6
Payment and certification
6.1 In any building contract, the key obligation of the client is to ensure the contractor is paid according to the contract, both in terms of the amounts paid and the timing of these payments. To pay the contractor less than it is rightfully due or to pay the right amounts but later than agreed will put financial strain on the contractor (normally through increased borrowing costs), which in extreme cases could result in bankruptcy. On the other hand, paying too much, or too early, will put the client at risk; should the contractor repudiate the contract it will be difficult, and in some cases impossible, to recover the money.
6.2 The RIBA Building Contracts contain detailed provisions concerning the appropriate amounts due to the contractor, how and when these amounts are to be assessed, when they become due and the procedures for payment, all of which are discussed below.
6.3 Both contracts offer a choice between monthly certification based on the value of work completed, a single interim payment following practical completion, or milestone payments. In addition, CBC offers the option of making an advance payment.
The contract price
6.4 The ‘Contract Price’ is defined in both contracts as ‘the amount that the Client shall pay the Contractor for carrying out and completing the Works, calculated in accordance with clause 7 of the Contract’. The Agreement states ‘The Client shall pay the Contractor the Contract Price, which will be calculated in accordance with the Contract’.
6.5 The Contract Price is set out in item K of the Contract Details of both contracts. This can be either a lump sum (the sum is inserted) or an amount calculated in accordance with the ‘Pricing Document listed under item D’. This would normally be a schedule of rates, in which case the amount due will be calculated in relation to the quantity of work actually carried out, based on the schedules of rates and prices provided by the contractor at tender. However, even if a lump sum, the contract price will be subject to change. This is acknowledged under the definition of ‘Contract Price’, which notes ‘The Contract Price may increase (or decrease) as a result of instructions given by the Architect/Contract Administrator’. In fact there are a range of mechanisms whereby the contract price may be adjusted, which are discussed in the next section.
Adjustments to the contract price
6.6 References to adjustments to the contract price can be found in the following clauses:
- (cl. 3.4) contractor’s proposed changes that will improve quality and/or reduce the contract price;
- (cl. 5.5.2) costs resulting from instructions regarding tests, etc. being added to the contract price;
- (cl. 5.11) adjustments due to change to works instructions;
- (cl. 9.7) ‘an event attributable to the Client or its agents’ adding costs and expenses to the works, entitling the contractor to apply for an adjustment (additional payment).
6.7 There are no ‘fluctuations’ clauses in either version of the contract, therefore the fact that the price of materials or labour may have changed since the contractor tendered would not be reason for the contract price to change.
Contractor’s proposed changes
6.8 As part of the Collaborative Working section, the contractor is encouraged to propose changes to the works that will improve quality and/or reduce the contract price (cl. 3.4). The clause then states that if such a proposal is made, the contract administrator will consider the proposal with the client, and may either reject it or issue instructions regarding its implementation. This clause has been rewritten since the previous version, where the onus was on the client to accept or reject it, and which had implied that the matter could be agreed between the contractor and the client before the contract administrator learns of it. The new wording places the authority for the decision firmly in the hands of the contract administrator. However, the contract administrator would be wise to always consult the client as required before any proposal is accepted, particularly if it is likely to have a significant impact on the design or on other aspects of the project.
6.9 Clause 3.5 states that any cost saving is to be divided equally between the parties. The contractor should, therefore, show in its proposal exactly how any savings are calculated. If there is any subsequent negotiation of the savings, the final reduction should be recorded before the instruction is issued.
Costs resulting from instructions regarding tests, etc.
6.10 Under clause 5.5, the contract administrator may instruct that work is uncovered or tested (see paras 5.19–5.22). If the work turns out to be in accordance with the contract, the costs resulting from the instruction are to be added to the contract price. The costs would include not only those of the uncovering and the tests themselves, but also for reinstating the work, making good any damage and disruption to general progress. If these are likely to be significant, the contract administrator could ask the contractor for an assessment of costs before issuing the instruction, in order to fully inform the client regarding the risks and benefits of the instruction prior to proceeding.
