Payment terms in construction industry

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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

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

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

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.

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

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

FIDIC suite of Contracts (99 Suite)

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).

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)

Payment
procedure
under FIDIC 99

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.

Payment
procedure
under FIDIC 99

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.

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)

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.

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

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).

Suspension rights old and new

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

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”

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

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

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.

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

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.

Conditional payment provisions

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

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

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

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

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!

EVENT Photos
12 Nov 2017

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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