Employer Payment Notices in Construction Contracts

Payment Notices are required to notify the sum to be paid under the Construction Contract

The Housing Grants Construction and Regeneration Act 1996 (“Construction Act”)  provides for payment in instalments, stage payments, or other periodic payments as a legal entitlement. Payment Notices are required.  This applies unless the estimated duration of the works is 45 days or less.

Pursuant to the Construction Act, the parties have the freedom to determine the payment amounts and frequencies, or the specific circumstances under which they are due.

If there is no agreement in place, or the agreement falls foul of the statutory requirements, the relevant provisions of the Scheme for Construction Contracts (“Scheme”) will be implied into the Construction Contract.

What is the Construction Act?

• Of relevance is Part II of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996).
• Applies to construction contracts whether oral or in writing
• Governs statutory payment, suspension for non-payment and adjudication

 

What is a construction contract?

• Section 104, Construction Act 1996 – Contract for carrying out of construction operations
• Includes architectural, design, surveying
• Includes advice on buildings, engineering, decoration, landscaping Contracts do not need to be writing
• Such oral contracts will now benefit from the default provisions within the Construction Act for payment and adjudication

 

What are Construction Operations?

• Section 105, Construction Act 1996 – very wide. If in the business of being a building contractor will almost always be caught by this provision
• nuclear processing, oil and gas projects, mineral extraction, and installation of equipment for food and beverage preparation excluded.
• main exclusion – a contract with a residential occupier

 What is an adequate Payment: mechanism?

• Contracts over 45 days -entitlement to interim payments.
• What is due, when?
• What is the final date for payment?
• If terms not compliant with the Act, then the Act imposes terms through the Scheme for Construction Contracts (“Scheme”).
•  

What are Payment Notices?

• Section 110A, Construction Act 1996.
• Given by payer, payee or specified person (architect/ engineer/ project manager).
• Given not later than 5 days after payment due date.
• Given even if sum due is zero.
• Specify amount due and basis for calculation (Similar to Pay Less Notice)

What is to be paid?

 

• Sections 111(1)-(2), Construction Act 1996.
• Express obligation to pay notified sum.
• Defined as amount in Payment Notice (subject to Pay Less Notice)

As far as we are aware, all standard form construction contracts, such as NEC or JCT, are Act compliant. They can be read as a stand-alone contract.

Bespoke amendments frequently depart from the requirements of the Act.

Bespoke amendments often have to be read in conjunction with the Act.

This is often a deliberate drafting strategy. The Contractual terms, because of the Act, may not be what has been recorded in writing but in accordance with the Construction Act.

Is the Payment Notice Valid?

 For Payment Notices to be Valid it must:

• Be issued in time
• Specify amount due at the payment due date and basis for calculation
• Be based upon a genuine belief of what is due
• Be intended to be a Payment Notice

If the Payment Notice is invalid, then it will be as if it was never issued.

Important Lessons to be Learnt

It is crucial for both parties involved in a construction project to understand the requirements for a Payment Notice to be considered valid. Failure to issue a valid Payment Notice can have significant consequences, as it may result in disputes over payment and potentially delay the project.

The Construction Act sets out clear guidelines for what constitutes a valid Payment Notice.

It must be issued in a timely manner, clearly state the amount due at the payment due date, provide a basis for how the amount was calculated, and be issued with the genuine belief that it accurately reflects what is owed.

Additionally, the Payment Notice must be clearly identified as such, indicating the intention for it to serve as a formal request for payment.

If a Payment Notice is found to be invalid, it will be deemed as if it was never issued. This means that the contractor may not receive payment for the work completed, unless a Pay Less Notice or Default Payment Notice was issued in its place. It is essential for both parties to adhere to the requirements outlined in the Construction Act to avoid any potential disputes or delays in payment.

Failure to comply with the requirements outlined in the Construction Act can result in serious consequences for both parties involved in a construction project. For contractors, not receiving payment for work completed can have a significant impact on their cash flow and ability to continue operating. On the other hand, for employers, failing to issue a valid Payment Notice can lead to legal disputes and potential delays in the completion of the project.

It is crucial for all parties to understand their obligations under the Construction Act and ensure that Payment Notices are issued correctly and in a timely manner. By following the guidelines set out in the legislation, both contractors and employers can avoid unnecessary disputes and maintain a positive working relationship throughout the construction process.

In conclusion, the issuance of Payment Notices is a critical aspect of the payment process in construction projects. By ensuring that Payment Notices are issued accurately and in compliance with the Construction Act, both contractors and employers can protect their interests and maintain a smooth payment process.

Matthew Dillon LLB, Solicitor, MCIArb

MJD Solicitors

30 April 2024

This article is for information purposes, does not constitute legal advice and should not be relied upon. For terms and conditions of this article please read https://mjdsolicitors.co.uk/terms-of-use/