6.11 If the contract administrator wishes to accept work that does not accord with the contract, this would have to be done through issuing a change to works instruction. The contract administrator should obtain the agreement of both parties, and ensure that an adjustment to the contract price is agreed and confirmed in writing. The client may not be happy to accept the work (or may later forget that it agreed to it). The contractor may prefer to correct the work, especially if the proposed reduction in the contract price is significant, and in general it cannot be denied the opportunity to do so (Mul v Hutton Construction Limited).
Mul v Hutton Construction Limited [2014] EWHC 1797 (TCC)
This case concerned what constitutes an ‘appropriate deduction’ when an employer decided to accept non-conforming work. Although decided in relation to a JCT contract (the JCT Intermediate Building Contract 2005), it is nevertheless applicable to the RIBA Building Contracts. The project concerned an extension and refurbishment work to a country house. A practical completion certificate was issued with a long list of defects attached, and during the defects liability period the employer decided to have this work corrected by other contractors. The employer then started court proceedings against the contractor, to claim back the costs of this work.
A key issue was the interpretation of clause 2.30, which provides that the contract administrator can instruct the contractor not to rectify defects and ‘if he does so otherwise instruct, an appropriate deduction shall be made from the Contract Sum in respect of the defects, shrinkages or other faults not made good’. In this case the contractor argued that an ‘appropriate deduction’ was limited to the relevant amount in the contract rates or priced schedule of works. The court disagreed. It decided that ‘appropriate deduction’ under clause 2.30 meant ‘a deduction which is reasonable in all the circumstances’, and could be calculated by any of the following: the contract rates or priced schedule of works; the cost to the contractor of remedying the defect (including the sums to be paid to third-party subcontractors engaged by the contractor); the reasonable cost to the employer of engaging another contractor to remedy the defect; or the particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.
However, the judge also pointed out that the employer will still have to satisfy the usual principles that apply to a claim for damages, which include showing that it mitigated its loss. If the employer unreasonably refused to let the contractor rectify defects, then it is likely to find its damages limited to what it would have cost the contractor to put them right.
Change to works instructions
6.12 The process for assessing an adjustment to the contract price as a result of a change to works instruction is covered by clauses 5.11–5.13. Clause 5.11 states:
6.13 The contract then states: ‘the Contract Administrator and the Contractor aim to agree on any Revision of Time and/or additional payment implications promptly’ (cl. 5.12). If the contractor fails to submit the calculation within the 7 days, or the contract administrator and contractor are unable to agree the revision/payment, ‘the Architect/Contract Administrator will determine the appropriate adjustment’ (cl. 5.13). This requirement is not discretionary, but imperative: the contract administrator must make this determination.
Additional payment
6.14 Clause 9.7 is headed ‘Additional Payment’ and states:
This wording is far less stringent than the 2014 edition, which required the application for the additional payment to be made within 10 days of the event ending (if a single event) and also stated that if the contractor failed to adhere to these time periods, the right to the additional payment would be lost. Nevertheless, the application must be made ‘within a reasonable time’, and it is suggested that this should be understood as ‘promptly’. It is reasonable that the contract administrator should be told as soon as the event is likely to happen – in that way the contractor and contract administrator can work together to resolve the problem.
