Construction Act: Pay up or else

The Construction Act was born out of a desire to prevent builders becoming insolvent as a result of cash flow problems. The idea was that the act would tell parties to construction contracts to “pay up or else”.

The core system that the legislation used to implement this brief was to require payers to regularly make adequate interim payments for the work done without making deductions for unjustified or unspecified contra charges, or else the payee would have the right to refer a dispute to an independent third party – an adjudicator for a quick resolution.

The system has generally worked well for the past decade, but last month the Parliamentary Counsel published a draft bill to amend the act. The proposals are intended to apply to construction contracts entered into after the bill has been passed into legislation, and the deadline for submitting comments in response to the department for business is today.

Opinions published in the press to date have not been complimentary. The lack of clarity of the drafting and the unnecessary cost of implementing changes have been criticised.

But with a bit of help from the judiciary, the existing adjudication provisions have worked. So why is a change needed?

Well, apart from a couple of tweaks proposed in the draft bill, the “or else” element is pretty well sorted, but the “pay up” bit has been more of a problem. The s111 withholding notice provisions preventing spurious contra charges, when combined with the right to adjudicate, have worked fine, but the existing act also introduced a “payment notice” (s110) which requires construction contracts to provide for the giving of a detailed build-up of the payer’s opinion of the amount due for each interim payment.

Here, a flaw in the logic has been exposed. There is no sanction against a payer for failing to issue a notice in accordance with the contract unless the contract itself provides a redress.

The threat of a 110B notice might focus the mind of the payer on getting the figure right

So a rethink is required. The idea introduced in the draft bill is that if the payer fails to issue the payment notice – or if it is not issued in adequate detail – then the payee can issue its own s110B notice setting out the amount due, and unless the payer issues a s111 notice, it will have to pay the amount demonstrated in the payee’s notice.

And the proposed s111 notice requires more detail than the existing one. To be effective, it will need to provide details of how the payer has calculated the sum due. As well as being a chance to notify reductions for defective works (and probably contra charges), it effectively becomes a second chance to issue the s110 notice.

The result? Either the payee is entitled to be paid the amount shown in its own applications, or it has a detailed view of the payer’s view of the account from which all reasons for any differences can be quickly identified. If no agreement on the differences is reached, a precisely defined dispute capable of quick resolution can be instigated. In addition, the threat of the s110B notice, and of the argument over which is the applicable notice, might just focus the mind of a payer who usually underpays on getting the payment figure right.

All of this remains somewhat speculative as the drafting leaves a significant amount of interpretation to the judiciary. But if you are thinking about submitting your comments to the department for business today, bear in mind that drafting legislation has never been straightforward.

According to Sir Frederick Pollock, a leading expert in the field of jurisprudence, writing in 1882, “the legislature is fortunate if its efforts are so skilfully executed that a single act is found sufficient to effect its purpose once and for all. More often the first amending act becomes the subject of (judicial) interpretation and the law as amended and interpreted is discovered to need reamendment. And so it goes on till we have a series of statutes which to an uninitiated observer might seem to deal with their whole subject, but are really mere islands scattered in an ocean of case law”.

A perfect solution may have proved elusive again in this latest piece of draft legislation, but it could yet be a step closer to achieving the original intention of the legislation.