|Local Democracy, Economic Development And Construction Bill [HL] - continued||House of Commons|
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Commentary on clauses
318. Section 107 of the 1996 Act provides that Part 2 of the 1996 Act only applies to contracts which are in writing. Section 107 has been interpreted restrictively by the courts such that all of the non-trivial terms of construction contracts must be in writing for Part 2 to apply. Clause 135 removes this general requirement, whilst prescribing that various matters must nonetheless be in writing.
319. Subsection (1) repeals section 107 in its entirety with the effect that Part 2 of the 1996 Act will apply to all construction contracts - those which are wholly in writing, partly in writing or wholly oral.
320. Subsection (2) provides that certain provisions of a construction contract, relating to adjudication, must be in writing. These are the provisions necessary in order to comply with the requirements specified in section 108(2) to (4).
321. This clause inserts new subsection (3A) into section 108 of the 1996 Act. New subsection (3A) has the effect of requiring the parties to a construction contract to provide in their contract that the adjudicator has the power to correct a clerical or typographical error in his decision arising by accident or omission. The provision concerned must be in writing. Such a requirement of their contract is in addition to the requirements which already apply.
322. Clause 137 inserts new section 108A into the 1996 Act. New section 108A provides that any agreement between the parties to a construction contract concerning the allocation between the parties of the costs relating to an adjudication is ineffective unless such agreement is made after the giving of notice by one party to the other of the formers intention to refer a dispute to adjudication and such an agreement is in writing. New section 108A catches both an agreement as regards the allocation of the parties own costs, and an agreement as regards paying the fees and expenses of the adjudicator.
323. Clause 138 inserts new subsections into section 110 of the 1996 Act. Subsection (1) of section 110 stipulates that every construction contract is to provide an adequate mechanism for determining what and when payments become due under the contract, and, in interpreting subsection (1), the courts have held that an adequate mechanism can include a certificate issued by a third party (for example, an architect or quantity surveyor) under a superior contract. This has caused difficulties - a sub-contractor may not be aware that a certificate has been issued in a superior contract and, where such a certificate covers work undertaken by other sub-contractors, payment to the sub-contractor is often delayed until all of the other work has been completed.
324. New subsection (1A) secures that it is not an adequate mechanism for these purposes to make the determination of what payments are due, or when, dependent upon the performance of obligations in a different contract (for example, in a superior contract) or upon someones decision as to whether obligations have been performed in a different contract.
325. New subsection (1B) has the effect of excluding, from this general prohibition at new subsection (1A), obligations (in a different contract) to make payments: section 113 of the 1996 Act already secures that pay when paid clauses in a construction contract (clauses whereby one party is not to be paid unless the other party has been paid) are (for the most part) ineffective.
326. New subsection (1C) creates a material exception to the general prohibition at new subsection (1A) to ensure, for instance, that payments in a superior contract can of course continue to depend upon the work carried out in a sub-contract. Thus, where a construction contract is an agreement between two parties (A and B) to the effect that a third party (C) is to carry out construction operations (a contract of the type referred to at section 104(1)(b) of the 1996 Act), it will be permissible for A and B to provide in their contract that payments in that contract may be dependent upon C carrying out those obligations (in the contract which B has with C).
327. Section 110(2) of the 1996 Act currently provides that the parties to a construction contract must include terms in their contract to the effect that, in relation to each payment and at most five days after such payment becomes payable (or would have become payable), the payer is to give the contractor (the payee) a notice. The notice must specify the amount (if any) which the payer proposes to pay (or has by that time paid) and the basis on which that sum has been arrived at. New subsection (1D) provides that an adequate mechanism for determining when payments become due under the contract is not the giving of a payment notice to the contractor. New section (1D) therefore secures that a provision in the parties contract whereby a payment will only fall due if a payment notice in respect of that payment is given to the contractor is ineffective.
Clause 139 - Notices relating to payment
328. Clause 139 amends the existing legislation relating to payment notices and, in doing so, provides for the giving of similar notices by the contractor (the payee). Clause 139 achieves this by repealing section 110(2) (subsection (2) of clause 139) and inserting new sections 110A and 110B into Part 2 of the 1996 Act (subsection (3) of clause 139).