6.15 The ‘additional payment’ clauses are intended to be a means of dealing with what is usually referred to as ‘loss and/or expense’. A clause 9.7 ‘event’ is not defined in the RIBA Building Contracts (unlike JCT contracts, there are no listed ‘relevant matters’); however, it is suggested that this term is wide enough to include any action by the client or its agents (which would include the contract administrator), including the issue of a change to works instruction. There is, therefore, some possible overlap between clause 9.7 and clauses 5.11–5.13. However, in practice the contractor is likely to apply for all the consequences of a change to works instruction together (as the time limits are the same) and, as long as the contract administrator takes care not to duplicate any award for losses, there should be no difficulty. A similar procedure is followed regarding applications to that for revisions of time, and for change to works instructions, i.e. the contract administrator and contractor endeavour to agree, otherwise the contract administrator determines the appropriate amount (cl. 9.9, see paras 4.30–4.32 and 6.12–6.13 above). If the parties have agreed any rules, then obviously these should be used for the assessment where appropriate. Any failure to give early notification that results in an avoidable increase in the ‘costs and expenses’ could be taken into account when making the assessment.
Certification and payment
6.16 As noted above, CBC and DBC include several payment options. The default system is the usual one of payment at monthly intervals, but there is also an optional clause (cl. 18) providing for milestone payments or for a single payment on practical completion. CBC contains a further optional clause (cl. 19) providing for advanced payment.
6.17 Whether to select one payment following practical completion rather than monthly payments will depend upon the length of the project. For small works planned to take less than around six weeks, a single payment might be the most convenient for both parties. However, in the case of CBC, it should be noted that for any contract over 45 days this would not comply with the Housing Grants Act. The Contract Details entry at S2 indicates that it should only apply for shorter periods.
6.18 All procedures for payment in CBC are intended to comply with those set out in the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the Housing Grants Act); see Appendix 1.
Advanced payment
6.19 Optional clause 19 in CBC provides for the client to make a payment in advance of the start date. item T of the Contract Details requires the parties to insert the amount, the date for payment and a schedule of repayment instalments, giving dates and amounts. It also provides an option for requiring an advance payment security. This would normally be in the form of a bond, and clause 19.2 states that the client is not liable for any advance payment until ‘the Contractor has met the stated requirements for the advanced payment bond’. It is suggested that the advanced payment provisions are only used with a security, as making an advanced payment to the contractor is a significant risk for the client (e.g. the contractor could become insolvent before the monies are expended on the client’s behalf). Although many contractors will argue that they are required to pay out large amounts in advance to their subcontractors and suppliers, and are therefore out of pocket, it is generally better that they should take this risk. If a significant reduction in price is offered to the client, the client should consider the risks carefully before making a decision.
Interim payments – monthly certification
6.20 The dates for interim payment where monthly certification is used are as set out in the Contract Details item K (cl. 7.1), which requires the ‘First Interim Payment Date’ to be entered, and the intervals for subsequent payments. If no first date is inserted, the default is 30 days after the start date, and if no interval is stated, the default is monthly. It is suggested that ‘monthly’ should be understood as on the same calendar date each month, not four-weekly.
6.21 The ‘Interim Payment Date’ is defined as ‘the date specified in clause 7 and item K of the Contract Details representing the date on which the amount of any payment due under the Contract is calculated and becomes due’. In the CBC the definition also explains that the interim payment date corresponds to the ‘Due Date’ as described in the Housing Grants Act (which requires all contracts to establish due dates for payment). It should be noted that inserting alternatives to the default periods, i.e. including a longer or shorter period before the first due date or increasing or reducing the intervals, would not constitute a breach of the Act, provided there were still regular payment dates.
6.22 The contractor is entitled to submit an application for payment ‘which complies with the requirements of clause 7.5’, but must do so at least 7 days before the relevant interim payment date (cl. 7.2). The contractor may prefer to do this, rather than simply wait for a certificate, as it gives it an opportunity to put forward what it thinks the correct figure should be, and why. This information may be very helpful to the contract administrator, but it is not binding; there is no contractual obligation on the contract administrator to accept it, or to provide a detailed rebuttal if it does not agree with the figures put forward (see Figure 6.1). The contract administrator should remember that this document is of no contractual effect, and should always ensure that the amount shown on a payment certificate is an independent and accurate assessment – the figures shown on the contractor’s version should never be simply ‘rubber stamped’.
