The Construction Act needs more radical reforms than are being considered in the present consultation document. Here’s what we should be lobbying for

The proposed changes to the Construction Act are a matter of real importance for the industry. In my last column (8 April, page 53) I dealt with the proposals in the consultation document to amend section 110. I concluded that they would not help to establish certainty of payment entitlement at the final date for payment. In fact, they could make matters worse. But these are not the only proposed amendments to the payment provisions in the act – and I intend to deal with the others here.

During the review process, the majority view was that withholding notices should be quantified in reasonable detail. Currently, under the act, it is sufficient that a withholding notice state the grounds for withholding and the amount attributable to each. This is a recipe for giving away little: “ground for withholding: delay; amount attributable: £50,000”.

It does not seem to be appreciated that withholding money is a serious breach of contract and could, of course, have a damaging impact upon the payee. It is vital, therefore, that fuller information is given. The DTI says that this cannot be done because of the “unnecessary disputes that [will ensue] about what constitutes sufficient details”.

Not a problem. The legislation should require that withholding notices state:

  • when the loss or damage was incurred
  • a breakdown of the items giving rise to the loss or damage
  • the basis of the calculation for each item.

Not much to ask, one would think. After all, applications for payment have to be accompanied by supporting documentation to demonstrate that the amount applied for was, in fact, earned.

Everyone knows that pay-when-certified provisions are aimed at getting around the limited ban on pay-when-paid. But the DTI suggests that pay-when-certified should be permitted subject to certain conditions, the main one being that the subcontract rates must have been referred to in the main contract certificate. It seems that the only reason for this is to accommodate the JCT management contract package and the rarely used JCT nominated subcontract documentation. Why legislation should accommodate such antiquated contracts produced by commercial organisations is beyond me.

Section 109 of the act introduced a statutory right to interim payment, but this is meaningless since the act does not indicate when the statutory right comes into being. Under the fallback provisions contained in the Scheme for Construction Contracts, the payment process begins from the date of the contact (not necessarily the signed formal written contract), which is usually before commencement of work on site.

The DTI says there is no evidence a ban on pay-when-paid would be fairer: in fact the evidence is staring it in the face

Respondees to the consultation document, therefore, should make clear that the statutory right to interim payments should commence from the date of contract or date of manufacture or design carried out prior to on-site work.

The DTI is reluctant to remove the right to allow pay-when-paid in the event of upstream insolvencies. In similar legislation in Australia, New Zealand and Singapore, pay-when-paid is outlawed. The DTI says there is no evidence that a ban would deliver a fairer outcome. In fact, the evidence is staring the DTI in the face: a subcontractor has to act as insurer against the risk of the main contractor or the client’s insolvency. Respondees should go for a ban.

While on the subject of insolvency, the DTI does not wish to override insolvency law by giving clients an option of paying subcontractors directly in the event of main contractor’s insolvency. How about an amendment to the act that places an obligation upon the payer to provide the payee with a payment bond or similar security whenever the payer demands a performance bond or similar security for the payee’s performance?

A DTI-supported conference on the act will held at the University of Wolverhampton on 13 June. For details call 01902-322280

Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group