HGCR Act 1996 - Stage Payments and Dates for Payment

© Daniel Atkinson 2001 29 September 2001

SUMMARY

Section 109(1) gives a party to a construction contract a statutory right to payment by instalments, stage payments or other periodic payments for any work under the contract.

Section 110(1) requires that every construction contract shall:

   (a)  provide an adequate mechanism for determining what payments become due under the contract and when; and

   (b)  provide for a final date for payment in relation to any sum which becomes due.

Section 110(2) requires that every construction contract shall provide that the payer shall give notice specifying the amount (if any) of the payment made or proposed to be made. The payer is required to give the notice not later than five days after the date on which payment becomes due from him under the contract. This notice must be given even if payment does not become due because the work has not been done, or due to set off or abatement.

1. Interim Payment - Section 109

Section 109(1) gives a party to a construction contract a statutory right to interim payment. This is an entitlement to payment by instalments, stage payments or other periodic payments for any work under the contract.

There is no such right under a construction contract for short duration contracts. The right does not arise if:

• it is specified in the contract that the duration of the work is to be less than 45 days, or
• it is agreed between the parties that the duration of the work is estimated to be less than 45 days.

The initial period for the minimum duration of the works was proposed to be 60 days, but following representation from smaller contractors, who wish to see this reduced to 30 days, a compromise was reached of 45 days. This period is for the total contract, the instalment or stage payments can be for any period agreed between the parties.

Section 109(2) provides that the parties are free to agree the amounts of the payments and the intervals at which, or the circumstances in which, they become due.

Section 109(3) provides that in the absence of such agreement, the relevant provisions of the Scheme of Construction Contracts apply.

2. Interim Payment -- The Scheme

Part II of the Scheme deals with payment. Paragraph II.1 of the Scheme states that paragraphs II.2 to II.4 apply where the parties to a "relevant construction contract" have failed to agree specified terms. The term "relevant construction contract" is defined in paragraph II.12 in terms similar to Section 109(1) of the Act. Thus the Scheme repeats that under short duration contracts, there is no statutory right to interim payment.

Section 109(2) of the Act refers to the following matters which need to be agreed by the parties;

• the amounts of the payments; and
• either the intervals in which the amounts become due, or
• the circumstances in which the amounts become due.

It is suggested that Section 109(3) of the Act is in terms that if both the above matters are not agreed then the Scheme applies. Paragraph II.1 of the Scheme is consistent with this interpretation of the Act. However both the Act and the Scheme refer to the application of the "relevant provisions". It is suggested therefore that the provisions of the Scheme at paragraphs II.2 - II.4 only apply to the extent that either of the two matters are not agreed. In other words it fills the "gap" in the contract.

Paragraph II.2 sets out the method for determining the amount to be paid, in terms of the "value of work" carried out to the end of the "relevant period" less amounts already paid or due for payment.

The "value of work" is defined in paragraph II.12 of the Scheme as:

"...an amount determined in accordance with the construction contract under which the work is performed or where the contract contains no such provision, the cost of any work performed in accordance with that contract together with an amount equal to any overhead or profit included in the contract price."

The "relevant period" is defined in paragraph II.2 of the Scheme as:

"...a period which is specified in, or is calculated by reference to the construction contract or where no such period is so specified or is so calculable, a period of 28 days."

The "contract price" is defined in paragraph II.12 of the Scheme as:

"...the entire sum payable under the construction contract in respect of the work."

Thus in the absence of specific terms in the contract, the Scheme will imply payment at cost together with overhead and profit included in the contract price, at 28 day intervals.

Paragraph II.2(4) of the Scheme limits the amount calculated to the difference between the contract price and the aggregate of the instalment payments due. In other words, the obligation is to pay up to and no more than the "contract price".

So, Section 109 of the Act does no more than create the right to interim payment for construction contracts of duration of 45 days or more. Section 110 deals with the mechanism of payment and the timing and is next examined.

3. Dates for Payment - Section 110(1)

Section 110(1) requires that every construction contract shall:

1. provide an adequate mechanism for determining what payments become due under the contract and when; and
2. provide for a final date for payment in relation to any sum which becomes due.

In addition Section 110(1) provides that the parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment.

It is to be noted that Section 110(1) is not limited in the same way as Section 109, to contracts of duration of 45 days or more. Section 110 applies to all construction contracts to which Part II applies. Indeed Section 109(4) confirms that Section 110 applies to statutory rights to interim payment, since it provides that references in the following sections to a payment under the contract include a payment by virtue of Section 109. This interpretation is reflected in the provisions of the Scheme, Part II.