6.23 Clause 7.3 states:
Clause 7.5 then states:
The contract administrator should note that it does not have the power to include or deduct amounts not set out in the clause, therefore the calculation set out above should be followed precisely when preparing the certificate. Some particular matters are discussed below.
The total value of work carried out
6.24 Note that this should only be work that is in accordance with the contract, and the contract deliberately does not mention materials and goods that are stored on or off site but not yet incorporated in the works, nor does it mention prefabricated off-site items, therefore neither of these should be included in the certificate. This is an important difference to many other standard contracts, which typically require that at least on-site materials etc. are included in the payment certificate.
6.25 The RIBA Building Contracts, unlike some others, do not include ‘property vesting’ clauses, which provide that such materials and goods will become the property of the client once certified, even if, for example, the contractor has not yet paid its suppliers. Once materials have been fixed to the construction, they will become the property of the client, and cannot be removed by the contractor or a subcontractor. The client could be at risk, however, where materials have not yet been built in, even where the materials have been certified and paid for. The contractor might not actually own the materials paid for because of a retention of title clause in the contract for the sale of the materials. Under the Sale of Goods Act 1979, sections 16 to 19, property in goods normally passes when the purchaser has possession of them, but a retention of title clause will be effective between a supplier and a contractor even where the contractor has been paid for the goods, provided they have not yet been built in.
6.26 Without property vesting clauses there is, therefore, a danger that unpaid suppliers may return and remove unfixed goods, despite the fact that the client has paid the contractor for them. As there is no requirement in the RIBA Building Contracts to include the value of any of these in interim certificates, normally it would be inadvisable to do so.
6.27 The contract administrator should only certify after having carried out an inspection to a reasonably diligent standard, and should not include any work that appears not to have been properly executed, whether or not it is about to be remedied, and even if the retention is adequate to cover any anticipated remedial work; retention is to cover latent (i.e. hidden) defects, not patent defects (those that are apparent, see Townsend v Stone Toms and Sutcliffe v Chippendale & Edmondson). Contract administrators should also note the case of Dhamija v Sunningdale Joineries Ltd, which stated that a quantity surveyor is not responsible for determining the quality of work executed.
Townsend v Stone Toms & Partners (1984) 27 BLR 26 (CA)
Mr Townsend engaged Stone Toms as architect in connection with the renovation of a farmhouse in Somerset. John Laing Construction Ltd was employed to carry out the work on JCT67 Fixed Fee Form of Prime Cost Contract. Following the end of the defects liability period, the architect issued an interim certificate that included the value of work which had already been included in the schedule of defects, and which the architect knew had not yet been put right. Mr Townsend brought proceedings against both Stone Toms and Laing. Laing made a payment into court of £30,000, which was accepted by Mr Townsend in full and final settlement. Mr Townsend then continued with the proceedings against the architect, claiming that he was entitled to recover any excess that he might have obtained from Laing had he continued with those proceedings. The Official Referee assessed the total value of the claims against Laing as only £25,000, therefore no excess was recoverable. The Deputy Official Referee also found that the architect was not negligent in issuing the interim certificate. Mr Townsend appealed and the Court of Appeal, although approving the lower court’s decision on the effect of the payment into court, held that the architect had been negligent. Oliver LJ stated (at page 46): the whole purpose of the certification is to protect the client from paying to the builder more than the proper value of the work done, less proper retention, before it is due. If the architect deliberately over-certifies work which he knows has not been done properly, this seems to be a clear breach of his contractual duty, and whether certification is described as ‘negligent’ or ‘deliberate’ is immaterial.
Sutcliffe v Chippendale & Edmondson (1971) 18 BLR 149
(Note: this case is the first instance decision which was appealed to the Court of Appeal sub nom. Sutcliffe v Thackrah)
Mr Sutcliffe engaged the architect Chippendale & Edmondson in relation to a project to build a new house. No terms of engagement were agreed, but the architect proceeded to design the house, invite tenders and arrange for the appointment of a contractor on JCT63. Work progressed slowly and towards the end of the work it became obvious that much of the work was defective.
