The Construction Act’s rules on payment have a basic flaw: they don’t contain a mechanism that enables a debt to crystallise by a certain date. So, time for a rethink …
Construction law devotees will probably recall – with fondness and nostalgia – Lord Denning’s position on the status of architects’ certificates. His opinion was that they were as good as cash. This was no doubt influenced by the traditional view that architects and engineers – as certifiers – “held the ring” between employer and contractor and, as such, were supposed to be acting impartially.
Within the space of 25 years, Denning’s confident assertion had been reduced to ashes. The rot set in with the case of Gilbert-Ash (Northern) Ltd vs Modern Engineering (Bristol) Ltd (1973). The House of Lords held that, unless there were clear express words to the contrary, the legal presumption was that rights of set-off were preserved in construction contracts. So, a certificate would not be immune to set-off.
But, worse was to come. In CM Pillings & Co Ltd vs Kent Investments Ltd (1985),the Court of Appeal refused payment under an interim certificate (issued under the JCT fixed-fee form of prime cost contract) where the employer had bona fide reasons for believing that the certificate was incorrect. Finally, Lord Hoffman in Beaufort Developments (NI) Ltd vs Gilbert-Ash NI Ltd (1998) put to rest the notion that architects (and engineers) ceased to be agents of the employer and, instead, morphed into impartial ringmasters when acting as certifiers. Once an agent of the employer, always an agent of the employer.
So, where does all this leave us? Although most contracts in the industry (being mainly subcontracts) do not have a certification process, an architect’s or engineer’s certificate was the only talisman capable of defining the amount that was due. Otherwise what is due – as far as progress payments were concerned – is in the mind of the beholder, especially where the traditional valuation process applies. The only way (before the Construction Act) to determine the amount due was for the parties to agree it or to resort to arbitration or litigation.
Which brings me to the Construction Act. The act was intended to clarify what was due and when in order to enable a debt to crystallise. So, by the final date for payment, a debt will have been created – which might be less than that expected by the payee where an effective notice of withholding has been issued. If such debt is not discharged, a right of suspension would be available to enforce payment.
Unfortunately, the act is peppered with the word “due”, which has frustrated the process by which the act seeks to achieve payment certainty (ie, a debt by the final date for payment). For instance, the withholding notice under section 111 refers to the withholding of a “sum due under the contract”. Where is this to be found? Answer: nowhere.
Section 111 refers to the withholding of a 'sum due under the contract'. Where is this to be found? Answer: nowhere
Even if the payer issues a notice under section 110, stating the amount they propose to pay, this is not necessarily the due amount. The act requires all contracts to have an adequate mechanism for defining what is due and when. But if contracts do not have an adequate mechanism, reliance on the Scheme for Construction Contracts will not necessarily supply the answer. The Scheme simply refers to the process of calculating the amount due.
Ultimately, the question of whether or not a debt exists must be adjudicated. This completely undermines the raison d’être for the act, as well as the structure underpinning it. adjudication should not be part of a process of defining the existence of a debt. This is a matter for legislation. The role of adjudication in this context is to provide an opportunity to the payee to challenge the payer’s reasons for withholding £x from his claim. This reflects everyday commercial practice.
If I send you a bill for £10 and you are only prepared to pay £6, the focus of any court action is on the justification for withholding the £4. In the meantime at least £6 remains enforceable as a debt.
The act should dispense with the use of the concept “due” and, instead, incorporate a structure that achieves its intended objective – crystallisation of a debt at the final date for payment. Hopefully, this will be resolved in the current review of the act.
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group