Lord Denning’s famous quote is as true today as when he said it when discussing similar legislation in England: “Cash flow is the lifeblood of the industry”.  This is a statement you will undoubtedly agree with if you are in any way involved in the construction industry.  

While a healthy cash flow is coveted in any industry, it is particularly important in construction, where costs are high and margins are low. Coupled with long time frames for dispute resolution via conventional means (such as litigation), this has allowed paying parties to put the squeeze on payees by delaying payments until payees are so desperate, they will take a deal or other similar tactics.    

Faster methods of dispute resolution

These issues became so prevalent that in 2010 Senator Feargal Quinn proposed what would become the Construction Contracts Act 2013 ('the act'), aimed at preventing these practices and providing faster methods of dispute resolution for payees. 

In this article, we take a look at some of the key points of the act and how they work, including how it is impacting the landscape of payment in the industry.

While it also protects main contractors, the act was primarily conceived to protect subcontractors from poor payment practices by main contractors. It is no silver bullet, but the main highlights are the following:

  • Prohibits pay-when-paid practices, so a main contractor cannot link its obligation to pay a subcontractor when it is paid by its employer meaning the main contractor has the risk of non-payment by its employer and cannot pass that risk to a subcontractor;
  • Introduces a minimum payment cycle of 30 days – which for subcontractors, cannot be extended, (but can for main contracts), though payees may need to make their applications in a certain manner to avail of this;
  • Allows those who have not been paid to suspend works at the expense of the non-paying party – provided they make the required notifications allowing them to do so;
  • Requiring both parties to include justifications for their assessments at the risk of those assessments being declared invalid – aimed at preventing unsubstantiated over or undervaluing; and
  • Introduces adjudication as a dispute resolution mechanism, which while it is an oversimplification, can be compared to justice via post and provides a quick method of obtaining a decision and therefore any sums due, usually in the region of six weeks.

That is all good news, so how does it all work? 

Well, first the contract must be a construction contract, defined by the carrying out of construction operations which includes design. The definition of construction operations is generally what you would expect it to be, while it does include labour-only contracts, it does not include the supply of materials unless it also includes installation. So those manufacturing items for use in the industry may need to check the fine print. 

It also does not apply to projects less than €10,000 in value, or those residential dwellings less than 200m2 floor area, ruling out most domestic works.

Next, when there is a construction contract, there must be a payment procedure, which allows for figuring out assessment periods (valuation intervals), how the amounts due are to be calculated and when payments are to be made. 

If there is no such detail, for example, if there are no written terms, then a procedure is implied by the legislation. As noted above, for subcontractors that payment procedure must result in a cycle of 30 days or less between payments, though main contractors can agree to longer payment cycles with their employers. 

Those looking to be paid are entitled to submit a 'payment claim notice', there are a number of requirements for this, the first being that it must be submitted in a certain time frame, specifically within five days of the payment claim date.   

Generally, the payment claim date will align with the valuation interval set out in the contract between the parties, but if there is none, the default will be 30 days. 

Though it should be noted the law is currently a little unclear here, and you should seek advice for your particular facts and circumstances as they are likely to differ on a per-project basis.

The other requirements are to set out the following:

  • The amount you are asking for;
  • The period to which the request relates;
  • Details of the project/section etc (subject matter); and
  • The details of how the amount due was calculated.

If a suitable payment claim notice is issued then that triggers an obligation on the recipient if they do not agree with the assessment to respond within 21 days of the payment claim date (note not receipt) stating the amount they propose to pay and including the details explaining any differences. 

The recipient must then pay any amount stated in the response by the next payment claim date (unless something else has been agreed under a main contract). 

There is a bit of a disconnect, as the act does not actually state that the amount claimed must be paid if the recipient does not issue a response. However, recent jurisprudence indicates (though are yet to confirm) that the court will adopt this position (see Aakon Construction Services Limited v Pure Fitout Associated Ltd [2021] IEHC 562).

If the due date for payment passes without payment, then that party can suspend the construction work by giving a written notice and waiting a further seven days for payment before downing tools. 

Loses entitlement to suspend

If payment is made or there is an adjudication commenced, then the party loses the entitlement to suspend and must continue to work as if there is no dispute.

Adjudication is becoming a more and more common way of resolving payment disputes, and anything related to payment on construction contracts can be referred. 

There is some debate as to what this actually means, with some circles applying a very wide definition (anything that involves money whatsoever) and others saying it must be something that has been claimed in a payment claim notice.  

There has been no definitive answer given by the courts or the government’s adjudication panel. However, we suggest that putting everything in the payment claim notice is conservative and the correct approach for now.

Adjudication itself is a dispute resolution procedure which compared to other methods (such as litigation or arbitration) is relatively quick and inexpensive. 

An adjudicator is appointed (usually by the government panel), who then receives submissions from both parties setting out their position and the evidence on which they rely. The adjudicator then issues a decision, usually within 28 days of receiving the first submission. 

If that decision is not complied with then – unless there has been something drastically wrong like bad faith or bias – it will be enforced by the high court, who have set aside a particular slot in the calendar for such cases.

That does not mean it is the final say on the matter, as if you believe the adjudicator was incorrect, you can still go to the next step (be it arbitration or litigation depending on your contract). 

Adjudicator’s decision generally 'good enough'

Until a decision is reached in that subsequent process, the adjudicator’s decision will stand. This is often referred to as 'pay now – argue later'.  However, in most instances no further steps are taken, as the adjudicator’s decision is generally 'good enough' to resolve the dispute and at least allow the parties to reach some kind of agreement.

You can see from the above that the ultimate goal of the act is to promote and protect cash flow in the industry supply chain, including the provision of quick dispute resolution when things do go wrong, allowing for quick payments, to avoid bogging companies down in long court processes where they may slowly run out of money. That is a scenario the government wishes to avoid and we are sure that all involved can see the benefits of a stronger industry. 

If you have any further questions on these provisions or others contained in the act, or just construction law in generally, please do not hesitate to contact Quigg Golden here

Author: John Doherty, Senior Associate at Quigg Golden, the construction and procurement law specialists in the UK and Ireland for more than 20 years.