The architect had issued ten interim certificates before Mr Sutcliffe entirely lost confidence, dismissed the architect and threw the contractor off the site. He then had the work completed by another contractor and other consultants at a cost of around £7,000, in addition to which he was obliged, as a result of the original contractor having obtained judgment against him, to pay all ten certificates in full. As this contractor was then declared bankrupt, Mr Sutcliffe brought a claim against the architect. The architect contended, among other things, that its duty of supervision did not extend to informing the quantity surveyor of defective work that should be excluded from the valuation. His Honour Judge Stabb QC found for Mr Sutcliffe, stating ‘I do not accept that the words “work properly executed” can include work not then properly executed but which it is expected, however confidently, the Contractor will remedy in due course’ (at page 166).
Dhamija v Sunningdale Joineries Ltd, Lewandowski Willcox Ltd, McBains Cooper Consulting Ltd [2010] EWHC 2396 (TCC)
An action was brought against the building contractor, the architect and the quantity surveyor (QS) (McBains) for defects in the design and construction of a home. There had been no written or oral contract with the QS, so the terms of its engagement would be those that would be implied. It was held that a QS’s contract of retainer would include an implied term that the QS acts with the reasonable skill and care of a QS of ordinary competence and experience when valuing the works properly executed for the purposes of interim certificates, but that the QS would not owe an implied duty to exclude the value of defective works from valuations, however obvious the defects. This was the exclusive responsibility of the architect appointed under the contract. Further, the QS owed no implied duty to report the existence of defects to the architect.
6.28 Where work that has been included in a payment certificate subsequently proves to be defective, the value can be omitted from the next certificate. Under clause 7.5.6 the contract administrator has the power to issue a ‘negative’ certificate, should this be necessary to correct an earlier over-valuation.
6.29 It should be noted that clause 7.5.1 does not specifically state at what point in time the value of work should be assessed. The definition of ‘Interim (or Final) Payment Date’ as ‘the date on which the amount of any payment due under the Contract is calculated’ suggests that the valuation should assess the work properly carried out at the interim payment date. This could create a slight problem in practical terms. Normal practice is that the contract administrator makes its valuation immediately after an inspection (in order to ensure that only work correctly carried out is included), and will then issue the certificate a few days later. If the contract administrator wishes to issue its certificate on the interim payment date (in order to allow the client the maximum payment period), this will mean that the inspection will be a few days before the interim payment date, and therefore will not reflect the value at that date. However, provided the gap is kept to a minimum, the value shown on the certificate will be close to the value at the interim payment date. The alternative, i.e. for the contract administrator to attempt to guess exactly what work will have been carried out between the inspection/valuation and the payment date, would place the client at risk.
Any adjustments required in accordance with the contract
6.30 Clause 7.5.3 also requires the contract administrator to certify ‘amount of any adjustments required in accordance with the Contract’. This would cover amounts due to the contractor that are not related to the value of the works, for example the costs referred to in clause 9.7 (see para. 6.14).
6.31 There are three further areas of adjustment that should be noted:
- Failure to make good defective work – under clauses 5.8 and 10.6, the client may take action if the contractor fails to make good defective work and the contractor ‘shall be responsible for all costs incurred’ (cl. 5.8.4 and 10.6).
- Failure to take out insurance – under clause 6.4, the ‘Contract Price will be adjusted’ if either party fails to provide evidence that it has taken out the required insurance, and the other takes it out as required.
- Liquidated damages – clause 10.1 states that if the contractor does not complete by the relevant date for completion, the client ‘shall be entitled to deduct Liquidated Damages’.