329. New section 110A(1) provides that a construction contract is to contain either:
330. A specified person is defined at new section 110A(6) - such a person is one identified in the construction contract or one determined in accordance with terms in the contract (for instance, terms allowing the payer subsequently to notify the payee of the appointment and identity of such person). In practice, a specified person is generally an architect or engineer: someone qualified to value construction work.
331. New section 110A(2) prescribes the contents of a payment notice given by the payer (or a specified person) to the payee. Such a notice is to identify the sum which the payer (or the specified person) believes is payable (by the payer) on the date that the payment concerned becomes payable (or, where some or all of that amount has been paid before the notice is given, the sum that would have been payable on such date). Such a notice is also to explain how that sum has been arrived at - for instance, by identifying any relevant moneys paid before the payment concerned actually became payable, or by identifying any set-off or abatement applied by the payer.
332. New section 110A(3) prescribes the contents of a payment notice given by the payee to the payer (or to a specified person). Such a notice is to identify the sum which the payee believes is payable (to the payee) on the date that the payment concerned becomes payable (or, where some or all of that amount has been paid before the notice is given, the sum that would have been payable on such date). Such a notice is also to explain how that sum has been arrived at.
333. The effect of new section 110A(4) is to ensure that, even where, in relation to any payment, the payer or, as appropriate, the payee, considers that no sum is actually payable, a payment notice to that effect must still be given. Such a notice is also to explain (for instance, because of any set-off or abatement) why no sum is believed to be payable.
334. New section 110A(5) provides that where the parties to a construction contract fail to include terms in their contract for the giving of a payment notice pursuant to new section 110A(1), the appropriate provisions of the relevant Scheme for Construction Contracts will apply. (The consequence of this is that terms providing for the giving of a payment notice by the payer to the payee will take effect as implied terms of their contract.)
335. In addition to the definition of specified person, new section 110A(6) defines what is meant by payee, payer and payment due date.
336. New section 110B applies in a case where the parties to a construction contract have said in their contract that the payer (or a specified person) is to give the payee a payment notice (at most five days after payments become due) and, in relation to a particular payment, no notice is actually given (or, if given, is late). New section 110B also applies in a case where the parties have failed to make provision in their contract for the giving of payment notices (such that the relevant Scheme for Construction Contracts has implied a payer payment notice term into the contract), and, in relation to a particular payment, no notice is actually given (or, if given, is late). In other words, new section 110B addresses the situation of a payer failing to serve a payment notice as required either by an express or by an implied term of the contract.
337. The effect of subsection (2) of new section 110B is (generally speaking) to allow the payee to give the payer a payment notice instead (one which complies with the requirements (as to content) of a payment notice given by a payee in cases where parties to a construction contract have agreed in their contract that it is the payee who gives this notice). A notice like this given by a payee in default of a payers (or specified persons) payment notice may be given at any time after the date by which the payer (or specified person) ought to have given the payment notice.
338. New section 110B(3) is a provision to postpone the final date for payment of a relevant sum where, pursuant to new section 110B(2), the payee serves a notice in default of the payer (or specified person) giving a payment notice. The effect of this new provision is to postpone the final date for payment of the sum in question by the same number of days after the date by which the payer (or specified person) ought to have given the payment notice, as the number of days after that date that the default notice was given. If, for example, a sum becomes payable on the 2nd day of the month (such that the date by which the payment notice should have been given was the 7th day) and must be paid, at the latest, on the 17th day, the effect of a payees notice in default served on the 14th day would be to postpone the date on which the relevant sum must finally be paid to the 24th day of the month (17 +7 = 24).
339. Subsection (4) of new section 110B provides that where the parties had agreed in their contract that the payee was to notify the payer (or a specified person) of the sum that the payee believed was due in relation to a payment and of how that sum was arrived at (what in the construction sector is known as a payees application), such a notification is deemed to be a notice given pursuant to new section 110B(2) and, indeed, the payee cannot give a notice pursuant to new section 110B(2) in such a case.
340. Subsection (1) of clause 139 makes a consequential amendment to bring the wording of section 109(4) into line with that used in new sections 110A and 110B.
341. Section 111 of the 1996 Act currently provides that a party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless that party has given a notice of the intention to do so. Subsection (1) of clause 140 substitutes a new section 111 and, in doing so, replaces this provision in respect of withholding notices with (generally speaking) a requirement on the part of the payer to pay the sum set out in such a notice. New section 111 also makes provision for the sum in such a notice to, in effect, be challenged or revised by the giving of a type of counter-notice.
