Moves to speed up payment for the supply chain may have tipped the balance too far the other way and some subcontractors are cashing in

Ian Yule

Three years ago this October the Construction Act of 1996 underwent a number of amendments. Most of these were made so as to carry on the good work of speeding up payment for the supply chain.

A key provision was to plug what was seen as a gap in the original legislation regarding “payment notices”. Payers (employers and main contractors, generally) were supposed to serve these notices to let their payees know what they were actually going to receive. Often they didn’t do so, and there was no real sanction. The 2011 amendments provided some teeth. If the payer did not serve the payment notice, the payee could now serve its own, or rely on its earlier application for payment.

The payer meanwhile got one more chance to get out of jail with a “pay less” notice. However, if that was missed as well, the payee’s application, or notice, became the amount due. The payee could then enforce payment of that sum by adjudication.

The “payees” for the above purposes are often subcontractors. They were the people that the 2011 changes were largely designed to help. In one of the parliamentary committee debates
that took place as the legislation was being drawn up, it was said that 99.9% of construction firms were SMEs. 

There is no doubt that many subcontractors are now seizing on alleged non-compliances by main contractors, and chancing their arms in adjudication. The risks are small

But has the pendulum now swung too far the other way? There is no doubt that many subcontractors are now seizing on alleged non-compliances by main contractors, and chancing their arms in adjudication.

The risks are small – a few thousand pounds for the fees of an adjudicator, plus the subcontractor’s own costs. The arguments are usually about a single point of law, so detailed factual evidence is not required.

Meanwhile, the potential rewards are high. If the adjudicator finds that the main contractor has missed its notices, the subcontractor will get payment of whatever sum it applied for, no matter how great, and regardless of the merits. The main contractor may have insufficient left in reserve to claw that sum back on the next valuation, even taking retention into account.

Subcontractors are using various arguments. One is to find some flaw in the content of any notice given. With pay less notices in particular, it is often argued that the notice does not show how the sum being deducted is calculated.

Other arguments are based on the timing of notices. It is surprisingly common at subcontract level for parties to have differing views about whose contract terms apply, or about what documents are incorporated.

That may mean that the parties have differing views about notice dates. A subcontractor may have little to lose by making applications that correspond to alternative interpretations of the contract. The main contractor may serve notices in accordance with its own view, but find that an adjudicator is persuaded by one of the other interpretations. The result can be disastrous.

Finally, subcontractors are catching main contractors off guard with applications made after practical completion. JCT contracts say that such applications can be made every two months, but other contracts are not always as clear. Some do not provide an adequate payment mechanism for this period at all, in which case the Scheme for Construction Contracts will apply. But there may be arguments about whether the payment mechanism is indeed “adequate” which, again, muddies the water about notice dates. Any main contractor that takes its eye off the ball during the maintenance (defects liability) period, believing that there is nothing to do until final account stage, may be in for a nasty surprise. 

What can main contractors, or indeed employers, do about this? Clearly they have to remain alert to the dangers, especially after practical completion. If in doubt, they should serve protective payment notices or pay less notices, without prejudice to their position. They might even try getting their own back a little. Under the JCT subcontracts, where the final payment shows a balance due to the main contractor, it may well be the subcontractor that is obliged to serve one of the notices. That point is not always appreciated, on either side.

There is no doubt that the 2011 legislation rectified some faults in the original act. But it is unlikely that the legislators foresaw the use that subcontractors in particular would make of their new-found rights. It may be that the amendments have now tipped the balance of fairness too far in their favour. 

Ian Yule is a partner at Weightmans