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New thinking on non-payment

Legal matters

One might be forgiven for thinking that the new Construction Act is all about adjudication. In fact, half of the provisions of Part II concern payment. The Act heralds a brave new dawn of prompt periodic payments, the right to suspend work if payment is not made and the outlawing of 'pay-when-paid' clauses. As with the adjudication provisions, the Act asks that all contracts should provide for periodic payments (unless the duration of the works is less than 45 days). If not, the government's scheme imposes its own regime.

Frankly, parties would be well advised to agree the amounts of payments and the intervals at which, or circumstances in which, they become due. The scheme identifies at least eight different dates, defining a variety of different time periods. Interim payments are due seven days after valuation or claim and should be paid within 17 days, on what the scheme calls 'the final date for payment'. Between the due date and the final date for payment, the paying contractor or employer has five days in which to notify the other party of the amount to be paid, and another five within which to give notice of any sums to be withheld.

If no effective notice to withhold payment is made, and sums due are not paid by the final date for payment, then the disappointed contractor or subcontractor has the right to suspend work until full payment is made, provided that he gives at least seven days' notice of his intention to do so. Traditionally, of course, stopping work could be seen as 'a repudiatory breach entitling the employer to determine the contract, engage alternative contractors to complete the works and claim the additional completion costs and other losses from the defaulting contractor'.

Equally, a hard-pushed contractor may have downed tools in response to a catalogue of breaches by the employer which may themselves have gone to the root of the contract and entitled the contractor to take such drastic action. The difficulty with these fundamental breach/determination problems was that the waters were usually muddy and the stakes high. The potential cost to either party, if it transpired that the contract was wrongly determined, were often so vast that, however serious the breaches, the parties were usually prepared to soldier on. The extreme consequences of determination played a key role in the thinking of architect West Faulkner Associates, when it repeatedly decided against issuing a certificate under clause 25 of jct '63 despite persistent and extreme delay by the contractor in the London Borough of Newham v West Faulkner case.

The architect could have given the contractor notice that it was failing to proceed with the housing refurbishment works regularly and diligently, thereby triggering the employer's right to determine the contract. Without the certificate, the local authority was obliged to take matters into its own hands and claim its costs from the architect. The court found that the responsibility for ending the contract was the employer's and the architect was wrong not to issue the certificate.

Against this background, a statutory right to suspend work in the face of non-payment may be seen as something of a holy grail. It should be borne in mind, however, that contractors are only protected from the consequences of wrongful suspension if the provisions of the Act and the scheme have been fulfilled. Section 112 requires a contractor to give seven days' notice of his intention to suspend work and his grounds for doing so. Section 115 provides that, unless the parties agree otherwise, such a notice should be sent to a company's registered or principal office. Thus, no matter how much care is taken in drafting this important notice, it will be ineffective if sent to the wrong address.

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