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Payment terms in construction industry
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Venkataraghavan Ramadurai, LLM, FCIArb, FCMA, MRICS
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My presentation to Society of Construction law conference at Delhi on 12th November 2017.
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Payment terms in construction industry
1.
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rights reserved Payment terms in construction Industry R. Venkat LLM (UK), B.Eng., C.Eng., FCIArb, FICA, MRICS, FCMA Partner/Director C Cubed Consultants Limited, Dubai. www.rmvenkat.com New Delhi November 10-12, 2017 Payment terms in Construction Industry
2.
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rights reserved Payment terms in construction Industry
3.
3www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Proposed walk-thorough • Uniqueness of construction Industry • Importance of timely payments • Payment procedures in Standard form of Contracts • Remedies for payment default • Contract based • Statutory remedies (Common law) • Self help remedies (based on UAE Civil Code) • Brief note on Conditional payments • Questions
4.
4www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Construction is a Unique and Risky business! (as against say car manufacturing) • Mainly Bespoke! • Assembly takes place in open air • Various geographical locations, remote areas • Operations are consecutive not concurrent! • High proportion of labour costs • Capital intensive, Long duration
5.
5www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Further complications in Construction Industry The complexities of construction activities and the nature of working environment which constantly change contribute to greater risks occurring at construction sites at all times.
6.
6www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Dawnays Ltd v F G Minter Ltd; (Court of Appeal) Circa 1970 Architects’ certificates under standard forms of building contracts were to be regarded in the same way as a cheque or cash as ‘cash flow was the very lifeblood of the enterprise’. Lord Denning on the importance of Contractor’s Payments CASH FLOW
7.
7www.rmvenkat.com © All
rights reserved Payment terms in construction Industry The Employer shall submit, within 28 days after having received any request from the Contractor, reasonable evidence that financial arrangements have been put in place and are being maintained which will be enable the Employer to pay the Contract Price. (Sub-Clause 2.4) FIDIC has introduced a clause in 99 suite of Contracts Obligating the Employer to provide reasonable evidence of financial arrangement
8.
8www.rmvenkat.com © All
rights reserved Payment terms in construction Industry FIDIC suite of Contracts (99 Suite)
9.
9www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Duty to pay: According to Clause 14 the Employer shall pay the Contract Price to the Contractor. The Employer shall not withhold any payments or set off against an amount certified in a Payment Certificate (Sub- Clause 2.5).
10.
10www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Payment mechanism in FIDIC contract Advance payment Interim payments including Material at site Final payment Retention monies on each certification o Half of the retention at the time of Taking Over o Full release after final certificate (After DLP or DNP)
11.
11www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Payment procedure under FIDIC 99
12.
12www.rmvenkat.com © All
rights reserved Payment terms in construction Industry The Employer shall make an advance payment, as an interest-free loan for mobilisation. The Engineer shall issue an Interim Payment Certificate for the first instalment after receiving a Statement and after the Employer receives (i) the Performance Security in accordance with Sub-Clause 4.2 and (ii) a guarantee in amounts and currencies equal to the advance payment. The Contractor shall ensure that the guarantee is valid and enforceable until the advance payment has been repaid, but its amount may be progressively reduced by the amount repaid by the Contractor as indicated in the Payment Certificates.
13.
13www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Payment procedure under FIDIC 99
14.
14www.rmvenkat.com © All
rights reserved Payment terms in construction Industry
15.
15www.rmvenkat.com © All
rights reserved Payment terms in construction Industry No payment will be made if no certificate has been issued. Conversely, no payments shall be withheld which have been certified. (exception Sub-Clauses 4.19 and 4.20) However, Sub-Clause 14.6 allows the Engineer to withhold an Interim Payment Certificate if the Contractor fails to perform an obligation.
16.
16www.rmvenkat.com © All
rights reserved Payment terms in construction Industry What are the avenues to pursue when payment is delayed? A Contractor in these circumstances is allowed to suspend the works. Sub-Clause 16.1 deal with these aspect. A further remedy is ruled by Sub- Clause 16.2 according to which the Contractor is entitled to terminate the Contract in the event of sustainable non payment. Late Payment; Remedies to Contractor (FIDIC)
17.
17www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Financing charges shall be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country. Additionally the Contractor may claim for financial charges (Sub- Clause 14.8), Time extension (Sub-Clause 16.1) and finally cost plus reasonable profit (Sub-Clause 16.1). Late Payment; Remedies to Contractor (FIDIC) The Contractor shall be entitled to this payment without formal notice or certification, and without prejudice to any other right or remedy.
18.
18www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Housing Grants, Construction and Regeneration Act 1996 (Construction Act). The amended act has been brought in by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (LDEDC). More suspension rights under the 2009 amendment! Construction Payments; Statutory provisions under English Law
19.
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rights reserved Payment terms in construction Industry Suspension of works (Section 112) NEW!! Rights has been enhanced. The suspending party will be: • entitled to suspend the whole or part of their obligations; • entitled to the reasonable costs and expenses incurred by the suspension, such as the costs associated with removing plant and equipment and re-mobilisation costs; and • entitled to time "in consequence" of exercising the right to suspend (in addition to the current right to seek an extension of time for the period of suspension). (extra time to re-mobilise staff and to return plant to the site).