342. Subsection (1) of new section 111 provides that the payer must pay the notified sum the sum set out in such notice on or before the final date for payment of such sum, (to the extent that it is unpaid). Subsection (2) has the effect of explaining what is meant by the notified sum. In relation to a payment, it is (as appropriate):
343. This requirement to pay the notified sum is intended further to facilitate cash flow by determining what is provisionally payable. What is properly and ultimately payable as a matter of the parties' contract is unaffected (see the decision of the Court of Appeal in Rupert Morgan Building Services (LLC) Limited v Jervis  EWCA Civ 1563).
344. Subsection (3) of new section 111 provides that a payer (or a specified person) may, in relation to a payment, give a notice to the payee of the payers intention to pay less than the notified sum. Subsection (3) permits both the giving of such a counter-notice where the notice containing the notified sum was given by the payee and, also, the giving of such a counter-notice where the notice containing the notified sum was given by the payer - a payer may wish to revise the amount he proposes to pay because, for instance, he subsequently discovers that the work in question was unsound.
345. Subsection (4) prescribes the content of such a counter-notice. It must identify the sum which the payer believes is payable on the date that such notice is given and is to explain how that sum has been arrived at (for instance, by identifying any moneys already paid by the date of the notice or by identifying any set-off or abatement applied by the payer). Subsection (4) makes it clear that such counter-notice may be for a nil payment (for example, as a consequence of any such set-off or abatement).
346. Subsection (5), read in conjunction with subsection (7), prescribes the timing of such a counter-notice. It must be given no later than such number of days as the parties have agreed in their contract before the final date for payment or, where there is no contractual provision, such number of days before the final date for payment as the relevant Scheme for Construction Contracts provides. Subsection (5)(b) has the effect of prohibiting the giving of such a counter-notice before the payee has actually given his payment notice (whether in a case where the parties had agreed in their contract that payment notices were to be given by the payee, or the payee is giving (or is deemed to have given) his payment notice in a default of the payer giving a payment notice).
347. Subsection (6) has the effect that the amount set out in a counter-notice given under subsection (3) of new section 111 becomes the notified sum which the payer must pay pursuant to subsection (1).
348. Subsection (7) defines the prescribed period. It is the period that has been agreed by the parties to the construction contract. Where there is no such agreement, the provisions of the relevant Scheme for Construction Contract will apply. The Schemes currently make this seven days before payment is finally due.
349. Subsection (8) states that subsection (9) applies where the payment notice provisions have been complied with but there is a dispute about the amount owing and the adjudicator decides that more money is owed than that set out in the relevant notice.
350. In such a case, subsection (9) provides that any such additional amount must be paid by the date which is the later of seven days from the date of the adjudicator's decision or the date which, but for the notice, would have been the final date for payment.
351. Subsection (10) has reference to the decision of the House of Lords in Melville Dundas Limited (in receivership) and others v George Wimpey UK Limited and others  UKHL 18 (a transcript of which judgment can be found at http://www.bailii.org/uk/cases/UKHL/2007/18.html/). In that case, the House of Lords decided that the payer could legitimately withhold moneys, notwithstanding that no withholding notice under current section 111 of the 1996 Act had been given, in a case where the parties contract had provided that moneys need not be paid in the event of the payees insolvency. The key to that decision was the fact that the insolvency occurred after the period for giving a withholding notice had expired i.e. it was not in the nature of things possible for the payer to have given such a notice beforehand.
352. Subsection (10) is intended to ensure that the Melville Dundas decision remains confined to insolvency situations alone (and is not interpreted to include other events which the parties may have specified in their contract). In the context of new section 111, it provides that the subsection (1) requirement to pay the notified sum does not apply where the contract allows the payer to withhold moneys upon the payees insolvency and the payee becomes insolvent after the expiry of the period for giving a notice of intention to pay less than this sum (pursuant to subsection (3)).
353. Subsection (11) applies the existing definitions of insolvent in the 1996 Act (section 113) to subsection (10).
354. Subsection (2) of clause 140 makes consequential amendments to section 112 of the 1996 Act such that, in effect, relevant references in that section are to the new subsection (1) requirement i.e. the requirement to pay the notified sum.
