Payment rules: Was it worth it?

In the last two decades payment practices and contracts have twice been overhauled – for the Construction Act and the amended act of five years ago. The industry has invested heavily in drafting for, operating and disputing the act’s payment rules. However, there remains a lack of evidence as to whether the act’s payment regime has met its main aim of improving cash flow – let alone that the benefits outweigh the costs.

In any event, the results of the industry’s investment are far from perfect. The courts’ judgments show parties still not agreeing payment rules in their contracts that comply with the act. It is testament to the act’s complexity that, 20 years after introducing the twin requirements of “payment due dates” and “final dates for payment”, parties still struggle to draft for them.

Non-compliant payment provisions are also a symptom of standard forms not being used by those the act most sought to help. But even standard form producers have struggled with the act’s payment rules: the Infrastructure Conditions of Contract suite (which replaced the ICE forms) after being issued to cater for the amended act, were corrected 11 weeks later.

The courts’ judgments also show parties repeatedly failing to issue payment applications, payment notices and payless notices that comply with their contracts and the act. This will always happen – whether by oversight, carelessness or otherwise. However, there is now more scope – and need – for arguing that such documents are non-compliant even when given on time, to the right person and by correct means.

20 years after introducing twin requirements of ‘payment due dates’ and ‘final dates for payment’, parties still struggle to draft for them

It was, therefore, not much of a prediction that this year there would be yet more judgments on the amended act’s payment rules than there were for the original act [see my end of year review – “The year of supreme busyness”, 18 December 2015, page 48]. There are three reasons for the significant disparity.

First, the amended act made it more common for a payer that fails to give a valid payment or payless notice, to have to pay the sum notified by its payee, without deduction. Under the original act this occasionally happened, but the amended act has significantly increased its frequency.

Second, some judgments have suggested that a payer who fails to give a valid payment or payless notice cannot adjudicate for a valuation of the sum that should have been notified and must await the next interim payment (if any). While it appears that parties may contract out of this, the major standard forms have yet to change.

Third, given the above two developments, the courts have adopted a much stricter approach in deciding when payment applications trigger such potentially serious consequences. Payment applications are now judged for their form, substance and intent. This reflects the strict criteria applied to certificates and may remind some of where we were for a few years straddling the UK joining the EU in 1973. Then payment certificates were raised to a status comparable to a payment application today when a payer fails to give a valid payment or payless notice.

Some judgments have suggested that a payer who fails to give a valid payment or payless notice cannot adjudicate for a valuation of the sum that should have been notified

It is clear that under the amended act parties need to invest more in how they prepare their payment applications, payment notices and payless notices. That is before one adds the requirement for them to state the “basis” on which the sum sought is calculated. There is one Scottish authority under the original act that suggests, in passing, that this sets a high threshold (Maxi Construction Management Ltd vs Morton Rolls Ltd [2001]).

Adjudication – as the largely successful requirement of the act – is no panacea to the above trends. The last reports from Caledonian University, show that payment disputes account for the bulk of adjudications. But another trend has developed when parties oppose the enforcement of adjudicators’ decisions. That is, to ask the court to hold that the adjudicator was wrong to decide, for example, that a payment application was compliant. If the court does so, it will not then enforce an adjudicator’s decision ordering payment of the sum applied for. There is now far greater scope for this.

It is not difficult to foresee calls for change. It is hard, though, to see the resurrection of the Banwell Report’s recommendation of over 50 years ago to have a single standard form for all construction and engineering contracts. However, one option may be a more prescriptive payment regime, like the Australian East Coast model, but keeping adjudication as it is.

When the amended act was enacted the government suggested reviewing it after three years. Whatever happens, there should be a proper (re)evaluation of whether our laws have improved cash flow, if the price of any improvement is justified and if we – as I was often told at school – can do better.

Rupert Choat is a barrister, arbitrator and mediator at Atkin Chambers