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rights reserved Payment terms in construction Industry Suspension rights old and new
21.
21www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Securing payment for services and goods supplied is a common point of contention between a Contractor and an Employer. It is not uncommon for a contractor to face a very real struggle to receive payment. Self-help remedies
22.
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rights reserved Payment terms in construction Industry A convenient definition of a lien is: “a right conferred by law upon a person who has put money or money’s worth into a property of another, of retaining such property in his possession until he has been compensated Self-help remedies Lien A right exists in many jurisdictions for the ‘unpaid contractor’ to retain possession of property on which it has worked, until paid for that work. In most jurisdictions, this right of retention is known as a “lien”
23.
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rights reserved Payment terms in construction Industry Article 879(1) and (2) reads as follows: “(1)If the work of the contractor produces (a beneficial) effect on the property in question, he may retain it until the consideration due is paid…. (2)If his work produces no (beneficial) effect on the property, he shall not have the right to retain it pending payment of the consideration,” Self-help remedies under UAE Law
24.
24www.rmvenkat.com © All
rights reserved Payment terms in construction Industry Another practical issue is the fact that there may be more than one contractor who wishes to exercise a right of retention for unpaid works over the same property. potentially leading to a situation in which a plurality of independent contractors simultaneously exercising their rights under Article 879; What constitutes a ‘beneficial effect’, as the term is not defined. The onus is on the person alleging that there has been a beneficial effect. Self-help remedies
25.
25www.rmvenkat.com © All
rights reserved Payment terms in construction Industry The remedy under Article 879 may, by the mere virtue of the contractor remaining in possession of the property, prove to be commercially effective in procuring payment from the employer, as it may frustrate the Employer’s need for the property. Self-help remedies That said, it does not come without its disadvantages, which include (i) the allocation of additional resources to keep continuous possession of the property, and (ii) the exposure to a damages claim in the event that the attempted exercise of the Article 879 right is found to be unlawful and damage is suffered by the owner of the property.
26.
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rights reserved Payment terms in construction Industry Right to suspend (Reciprocity of obligations) UAE Civil code Article 247 provides that: “In contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do.” Bahrain Article 150; Kuwait Article 219; Oman Article 157 and Qatar Article 191
27.
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rights reserved Payment terms in construction Industry A party considering suspending work should ask: Right to suspend • Does the Employer have any legitimate reasons for withholding payment? • But for the breach, has the Employer otherwise substantially discharged his payment obligations? • The consequences of an unlawful suspension can be severe and therefore caution is required.
28.
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rights reserved Payment terms in construction Industry Conditional payment provisions
29.
29www.rmvenkat.com © All
rights reserved Payment terms in construction Industry The Main Contractor will pay the subcontractor within X days of receiving payment from the owner. A timing mechanism only Generally will not excuse the Main Contractor from having a payment obligation to the subcontractor, regardless of whether the Employer has paid the Main Contractor. Condition precedent! The Main Contractor only incurs an obligation to pay the subcontractor if, and only if, it is first paid by the Employer. It excuses the Main Contractor from having a payment obligation to the Subcontractor if the owner/Employer does not pay the Main Contractor. Pay “when” paid Pay “if” paid
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rights reserved Payment terms in construction Industry Pay-when-paid clauses are prohibited (in most situations) under section 113 of the Construction Act (prior to 2009 revision). Conditional Payments are Prohibited New variants emerged! Pay-when-certified Midland Expressway Ltd v Carillion Construction Ltd [2005] EWHC 2963
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rights reserved Payment terms in construction Industry Under new section 110 (1A) even pay-when-certified clauses will be banned. However, this blanket ban is subject to the following two exceptions: Management Contracts (Section 110 (1C)) “First tier PFI sub-contracts” will be exempt by virtue of the separate Exclusion Order. Conditional Payments are Prohibited
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rights reserved Payment terms in construction Industry The court of cassation in Dubai held that: The Subcontractor will only be entitled to a proportional payment during the performance period from any payment received by the main contractor from its client, the same does not apply when a sub-contractor has completed all his work and delivered the project to the main-contractor. Dubai Court of cassation Judgment No. 281/95 dated 6 July 1996. Conditional payment in UAE A sub-contractor has no obligation to wait for payment until such time as the main-contractor has been paid
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rights reserved Payment terms in construction Industry Summary • Timely payments are very important • FIDIC form provides detailed remedy for payment default • Enhanced Statutory remedies available under English law • Limited Self help remedies in civil law jurisdictions (UAE) • Conditional payment provisions are generally prohibited • Potential source of dispute in construction contracts!
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rights reserved Payment terms in construction Industry EVENT Photos 12 Nov 2017
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rights reserved Payment terms in construction Industry R. Venkat LLM (UK), B.Eng., C.Eng., FCIArb, FCIA, MRICS, FCMA Consultant, Trainer www.rmvenkat.com Thank you for your attention!
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