Impact of legislation

Right to suspend performance

Under section 112 of the Housing Grants, Construction and Regeneration Act 1996, a party to whom payment has not been made may in certain circumstances have the right to suspend performance. Under the HGCRA in it's original form, the right to suspend performance arose where a sum due under the contract was not paid in full by the final date for payment and no valid withholding notice had been served.

Under the amended HGCRA, the right to suspend performance arises where the payer has failed to pay the notified sum under s110A or 110B in full by the final date for payment and no valid pay less notice has been issued. The party to whom the sum was due is entitled to suspend performance of any or all of their obligations under the contract until payment is made in full. A party exercising this right must first give at least 7 days' notice of his or her intention to suspend performance stating the ground or grounds for doing so.

In contracts to which the Act applies in its amended form, s112(3A) provides that where the right to suspend is exercised, the party in default must pay a reasonable amount in respect of the costs and expenses incurred by the suspending party as a result of the suspension.

Prohibition of 'pay when paid' clauses

Under section 113 of the HGCRA, any provision in a construction contract which makes payment conditional upon the payer receiving payment from a third person is invalid unless:

1. the third person is insolvent; or
2. any other person, payment by whom is a condition of payment by the third person, is insolvent.

Where a provision is rendered ineffective by this section of the HGCRA, the parties are free to agree other terms for payment. If they fail to do so, the provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 apply.

Section 113 and the associated provisions of the Scheme are not affected by the amendments introduced by the Local Democracy, Economic Development and Construction Act 2009.