Impact of legislation

Payment notices

Contracts entered into before 1 October 2011

Contracts entered into before 1 October 2011 are subject to the original provisions of the Housing Grants, Construction and Regeneration Act 1996. These provisions state that the construction contract must contain a 2-stage process payment process involving:

  1. a notice of payment issued by the employer; followed by
  2. a withholding notice in the event that the employer does not intend to pay the full amount of the sum due to the contractor.

Notice of payment

Section 110 (2) of the HGCRA requires that every construction contract to which the HGCRA applies in its unamended form must provide for the employer to give a notice of payment no later than 5 days after the date on which a payment became due under the contract (or would have become due if the other party had carried out their obligations under the contract and no set-off or abatement was permitted).

The notice must state:

  1. the amount which the employer has paid or has proposed to pay; and
  2. the basis on which that amount was calculated.

If the contract does not make this provision, the relevant provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 apply.

Withholding notice

Under section 111 of the HGCRA, a party to a construction contract to which Part II of the HGCRA applies in its unamended form may not withhold payment of a sum due under the contract after the final date for payment unless they have given an effective notice of intention to withhold payment (commonly referred to as a 'withholding notice').

To be effective, the notice must specify the amount proposed to be withheld and the grounds for withholding payment. If there is more than one reason, the notice must specify each reason and the amount attributable to it.

The notice must be given no later than the prescribed period before the final date for payment. The parties are free to agree what the prescribed period is, but if they do not, the provisions of the Scheme apply.

Contracts entered into on or after 1 October 2011

Contracts entered into on or after 1 October 2011 are subject to the provisions of the Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009. These provisions set out a new process whereby a payment notice is issued, and the paying party must pay the notified sum unless he or she issues a valid notice of intention to pay less than that sum (a ‘pay less notice’).

In the following sections, ‘payer’ means the person from whom the payment is due. ‘Payee’ means the person to whom the payment is due. ‘Payment due date’ means the date provided for by the contract as the date on which the payment is due.

Payment notices

Under s110A of the amended HGCRA, every construction contract to which Part II of the HGCRA applies must, in relation to every payment provided for by the contract, require a payment notice to be given by either the payer, the payee, or another person specified in the contract. To be effective, the notice must be issued not later than 5 days after the payment due date and must specify:

  1. the sum which the person giving the notice considers to be, or to have been due at the payment due date; and
  2. the basis on which the sum was calculated.

To the extent that the contract does not meet this requirement, the provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended by the Scheme for Construction Contracts (England and Wales) Regulations 1998 Amendment (England) Regulations 2011 apply.

Payee’s notice in default of payer’s notice

Section 110B of the amended HGCRA applies where the contract provides for somebody other than the payee to give the payment notice under section 110A. Section 110B itself does not require the payee to issue a payment notice before that other person’s notice has been issued. But if a valid payment notice is not issued, the payee may issue a payment notice themselves. The payee’s notice must specify the sum which the payee considers to be, or to have been due at the payment due date, and the basis on which the sum was calculated.

If such a notice is issued, the final date for payment of the notified sum is postponed by the same number of days as the number of days between the date when the contractual notice should have been issued, and the date when the payee’s notice was issued.

Pay less notice

The effect of s110A and 110B is that for each payment under the contract, a ‘notified sum’ will emerge for the purposes of the amended HGCRA. The payer must pay the notified sum unless the payer or a specified person has issued an effective notice of the payee’s intention to pay less than the notified sum (a ‘pay less notice’).

To be effective, the pay less notice must be given not later than the prescribed period before the final date for payment and must specify:

  1. the sum that the payer considers to be due on the date the pay less notice is served; and
  2. the basis on which that sum is calculated.

The ‘prescribed period before the final date for payment’ is the period agreed by the parties under the contract. However, in the absence of such an agreement, the Scheme as amended by the Scheme for Construction Contracts Regulations (England and Wales) 1998 Amendment (England) Regulations 2011 will apply. Paragraph 10 of the amended Scheme provides that the pay less notice must be given not later than 7 days before the final date for payment.

Insolvency of the payee

It is not uncommon for contracts to provide that if a payee becomes insolvent, the payer's obligation to make payments to that party ceases. Section 111(10) of the amended HGCRA, states that where a contract makes such provision, and the payee becomes insolvent after the prescribed period before the final date for payment, the payer is no longer required to pay the notified sum even if a pay less notice has not been served.