6.32 In the case of the first deduction, the contract does not state how the costs are to be recovered. Assuming the work is, as a result of the client’s action, now complete to the standards in the contract, the certificate could include this work (but making the circumstances clear), taking account of the net effect on the contract price (normally a deduction, i.e. a net additional cost to the client). However, it may be more practical for the contract administrator to simply omit the work, and for the client to deduct the net additional costs from the certified amount. For the second item, however, the contract specifically states that this requires an adjustment to the contract price, therefore this cost should be accounted for in the Certificate.
6.33 With the third, although there does not appear to be any reason why the deductions cannot be made on the face of the payment certificate, in practice it is more usual, and more sensible, for the client to make a deduction by means of a pay less notice (see para. 6.50). Whether to make the deduction is entirely a decision for the client, so if it is made on the certificate, the contract administrator must consult with the client and ensure that there is a written record of the client’s decision. Alternatively, for clarity the contract administrator could note on the certificate what client deductions have been made from earlier certified amounts; however, this would simply be a record for information, and would not affect the calculation of the total certified amount.
6.34 Note that if optional clause 19 has been selected (CBC only), which allows for the client to make a payment in advance (see para. 6.19), the parties will have set out a schedule of repayment instalments in item T of the Contract Details. Clause 19.1 states that the client should deduct the repayments from payment certificates, so there is no need for the deduction to be included within the certificate. As with other deductions, the client should follow the pay less notice procedures as discussed below.
Amount of any retention
6.35 The definition of terms defines ‘Retention’ as ‘a percentage of the amount included in a Payment Certificate that is deducted from a payment in accordance with clause 7’. Under clause 7.14 the retention is set at 5 per cent up until practical completion, and 2.5 per cent during the defects fixing period. The wording does not make it clear exactly what the percentage is deducted from, but normal practice would be to deduct it from the value of work properly carried out, before the other deductions are made (e.g. as under JCT contracts). There is no opportunity to specify a different rate to 5 per cent; if a different rate is preferred then the contract would need to be amended.
The total amount included in previous payment certificates or payment notices
6.36 The application or payment certificate should state ‘total amount included in previous Payment Certificates or Payment Notices’ (cl. 7.5.5). This might include payments made to the contractor as a result of a payment notice, in situations where the contract administrator has failed to issue a payment certificate (see para. 6.54). Care should be taken when calculating the final amount due; for example, if the total deduction is made before retention is deducted, it should be the total gross value of work identified on the previous payment certificate, and before any other deductions are made.
6.37 Note that there should not be any other payments to the contractor which are not covered by a payment certificate or payment notice. Sometimes, on smaller projects, the client may ask the contractor to, for example, purchase items of equipment not included in the contract documents. This type of direct arrangement should be avoided; all items should be handled through the contract administrator by means of a change to works instruction, as otherwise there are issues as to whether this forms part of the works and is therefore covered by such matters as liability for defects and insurance. Should such situations inadvertently arise, clause 7.5 does not entitle the contract administrator to deal with them under the main contract.
Interim payments – milestone payments
6.38 As an alternative to the monthly due dates, the contract allows for payment by milestones (cl. 18). If adopted, the parties must define the milestones in detail (item S1 in the Contract Details). The milestones will normally be identifiable points in the completion of the project, for example completion of: (1) foundations and groundworks, (2) ground floor slab and walls up to the damp-proof course, (3) external walls, (4) roof, etc.
6.39 Linking payment to milestones introduces an incentive to the contractor to maintain steady progress throughout the project (whereas the threat of liquidated damages applies only to achieving practical completion).
6.40 The exact work that must have been correctly completed for a milestone to be achieved should be set out in detail in item S1. In addition, the parties are required to set out the payment that will be made on achievement of the milestone, either as a value or as a percentage of the contract price.
6.41 The corresponding optional clauses for item S1 state:
- 18.1 If item S1 or item S2 of the Contract Details is selected, then the part of item K of the Contract Details regarding payment certificate frequency shall not apply.
- 18.2 If item S1 of the Contract Details is selected, then the Interim Payment Date shall be the dates on which the milestones are achieved.
