The Construction Act: Changes to NEC and ICC payment provisions

On 15 September NEC published amendments to bring its payment provisions into line with the amendments to the Construction act that came into force on 1 October 2011 (1 November in Scotland). This coincides with publication of the new infrastructure Conditions of Contract (ICC). These, as readers may know, replace the ICE conditions of contract and are produced by the Association of Consulting Engineers (ACE) and the civil engineering Contractors Association (CECA). This article focuses on the design and construct contract from both bodies.

NEC

In NEC, the changes have been made by amending Option Y(UK)2. The changes have been kept to a minimum and are relatively straightforward. Under the main design and construct contract:

• The certificate issued by the project manager is the payment notice that must state the amount due as at the due date and the basis for the calculation
• Unlike JCT, NEC has not written into its provisions what happens when no valid payment notice is issued. It doesn’t need to as the Local Democracy Economic Development and Construction Act provides that in the absence of a valid payment notice, the contractor or subcontractor will be entitled to determine the sum due. This will normally happen automatically through the contractor’s or subcontractor’s application for payment. The sum brought out in this will be the sum due, subject to the right of the payer to reduce this by a “pay less notice”. Where there has been no such application, the contractor will need to serve a fresh notice that is generally known as a payee default notice. It is worth noting here that where there has been an application for payment, the contractor cannot also serve a payee default notice because it isn’t needed and also because the legislation doesn’t recognise it
• NEC has replaced the withholding notice provision with a notice requirement in line with the new rules. This is generally known as a “pay less notice”. This has involved a subtle change to its withholding notice provision by requiring the notice to state the amount considered due (as opposed to simply the amount being withheld) and the basis for that calculation.

ICC

ICC has taken over the ICE conditions of contract. An attempt has been made to update the payment provisions to comply with the new Construction Act. However, the drafting may cause some real problems because:

• It uses the old withholding terminology and hasn’t updated this clause to require the notice to state what is due and why, as well as what is being deducted. This may mean a party complying with this clause will still fall foul of the new act and will not be able to hold back sums of money referred to in the notice as it is inadequate for this purpose
• It fails to appreciate that where the contract allows for applications for payment by the contractor, however they are described, there is no place for a payee default notice - unless the contractor doesn’t issue its application for payment.

Clause 60(9)(b) attempts to set out what will happen where the employer’s representative fails to issue a valid payment notice. It states that in those circumstances the contractor may “give the employer … a payment notice in respect of the sum the contractor considers to be due at the payment due date and the basis on which that sum is calculated”.

However, as this is referring to such a notice from the contractor being issued after the employer fails to issue its payment notice, it will not work where there has been an application for payment. In those circumstances a notice issued under clause 60(9)(b) will have no effect.

• Under this contract the contractor’s applications for payment are described as statements. This doesn’t stop them being treated as applications for payment for the purposes of the new act.
• The time period between the employer’s payment notice date (namely, 25 days after the contractor’s application for payment), and the final date for payment (namely, 28 days after the contractor’s application for payment), is very tight - it leaves only two days (ie one day before the final date for payment) for any pay less notice to be issued.

Parties would be well advised to amend these provisions to address these issues. Simply leaving them as they stand may lead to problems.

Lindy Patterson is a partner in Dundas & Wilson