'There must be cash flow in the building trade. It is the very life blood of the enterprise.' So said Lord Denning back in the early 70s. He went on to say that architects' certificates should be honoured, much like a cheque, without set-off or counterclaim. The House of Lords put him right on that and decided, in the seminal case of Gilbert-Ash v Modern Engineering that contra charges could be set off against certificates as they could any against other debt.
This did not mean, however, that Lord Denning's famous words were any less apposite. Conversely, however, it seems that prompt payment is an anathema to the industry. If evidence were needed, it can be found in the increase, over the last two years, of the turnover of City-based fit- out company Miletrain, from £9 million to £59 million on the strength of the low prices it can obtain because it pays within two days.
Interestingly, Sir Michael Latham's recent review of the construction industry did not put payment up there with the big problems. Instead he considered that certain unfair practices undermined the spirit of teamwork he was keen to engender. So, he recommended that the industry should be encouraged to use friendly forms of contract such as the NEC, and that any unfriendly amendments should be outlawed by legislation. He had in mind pay-when-paid clauses and arbitrary contra charges, particularly in respect of contracts other than the one in progress.
The new Construction Act seeks to impose a structured payment regime underpinned by a statutory right to suspend works in the event of non- payment. The payment provisions of the Act are not an easy read. On the one hand the Act seeks to create a mechanism triggered by dates and notices which includes a type of 'virtual payment zone', but leaves it up to the parties to agree the duration of some of the key periods. On the other hand, in default of agreement, the scheme kicks in with its own fairly stringent timings. The mechanism distinguishes between the 'due date' and the 'final date' for interim payments. The due date is the date when legal liability for the sum due crystallises. The final date for payment is the date by which it must, be paid. The intervening time is no different from the ordinary credit period between receipt of any invoice and its date for payment.
The parties can agree for the credit period to be as long as they like. It seems that by manipulating this period and making it unrealistically long, the paying party can ensure that it is the recipients who effectively fund the works. If they do not agree, however, the scheme will then impose an equally unrealistic 17 days. It is during this time that, if contra charges are to be made, notice must be given. The notice should say what sums are to be withheld and why. The reasons suggested by the Act are:
not having complied with contractual obligations set off or abatement of other sums claimed to be due under the present or other contracts.
If notice is not given at least seven days before payment, then no deductions can be made. The idea is that potential disputes will be brought to a head by clearly flagging up what is being deducted and why. These disputes can then be the subject of adjudication. The sharp-eyed among you will have spotted that contrary to Sir Michael's express wishes, contra charges on other contracts can be set off against sums otherwise due for work carried out. How is that for teamwork?