355. Section 112 of the 1996 Act permits a contractor to stop carrying out work under the contract in the event of non-payment by the other party.
356. Subsection (2) of clause 141 amends subsection (1) of section 112 to put it beyond doubt that a contractor may stop carrying out some, and not simply all, of the work in such a case.
357. Subsection (3) of clause 141 inserts a new subsection (3A) into section 112. The effect of this is to make the party in default (the party who has not paid) liable to pay to the contractor stopping work pursuant to section 112 a reasonable amount by way of the costs and expenses he incurs by stopping work (for instance, the payees reasonable costs in redeploying staff or removing plant and equipment).
358. Subsection (4) of clause 141 amends subsection (4) of section 112. Section 112(4) provides that any period during which the contractor stops work in pursuance of this right to do so in a non-payment situation is to be disregarded in calculating any time period prescribed in the contract. The amendment extends this to any period in which the contractor stops work in consequence of the exercise of this right; with the effect that extra time is allowable - for instance, the time which the payee requires to remobilise staff or return plant and equipment to the relevant site.
359. Implementation of the measures in the Bill will mean some costs for the public sector. The net cost will be approximately £35 million in 2010/11 and the same per year, subject to inflation, thereafter.
360. Duties relating to promotion of democracy (Part 1, Chapter 1), will have a net cost of £22.3 million per annum, falling on local authorities, which will be funded via the new burdens principle. This is based on the assumption that the duties will require two employees working in this area and a publicity budget for each county and unitary authority. Each district authority will require 0.5 employees and a publicity budget.
361. Petitions to local authorities (Part 1, Chapter 2), will have a net cost of just over £3 million, falling on local authorities.
362. At this stage, Housing (Part 1, Chapter 4) will involve only minimal costs. Clause 25 simply bestows a power to fund on the Secretary of State - it does not confirm or provide those funds. We have made provision in the current spending review period of £1.5million each year to support setting the National Tenant Voice up and its on-going work. Clause 26 is a power for the Secretary of State to nominate a body fulfilling certain criteria and for the new social housing regulator to consult that body. This will involve a minor administrative cost to the regulator.
363. Governance (Part 2, Chapter 1), will impose a cost of £1.2 million on local authorities per annum. This cost is based on the assumption of one designated full time overview and scrutiny officer in each top-tier local authority.
364. We estimate that the local government boundary and electoral change provisions (Part 3) will cost approximately £3 million to £4 million a year, based on the monies allocated to the electoral boundary function in the Electoral Commission's previous budgets. However, monies provided to the new Local Government Boundary Commission for England will ultimately be a matter for Parliament and will vary year on year dependent on workloads.
365. The local authority assessment duty (Part 4), will impose a cost of £7.6 million per annum on local authorities. This cost will be funded by central government under the new burdens principle. This cost is based on case studies of good practice and on the costs for the Joint Strategic Needs Assessment. It assumes that a significant number of local authorities will undertake joint assessments and that local authorities that already undertake assessments will face less costs than those authorities who do not already undertake these assessments.
366. The regional strategy (Part 5) will impose no new costs.
367. The Government will not fund the costs associated with setting up or running an EPB, combined authority or multi-area agreement with duties as it expects these arrangements to be cost-neutral, or to provide savings for the local authorities involved, through delivering efficiencies.
368. Implementation of the measures in the Bill will mean a slight increase in public sector manpower for local authorities.
369. The duties in Chapter 1 of Part 1 will require an additional two employees for each top-tier local authority and 0.5 employee for lower-tier authorities.
370. We expect Part 1, Chapter 2, petitions to local authorities, to have some additional public service manpower implications however we expect these to vary in each local authority according to population size.
371. Governance (Part 2, Chapter 1), will result in one designated full time Overview and Scrutiny officer in each top-tier local authority.
372. Local government boundary and electoral change (Part 3) will have no public service manpower implications. Boundary functions are already undertaken through the Electoral Commission. This bill will remove the boundary functions from the Electoral Commission and set up a new independent Local Government Boundary Commission for England. We expect the Electoral Commission to agree a transfer scheme (under clause 59) with the new Local Government Boundary Commission for England, which will determine how many staff will be transferred from the Electoral Commission to the Local Government Boundary Commission for England.
373. Local authority assessment duty (Part 4) is likely to have public service manpower implications, but this will vary amongst local authorities depending on their existing capacity.
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