Show me the money

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We kick off this Construction Act review special by asking why the DTI’s consultation document does not properly address subcontractors’ right to get hold of their cash

On 30 July 1993, Building wrote this in an editorial: “What is the corporate point of an organisation that is so financially weak that it cannot afford to pay its suppliers before receiving the cash from the client?” This statement goes to the heart of the industry’s dysfunctional financing structure. The industry is still funded from the bottom upwards with ever-lengthening payment periods and greater exposure than ever to insolvency risks upstream.

The Construction Act has made a difference. Payment “shams and scams” can be exposed in adjudication. Pay-when-paid clauses (other than pay-when-paid on the insolvency of a third-party payer) are outlawed and the statutory right to suspension for non-payment is a potent weapon.

But the past few years have revealed shortcomings in the act’s payment provisions. Implicit in the structure of the act is the expectation that by the final date for payment, the payee will know exactly where they stand as far as their payment entitlement is concerned. In the absence of a withholding notice they expect to be paid their entitlement, failing which they could exercise their right of suspension. Section 111, the withholding provision, assumes that the amount due, from which any withholding would be made, has already been determined.

So, what is due? The requirement to issue a notice under section 110(2) informing the payee of the amount the payer is prepared to pay does not (contrary to what many think) determine what is due. In any event, it is hardly ever issued because there is no sanction for non-issue. In fact, a sum of money is only due if both sides agree it or it is determined as due by a third party under the contract.

Ah! Section 110(1) says that there must be an adequate mechanism in the contract that determines what is due and when. If (often a big if) there is no adequate mechanism in the contract, we look to the Scheme. But the Scheme only provides the means of calculating what is due. We are none the wiser.

The DTI’s consultation document (CD) thinks it has the answer. Every contract should spell out the elements of an adequate mechanism including:

What amount constitutes payment;
When a payment is to be assessed;
How amounts are to be determined.

If the contractual mechanism is not operated, says the CD, then we will all trip off to adjudication.

A payee should not have to go to adjudication to ask the adjudicator to redo his bill

Even if a contractual mechanism is properly operated, we will still be fighting over what is due. So let’s dump section 110 and replace as follows:

Payee to have a statutory right to submit applications for payment in respect of all the work he is contractually required to provide;
The act to state that the amount applied for shall constitute a debt by the final date for payment unless a valid withholding notice is issued;
If a withholding notice is issued, the act to state that the difference in the amount withheld and the application (if in the payee’s favour) shall constitute a debt at the final date for payment.

The focus of the debate in the review process was on achieving a point at which a debt would be crystallised. The CD does not address this.

A payee should not have to go to adjudication to ask the adjudicator to redo his bill. This does not happen in any other industry. The payee should be able to know at a certain time that he can either suspend performance or issue debt recovery proceedings. The only purpose of adjudication in this context should be to determine the validity of any withholding notice and the amount therein.

The CD does, however, ask whether the legislation should allow for the payee to make an application for payment. It also proposes that all withholding notices should state the amount the payer intends to pay after withholding the amount notified. Sadly, such changes, without the structure I have proposed, will not help to clarify a debt. This is the kernel of the debate over sections 110 and 111. We must get this right.