By Ben Smith, partner,Pinsent Masons construction team
The introduction of the new Local Democracy, Economic Development and Construction Act 2009 (LDEDC) promises to change and simplify payment mechanisms for the construction industry – but what does this mean for you?
The first big change is that there will be no more Withholding Notices, a new notices regime will be introduced and, in some cases, a contractor may have an entitlement to the amount identified in the application.
Also significant for the industry is that it will no longer be necessary for the contract to be in writing for the Act to apply. The payment and notices regime will apply even if there is only a verbal agreement.
What is the position now?
A quick reminder, a payer, for example a developer, has to issue two types of notice. Firstly, a "payment notice", issued within five days after the date a payment becomes due to the payee, for example a contractor, identifying the amount that will be paid. One of the problems currently is that there is no sanction for failure to issue this notice and this creates uncertainty.
Secondly a "withholding notice". This must be issued if any payment is to be withheld, with the reasons for withholding, for instance if there has been delay on the project and the developer believes it is the contractor's fault. If a valid withholding notice is not issued, the developer cannot withhold and payment can be recovered through adjudication or a notice to suspend the works can be issued.
What are the proposed changes?
Once the changes come into force, there will be a new form of payment notice which effectively combines both the payment and withholding notices. You will still need to serve it in the same manner as before, so no later than five days after the specified due date, stating the amount due, the basis on which that amount is calculated and identifying sums not being paid. It will also be possible, to identify in the contract another person to issue the notice, such as the engineer or architect.
The crucial change is that if the developer (to use the same example as above) fails to issue that notice, the contractor (the receiving party) can issue its own payment notice (known as a "notice in default") identifying what it believes to be due. If the contract provides for applications to be made, it will not be necessary for the contractor to issue a new notice. The contractor will simply become entitled to be paid the sum it asked for in its application.
The potential to be paid the sum you apply for is a very significant change. However, take note, the payer can still avoid that result if he issues what will be known as a "Notice of Intention to Pay Less". This notice does exactly what you might expect and to be valid it will need to identify any different amount and the basis on which that amount is calculated. This is fairly similar to the current withholding notice and will need to be served not later than seven days (or another period agreed by the parties) before the final date for payment.
The planned changes will also prohibit clauses that make payment conditional on other contracts, such as "pay when certified" clauses. The current Act only prohibits "pay when paid clauses" and this change is intended to increase the protection for receiving parties.
In addition, the right to suspend work for non payment has been enhanced. It will be possible to suspend all or part of the works on a project, this will allow strategic suspension, for example a contractor, who has not been paid, could refuse to implement a particular change requested by a developer whilst continuing with the rest of the works. Also, importantly, the suspension will result in an extension of time and an entitlement to prolongation and disruption costs.
It seems unlikely the changes will come into force until 2011 at the earliest. When the changes are implemented, parties will need to ensure that their contracts comply with the new provisions. Just as importantly, the parties will need to be aware of the potential for the application to determine the sum to be paid if the correct notices are not issued.