The impact of the new payment provisions on the hire of plant with an operator

The new Construction Act came into force on 1 October 2011, significantly amending the existing Construction Act 1996. It is crucial that all companies involved in the construction industry are aware of these changes.

Application to plant hire contracts

Contracts for the hire of plant alone are unlikely to be covered by the provisions of the Construction Act. However, where the plant owner supplies a driver or operator in addition to plant, in many cases it is likely that this will fall within the definition of “construction operations” set out in the Construction Act. This means that a contract for the supply of plant plus a driver or operator may be classed as a “construction contract” and subject to the new provisions of the Construction Act.

Companies who regularly provide or hire plant with an operator should understand the new provisions which will regulate payment. If payment terms are not agreed and set out in a contract, the provisions of the amended Scheme for Construction Contracts (the “Scheme”) will dictate the payment terms which apply to the hire contract.

It is important to note that the CPA Model Conditions do not include the payment provisions required by the Construction Act, so payment under contracts incorporating the CPA Model Conditions will also be governed by the Scheme, unless appropriate payment terms are agreed between the parties to the hire contract.

Changes to payment provisions

The new Act introduces two payment procedures. One of these procedures must be incorporated into every construction contract, and companies can choose which procedure they wish to use. Contracting parties are still free to choose the due date and final date for payment.

The “Payer-Led” Procedure

Under this procedure, the payer (i.e. the hirer) must issue a Payer’s Notice not later than 5 days after the payment due date. The Payer’s Notice must specify the sum the hirer considers to be or have been due at the payment due date and the basis on which that sum is calculated. Then, if the hirer decides that the sum set out in its Payer’s Notice is too high, the hirer can issue a Pay Less Notice prior to the final date for payment specifying the lower sum the hirer intends to pay.

However, if the hirer fails to issue a Payer’s Notice, the sum which becomes due for payment is dictated by the payee (i.e. the plant owner). If the owner has already submitted an application for payment in accordance with the contract (such as an invoice), then provided the application specifies the sum the owner considers to be due and the basis on which that sum is calculated, the sum claimed in the owner’s application will become due.

Alternatively, if no application has been submitted, or an application  has been submitted but it does not  comply with the contract, the owner is able to issue a Payee’s Default Notice setting out the sum it  considers to have been due at the payment due date and the basis on which that sum is calculated. If a Payee’s Default Notice is issued, the final date for payment will then be postponed by the number of days which pass between the date the hirer should have served its Payer’s Notice and the date the owner serves its Payee’s Default Notice.

The “Payee-Led” Procedure

Under this procedure, the owner issues a Payee’s Notice specifying the sum it considers to be due on the payment due date and the basis on which that sum is calculated. The Payee’s Notice must be issued not later than 5 days after the payment due date. The hirer is not required to issue a Payer’s Notice. Instead, the sum set out in the Payee’s Notice becomes due for payment. If the hirer wishes to pay less than the sum specified by the owner, it is critical for the hirer to issue a Pay Less Notice.

Payment under the Scheme

If your hire contract does not include specific payment terms, the provisions of the amended Scheme will dictate how payment should be made.

Where no payment periods have been agreed, the Scheme splits long term hire contracts into 28 day periods. Payments become due on the later of either:

a)       the expiry of 7 days following the expiry of each 28 day period; or

b)       the making of a claim by the payee (the owner).

Submitting an invoice is likely to be sufficient for the purposes of ‘making a claim’, so it is important for plant owners to ensure they do this promptly following the expiry of each 28 day period so that payment is not delayed unnecessarily.

As the Scheme operates under the Payer-Led procedure, the hirer is required to issue a Payer’s Notice no later than 5 days after the due date for payment. If the hirer does not issue a Payer’s Notice, then the sum specified in the owner’s invoice/application for payment may become due automatically, provided that the owner’s invoice specified the sum the owner considers to be due and the basis on which that sum was calculated.

Alternatively, if the owner’s invoice/application for payment does not specify the sum the owner considers to be due and the basis on which that sum is calculated, it is likely that the owner will be required to issue a Payee’s Default Notice. It is important to ensure that this is done as quickly as possible to ensure that the final date for payment is not delayed.

The final date for payment under the Scheme is 17 days after the due date. If the hirer wishes to pay less than the sum set out in its Payer’s Notice (or, if no Payer’s Notice was issued, the sum set out in the owner’s Default Notice or the owner’s invoice), the hirer must issue a Pay Less Notice no later than 7 days before the final date for payment.

If you do not want the Scheme to govern payment under your hire contract, you should ensure that it includes appropriate payment terms. It is likely that the most straightforward option would be the Payee-Led procedure. The owner’s invoice would effectively be a Payee’s Notice, provided that it specifies the sum considered to be due and the basis on which that sum is calculated. Under the Payee-Led procedure, the owner’s invoice would be binding on the hirer unless the hirer issued a Pay Less Notice.

Summary

• Where plant is provided with an operator, it is likely that the payment provisions set out in the Construction Act will apply to the hire contract.
• If the hire contract does not specify a due date for payment and a final date for payment, and incorporate either the Payer-Led or Payee-Led process, the provisions of the Scheme will dictate how payment should be made.
• Under the Scheme, the onus is on the hirer to issue a Payer’s Notice specifying the sum that is payable. The owner can only specify the sum which is payable if the hirer fails to issue a Payer’s Notice.
• If the Payee-Led procedure is incorporated into the hire contract, the owner is able to specify the sum which is payable and the hirer is only able to challenge this by issuing a Pay Less Notice.