- 18.3 When the Architect/Contract Administrator is satisfied that a milestone has been achieved it will notify the Parties.
6.42 Clause 18 will need to be applied with care. The milestone payment certificates will state the value or percentage for that stage, once the milestone has been reached, and should comply in all respects with clause 7.5, including accounting for any adjustments required under the contract. For the milestone to be achieved, the work should not simply be complete, but be complete to the standard set out in the contract, with no patent defects. Item S1 in the Contract Details requires the parties to insert a ‘date to be achieved by’ for each milestone. However these operate as a target, no amounts would be certified until the milestone is actually achieved.
Interim payments – payment on practical completion
6.43 Optional clause 18.4 states:
6.44 Although the clause does not specifically state this, it is clear from the guidance notes that this is intended to replace monthly certification with a single payment at practical completion. As such, it should only be selected when the contract period is very short, and no longer than 45 days (as otherwise the contract must comply with the Housing Grants Act). As this is an ‘interim payment’ the contract administrator must issue a payment certificate in accordance with clause 7.3 as discussed above. This payment certificate would, therefore, show the adjusted contract price, with any applicable adjustment as listed in clause 7.5, and with 2.5 per cent retention.
Payment of interim payments
6.45 The client (or contractor, if the certificate shows a balance due to the client) is required to pay the amount shown on a payment certificate ‘by the Final Date for Payment’ (cl. 7.6). ‘The Final Date for Payment’ is defined as ‘the date, specified in clause 7, following the due date for interim or final payment, by which a payment that is due should be paid’. Clause 7.7 states that ‘the Final Date for Payment of an interim and the final payment shall be 14 days after the relevant payment due date’. The problem with this wording, apart from being somewhat circular, is that ‘the relevant payment due date’ is not a defined term, or otherwise set out in the contract. However, bearing in mind that the ‘Interim (or Final) Payment Date’ is defined, at least in CBC, with reference to the Housing Grants Act requirement for ‘due dates’, it is likely that the Final Date for Payment of an interim certificate will be understood as 14 days after the interim payment date.
6.46 The time periods are quite short: if the contract administrator takes the full 5 days allowed after the interim payment date to issue the certificate, then this will leave the client with only 9 days to pay, which could of course include 4 weekend days; clearly, the contract administrator should issue payment certificates promptly. If the certificate shows a balance due from the contractor to the client, then the contractor must similarly pay the amount within 14 days.
Contractor’s invoice
6.47 Clause 7.15 requires the contractor to issue the client with a valid VAT invoice, and the client to pay the invoice promptly. The rules relating to VAT are beyond the scope of this Guide; if advice is needed the parties should contact HM Revenue & Customs or an appropriate expert. VAT is a matter of law, and any mistakes or attempt to avoid it would be a breach of the law; in this case it would also be a breach of contract, allowing the parties to claim against each other for losses due to an infringement.
6.48 It is suggested that the requirement to pay the VAT invoice ‘promptly’ does not override the time limit as set out in clause 7.6; the client should pay the amount shown on the payment certificate within 14 days of the interim payment date, regardless of when the VAT invoice is issued. If it is issued shortly after the certificate, the VAT invoice could be paid at the same time; if it arrives later, the VAT will be paid separately.
Pay less notices
6.49 If the client or contractor wishes to pay less than the certified amount, it must issue a ‘Pay Less Notice’ not later than five days before the final date for payment (cl. 7.9). The pay less notice should state the amount the client considers due, and how it was calculated. If the certificate shows a balance due to the client, then the contractor may issue a pay less notice (cl. 7.9). The contract does not expressly state so, but it can be assumed the paying party can pay the lesser amount shown in the notice, provided it was issued in accordance with the contract terms.
