The DTI has unveiled its proposals to amend the Construction Act. But if the government wants to stop payment abuses, it's not really going about it the right way

During the House of Lords debate on the Construction Bill (as it then was) on 26 February 1996, Lord Lucas on behalf of the government said: "This legislation requires that payment should be defined in terms of amount and date."

Parliament left it to the industry to get this right by insisting all contracts have an adequate mechanism for payment. Needless to say, the industry did not get this right. Hence the review.

The DTI now proposes amending section 110 (1) to provide that a contractual mechanism is adequate only if it requires a statement of what is due in a certificate issued by one of:

  • The payer
  • The payee (via an application for payment)
  • A third party named in the contract.
Will this solve the problem? First, a general point. The operation of the act's provisions, especially the withholding provisions, are wholly dependent on there being certainty of the amount to be paid by the final date for payment. There should be a statutory mechanism enabling ascertainment of that amount. Furthermore, a contractual solution gives rise to further uncertainty. Most firms in the industry will not be able to determine (without help from lawyers) whether their contracts comply with the act.

The best solution is that provided by the New Zealand Construction Contracts Act 2002. Here, the contractor submits a payment claim that must be paid or responded to with a payment schedule. In the absence of a schedule, the payee becomes entitled to his payment claim as a debt. If there is a schedule that indicates the method of calculation, reasons for any difference in the sum to be paid and reasons for any withholding, the amount in the schedule is the debt.

Returning to the DTI's solution, what happens if a party disagrees with the certificate/application issued by the other? If there aren't the means for resolving the deadlock by the payment date, the payment machinery will not be adequate. Moreover, how is the withholding provision in section 111 to be operated? If the payer has issued a certificate, it is illogical to suggest he can withhold monies from that which he has stated to be due (which may be challenged by the payee arguing that some other sum is due).

Some may say adjudication should provide the answer. But dispute resolution procedures should not play a part in defining what should be paid.

It is disgraceful that the DTI isn’t prepared to get rid of pay-if-paid clauses in the event of upstream insolvency. There should have been a review of insolvency law

The DTI proposes the removal of the payment notices in section 110 (2). This is fine, provided the necessary information about how the payment is calculated is part of the solution proposed. The DTI also proposes that the payee should have a right to apply for payment if the contract does not provide for certification or a certificate is not issued. Presumably, the former will be provided in the Scheme for Construction Contracts and the latter will have to be in the primary legislation.

As the DTI has acknowledged, its solution would prevent the use of pay-if-certified arrangements. However, it appears reluctant to act on pay-when-certified clauses. Any provision that makes payment conditional on some event under another contract should be outlawed.

In last year's consultation, 67% of respondents believed there should be a limit on the use of cross-contract set-off. One wonders what was the point of the consultation when the DTI has decided not to act on this. Its reasons are less than convincing. Apparently, wider legal and economic policy considerations are at stake …

It is disgraceful that the DTI is not prepared to get rid of pay-if-paid clauses that apply in the event of upstream insolvency. It says this was the subject of a pragmatic compromise on the part of the government and the industry when the Construction Act was passed. The DTI seems to have forgotten the terms of that compromise. It was agreed by the then government (and by the incoming Labour government) that there should be a review of the operation of insolvency law and practice to establish whether protection against upstream insolvencies was necessary. Such an exercise was never carried out.

Finally, should the Scheme make provision for stage payments for off-site work? Almost 60% of respondents agreed with this proposal. But the DTI will not act on it. In any event, the issue that came out of the review did not relate to this. The proposal was that the statutory right to interim payments in section 109 should be expressed to arise on the commencement of the contract. The Scheme acknowledges that the payment process starts at this point and this should be made clear in the act. At present, section 109 is devoid of content.

All these issues need to be addressed. To ignore them or fudge them will simply mean that payment abuse will continue. In that event, many people will be left with egg on their faces.