At the time of the government’s consultation on Building a Responsible Payment Culture I commented on the balance between legislative intervention and the freedom to contract. At that time it was debatable whether further legislative intervention in contractual payment was desirable. Other commentators also expressed doubts. However the driver then, which still prevails, was that the payment process still needs improving. Therefore, it is not wholly surprising that we have seen further legislative change and government guidance as regards fair payment, albeit not as extensive as some may wish.
For payment to work effectively it is necessary for the parties to act properly. Facets of acting include good faith, appropriate skill and knowledge of the payment process. Where these attributes exist, few problems regarding payment should occur. Contract authoring bodies for their part can only specifically address the payment process but the simplicity or otherwise of that process has an impact on the ability for users to understand and apply its rules.
There have been pleas for contracts to be made simpler and this equally applies to their payment provisions. However, simplicity does not necessarily mean short. The shortest way to deal with payment in a contract is to state only the price to be paid and to leave it to the law to fill the gaps: shortest certainly, simplest certainly not. Filling all the gaps requires an understanding of the relevant law so as to achieve compliance. Far better that all relevant law, which in the case of payment constitutes a significant amount of legislation, is distilled into a standard contractual framework which also takes account of fairness and reflects the Government’s Fair Payment guidance. That is the purpose of the payment provisions of the JCT suite of contracts, which a user can rely on and which avoids wasting resources.
Some argue that understanding contractual provisions can be quite a task and consequently often look for short cuts to understanding for the purposes of their administrative functions. But that is very different to providing a legally solid legal framework that also reflects fair payment guidance.
So for example, under JCT contracts what is the interim payment process that has been distilled?
The process works on the principle of a common assessment date for all tiers in the contractual supply chain so that the main contractor, sub-contractor and sub-subcontractors are all paid within a 30 day period from that date. The common assessment date is the Interim Valuation Date that applies to both main and subcontracts and which is established at pre-contract stage. It forms the basis of the contractual time framework.
Under the Design & Build Contract (which this article is primarily concerned) the Contractor is required to make an application for interim payment and it is this application which triggers the payment process. Where there is no Contractor’s application no payment becomes due. By contrast under the Design & Build Sub-Contract a selection should be made at sub-contract stage as to whether or not the subcontractor is required to submit an application for payment: where there is no such requirement, although the sub-contractor may still do so, the Contractor must issue a Payment Notice to the subcontractor regardless.
Where the Contractor’s application is received not later than the Interim Payment Date the due date for each interim payment is 7 days after that Interim Valuation Date. Where the application is received after the Interim Payment Date the due date is 7 days after its receipt by the Employer.
One of the consequences of adopting a common assessment date is that stage payments need to be dealt with differently than they have in the past. This now entails a monthly Interim Payment regardless as to whether Alternative A (Stage Payments) or Alternative B (Periodic Payments) applies. The difference between them lies in the calculation of the assessment (Gross Valuation) for that payment. For Alternative A, it includes completed stages and variations whereas for Alternative B it values works in progress together with site materials.
The Interim Valuation Date is distinct from the due date for interim payment. The Interim Valuation Date is the date at which the Gross Valuation is calculated whereas the due date for interim payment establishes the point at which time runs for the issue of a Payment Notice by the Employer and for establishing the last date by which payment must be made. A Payment Notice should be issued within 5 days of the due date and payment must be made within 14 days of the due date.
The amount stated as due in the notice is the Gross Valuation calculated as set out in clause 4.12 (Alternative A) or 4.13 (Alternative B) less, in both cases, the amounts referred to in clause 4.14 (e.g. retention, previous Interim Payments). The resulting amount must be paid within the 14 day period unless the Employer issues a Pay Less Notice in respect of that amount not later than 5 days before the final date for that payment. Where the Employer issues such a notice the payment due is not less than the amount stated in that notice.
Should the Employer fail to issue a Payment Notice the amount payable is that stated in the Contractor’s application. Nevertheless the Employer still has an opportunity to issue a Pay Less Notice so long as it is issued not later than 5 days before the final date for that payment.
Legislation and guidance increases the complexity of contracts but the use of the JCT process is still very much simpler than ploughing through vast tracts of legislative text to see what needs to be done.
Blog author: Peter Hibberd