Valuations & Payment Notices in Construction Contract
We have recently come across a number of situations where employers have been caught out by their failure to issue a valid valuation / payment notice to a Contractor’s payment application.
Should the employer fail to issue a valid valuation/ payment notice then the contractor will, on an interim basis, be entitled to payment of the sum claimed in its payment application.
The Construction Act
Those who infrequently procure construction services may not appreciate the significance of the Housing, Grants, Construction and Regeneration Act 1996 (the “Construction Act”).
The Construction Act was amended in 2011 by the Local Democracy Economic Development Act 2009. These amendments introduced critical changes to how the Construction Act and implied terms into construction contracts within the construction industry.
The Construction Act implies into construction contracts contractual terms concerning, amongst other things, payment and the right to refer disputes to adjudication.
The Act applies to the majority of main-stream construction operations. Some specialised construction operations are excluded (which are not covered in this note).
The Construction Act does not apply to construction contracts with a residential occupier. If a standard form of construction contract is used such as a JCT, then terms equivalent to those in the Construction Act are incorporated.
The Act will apply when there are no written terms of contract. The Construction Act will apply where the terms of contract are silent on issues , or contravene, the requirements of the Construction Act.
In reality, this means that the terms of agreement in a construction contract between the employer and the builder could vary greatly from what the parties originally wanted. This could lead to unforeseen outcomes.
What if the Construction Contract contravenes the Construction Act?
We have seen a contractor, inadvertently, advance terms of contract that contravene the Construction Act.
The employer was not aware that the terms of contract advanced by the contractor were invalid.
The Construction Act stepped in and implied contractual terms into the construction contract.
These implied terms take precedence over any conflicting terms that were initially agreed upon.
Consequences for payment when construction contract terms invalid
In a recent case the employer acted in accordance with the agreed terms of contract.
A payment dispute arose around the valuation of works.
The contractor, after taking legal advice, argued that its own terms of contract were invalid by virtue of the Construction Act.
The Contractor then said the payment provisions were not governed by the agreed terms of contract but by the Construction Act.
The contractor argued that it has a right to substantial payment under the Construction Act. Not based on a valuation of the real value of the works but on a technicality.
The contractor took advantage of its own invalid terms. It argued that it was entitled to payment because the employer had failed to issue a valid Payment Notice or Payless Notice.
Consequences for Dispute Resolution when the Construction Act applies
The contractor can commence a construction adjudication to recover the payment that it has claimed under the Construction Act.
The employer may not have any understanding of adjudication. The employer may wrongly think it can defeat such excessive claims by simply refusing to pay and defend court proceedings.
The right to adjudicate all contracts that are governed by the Construction Act cannot be contracted out of.
The first time an employer may have heard of construction adjudication is when it receives a Notice of Adjudication.
In such situations, the inexperienced employer is often surprised to find itself having to defend an adjudication. Even more surprised at liable for the adjudicator’s fees.
The potential liability of the employer under the Construction Act
Where the contractor seeks payment based on a failure of an employer to respond to a valid invoice or valid claim for payment, the true value of the claim is often irrelevant.
Pursuant to the Construction Act the contractor will argue it is entitled to whatever it has claimed (fraud will defeat such an argument).
If the contractor commenced court proceedings or an arbitration, then the employer could defend the claim or raise a counterclaim on matters that concern a true valuation of the account. Arguably in this scenario the employer’s failure to issue timeous payment notices or pay less notices does not matter.
What if the contractor were to commence an adjudication based on the lack of response to a claim for payment? The Employer would be exposed to a liability pursuant to the Adjudication and that liability could be for sums of money way beyond the contractor’s true entitlement.
Lessons are to be learnt- Construction Act
- If you are procuring construction works in any situation other than for your home, you should in the first instance assume that the Act will apply.
- Professional representation should be sought.
- A standard form of building contract should be used.
- The construction contract must then be operated in accordance with the Construction Act.
Matthew Dillon, MJD Solicitors
17 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-uses
