot
become due based upon the performance under another contract, thus outlawing
‘pay when paid’ clauses.
operation of the payment cycle has been amended as below;
contract must provide for a notice to be given either (i) by payer to the party
being paid or (ii) the payee to the payer.
(b) In absence
of any agreement, this notice must be given within five days of the payment due
date and specify the amount due and basis on which this is calculated.
(c) If the
payer is to provide notice and fails to do so within the relevant period, then
the payee is entitled to submit its own notice which will act as a substituted
version of the original notice, the final payment date will be delayed by a
payment must be made by the final payment date, subject to the provision of a
‘payless notice’ by the payer which must (i) set out sums deemed due by the payer
(ii) basis for the amount and (iii) issued within the prescribed period or 7
days before final payment date. If a valid payless notice is issued, the amount
due for payment becomes the amount on the pay less notice.
dispute to an amount on either a payment or payless notice if referred to an
adjudicator who determines that amount due is more than the sum in the notice,
the final payment date is seven days after the adjudicator’s decision or
original final payment date.
An alternate principle formulated
under the common law is the ‘quantum meruit’, whereby a recipient of services
or material benefit, the Employer is under an implied obligation to pay for
those services or other benefit. Where there is no provision in a building
contract to determine the final contract price, and no provision for pricing
contract variations or additions, the doctrine of quantum meruit may entitle
the builder to payment (reasonable sum) in respect of the cost of works executed
by the builder2.
However, the doctrine of quantum meruit cannot be relied upon if the contract
between the parties contains either an agreed contract price3,
or a mechanism for determination of the price. Before a claim founded on
quantum meruit can be maintained by a Contractor, he must rescind the contract4,
thereby establishing that the Contractor no longer considers itself bound by
the original contract price.
it is cash flow which drives the construction industry, it is essential to have
legislation to reduce risks and allow the works to progress. The
provisions in the HGCRA and LDEDC which facilitate the payment mechanism are
adequate to ensure cash flow. The building contracts drafted with suitable
provisions and remedies will undoubtedly assist, especially if a realistic
approach is taken to the fact that construction projects encounter changes,
which give rise to extra cost.
1 In Surrey and Sussex Healthcare NHS Trust v
Logan Construction (South East) Limited 2017 EWHC 17 (TCC), the court
held that the party providing the notice had to make sure that it was clear and
unambiguous that the notice was a payment notice
2 Alexander Hall & Son (Builders) Ltd. v Strathclyde Regional
Council (1988) and Parkinson v. Commissioners of Works 1949 2
3 Interbild Components Ltd. v. Fife Regional Council 1988 GWD 16 – 682.
4 ERDC Construction v. H M Love & Co., 70 Build L R 67; 1995 SLT 254.