Thursday, February 16, 2017
The Construction Contracts Act (the “Act”) applies to all construction contracts (as defined in the Act) entered into after 25 July 2016.
The Act’s two primary functions are:
Given that the Act has been in force for less than six months prior to the date of writing, we have yet to see the full implications (positive and negative) of the Act in practice. It is certainly too early to effectively analyse the impact that the introduction of adjudication has had on the Irish construction industry. It is, however, becoming apparent that in certain scenarios there may be some undesired or unintentional consequences attributable to the payment provisions in the Act.
Payments under Construction Contracts
S. 3(1) and 3(2) of the Act stipulate that a construction contract must provide for both the amounts and the intervals of interim and final payments to be made to the executing party (or an adequate mechanism for determining them). If a construction contract fails to satisfy this requirement then S. 3(3) of the Act stipulates that the Schedule to the Act shall apply by default to the contract.
The Schedule to the Act provides that the executing party must be paid every 30 days after the commencement date of the contract and then every 30 days thereafter up to substantial completion. The final payment under the contract is to be made 30 days after the date of final completion.
S. 3(4) of the Act provides that the Schedule to the Act shall apply to a subcontract except where the subcontract makes provision
Cash Flow Issues for Main Contractors vis-à-vis Subcontractors?
When S.3(1) and 3(2) are read in conjunction with S.3(4) it would seem that main contractors may in some circumstances be subject to cash flow issues when engaging subcontractors.
A main contract may satisfy the requirements of S. 3(1) and 3(2) of the Act whilst at the same time providing for a longer period for interim and final payments than the 30 day intervals which must apply to a subcontract as per the Schedule. The payment intervals in the main contract and subcontract will therefore not align but the main contractor must continue to pay its subcontractors in accordance with the Act until such time as it is paid under the main contract.
The level of discrepancy between the payment intervals in the main contract and subcontract will determine the main contractor’s ability to bridge this gap and some smaller contractors may find this is beyond their financial capacity. This could have serious implications for main contractors being paid upon the completion of works milestones which will not necessarily be evenly spread across their work programme. Failure to achieve a milestone could further delay payment and all the while the main contractor must continue to pay its subcontractors every 30 days (assuming that such subcontractors have not caused or contributed to the failure to achieve the milestone in question).
Turnkey Contracts and Energy Performance Contracts
Bigger problems may arise however in relation to certain turnkey contracts or contracts where a contractor will not receive payment until all works are completed. S. 2(3) of the Act states that a contract between a State authority and its partner in a public private partnership (PPP) arrangement is not to be considered a construction contract. However, there are many private contractual arrangements that are akin to PPPs in that they are split into separate construction and operational phases where the contractor’s remuneration is discharged during the operational phase of the arrangement once all construction work is complete.
A useful example of this is the energy performance contracting model whereby a contractor will carry out energy retrofit works to a building and will then be paid out of the resultant energy savings spread over a number of years after the works are completed. S. 2(4) of the Act stipulates that it will only apply to the provisions governing the construction elements of the energy performance contract; therefore, the Act is unlikely to apply to any subsequent operational or maintenance activities . However, it is during this phase that the contractor is to be remunerated for its work carried out during the construction phase.
By virtue of S. 2(4) of the Act it may be possible for an unscrupulous contractor to enter such a contract and submit a payment application in accordance with the Act 30 days after commencing work. Should the employer refuse to pay the contractor on the basis that it is not entitled to be paid until the work is complete the contractor may then be in a position to suspend the work in accordance with the Act on the basis that it has not been paid.
A similar scenario could potentially arise where a turnkey construction contract is employed which doesn’t adopt the traditional interim and final application/certification process to govern payment during the works. If those contracts do not provide for interim and final payments then the Act stipulates that the provisions of the Schedule must apply.
Zero Sum Payments
One possible way to satisfy the provisions of the Act whilst retaining the turnkey nature of such contracts would be to expressly provide that the value of all interim payments shall be ‘zero’ or some nominal amount. Whilst S. 2(5)(b) of the Act prohibits the limitation or exclusion of the application of the Act, nowhere does it state that interim payments cannot be set at ‘zero’.
It is debateable whether this approach would be seen as limiting the application of the Act although it could certainly be argued that this approach is inconsistent with the spirit and rationale of the Act. However, this might be the only means by which an employer can protect itself against a contractor seeking to rely on the provisions of the Act notwithstanding the fact that the parties have entered a contract where all payments to the contractor are to be made after the conclusion of the works.
The approach to adopting zero values for all interim payments for turnkey and energy performance contracts has yet to be tested. If it were to fall foul of the Act then this could have significant implications for these types of contracts and could severely limit their use (or indeed consign them to history). The aim of the Act in improving the position of contractors (and especially subcontractors) from a cash flow perspective is to be lauded, but it does seem incompatible with the traditional turnkey approach to contracting. It is still early days in terms of the application of the Act but it will be interesting to see how these issues will be addressed in practice.