19th January 2018

Pay up please!: construction payment terms and insolvent contractors

Most construction contracts in England, Wales and Scotland are governed by the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009, and referred to in this briefing note as the Construction Act. The three main elements of the Construction Act are:

Most construction contracts in England, Wales and Scotland are governed by the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009, and referred to in this briefing note as the Construction Act. The three main elements of the Construction Act are:

  • payment provisions in construction contracts;
  • suspension for non-payment; and
  • adjudication of disputes arising out of construction contracts.

The payment provisions in such construction contracts must stipulate a due date for payment and a final date for payment, whether such payments are interim or final, and require the service of payment notices and pay less notices in the right format and at the right time. The standard forms of contract, including JCT contracts and the RIBA Concise Building Contract, include payment mechanisms which comply with the Construction Act, the key objective being the maintenance of cash flow in the construction industry.

Disadvantageous payment clauses in construction contracts may not be something an unpaid sub-contractor just has to take on the chin whilst the payer is still solvent. If presented with bespoke construction contracts or amended standard forms, sub-contractors may find that, to secure the work, they have agreed to terms that are commercially unwise or that do not comply with the Construction Act. Even if sub-contractors have been commercially willing to accept long payment periods of 60 or 120 days, a contract that does not comply with the Construction Act may be open to challenge.

Construction contracts that seek to impose further barriers or delays to payment, common in other forms of non-construction commercial contracts , may be at risk of having statutory provisions imported into them by the Construction Act instead. Applied properly, the statutory protection could limit the damage before it is too late.

The main contractor is required to pay the sum previously notified in a payment notice not later than the final date for payment, unless a valid pay less notice is issued by the main contractor. However, if the employer becomes insolvent and a payment due to the main contractor has not been made by the employer, the main contractor might not be obliged to pay its sub-contractors .

If the main contractor becomes insolvent, the sub-contractor may require advice, amongst other things, on:

  • whether it is entitled to terminate its sub-contract, or whether the sub-contract is terminated automatically as a result of the main contractor’s contract with the employer being terminated;
  • if the sub-contract does not contain terms dealing with insolvency, the steps that can be taken to end its involvement in the project correctly; and
  • whether it will be entitled to recover any outstanding payments and other amounts under the sub-contract or otherwise at all.

If the main contractor is insolvent, the sub-contractor has not been paid and the sub-contractor in turn has contracts with one or more sub-sub-contractors who are demanding payment, the sub-contractor may want advice, for example, on:

  • whether payment notices should be issued to the sub-sub-contractors and, if so, when and in what format; and
  • whether pay less notices can be issued to avoid the sub-contractor having to pay anything further to the sub-sub-contractors.

In circumstance where the main contractor is not insolvent but has been very slow in making payments, the sub-contractor might want advice on whether it is entitled to suspend all or some of its sub-contract works for non-payment, a statutory right even if the sub-contract does not cover it.

For advice on insolvency and payment issues, please contact Steve McCombe.

For advice on specific insolvency-related issues, please contact Mark Cullingford.

For advice on preparing or negotiating construction contracts, please contact Eric Livingston.

 


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