Payment rules: Financial mechanics

So, parliament has approved the changes to the 11-year old adjudication and payment rules. The bill is ready to become law once a new set of sub-rules (the “new scheme”) is invented. Some say it will not commence for another year. Some say that the change to the payment rules is a mess. For me, the position is simple: parliament has performed precisely as expected.

Now then, I am about to attempt an explanation of the payment rules in what will eventually be the new Construction Act. It’s just a first shot at what I think the rules intend. Okay? Let’s go.

Let’s begin with an overview. When you enter into a commercial building contract the whole idea is to be able to point to an “adequate mechanism” showing the how, the what and the when of stage payments and the eventual final account payment. The mechanism produces a magic piece of paper called the payment notice. The mechanism then allows a “pay less notice” to bite a chunk out of the notified sum just before the final date for payment. And if, after all of this, the cheque doesn’t turn up, the disappointed payee can postpone or slow down its work until paid.

If the contract doesn’t contain all this “adequate mechanism”, or if it tries some doubtful footwork, the scheme will automatically be said to apply between the payer and payee.

Let’s have a closer look at what is meant by an adequate payment mechanism. You and the other person to the contract can choose or negotiate the circumstances and periods for interim payment. The mechanism will then indicate the periods or milestone events that become a due date, then a period after that when the cheque for final payment is due. If your contractual mechanism in your smallprint is inadequate, daft, unfair, the “scheme” will apply instead.

There are rules laid down as to what is not regarded as adequate. The essential aim is to get to the all-important payment notice that indicates the “notified sum”. The contract is to say who is to compile that notice. Either it will be the payer, or a specified person (for example, the architect), or the payee. If it is the payer, or the architect, and they fall asleep and fail to issue the payment notice, the payee can activate the default mechanism and serve its own notice, giving its notified sum.

Credit: Simone Lia

Doing that pushes the final date for payment back a bit but it’s not a disaster. By the way, the payment notice is to recite chapter and verse how the notified sum is calculated; it could run to quite a few pages. So, the notified sum is the amount to be paid on or before the final date for payment found in the adequate mechanism.

But there is one more rule. That nice, friendly “notified sum notice” can have a bite taken out of it or be gobbled up altogether by the fearsome monster called the pay-less notice. Either the payer or specified person can let loose this fellow. The rules require it to arrive within a specified time before the final date for payment and be inscribed with a story explaining each bite.

So, whether the notified sum becomes the amount to be written on the cheque or the notified sum minus the pay-less notice, the rule is that it’s all done by the final date for payment. Then, if no cheque arrives, the payee can stop work or just go slow; as expected, a notice of the go-slow is needed. Finally the ban on pay-when-paid remains as before.

The key in all of this appears to be to identify the interim payment provisions for the amount due then to pinpoint the final date for payment. The key question, then, is who is going to be responsible for issuing the payment notice with that notified sum. The easiest option is to make the application for payment/valuation the notified sum. Then the pay-less notice is sent in reply. The cheque amount will then be the notified sum minus the pay-less notice. The reason for opting to do it this way is because in real life the payee always sends in his valuation/ application for payment.

Then, in real life, the payer doesn’t hesitate to shout when it thinks it ought be lower. In short, tell the payee he has to serve the application for payment and let’s make the best of what parliament has achieved.