Non payment in the construction industry

[edit] Introduction

Non-payment in construction can also be referred to as withholding payment. This can be due to a dispute or contractual breach between two parties for non-performance of a certain clause. Provided that a party to a contract issues a compliant withholding-notice setting out the grounds and the sums attributable to each ground, then the party may legitimately withhold payment.

In this respect, the provisions set out in the Housing Grants, Construction and Regeneration Act and the Scheme for Construction Contracts will take precedence over any client payment clauses and will need to be adhered to.

[edit] The Housing Act guidelines to adhere to prior to withholding payment

Payment in construction is be subject to the Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act). This provides for:

• The right to be paid in interim, periodic or stage payments.
• The right to suspend (or part suspend) performance for non-payment and to claim costs and expenses incurred and extension of time resulting from the suspension.
• The right to be informed of the amount due, or any amounts to be withheld.
• Disallowing pay when paid clauses.

The client must issue a payment notice within five days of the date for payment, even if no amount is due. Alternatively, if the contract allows, the contractor may make an application for payment, which is treated as if it is the payment notice.

The client must issue a pay less notice if they intend to pay less than the amount set out in the payment notice, setting out the basis for its calculation. The notified sum is payable by the final date for payment.

If the client (or specified person) fails to issue a payment notice, the contractor may issue a default payment notice. The final date for payment is extended by the period between when the client should have issued a payment notice and when the contractor issued the default payment notice. If the client does not issue a pay less notice, they must pay the amount in the default payment notice.

The Late Payment of Commercial Debts Regulations also imposes a limit of not more than 30 calendar days (before the payment period begins) for a purchaser to verify the conformity of goods/services are in accordance with the contract - but this period can be exceeded by agreement and provided it is not grossly unfair to the supplier.

[edit] Grounds for non payment

To withhold payment the following grounds must be met as a minimum:

• The notice to withhold must be compliant with the contractual requirements.
• The notice to withhold must be compliant with the means of issue (e.g. recorded delivery post).
• The cause (breach) of the contract giving entitlement to withhold must be stated. It is important to set out the grounds and the amount attributable to each ground.
• A loss must naturally flow from that breach.
• The valuation of the payment withheld must be prepared correctly.

[edit] JCT and NEC compared

There are significant differences in the timescales for withholding payment in JCT and NEC Contracts. Each contract sets out their own payment due dates. As a general guide, the JCT stipulates that a withholding notice will need to be issued at least 5 days in advance of the final date for payment. The NEC has a longer period of 7 days. These dates however will be specific to each contract and will have to be adhered to for a valid non-payment/withholding-notice to be issued.

If the provisions of a contract do not comply with the Housing Grants, Construction and Regeneration Act, then the Scheme for Construction Contracts will apply.

[edit] Conclusion

The non-payment/withholding-notice in construction has to meet several legislative and contractual points to be valid. Contractors are within their rights to suspend performance for non-payment so due diligence will need to be carried out by both parties to avoid disputes and disruption to the construction project.

For more information see: Late payment.

[edit] Related articles on Designing Buildings Wiki

• Causes of construction disputes.
• Fair payment practices.
• Housing Grants, Construction and Regeneration Act.
• The Late Payment of Commercial Debts Regulations 2013.
• Payment notice.
• Payments to nominated sub-contractors.
• Pay less notice.
• Payment.
• Payment schedule.
• Prompt payment code.
• The causes of late payment in construction.