It takes astute playing of the payment game to conserve cashflow, reduce financial exposure and manage payment risks in construction contracts. Where payment issues arise, employers, contractors and sub-contractors each have their own positions to stand over. The current financial climate has created breaks in the cashflow chain from funders to employers, tapering down to contractors and sub-contractors and has lead parties to carefully review their respective development and construction contracts.
With continuing market uncertainty, exploring options ranging from project suspension, termination and dispute resolution (for contractors, sub-contractors and employers) to re-scoping and declaration of projects (for employers and contractors) can enable parties determine the best suit to lead to trump in the payment game.
Suspension – holding your cards
Suspension stops the clock on financial and risk exposure. Incorporating clear suspension clauses can reduce risks giving parties the chance to “wait and see” before deciding to resume or terminate a project.
Most standard form construction contracts in Ireland (eg GCCC and IEI) and the UK (eg JCT, NEC and ICE) as well as many bespoke agreements, expressly grant employers a general ‘no questions asked’ right to suspend all or part of projects for any reason.
Typically contractors cannot suspend for no reason but may be able to suspend for non-payment. There are also limited common law rights to support contractors’ right to suspend: CJ Elvin Building Services Ltd v Noble EWHC 837 (TCC).
Calls to introduce a statutory framework similar to that in England and Wales (the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”)), to address non-payment of contractors through the mechanism of suspension and referral to adjudication have found favourable support in Ireland through the presentation to the Seanad of the Construction Contracts Bill 2010.
Termination – folding your hand
Termination of a project aims to bring finality and certainty on costs and risks and where relationships between the parties have soured.
Most standard form Irish and UK construction contracts do not allow for projects to be cancelled without reason but instead rely on certain grounds including insolvency and breach of obligations. Contractors may also be entitled to terminate after a pre-agreed period for suspension is exceeded.
Employers should consider including no fault termination provisions to minimise risk. In drafting clear and weighted termination clauses lawyers should also address loss of profit or loss of expectation for contractors and parties should be aware of the consequences before agreeing them. However, even with such clauses, persuasive case law may support contractors’ rights to claim loss of profit for uncompleted works eg Abbey Developments Limited v PP Brickwork Limited EHWC 1987 (TCC).
In certain circumstances, termination may be the best option so that projects can be re-scoped in light of changed circumstances and with both parties acting in good faith.
Other Cards in the Deck
In lieu of suspension or termination and to better manage cashflow, employers can instruct project deceleration, re-phasing or re-scoping projects or parts of projects. In an uncertain market, agreeing project deceleration or re-scoping is very much dependant upon the parties’ relationships.
Notices of suspension or termination may also trigger other third party rights, such as step-in or novation, putting others into the shoes of either employers and/or contractors.
“Paid when paid” or conditional payment clauses allow one party to defer payment unless or until the other party has been paid. Such provisions are generally passed down to other parties, notably sub-contractors and/or suppliers, in the project contract chain. Given the implications on the payee clear and unequivocal wording is required in the relevant clause for it to work. Such clauses, together with other conditional payment and avoidance/payment deferring clauses in construction contracts have been successfully challenged through the courts of England & Wales e.g. William Hare Limited v Shepherd Construction Limited EWCA Civ 283 and Yuanda (UK) v WW Gear Construction Limited EWHC 720 (TCC). Such clauses in any event are to be outlawed in England & Wales when/if the Local Democracy, Economic Development and Construction Act 2009 comes into force.
Parties can also enforce the contract dispute resolution options specified (such as litigation or arbitration). To this end, their advisors will need to carefully review such provisions.
Adjudication – another chip in the game?
In the absence of adequate contractual mechanisms to quickly and decisively deal with payment issues parties in Ireland may also be able to look to statutory remedies, such as adjudication as proposed under the Construction Contracts Bill 2010.
Adjudication is generally viewed in the UK as the most popular means of resolving payment issues by an independent third party during the course of a project. It is typically viewed as quicker and cheaper than litigation or arbitration.
Under the Construction Contracts Bill 2010 adjudication decisions are to be reached within 28 days of referral or 42 days with the referring party’s consent.
The HGCRA is due for update by the Local Democracy, Economic Development and Construction Act 2009 once commenced, which is anticipated may occur in March/April 2011. It will introduce amendments to the adjudication, suspension and payment provision within the HGCRA.
The 2009 Act envisages a payment regime which is solely triggered by the issue of payment notice(s). The Act also sets out stand alone optional payer or payee payment notice regimes. It remains to be seen if this approach will be followed in Ireland.
Section 145 of the 2009 Act further introduces an interesting twist on suspension whereby rather than suspending all works on a project an unpaid party can suspend only that part of its involvement on the project that relates directly to the non payment. The 2009 Act allows an extension of time and loss and expense (including legal expenses) reasonably incurred for the period of suspension and other periods of delay arising from the suspension. It will be interesting to see how or if the Construction Contracts Bill 2010 addresses such issues.
Playing the Best Hand in the Money Game – Practical Tips
Practical considerations when dealing with payment and cashflow issues depends on a party’s role in the game.
Employers should give realistic advance notice of suspension or termination to enable contractors and sub-contractors/suppliers to wind-down activities on and off site and mitigate losses. Similarly, contractors should give adequate notice and all parties should strictly follow agreed suspension or cancellation contractual provisions as appropriate. Notice will then provide the springboard for claims submission and replacement of contractors/sub-contractors.
On suspension, the site, onsite materials and plant machinery need to be secured and employers may wish to consider securing offsite materials possibly through vesting certificates. Fluctuation on suspension is important to consider particularly if previously excluded from the contract. Here contractors need to be mindful of future rises in construction costs.
In respect of termination, employers typically pay for completed works, material purchases and possible compensation for loss of profits in accordance with the contract terms. Contractors need to clear the site and hand over documents and materials purchased prior to termination.
Security and property documents, performance bonds and insurances should be examined to see how these are affected by suspension or termination.
The Winning Game
Skill, appropriate contractual mechanisms for suspension and termination and working towards the same endgame, combined with some good luck in the current market, will help involved parties best manage cashflow and risk. Knowing the aces from the joker and working within contractual and legislative parameters will guide the winning hand in playing the construction contracts payment game.
This article appeared in the Autumn edition of SCS Review (2010) and was contributed by Cassandra Byrne and Jarleth Heneghan.
