What steps can construction subcontractors take to protect themselves against non-payment? Find advice from Arbicon here
If a non-payment issue arises, assuming there is no insolvency involved and the work is commercial, there is plenty that can be done quickly to ensure payment is recovered. To make the other party pay, the facts need to be assessed and the appropriate attack deployed using construction law and the contract. The contract, therefore, needs to be effective at dealing with the non-payers. The contract is the toolbox any contractor should have properly stocked before commencing any work, with steps taken to reduce the risk of non-payment arising. The main points in stocking the contract toolbox are:
1. Procurement – Get the right contract in Place
If terms are imposed in a document or subcontract order issued after works have commenced, it counts for nothing, unless then signed by the subcontractor. This is known as “the battle of the forms” and is very common in construction contract procurement.
TIP: The last set of terms on file before the start take precedence.
If there is a prestart meeting or subcontract order before the start, be sure to counter any inaccuracies or clauses you do not accept in writing before the start of work and do not sign the contract. If you sign a formal contract, everything that has gone before it is wiped out and the new deal, perhaps with unacceptable terms, will apply and take retrospective effect.
TIP: If you are faced with “sign or you will not be paid”, any clause or imposition to this effect is void and illegal – ignore it.
2. Payment terms the construction act
Payment Terms The Construction Act, which governs the right to payment, demands that payment terms provide an “adequate mechanism”. Construction subcontractors should be aware of common payment terms that are illegal/void and those that are not illegal/void.
An easy way of setting out payment terms in a quote for a project is to say the Scheme1 applies and you alter any of its terms as you wish. The Scheme is in effect a Statutory set of contract terms that are imported in when payment terms are missing or inadequate. The Scheme sets a 17 day payment period and only 10 days to serve a Pay Less Notice.
Other terms that ought to be included in writing for clarity are ‘no discount applies nor retention’ and ‘rights to suspend or terminate the works on a 7 day notice for non-payment after the Final date for Payment’.
TIP: Be clear on payment term adequacy, due dates and periods. Use the Scheme.
3. Other essential terms to protect rights
It is particularly important at the start to ensure that Price, Time and Scope are correct as these are often areas of potential quarrel. You should consider if the price is to be fixed or on quantities, whether you will be bound by a deadline to complete, and whether to introduce or exclude EOT, loss/expense, Liquidated Damages, with time at large or not. Be clear on what you will deliver, what qualifications have been made, has the work been designed and specified, what provisional sums are there and how all of these are dealt with.
TIP: Always pay for an Arbicon contract evaluation before you submit a tender or sign the contract.
Other important terms to consider include:
- Variations – How these are dealt with
- Late Payment Rights – Late Payment Act, base + 8% and debt recovery costs
- Service of Notices – Parties are free to agree so make it simple
- Practical Completion – Define this
- Design Responsibility – Who has this?
- Warranties – Do you have to provide these and at what cost?
- Assignment Rights – Do not allow without agreement
- Adjudication – You have a Statutory Right but incorporate the Scheme
Common terms that can cause issues include ‘supplement the labour at your expense’, ‘insolvency of the Employer no further sums due’, ‘instant termination’, ‘condition precedent’s to entitlement to time’ and ‘assignment of contract to a valueless party’. Check that all the terms are in your favour at the outset otherwise it could cost you your business!
What if non-payment does occur?
If you have carried out works and are not being paid, no matter which stage the works are at, even if already in Court, there are several ADR options you can take including Adjudication. The adjudication process is a fast and cost-effective method of resolving contract disputes without the need for lengthy and expensive Court proceedings.
TIP: Engage Arbicon to evaluate your case position, put your case forward and if needed prosecute the case in adjudication.
1. The Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011.