Whether you are in business as a construction contractor or you are having or contemplating having construction work carried out for you, you need to be aware of the intricacies of paying or being paid for construction work. Recent first-hand experience in the Court of Appeal has been a timely reminder of the processes that need to be followed.
When the Construction Contracts Act 2002 (the CCA) came into force on 1 April 2003, it reformed the law relating to construction contracts and, in particular, sought to change the way in which cash flows occur in the construction industry by facilitating regular and timely payments between the parties to a construction contract.
Under the CCA, parties to construction contracts may agree to any terms and conditions regarding the number of payments, their frequency, the amount of each payment and the dates when each of those payments becomes due.
Since 1 December 2015, under the Construction Contracts Amendment Act 2015, the statutory right to progress payments and the default payment provisions in the CCA for calculating the amount of a progress claim and the due date for payment apply to all construction contracts entered into or renewed on or after that date.
The way in which parties to a construction contract must work in the context of payments is that the payee must make a payment claim and the party liable for that payment, the payer, responds by way of a payment schedule if they disagree with the claim.
Payment Claims are formal demands for payment but to be valid a payment claim must comply with the following mandatory requirements:
- be in writing;
- contain sufficient details to identify the construction contract to which the payment relates;
- identify the construction work and the relevant period to which the payment relates;
- state a claimed amount and the due date for payment;
- indicate the manner in which the payee calculated the claimed amount; and
- state that it is made under the CCA.
A payment claim must be accompanied by a written notice outlining the process for responding to the claim and explaining the consequences of not responding if payment of the claimed amount in full is not made by the due date for payment.
A payer who receives a payment claim under the CCA and does not agree with the way in which the payee has calculated the payment claim, must respond by providing a payment schedule. A payment schedule must:
- be in writing,
- identify the payment claim to which it relates, and
- state a scheduled amount, i.e. the amount the payer proposes to pay to the payee in response to the payment claim.
A payment schedule is intended to inform the payee as to the amount the payer proposes to pay on the due date for payment and the payer’s reasons for any difference between the scheduled amount and the claimed amount such that the payee can make an informed decision as to whether or not to pursue the unapproved amount in an adjudication.
If the scheduled amount is different from the claimed amount the payment schedule must also indicate:
- the manner in which the payer has calculated the scheduled amount;
- the reasons for any difference between the scheduled amount and the claimed amount; and
- where the difference is because the payer is withholding payment on any basis, the payer’s reasons for withholding payment.
A payment schedule must be served on the payee within 20 working days of receipt of the payment claim unless the parties have agreed to a different period in their contract. If no payment schedule is provided within the mandatory period, the payer becomes liable to pay the payee the whole of the claimed amount on the due date for payment, whatever the merits of the claim.
This may all appear simple and probably is in the case of dealing with good building contractors who have proper systems and everything is underpinned by a robust contract.
However, sometimes the information provided by both the payee or the payer can be subjective and mediators or even the Courts will be required to determine whether the payment claim or the payment schedule complies with the criteria.
We recently acted as liquidators of a construction company that had engaged with a client to renovate a commercial property. The parties had not concluded a contract so there was doubt around what price was to be charged and on what terms payments were to be made.
Some 6 months into the contract, the builder rendered an invoice for work undertaken and it stated “This is a Payment Claim Under the Construction Contracts Act 2002”. The customer, however, being dissatisfied with the progress had already enlisted a quantity surveyor whose opinion held that the client was being overcharged.
The client responded to the payment claim with a somewhat ambiguous and poorly worded email, making reference to the quantity surveyor’s report and suggesting that the invoice be revisited, but did not necessarily meet the defined criteria to be a payment schedule.
Prior to going into liquidation the construction company issued proceedings and the matter came before the Court. At the heart of the issue was whether the payment claim met the criteria set out in the CCA.
It was found by the Court, probably because of the lack of any contractual background, that the payment claim did not meet the statutory criteria. While the payment schedule equally did not meet the criteria laid down in the CCA, without a valid payment claim, the payer was absolved from his obligations.
The moral of the story here is that if you are a construction contractor, make sure that that your payment claims are sufficiently detailed and can be reconciled to the construction contract. If you are the client of a construction company and you disagree with the claim submitted to you, make sure that you respond properly with an accurate and true payment schedule within 7 working days.