Julie Scott-Gilroy, an associate at BTO Solicitors LLP, looks at how well the construction industry’s payment regime is working.
Payment in the construction industry is regulated by the Construction Act 1996, as amended by the LDEDC Act 2009. One of the reasons behind the introduction of the Construction Act 1996 was to ease cashflow and speed up payment. However, it has to be questioned whether this aim has been achieved (and I note this is the sort of issue raised in the English consultation on the Act, which was published recently).
What is the payment process in Scotland?
Taking the SBCC 2011 as an example as it is reflective of the statutory payment provisions (just like the JCT is in England), the interim payment process commences when the contractor makes an application for payment. The employer is then required to issue a payment notice in the form of an interim certificate not later than five days after the due date setting out the sum the employer considers due at the due date and the basis upon which this is calculated. It should be noted that the due dates are the dates specified in the Contract Particulars. If no payment notice (or interim certificate) is issued, the amount of the interim payment due will be as stated in the contractor’s application.
If the employer wishes to pay less than the due sum, the employer is required to issue a pay less notice. A pay less notice must be served no later than five days before the final date for payment and it must state both the amount considered to be due to the contractor and the basis on which it is calculated. The SBCC contract provides for the architect/contract administrator, quantity surveyor or employer’s representative (or any person who the employer notifies as authorised), to give the pay less notice.
It is worth noting that it is also permissible for the contractor to issue a pay less notice to the employer.
A similar payment regime applies at the final account stage but the final date for payment is 28 days rather than 14 days from the due date (which applies to interim payments).
What is happening in practice?
Invariably, the payment rules are ignored. One of the most common queries I deal with is in respect of a party’s failure to make payment. There appears to be a number of reasons why the payment process is not being followed. These include:
- A failure to understand the contract’s payment provisions.
- A failure to diarise the dates for payment notices, pay less notices and the final date for payment.
- Non-receipt of applications for payment.
- An inability to process payments within the contractual timescales due to the volume of projects being dealt with.
- The inexperience of those administering the contract’s payment provisions.
- Parties changing the payment provisions during the course of the contract and, when there is a change in personnel, these changed provisions are not apparent to those who take over.
- Entering into contracts that do not comply with the statutory requirements and failing to understand that the Scheme for Construction Contracts (Scotland) Regulations 1998 steps in to replace the non-compliant provisions (its provisions act as implied terms, just like in England).
The big question arises as to what happens when no payment is made and no pay less notice is given. The simple answer is that the contractor can head off to adjudication and get an order for the sum due, either as set out in the payment notice or its application for payment. These are known as “smash and grab” adjudications.
This essentially means that there is no defence to non-payment and the contractor will generally be awarded the sum that it claims. However, that is not always the end of the matter as employers/main contractors will invariably seek to commence separate proceedings to determine the true value of the contractor/sub-contractor’s claim, which leads to uncertainty and a costly dispute process for all parties involved.
Is there an answer?
There is no quick fix to this issue. One piece of advice I always give to parties is to understand their payment process as soon as the project goes live. It is helpful to make a flow chart so it is easy to follow the steps that are required. The payment process has been agreed for a reason and it should be followed to avoid the inevitable disputes that will follow.