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Most would agree that the Housing Grants, Construction and Regeneration Act 1996 (the Act) has proved effective in introducing certainty into payment procedures and enabling disputes to be resolved quickly and effectively.

There are, however, several issues that have yet to be clarified.

One such issue is the effect of the payment notice in Section 110(2) of the Act. This requires every construction contract (within the meaning of the Act) to provide for the giving of a notice by the paying party specifying the amount of payment proposed to be made and the basis upon which that amount has been calculated. If a contract does not contain such provisions, or the provisions do not comply with the minimum requirement of the Act, the Scheme for Construction Contract (the Scheme) imposes these provisions.

Some argue that, if the payment notice is not given, the applicant should be entitled to payment of the full amount. Others argue that the absence of a payment notice should not automatically entitle the applicant to the full amount of his application because he is only entitled to be paid a sum due under the contract and Section 110(2) makes no express provision as to the consequence of a failure to give a payment notice.

This is not to be confused with the withholding notice under Section 111 of the Act. This usually does prevent a party from withholding payment of a sum due under the contract unless he has given a notice specifying the amount proposed to be withheld and the ground or grounds for withholding such payment.

While there have been a number of decisions on the effect of the withholding notice, or rather its absence, there had been no judicial guidance on the effect of the payment notice, that is until the recent decision in S L Timber Systems Ltd versus Carillion Construction Ltd (2001).

In S L Timber the payment provisions of the Scheme applied. A dispute arose as to the amount due to the sub-contractor in the absence of a payment notice and the contractor's failure to serve a withholding notice within the required time. The dispute was referred to adjudication and then to the court.

Lord MacFadyen, a Scottish Court of Session judge found that Section 110 makes no provision as to the consequence of failure to give a payment notice and certainly does not preclude any dispute as to the amount claimed. The sub-contractor was only entitled to be paid the sums due under the contract and in the absence of a payment notice and withholding notice the applicant would have to prove his entitlement to payment of the amount for which he applied.

The decision in S L Timber was based upon the examination of the provisions of the Scheme because the contracts in question did not comply with the Act. The starting point for any analysis of a party's entitlement to payment should be the contract itself. If the contract complies with the minimum requirements of the Act then one must apply the provisions of the contract in order to determine the consequences of any failure to serve a payment notice.

The different standard forms of building and engineering contracts approach this matter in different ways. These are as follows:

• JCT standard form of building contract 1998 private with/without quantities – within five days of the Interim Certificate being issued the employer must give notice to the contractor specifying the amount proposed to be made, to what it relates and the basis on which it is calculated. This notice from the employer amounts to the payment notice.

  Where the employer fails to give any written payment notice he is required by clause 30.1.1.5 to pay to the contractor the amount certified by the architect in the Interim Certificate.
  

• JCT with contractors design 1998 – similar to the above form, if the employer does not give a payment notice clause 30.3.5 requires him to pay the contractor the amount stated in the contractor's application for interim payment.
  
• ICE 7th edition – the contractor submits a monthly application for payment to the engineer who certifies the amount payable by the employer to the contractor. This certificate amounts to the Employer's Section 110(2) payment notice but unlike the JCT forms there is no express provision explaining what is to happen in the event of the engineer failing to issue a certificate.

  Consequently, it would appear that, following the decision in S L Timber, the contractor would not automatically be entitled to receive the full amount of his application. Subject to a withholding notice being issued, there would, in effect, be a dispute as to the amount due to the contractor which an adjudicator may determine.
  

• GC/Works/1 1998 – the project manager certifies the sums due to the contractor and, in accordance with the Act, the employer is required to give a payment notice specifying the amount proposed to be paid and the basis on which that amount is calculated.

As with the ICE contract (and the Scheme) there is nothing to say what should happen if the employer fails to give a payment notice and, again, it appears that the contractor would not automatically be entitled to receive the full amount of the project manager's certificate.

Conclusion
The decision in S L Timber appears to have clarified one of the issues which had sparked so much debate and differing views within the industry. But before giving up all hope of being paid the full amount of your application remember that:

• this is a Scottish case and is only a persuasive authority, an English Court may choose to take a different view; and
  
• you should first look at your contract. If it complies with the minimum requirements of the Act its terms and conditions will prevail over the Scheme and, as in the JCT forms, may automatically entitle you to payment in full of your application in the absence of a payment notice from the employer.