Payment provisions of the Construction Act

Hills Electrical & Mechanical Ltd entered into a subcontract with Dawn Construction containing a 'pay-when-paid' clause. Although such clauses have continued to antagonise many in the industry, since the Construction Act there is no proper cause for complaint. Section 113 of the Act provides that pay-when-paid clauses are perfectly lawful, providing they only apply in circumstances where the third party payer is insolvent.

Within four months of entering into the subcontract, the employer under the main contract indeed became insolvent.

Dawn refused to pay further monies to Hills, relying on the pay-when-paid clause of the subcontract. Not entirely happy with this prospect, Hills commenced proceedings to recover some £93,000 that it contended was due.

Hills did not argue that the pay-when-paid provision was unlawful. Such an argument would not have taken it very far. Instead it approached the problem from a different angle. Hills argued that the final date for payment of the £93,000 had occurred a few days prior to the insolvency of the employer. That being the case, those monies should have already been paid to Hills before the insolvency, and accordingly the pay-when-paid provision should not bite.

In order to achieve that position, it was necessary for Hills to contrive an argument that supported the contention that the final date for payment had indeed passed at the date of the insolvency of the employer. The subcontract provided that the final date for payment should be 28 days from the due date of any interim payment. Crucially, the statutory Scheme for Construction Contracts provides that the final date for payment shall be only 17 days from the due date.

This 11 day period was critical to Hills, for it straddled the date at which the employer had become insolvent. Quite simply, if the main contractor was permitted 28 days for payment of the sum due, by that date the employer had become insolvent and the pay-when-paid provision would bite. On the other hand, if only 17 days applied, the main contractor would have been obliged to make payment before the insolvency of the employer and accordingly the pay-when-paid clause would be irrelevant.

Hills needed to prove that payment should have been made within 17 days. It was, therefore, necessary for it to show that the subcontract terms for payment were in some respect non-compliant with the Housing Grants Construction and Regeneration Act, with the effect that the entire payment provisions of the Scheme for Construction Contracts should be imported into the subcontract.

Hills relied on Sections 109 and 110 of the Act. Hills' position was that when a construction contract failed to contain terms that comply with the requirements of Section 109 and 110, the whole of the Scheme provisions came in to play in substitution for any agreed contractual provisions regarding payment.

Hills argued that the subcontract between the parties failed to provide dates by which the subcontractor should make applications for payment. According to Hills, this was sufficient for the entirety of the subcontract provisions to be dropped and replaced by the Scheme, which would then allow for a final date of payment of each interim amount within 17 days of the due date.

Dawn did not accept that the subcontract terms were deficient in any manner, but argued that even if they were, the final date for payment of any sum due to the subcontractor was a matter which had been agreed within the subcontract. This did not fall to be substituted by the provisions in the Scheme.

Hearing these matters in the Outer House of the Court of Session in Scotland, Lord Clark had to decide the correct approach. The only previous case which had directly touched on this question was that of C&B Scene Concept Design -v- Isobars. There it had been argued that the parties had failed to complete Appendix 2 to the JCT form where it was necessary to select either alternative A for lump sum payment, or alternative B for periodic evaluation.

Isobars had argued that if no mention had been made between alternatives A and B, the entirety of clause 30 of the JCT contract concerning payments must be swept away, to be replaced by the Scheme for Construction Contracts. At first instance, the judge held that this was indeed the case. The matter then came before the Court of Appeal, but regrettably that part of the question was not considered.

Relying upon the C&B case, Hills argued that it would create chaos for payment provisions to rely both upon imported sections from the Scheme and retained parts of the subcontract.

Lord Clark could not see that chaos would result. Section 110(1) provided that the parties were free to agree the number of days between the date a sum becomes due and the final date for payment. In his judgment, the approach of the legislation was not as Hills contended. The approach was simply to import into the parties' contract the appropriate provision from the Scheme to make up for any omission.

In consequence, the originally agreed subcontract period of 28 days continued to apply. This meant that the date for payment did not fall until after the employer had become insolvent, and thus the pay-when-paid clause applied. Hills' attempt to recover the £93,000 failed.