Certain aspects of the Construction Contracts Act 2013 need to be treated with caution.
The Construction Contracts Act 2013 (“the Act”) applies to certain construction contracts entered into after July 25, 2016. However, construction professionals need to be aware that certain aspects of this legislation need to be treated with caution.
Failure to respond to a payment claim notice
Unlike the equivalent English and Welsh legislation, the Act does not expressly state that the amount claimed in a payment claim notice shall become payable if no response to the notice is issued by the other party. Nor does the Act set out the consequences of a failure on the part of the paying party to deliver a response within the required time. Instead, the Act is silent on what is to happen in these circumstances.
Legislation in the UK provides that the claimed amount is due for payment where the paying party fails to serve the required notice. But the Irish Act does not say that the amount claimed becomes due if the paying party fails to respond. under standard forms of contract, the amount due is calculated by reference to the value of the work and in default the schedule to the Act contains a similar provision.
It is advisable to ensure that construction contracts address this gap in the legislation. For example sub-clause 11(c)(2) of the ‘Agreement and Conditions of Sub-contract (NN)’, second edition, issued by the Construction Industry Federation (CIF) for use with public works contracts states: “If the Contractor does not issue a response to a NN Sub-Contractor’s Payment Claim in accordance with Clause 11(c)(1) the Contractor shall pay to the NN Sub-Contractor the full amount claimed in the NN Sub-Contractor’s Payment Claim without any deduction other than Retention (if not already allowed for in the Payment Claim)”.
Right to suspend the works
The Act provides for an entitlement to suspend work in two situations. First, under sub-section 5(1): “Where any amount due under a construction contract is not paid in full by the day on which the amount is due”.
This arises if no sum is paid on the due date or if a certified sum that became due for payment is not paid. This right of suspension could arguably also arise where a payment claim notice is served, no response is given in accordance with the Act, and a sum less than the sum claimed is paid on the due date. However, in order to circumvent this suspension, if the other party refers the payment dispute to adjudication the contractor must resume work [s.5(3)].
A party can also, pursuant to section seven of the Act, suspend the works if the other party fails to make payment of a sum due under an adjudicator’s decision. However, in such circumstances, if the other party refers the dispute to arbitration the contractor must resume work [s.7(3)]. In reality it could take many months or years for an arbitration to reach the hearing stage, while in the meantime the contractor’s cash flow will be negatively affected and they will also be incurring legal costs.
ONE OF THE MOST EFFECTIVE WAYS OF ENFORCING PAYMENT IS TO SUSPEND THE WORKS. THIS ALSO PROTECTS THE CONTRACTOR FROM THE RISK OF FURTHER LOSS IF IN FACT THE PAYING PARTY IS INSOLVENT.
It will be well known that one of the most effective ways of enforcing payment is to suspend the works. Suspending the works also protects the contractor from the risk of further loss if in fact the paying party is insolvent. The other party, if unable or unwilling to pay, can simply avail of these provisions and defer payment, without risking suspension.
The question then arises as to whether clauses in construction contracts allowing a party to suspend work where a sum due under the contract has not been paid must be read as incorporating a provision requiring the suspension to be withdrawn in the event of notice of adjudication being served or referral of the decision of the adjudicator to arbitration or litigation. One would presume they are to be so read unless the contract says otherwise and, if the contract says otherwise, that may be regarded as an attempt to limit or exclude the application of the Act and therefore be contrary to subsection 2(5) of the Act. It is worth stating section 2(5) of the Act: “This Act applies to a construction contract whether or not – (a) the law of the State is otherwise the applicable law in relation to the construction contract, or (b) the parties to the construction contract purport to limit or exclude its application”.
A further risk is that a party who suspends under the Irish Act is at risk of being found liable for damages if it transpires that there was no sum properly due under the contract at the time the suspension occurred. This is because, depending on the circumstances, under the Act the sum claimed through a payment claim notice is arguably not necessarily due and may be found in adjudication not to be due, notwithstanding that no response notice has been given.
Different treatment of sub-contractors and contractors
Sub-section 3(3) of the Act states: “The Schedule shall apply to a main contract if and to the extent that it does not make provision for the matters specified in subsections (1) and (2)”.
Sub-section 3(4) of the Act states that the schedule shall apply to a sub-contract unless the terms of the sub-contract itself are more favourable to the sub- contractor. The schedule provides for payment, at
the latest, every 30 days.
In theory this could cause some difficulty for main contractors. It is possible, for example, that the terms of the main contract may provide for the first payment being made on a valuation carried out, say, 60 days (or more) after commencement, with payment thereafter at regular intervals. As is often the case if the majority of the work is being
carried out by sub-contractors, and if they are entitled to payment on a valuation carried out 30 days after commencement, the main contractor
has a problem.
Chartered Surveyor and barrister, and principal of Slevin Consulting.