Briefing Note: Payment Regime
It’s probably one of the most important aspects of a running a business – getting paid! Yet there seems to be a general lack of understanding on how the payment regime works within construction contracts. The Housing Grants Construction and Regeneration Act 1996 (as amended) (“the HGCRA”) and the Scheme for Construction Contracts (Scotland) Regulations 1998 (as amended) (“the Scheme”) sets out the payment regime yet it’s still common practice to see contractual agreements that don’t comply with the statutory provisions or in practice being ignored in their entirety.
All construction contracts are governed by the HGCRA and the HGCRA requires that a Construction Contract’ must contain an “adequate” mechanism for determining what payments become due under the Contract and when those payments become due. This mechanism needs to be in such a form that makes it easily understandable by both parties and both parties should understand how to operate the provisions. If the construction contract omits or varies any element contained in the legislation, this element will be implied or replaced in its entirety within the contractual documentation by the Scheme.
Getting the payment mechanisms wrong within a construction contract has several effects, the most obvious one that everyone will understand is there is a potential for payment not being made. Two other side effects that are often overlooked are the rights to suspend services and the right to adjudication. Both of these statutory rights are contingent upon the payment mechanism within the Construction contract complying and being followed in line with the HGCRA, if it doesn’t then neither of these protections can be utilised.
Payment provisions
The HGCRA states that every construction contract (if the contract period is or is estimated to be in excess of 45 days) must provide for interim payments and, for every payment, a mechanism for calculating the sum due; a mechanism for calculating the due date; and a mechanism for calculating the final date for payment.
There seems to be some misconception regarding the term ‘due date’ (which isn’t actually defined within the HGCRA). The ‘due date’ is not the date in which the payment is made, the ‘due date’ is the date when a payment becomes due (but not yet payable), it is the date which triggers the payment process. How this date is set out in a contract can vary, for example in SBC/Q/Scot 2016 it states that in relation any interim payments that the monthly due dates for interim payments by the Employer shall in each case be the date 7 days after the relevant Interim Valuation Date. The Interim Valuation Date being a determined date specified within the Contract Particulars. In that case the payment process is triggered 7 days after a specific date- defined within the contract. Within bespoke contractual documents commonly used wording can be that the due date for sums due shall be the date on which the Employer receives an application for payment or the date of receipt of an invoice for the relevant instalments.
The bespoke contractual documents are really the ones that need to be closely looked at in terms of the payment provisions, these are the documents in which there are more likely to be far longer payment terms than the party providing the service agreed to when tendering for the work. These are also the contractual documents more likely to have complicated drafting setting out the payment provisions.
The HGCRA permits two payment options:
The HGCRA permits two payment options, the first option involves the paying party issuing within 5 days of the due date (which will be a date either prescribed by the Contract or by the Scheme) a payment notice. The payment notice is usually issued by the paying party following receipt of either a valid invoice or an application for payment and should be issued for every payment. For a payment notice to be valid it must contain the amount that the payer considers due and the basis on which the amount was calculated and quite importantly issued within the correct timescales to comply with the either the provision of the contract or the Scheme. It’s important to note that, even if, the payer considers the sum due to be zero then a payment notice must still be issued. The sum referred to within a payment notice is the notified sum and this is the sum that must (subject to any valid payless notice being issued) be paid on the final date for payment.
If no valid payment notice is issued with the 5 days of the due date, then the payee may then issue its own default payment notice on any day before the original final date for payment, but the payment between day five and its issue is then added to the original final date for payment to give an amended final date for payment. There is now a sanction for failure to issue a payment notice and a greater risk faced by parties that fail to issue payment notices – the risk is that the payee may now issue a notice in default stating the amount considered to be due and the basis for calculation.
The second option involves the payee issuing an HGCRA complaint payee payment notice within 5 days of the due date (which again, will be a date either prescribed by the Contract or by the Scheme). If that notice is correctly issued, the sum due under the Contract and payable by the Final Date for Payment is that sum set out in that notice. The final date for payment will be delayed by the number of days that have elapsed between the default of the payer and the issue of the default payment notice.
In terms of both options, should the payer decide to pay less than the notified sum there is still the option to issue a subsequent notice called a “Pay-Less notice”.
Commentary:
I started off this brief with the observation that getting paid was probably the most important aspects of running a business and that the contractual payment mechanism needs to be in such a form that makes it easily understandable by both parties and both parties should understand how to operate the provisions. I would hazard a guess that most people reading this brief would most likely disagree with me there and comment instead that in reality most payment mechanisms are not easy to understand and in some cases are like trying to navigate a mine field. So why does this happen? Well, there are several reasons (in my opinion) it could be down to simply not understanding the payment regime when drafting the document. It is not uncommon for organisations not to want to incur the expense of employing a professional, whether it be a legal specialist, such as myself or a quantity surveyor, to draft their contractual documents for them and they try and draft something themselves. In other cases it is down to over-the-top drafting making the document more difficult to understand than it requires or as I have discovered in a limited number of occasions it is a blatant attempt to override the statutory provision and delay payment. It could even be down to the drafter not even realising that the HGCRA exists and as a result they draft something wholly inappropriate (this happens more often than you would think).
So how can you protect yourself and or your organisation from the pitfalls of getting the payment regime wrong in a construction contract? The first thing I would suggest is to educate yourself, ask the person who is drafting the documents for you, to explain them to you, get them to highlight the pitfalls and what you need to do when either seeking or making payment. This should be included within the fee you pay to them, it should not be an additional cost, so do not be afraid to ask. If they are negotiating a construction contract on your behalf, make sure that they know the HGCRA exists (always a good starting point, if they do not know about it, then it might be advisable to find someone who does).
There are simple drafting techniques that can be used to protect the position of the entity seeking payment. A very simple one is to insert in drafting that the application/invoice becomes a default payment notice should the payer not issue a valid payment notice within the 5 days of the due date. This would save your client time and they would not have to issue a default payment notice causing further delay in payment being made. Always check the time frame from the due date to the final date for payment. You don’t want to get a nasty surprise and discover your client has 90 days payment terms when they thought it was agreed at 28 days.
If you are the one calculating when the notices are required be careful when doing so. When calculating time under the HGCRA be aware that in relation to Payment Notices (including Default Payment Notices) and Pay Less Notices the following days do not count:
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- Christmas Day.
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- Boxing Day.
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- New Year’s Day.
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- Good Friday; and
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- Where the period would include a day which under the Banking and Financial Dealings Act 1971 is a bank holiday in Scotland (would also include England and Wales), that day should also be excluded.
Remember, weekends do count unless they are excluded for another reason – for instance when Christmas Day falls on a Sunday – the Saturday would be included but not the Sunday. Remember the days that count vary from year to year, be aware of these and diarise carefully. Check the contract provisions for any exclusions, commonly defined as “Working Day” or “Business Day”, these may well exclude local holidays in the area the works are being carried out and you will need to check what days are local holidays to be excluded in the count.
This briefing note does not constitute legal advice: individuals should seek professional advice, specific to their own circumstances, in relation to any matters raised.