New provisions in the Construction Act: To be judged

Before the amendments to the Construction Act came into force, many commentators warned that the act was poorly drafted. Five months on, differences of opinion are emerging as to how the new provisions are supposed to work.

The new pay less notice provisions are one area giving rise to debate. That controversy arises from the requirement that a pay less notice should state: “The sum that the payer considers to be due on the date the notice is served” (S111(4)(a)).

This contrasts with the requirement that a payment notice should state: ‘the sum that the payer considers to be or to have been due at the payment due date in respect of the payment’ (S111(4)(a)).

The new pay less provisions are giving rise to controversy and debate

Note the difference in the words underlined which, at first glance, appear to refer to different dates. The date of the pay less notice will be later than the payment due date. Some have taken this to indicate that the works should be valued as at the date of the pay less notice, thus including work done after the payment due date. This would disrupt the payment cycle and cashflow meaning that contractors may have to value and pay for work by subcontractors before they have a chance to claim payment from their employer. In some cases it would result in a pay less notice becoming “pay more notices” where the value of work done since the payment due dates exceeds the amount the payer wishes to deduct.

Is this really what parliament intended and, if not, why did they not use the same wording in both sections? To answer this one must go back to the basic structure of the act’s payment regime. Contracts covered by the act must provide due dates for payment and final dates for payment. Payments for work done become due on due dates. Further payments do not fall due between due dates. The amount due for work done as at the date of the pay less notice is therefore the value of work as at the last payment due date. Why did the legislators not just say so? It would seem that the reason is that the drafting is intended to allow the payer to raise deductions, even if those deductions arose after the payment due date. There are, however, those who disagree on that too.

Staying with pay less notices, the act does not require that the pay less notice must be issued by the same person as issued the payment notice. The JCT contracts are drafted in a way that allows them to be issued by different people. Does this mean that if the employer does not agree with the value in the contract administrator’s certificate, he can have someone else give a different valuation in a pay less notice? There does not appear to be anything in the act preventing it but the courts are unlikely to tolerate any shenanigans in this area.

Questions have also arisen about the operation of the new default payment notice. A payee’s application for payment stands as his default notice if the contract “permits or requires” him to make one. Does a contract permit an application only if it does so expressly or is it sufficient that it does not expressly prohibit a payee from making one? Common sense may suggest the former as a more likely interpretation.

The safest approach is to make sure your contract terms state whether payment applications may be made. If the terms are silent but applications are made, the parties will have to back their own judgment as to what the act means. All this could lead to confusion as to what, if anything, is due to be paid and when - exactly the problems the act was intended to stop.

Some comfort can be taken from the fact that the courts have been very consistent in trying to interpret the original act in a way that gives effect to the intention of the legislators.

We await the first decision under the new provisions but it is worth noting that the court in Leander Construction vs Mulalley (although this did not involve the new provisions) went out of its way to address one point of controversy. Many have expressed concerns about the drafting of s 108A which was intended to outlaw so called Tolent clauses. These clauses require one party to pay the adjudication costs of the other regardless of who wins the adjudication. The court indicated that arguments that s 108 does not prohibit Tolent clauses are likely to be given short shrift.

Let’s hope for a similar no-nonsense approach to the other difficult areas of the act.

Mark Clinton is a partner at Thomas Eggar