The Latham payment review panel has failed to produce an ABC for squabbling subbies. Nanny government must decide when to step in, and when to keep clear
How was it for you? The Construction Act is 6½ years old. How has it treated you? Think about it in two bits: first bit, payment rules; second bit, adjudication. The minister for construction, Nigel Griffiths, asked Sir Michael Latham to inquire into how the bits have worked in practice. Two review panels have reported and these reports are now in the minister’s hands. Don’t worry; you can still have your say. The minister is publishing a consultation paper.
Let me tell you what review panel number one said about the payment rules. Next week, we will look at what Latham’s second review panel said about adjudication. But do bear in mind that the nice people who make up the panels and have made their recommendations are (how can I put this without seriously injuring my friends?) only hangers on, as indeed I am. Can we now hear from the real users of the Construction Act?
There are nine items to do with payment on the first panel’s report. Let’s have a look at each.
First item: “Failure to submit a section 110 notice and failure of the legislation to provide a sanction for such failure”. Do you recall that the rules provide for three notices: green, amber and red? Red is a missile, which tells you that your subby is about to pull off site. Amber is a “withholding money” notice. Green tells you what your customer intends to pay you on the next cheque. The snag is that if he doesn’t send you this “green 110” notice, the Construction Act imposes no sanction. Some folk thought that if no notice turned up from the payer, the application for payment became the amount due by default. Some contract documents say that, but the act itself does not. Payers don’t want the default system; payees do. Review panel number one seems to struggle with all this, which isn’t surprising. But their compromise is not so bad. They suggest a set of rules to fathom more easily what is due in the interim account and when.
Second item: “The piggy in the middle clause.” In the main, the Construction Act banned “pay when paid” clauses. So a practice popped up whereby people say “we will pay the subbies the money when it is certified by the architect”. This is “pay when certified”, and a loophole in the act. What’s to be done? Review panel number one says that “the group was unable to reach a consensus conclusion”.
But to be fair, there are things that nanny government ought to leave to the industry to sort out for itself. The trick is for the subby to read the small print then tell the main contractor (nicely) to go to hell with that clause.
Third item: “Failure of payers issuing with- holding notices to provide adequate detail of the reason for withholding”. Guess what; “the group was unable to reach a consensus conclusion.”
Fourth item: “The current exception provided by the legislation to allow the use of ‘Pay when Paid’, clauses in case of insolvency.” Guess what again; “the group was unable to reach a consensus conclusion.”
Fifth item: “Commencement of the payment process”. Guess what; yes, you guessed it.
The nice people who make up the panels are only hangers on, as indeed I am. Can we now hear from the real users of the Construction Act?
Sixth item: “Length of payment periods”. Guess what; the same inconclusive conclusion.
Seventh item: “Right of suspension to include entitlement to loss and expense during suspension period.” Review panel number one recommended that nanny government should lay down rules so that money flows when a correct postponement occurs.
Eighth item: “Cross contract set-off”. The panel said ban it, but not in the case of “closely associated” contracts such as a framework agreements. Yes, of course. But nanny will need three pages of legislation to explain all that.
Ninth item: “Security of payment under construction contracts”. This is all to do with the ghastly risk of the payer going down the insolvency pan. Sir Michael Latham beat the drum about it 10 years ago, but it eventually bit the dust. Bring this one back on the agenda, I say. It is a topic for another page in a few weeks’ time.
So, does all this whet your appetite for a system which avoids the financial hurt of a customer going phut on you? It would be a world-beating innovation, but that’s what we are good at. Don’t tinker; get stuck in.
Tony Bingham is a barrister and arbitrator specialising in construction. You can write to him at 3 Paper Buildings, Temple, London EC4 7EY, or email him on email@example.com.