As we await the first court judgment on the Construction Act’s amended payment rules, questions remain over whether the law says exactly what legislators meant it to …

Rupert Choat

Forty years ago, the Chinese leader Zhou Enlai reputedly said that it was too early to judge the impact of the French revolution. It is now thought he was referring to events in France that had only taken place three years earlier. While it is also too early to know how judges will treat the Construction Act’s amended payment rules, which came into force nearly a year ago, there is scope here, too, for much to be lost in translation.

Legislators fear the unintended consequences of their laws. These can arise not only where an act’s wording is ambiguous or absurd - allowing reference to Hansard to ascertain parliament’s intentions - but also where it is applied as stated. The meaning of the amended act is sufficiently important for parties to push at both its fuzzy and straight edges.

Rudi Klein’s article (18 May 2012) suggests that the amended act outlaws cross-contract set-off - that is, the scope for, say, a client to withhold payment to his contractor that is otherwise due under contract 1 because of defects in the same contractor’s work under contract 2. Rudi goes too far. One must distinguish (a) set-off rights under contract 1’s terms and (b) set-off rights that exist anyway if the contract does not exclude them.

For (a), Rudi may be right, given that section 110(1A) says that when a contract makes payment conditional on the performance of duties under another contract that is not an adequate payment mechanism. If he is right, it was not intended, as during the new act’s consultation process, the government said it would not legislate against cross-contract set-off. However, if a term providing for cross-contract set-off is invalid, that still leaves cross-contract set-off rights that exist anyway.

The amended act does not outlaw cross-contract set-off rights (in law or equity) if the contract does not exclude them. While clear unequivocal words are usually needed to exclude set-off rights, it is possible that less clear words are needed to exclude a payer’s set-off rights in contracts governed by the act. That, though, is not the same thing as Rudi’s ban, and is not new under the amended act.

The Jimmy Carr award for avoidance devices goes to clauses providing for interim payment decisions to be ‘final and conclusive’. oddly the ban in the July 2008 draft bill was dropped

Another potential unintended consequence of the amended act concerns its new notices. All construction contracts are now required to trigger payments by a notice given by the payer or the payee. For the former, if the payer fails to give a payment notice, the payee’s preceding payment application may qualify as one or, failing that, he may issue a payment notice of his own. Whether payment is triggered by a payer’s or payee’s payment notice, the payer may give notice that he will pay less than the sum stated in the payment notice. If the payer fails to give a valid pay-less notice (for whatever reason) he must pay the sum stated in the payment notice by the final date for payment without any deduction.

The pay-less notice (like the payment notice) must state the “basis” on which the sum it notifies is calculated. Parties will argue about whether notices are invalid for failing to state the “basis”. Pending judicial clarification, it will be uncertain what is required (and even then it will remain to be seen how uniformly adjudicators apply whatever test emerges).

During the new act’s consultation process, the government said it would not require “withholding notices” to state more detailed grounds for withholding than previously. However, one Scottish case (Maxi vs Mortons, 2001) suggests that more detail is now required. If that is correct, payers and certifiers may find it very onerous providing valid payment and pay-less notices and the different information needed for each.

The amended act is not just about unintended consequences. There are many unfortunate consequences that were expected. Plenty of devices are still available to those who wish to avoid the act. The Jimmy Carr comedy award for avoidance devices goes to clauses providing for interim payment decisions to be “final and conclusive” (so as to prevent any tribunal or court from revising them, thereby giving payers carte blanche). During the consultation their efficacy was recognised but oddly the ban in the July 2008 draft bill was dropped. It is hard to think of a better advert for an act-avoidance device.

The most notable failing of the act (old and new) is its impotence in the face of lengthening payment periods, despite the primary aim of the act’s payment rules being to improve cash flow. There remains a distinct lack of evidence to show that any gains from the old act’s payment rules outweighed its implementation costs - in drafting contracts, establishing new payment practices, giving notices and disputing what it all meant. The new act reimposes many of these costs afresh for unconvincing, if not non-existent, gains at the worst possible time.

Rupert Choat is head of construction disputes at CMS Cameron McKenna