Biting back

The review of Part 2 of the Construction Act by the Payment Working Group has taken place, and the chairman’s final report published.

One of the five specific recommendations of the group is worrying. This is to remove section 110(2) of the act, which requires a construction contract to provide for a formal payment notice by the payer and a due date for payment.

The group considered retaining the requirement for a section 110(2) notice and backing it with some form of sanction but in the end it chose to recommend its wholesale removal.

The group’s motives are entirely understandable. Payers frequently fail to submit their section 110(2) notice and there is no sanction against this. Furthermore, the group has recommended clarifying the definition of an “adequate mechanism” of payment to ensure that a valuation of the payment crystallises before the payment date.

The group considered certain recommendations by TeCSA, the solicitors’ association. TeCSA had suggested that a payee’s application should be introduced into the legislation and that this application would be payable if no withholding notice was served. The payee would be required to serve a reminder notice to the payer requiring him to comply with the legislation before the date for payment. Adjudicators would have the right to consider whether the amount applied for was properly due under the contract.

The problem is that although these sensible suggestions were considered, there was no agreement on them. We therefore have a clear recommendation that payers’ notices should be done away with, and another recommendation that the definition of adequate mechanism should be tightened up. However, we do not have any agreement that if the payer’s notice is done away with, the payee’s application, in default of a notice of withholding, should drive the payment process.

Under English law we have something called appropriation. This is the practice of earmarking money. The payer, with his payment, sends a note saying that he is paying so much for dayworks and so much for measured works and so much for loss and expense. If he does not earmark payment, then the recipient of the payment can give notice earmarking it towards money properly due as he sees fit.

The problem with construction contracts in the past has always been that the payer would not pin himself down to saying precisely what he was paying for. And when the payee earmarked the money as he saw fit, the payer would promptly say that payment was not “properly due” because the works had not been properly executed or the quantity of work claimed had not been done.

In short, the payer needed to be pinned down to saying what he was paying for. Section 110(2) was the mechanism for doing that. It would be better to retain Section 110(2) and apply a sanction for default, rather than to do away with it altogether.

In a string of cases, such as Acsim (Southern) vs Dancon Contracting and Development Company (1989) and A Cameron Ltd vs John Mowlem and Company (1990), the courts have repeatedly held that stringent set-off provisions can be bypassed by the payer arguing that the payee’s valuation was wrong.

We must either make the payer say precisely what he is paying for or make the payee’s application final in default of a valid timely written challenge.

There is unfairness in making a payee’s application effectively “cash in the bank” in the absence of a valid challenge within a short space of time. The With Contractor’s Design form of contract makes the contractor’s application payable in default of service by the employer of the payer’s notice within five days of the due date and/or the timely service of the withholding notice. Therefore, if I build a dog kennel for you under the WCD contract and on 1 April I apply for a payment of £5m and you disregard my application as a joke, this sum becomes payable under the contract within a couple of weeks. If I insist on payment, the courts can investigate my fraud, but an adjudicator has no jurisdiction to do so and would therefore order payment of £5m.

Are we not better off to insist on a payer’s notice and give it teeth?

Philip Harris is a solicitor with Warwickshire firm Wright Hassall