6.50 The client has the right to pay less than the certified amount, but only for reasons that can be justified under the terms of the contract. It is suggested that these could include that some of the work covered by the certificate was not in accordance with the contract, or if there was some error in the calculation of the payment certificate, or for any of the matters which might entitle the client to a deduction, as noted at para. 6.31, namely:
- failure to make good defective work;
- failure to take out insurance;
- liquidated damages.
6.51 In the case of the contractor, a pay less notice will only arise if the certificate shows a negative balance. This is only likely to happen if work which has previously been certified later proves defective and is excluded from a subsequent certificate. It is possible that the contractor may disagree with this decision and refuse to repay the required amount. If this happens, the client’s remedy would be to wait until the next certificate, by which time the balance may be due to the contractor, or to take the matter to adjudication
Contractor’s remedy if no certificate issued
6.52 The contractor is given various remedies should the above payment systems break down. If no payment certificate is issued, and the contractor had made an application for payment under clause 7.2, then this is said to become a ‘Payment Notice’ (cl. 7.4.1). The contractor may need to forward the application to the client, if it has not already done so. The client must pay this amount on the final date for payment for interim certificates (cl. 7.6), subject to any pay less notice.
6.53 If no application had been made, the contractor may now issue a payment notice, showing the amount it considers due and how it was calculated (cl. 7.4.2). In this case, the final date for payment is postponed by the same number of days that it took the contractor to issue the payment notice after the final date that the certificate should have been issued (cl. 7.8).
6.54 In either case the client should notify the contract administrator that payment has been made, so that this can be taken into account in the next certificate. A similar system is set up for the final payment certificate; if the contract administrator fails to issue the certificate, the contractor may submit a final payment notice (cl. 7.12.2 and 7.13).
Contractor’s remedies if certificate not paid
6.55 If the client fails to pay an amount that is due by the final date for payment, clause 7.16 makes provision for simple interest to accrue on any unpaid amount. The rate of interest can be set by the parties (e.g. they could adopt the rate stipulated in many JCT contracts, i.e. five per cent over the base rate of the Bank of England). If no rate is set in item K, the default is the statutory right to interest under the Late Payment of Commercial Debts (Interest) Act 1998. The interest accrues from the final date for payment until the amount is paid. The provisions apply to the final payment certificate as well as to interim certificates.
6.56 If the client makes a valid deduction following a pay less notice, it is suggested that interest would not be due on this amount. The clause does not refer to the amount stated on the certificate but to ‘any unpaid amount’, which would take into account valid deductions.
Right of suspension
6.57 The contractor is given a ‘right to suspend’ under clause 8.1. If the client fails to pay the contractor by the required time limit, the contractor has a right to suspend performance of some or all of its obligations under the contract, which would not only include the carrying out of the work, but could also, for example, extend to any insurance obligations. In addition, under optional clause 22, the contractor may request that the client provides evidence of its ability to pay the contract price, and may suspend its obligations under clause 8 if the evidence is not provided.
6.58 This non-payment is stated to be of ‘an amount that is due’, therefore the contractor may not suspend work if a valid pay less notice has been issued by the client. The contractor must have given the client a written 7-day notice of its intention to suspend work and stated the grounds for the suspension, and the default must have continued for a further 7 days. The contractor must resume work when the payment is made.
6.59 Under these circumstances the suspension would not give the client the right to terminate the contractor’s employment. The suspension will, however, give the contractor the right to a revision of time, and to reasonable expenses and costs arising out of the suspension (cl. 8.2). This right is required by the Housing Grants Act, and therefore could be deleted in DBC if the client would prefer.
Termination
6.60 The contractor also has the right to terminate its employment if the client does not pay amounts due (cl. 12.3), at least to the extent that the non-payment might be considered a material breach. The contractor must have given a 14-day notice of this intention, which must specify the default and refer to the specific clause. It should be noted that this right is probably limited to non-payment of significant amounts, or to persistent non-payment, and so could not be exercised for minor non-payment. It is unlikely, in practice, that the contractor would terminate for minor shortfalls, given that the suspension remedy is available.