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This is the second in a series of articles looking at the key changes to the 2016 suite of JCT contracts. This article examines the payment provisions of the standard form JCT Design and Build Contract 2016 (JCT 2016) compared to those contained in the now-defunct 2011 version and provides an explanation of how JCT 2016’s payment mechanisms work in practice.
For the first article in the series, titled: JCT 2016 – two years after publication, it’s time to get involved.
JCT 2016 has introduced the concept of a common Interim Valuation Date (IVD) which is built into all contracts, subcontracts and sub-sub-contracts. Establishing IVDs that operate down the supply chain is intended to reflect the government’s fair payment charter. It also speeds up the payment process throughout the contractual chain so that all levels of the chain from the main contractor down to subcontractors and sub-sub-contractors are paid within the same 30-day period. Here’s how the inclusion of IVDs and the surrounding payment mechanism has this effect in practice.
The Contractor remains entitled to claim for loss and expense incurred where the progress of the works has been materially impacted by a Relevant Matter (as described in clause 4.21 JCT 2016), such as, a change in the Employer’s instructions. Further, JCT 2016 includes a new procedure for the ascertainment and notification of such loss and expense. Under JCT 2016 the Contractor is obligated to:
In return, the Employer must notify the Contractor of the ascertained amount within a strict 28-day time frame from receipt of the original assessment and notification, and within 14 days following each update. The Contractor’s failure properly to ascertain and notify loss and expense, as per the above, could mean the Contractor is barred from the reimbursement of those costs.
JCT 2016 provides greater choice and flexibility when dealing with fluctuations. The old fluctuation provisions (clause 4.19 of the 2011 version) have been removed and replaced with options set out directly in the Contract Particulars. When calculating the gross valuation of each Interim Payment, in accordance with either Alternative A or Alternative B (as set out in clauses 4.12 and 4.13 respectively), JCT 2016 sets out how these payments are calculated, including the values to be added and subtracted. The amount payable to the Contractor includes amounts equivalent to any applicable fluctuations as set out in the contract, provided adjustment for the fluctuations has not been made under the wider calculation provisions of 4.12 and 4.13 or the contract sum adjusted in accordance with clause 4.2.
The payment provisions in construction contracts are subject to the Housing Grants, Construction and Regeneration Act 1996. Where the payment terms in a construction contract do not comply with the Act then the statutory Scheme for Construction Contracts 1998 will imply terms into the contract. This is potentially problematic as the inclusion of implied terms to poorly-drafted payment provisions can create uncertainty and make it unlikely that all parties will be able to act in accordance with both the express and implied terms of the contract. JCT 2011 included different requirements for interim and final payments but, JCT 2016 has consolidated the notice requirements of the Act into the standard form contract.
The parties to JCT 2016 specify, in the Contract Particulars, what the first IVD will be. Thereafter, the IVD occurs on the same date each month (or the nearest business day if the IVD falls on a weekend or bank holiday). The default position if the parties fail to specify the date is that the IVD will occur exactly one month after the date of possession.
The Contractor can make an application for payment (Interim Payment Application) at any time before the IVD. The Contractor makes the application based on the amount the Contractor considers due and describes the basis on which that sum has been calculated. For both interim and final payments, the Due Date is 7 days after the IVD and the Final Date for Payment is 14 days following the Due Date. Five days after the Due Date the Employer must issue a Payment Notice. The Payment Notice specifies the sum that the Employer considers to be due to the Contractor on the Due Date and the basis upon which that total has been calculated. Subject to a Pay Less Notice the Employer must pay the amount contained in the Payment Notice on (or before) the Final Date for Payment.
The IVD in the JCT 2016 Subcontract is the same date as that contained in the main JCT 2016. There is the option to require the subcontractor to submit its payment application at least 4 days prior to the IVD to ensure its application for payment is included in the Contractor's application, up-stream to the Employer. The Final Date for Payment has been shortened in JCT 2016 Subcontract (from 21 days following the Due Date to 14 days) but in overall terms the period has lengthened because the Due Date is later. The Contractor then has 5 days after receiving funds from the Employer to make the payment to the Subcontractor.
Where the Employer in JCT 2016 (or Contractor in JCT2016 Subcontract) intends to pay less than the sum stated as due in the Interim Payment Application or Payment Notice, he must give notice to the payee of that intention by issuing a Pay Less Notice not later than 5 days before the Final Date for Payment. The sum contained in the Pay Less Notice must then be made on or before the Final Date for Payment.
JCT 2016: What Could Go Wrong?
The introduction of the IVD is intended to synchronise the payments throughout the contractual chain. The fair payment process is, therefore, only effective if a common IVD is used across all tiers of the project. In reality, as you progress down the contractual chain, the use of standard form contracts becomes less common, meaning the potential benefits may be lost or at least diminished.
In some months the IVD will not be a Business Day and will change to the nearest Business Day in that month. In such circumstances, the parties (and their advisors) will need to recalculate all subsequent dates in the payment cycle. This is a particularly problematic area for Employers. Such a minor change can have far-reaching consequences. Failure on the part of the payer in the contractual chain to issue a Payment Notice by the deadline, subject to a Pay Less Notice (discussed above), means the balance due is the total amount set out in the Interim Payment Application. The courts have consistently held that, irrespective of how inaccurate or inflated the amount demanded, it will all, nevertheless, be due and payable to the payee in such circumstances.
An amount not paid in accordance JCT 2016’s payment terms will constitute a breach of contract and the overdue amounts will accrue interest. The payee can recover any unpaid amounts (and associated interest) as a debt and has the right to suspend performance of the works and even terminate the contract for non-payment. It is crucial, therefore, that parties take note of the dates which govern the payment mechanisms as the consequences of missing such dates can be severe. The courts have in recent times adopted a hard line, against payers, in favour of an overarching objective of securing cash flow down the construction supply chain.
It is, therefore, extremely important to seek professional legal advice before making the switch to JCT 2016. Many problems can be avoided by ensuring that the contracts at all levels of the supply chain are carefully drafted at the outset.