When it comes to payment, the vast majority of construction contracts are tedious in the extreme. The QS values the work. The architect issues the certificate. The employer pays. No problem.
The payment rules from the act have long since been written into the standard forms of building contract, but, because there is seldom a need for people to deal with them, they do not remember that they exist. This is causing problems.
One of the rules that the act brought in was that the employer could withhold payment of sums due under the contract only if a notice of intention to do so had been given. This “withholding notice” had to be issued not later than five days before the final date for payment.
To be clear, if a certificate is issued under a construction contract, unless a withholding notice is issued at the proper time, the sum must be paid. If not, the contractor can go to adjudication and will almost certainly win an order that payment be made within seven days. And the courts will enforce the decision.
So, what is happening now? I will explain with a couple of recent examples.
The first involved a contract that had overrun the extended completion date. Liquidated and ascertained damages were due. The QS (not one of my lot, I hasten to add) issued the valuation, the architect issued the certificate and the employer paid the balance after deducting the damages. The valuation was not in doubt. The deduction of damages was, but only because the employer had not followed the rules and issued a withholding notice. The contractor promptly went to adjudication and was awarded payment of the deducted damages.
I suspect that what happened here was that the “normal” procedures were followed. When I was a little QS being dandled on my mother’s knee, I was told that we should not show the deduction of damages on our valuations. Under the contract, it was a matter for the employer to choose whether to deduct. Similarly, I suspect there were lots of architects out there being told the same bedtime stories. But has anyone told the employer about five-day notices? Obviously not in this case, but the answer should have been for some bright consultant to draft a letter for the employer to send that ensured compliance with the contract provisions.
The second example was even more fun. The contractor went into administration with a payment certificate outstanding.
Let me refresh your memory about the IFC 98 contract here. Because this was administration, there was no automatic determination under the contract. Instead, the employer could choose to give notice of determination. On payment, the contract says: “From the date when the employer could first give notice to determine the contract … the employer shall not be bound by … this contract to make any further payment.” The employer thought this meant what it said – no further payment need be made, including under the outstanding certificate. The administrator thought otherwise and said that, as no notice of withholding had been issued, payment was due.
I have no answer to the administration question, as it is still to be decided. What I can say is that we all need to be careful in situations when payment is not to be made strictly in accordance with the certificate. If that happens to you, think twice, read the contract and the Construction Act, consult your legal adviser if it looks tricky and, above all, issue that withholding notice if you have the slightest doubt.
Postscript
Andrew Hemsley is director of consulting at Cyril Sweett. He can be contacted at ahemsley@cyrilsweett.co.uk.