PRACTICE NOTE 1

Every construction contract to which the Act applies must therefore have a payment mechanism, but there is no indication how the adequacy of the mechanism will be judged. It is suggested that certification procedures under existing standard forms, by independent Engineers/Architects, will be considered adequate. It is suggested that an unfettered discretion of one party to decide the amount due will not be adequate. There must be some recognisable and logical procedure for determination of the amounts due. It is suggested that the Scheme will be the main guideline for the Courts. The reference to final date for payment in the Act may cause some confusion as it relates not only to the final payment of the contract but also the final date for payment of any interim or stage payment.

Section 110(3) provides that if or to the extent that a contract does not contain the provisions in Section 110(1) then the relevant provisions of the Scheme for Construction Contracts apply.

4. Dates for Payment -- The Scheme

Paragraph II.3 of the Scheme states that where the parties to a construction contract fail to provide an adequate mechanism then the relevant provisions of paragraphs II.4 - II.7 apply.

A.  Amount Due

The Scheme provides at paragraph II.2 the default mechanism for determining what payments become due under the contract. As described above this is in terms of the difference between the value of work carried out to the end of the relevant period and payments made or due, limited by the contract price.

B. Due Date for Payment

Paragraph II.6 provides for the due date for payment of the amount due for short-duration contracts, that is construction contracts which are not "relevant contracts". Payment of the contract price is due on whichever is the later of

"(a) the expiry of 30 days following the completion of the work, or

(b) the making of a claim by the payee."

The term "claim by the payee" is defined in paragraph II.12 of the Scheme as

"...a written notice given by the party carrying out work under a construction contract to the other party specifying the amount of any payment or payments which he considers to be due and the basis on which it is, or they are calculated."

Thus under short duration contracts the due date for payment is either 30 days after completion, or the date of any claim made after the 30 days. The payee should therefore ensure that his claim is submitted as soon as possible. The definition of a claim requires it to be in writing and to set out the basis of evaluation. It is suggested that the notice provisions of Section 115(4) are followed when submitting the claim.

Paragraph II.5 defines the due date for payment of the final payment for relevant contracts in similar terms to paragraph II.6 for short duration contracts.

Paragraph II.4 defines the due date for payment of instalment, stage or periodic payments as the later of the following:

"(a) the expiry of 7 days following the relevant period; or

(b) the making of a claim by the payee."

The payee should therefore ensure that he makes his application for payment within the 7 days following the relevant period, if he is not to delay payment.

The due date for payment of all other types of payment is defined in paragraph II.7 as the later of the following:

"(a) on the expiry of 7 days following the completion of the work to which the payment relates, or

(b) the making of a claim by the payee."

It is suggested that paragraph II.7 payments are those which are due, not at specific periods, but on the happening of certain circumstances. The circumstance envisaged by paragraph II.7 is the completion of the specified part of the work. But the Payer may wish to specify in the contract some event such as a certificate or test.

C. Final Date for Payment for Sum Due

Paragraph II.8(2) of the Scheme provides that the final date for the making of payment is 17 days from the date that payment becomes due. This is the default provision if the parties fail to agree the period in accordance with Section 110(1) of the Act.

5. Dates for Payment - Section 110(2)

Section 110(2) requires that every construction contract shall provide that the payer shall give notice specifying the amount (if any) of the payment made or proposed to be made. The payer is required to give the notice not later than five days after the date on which payment becomes due from him under the contract. This notice must be given even if payment does not become due because the work has not been done, or due to set off or abatement. Section 110(2) provides that notice must be given not later than five days of the date on which payment would have been due if:

1. the other party had carried out his obligations under the contract; and
2. no set-off or abatement was permitted by reference to any sum claimed to be due under one or more other contracts.

In addition the payer is required to specify the basis on which the specified amount in the notice has been calculated.

PRACTICE NOTE 2

It is suggested that the purpose of Section 110 is to provide a recognisable and logical mechanism for payment, and to ensure that the payer should provide sufficient information to the payee to show that the mechanism has been applied.

It is to be noted that Section 110 does not require the payee to make a claim. Even the Scheme only allows the payee to make a claim, it does not require him to do so. The payer on the other hand is required to give the notice described above within 5 days of the date when payment becomes.

This was intended, and will, change the way Main Contractors administer Sub-Contracts. In effect Main Contractors will be required to instigate procedures similar to certifying procedures in standard forms.

6. The Scheme -Notice Specifying Amount of Payment

Paragraph II.9 of the Scheme is written on similar terms to Section 110(2) of the Act.