12 November 2009
319.Section 142 inserts new subsections into section 110 of the 1996 Act. Subsection (1) of section 110 stipulates that every construction contract is to provide an “adequate mechanism” for determining what and when payments become due under the contract, and, in interpreting subsection (1), the courts have held that an “adequate mechanism” can include a certificate issued by a third party (for example, an architect or quantity surveyor) under a superior contract. This has caused difficulties – a sub-contractor may not be aware that a certificate has been issued in a superior contract and, where such a certificate covers work undertaken by other sub-contractors, payment to the sub-contractor is often delayed until all of the other work has been completed.
320.New subsection (1A) secures that it is not an adequate mechanism for these purposes to make the determination of what payments are due, or when, dependent upon the performance of obligations in a different contract (for example, in a superior contract) or upon someone’s decision as to whether obligations have been performed in a different contract.
321.New subsection (1B) has the effect of excluding, from this general prohibition at new subsection (1A), obligations (in a different contract) to make payments: section 113 of the 1996 Act already secures that “pay when paid” clauses in a construction contract (clauses whereby one party is not to be paid unless the other party has been paid) are (for the most part) ineffective.
322.New subsection (1C) creates a material exception to the general prohibition at new subsection (1A) to ensure, for instance, that payments in a superior contract can of course continue to depend upon the work carried out in a sub-contract. Thus, where a construction contract is an agreement between two parties (A and B) to the effect that a third party (C) is to carry out construction operations (a contract of the type referred to at section 104(1)(b) of the 1996 Act), it will be permissible for A and B to provide in their contract that payments in that contract may be dependent upon C carrying out those obligations (in the contract which B has with C).
323.As originally enacted, section 110(2) of the 1996 Act provided that the parties to a construction contract had to include terms in their contract to the effect that, in relation to each payment and at most five days after such payment became payable (or would have become payable), the payer was to give the contractor (the payee) a notice. The notice had to specify the amount (if any) which the payer proposed to pay (or had by that time paid) and the basis on which that sum had been arrived at. New section 110A (see below) amends the original legislation relating to “payment notices”. New section 110(1D) provides that the giving of a “payment notice” to the contractor is not an “adequate mechanism” for determining when payments become due under the contract .New subsection (1D) therefore secures that a provision in the parties’ contract whereby a payment will only fall due if a “payment notice” in respect of that payment is given to the contractor is ineffective.