HM Insights

Construction Snapshot: An Unbearable Risk to Employers? Statutory Payment Terms and Overpayments

The Local Democracy, Economic Development and Construction Act 2009 effected changes to the statutory payment regime applicable to all construction contracts introduced by the Housing Grants Construction and Regeneration Act 1996. 

The most commonly used standard form contract suites (SBCC and JCT) have been revised to reflect these changes so as to alter the mechanics for payment. However recent case law has highlighted that there may be an unacceptable risk for employers associated with these changes.

In this briefing we consider the particular risk to employers posed by any failure to issue payment notices for interim payment and their rights under the standard forms to mitigate against any interim overpayment.

The Statutory Change

The 2009 Act sought to address shortcomings which had been identified by the practices of the industry to avoid or defeat the intended purpose of the statutory rules imposed by the 1996 Act with regard to payment.

In particular it was identified that, notwithstanding the requirement of the 1996 Act for payment notices by employers setting out the amount of each interim payment to be paid to a contractor, in practice this requirement was commonly ignored without any contractual consequence (with the notable exception of the JCT 1998 Design and Build standard form which did provide that in the absence of such a notice the amount of a contractor's application for payment would become due and payable under that form of Contract).

To address this practice the 2009 Act provided for an alternative where a Payment Notice was not issued by the party responsible for issue (normally employer or third party contract administrator). If a Payment Notice is not issued then the amount of the interim payment payable on any due date may now be determined by reference to a Payment Default Notice.

A Payment Default Notice is identified as being either an application for payment previously submitted by the contractor in advance of the due date or subsequently submitted by the contractor following the period for issue of a Payment Notice having expired.

The Risk

The recent case of ISG Construction Ltd v Seevic College has highlighted the risk associated with the statutory change in the context of the standard form terms.

ISG applied for interim payment in the amount of £1,097,696.29. Seevic served neither a payment notice nor a pay less notice in respect of the interim application for payment. ISG proceeded to adjudication and obtained an award in their favour for the full amount of their application based on the lack of such notices.

Seevic in advance of the adjudicator's award raised further adjudication proceedings seeking the proper valuation of ISG's works as at the date of the interim application. The adjudicator determined that £315,450.47 was the proper valuation (in fact ISG's valuation of measured works was accepted but their claim for loss and expense incorporated in their application for payment was excluded).

The Court confirmed ISG's entitlement to summary judgement in their favour for enforcement of the award from the first adjudication.

It was further held that the award in the second adjudication was of no effect where the contract terms (JCT form):

  • provided no mechanism for determining interim payment to the contractor other than in accordance with the interim payment terms considered in the first adjudication; or
  • for repayment to the employer of any overpayment to the contractor until the final payment under the Contract following issue of the Final Certificate in accordance with the Contract terms.

The risk is clear – due to administrative failure an amount some £700,000 in excess of the accepted value of the contractor's works fell due to be paid without deduction and with no possible recovery of any overpayment until following the issue of the Final Certificate under the Contract.

There will not be many employers who will appreciate such an impact upon their cashflow due to such administrative error!

The Mitigation

Competent and educated Administration of Contracts

A clear understanding of the contract requirements by those responsible for administering payment is essential.

Very often it is our experience that:

  • due dates and final dates for payment of interim payment are not properly identified and tracked;
  • deadlines for issue of Payment Notices and Pay Less Notices (if necessary) are not circulated to all parties with an interest in the proper administration of the Contract;
  • contract requirements as to the content of notices are not fully understood or adhered to; and
  • contractual requirements for service of notices are disregarded.

We are regularly asked to provide training for relevant staff of clients to educate and reinforce good practice on all of these matters.

Pay Less Notices

If a Payment Notice is missed and a Payment Default Notice becomes the relevant determiner of the payment due to the contractor, there is the fall back position offered by the issue of a Pay Less Notice.

This allows the employer to restrict payment to a properly identified amount. However in any dispute which may follow it must be appreciated that there has been a shift in the onus of proof. Instead of the contractor having to demonstrate that it should be paid more than a sum certified the employer will require to demonstrate that the contractor should be paid less than it has applied for.

Again the contract requirements as to content and service must be fully understood and taken account of.

We are often required to draft these notices for clients given the financial importance which may be attached.

Contract Drafting

Standard forms are regularly amended to be on terms more favourable to suit the particular requirements of employers relating to management of risk.

Timescales allowed for the issue of payment notices following each due date may be lengthened and the period for issue of pay less notices prior to each final date for payment shortened.

In light of the decision in the ISG v Seevic case, it may also be considered that a general amendment to accommodate interim reconciliation of overpayments is also included in contracts to ensure that employers do not require to endure until the final payment to retrieve their position.

We trust that the content of this briefing is of interest. If you would like any advice or assistance on any of the issues covered please contact Partners Michael Conroy or Jane McMonagle in our Construction team.