Payment and performance

The Housing Grants, Construction and Regeneration Act 1996 will change the rules on payment in construction.

The contractor’s right to payment is usually dependent on the wording of the contract in question. Where there is no express contract, a party may be left with only a claim for a reasonable sum in respect of works carried out, frequently called a quantum meruit.

In practice, often because of the parties' failure to finalise contract documents, there are numerous instances, even on quite large projects, where the parties' entitlement lies with a quantum meruit.

Section 109 of the Construction Act imposes a basic payment structure on all construction contracts. It achieves this by requiring construction contracts to include an "adequate mechanism" for dealing with certain payment matters, not least a right to interim payment.

Part II of the Act applies only to written construction contracts, with "construction" defined to apply to a broad spectrum of building and engineering activities. It may not apply to quantum meruit arrangements, in part because there are competing theories as to the legal basis of the changes plaintiff's incumbent entitlement in these circumstances. The traditional theory is that there is a quasi-contract: the law implies a contract between the parties, even though there has been no formal offer and acceptance. The more modern view is that the plaintiff is entitled to be paid by virtue of the equitable doctrine of restitution. If the latter view is taken, there will be no contract, written or otherwise, for the act to apply to. However, even in the former case it is a moot point as to whether an implied contract, with arrangements between the parties evidenced in writing, would fall within the provisions of the new act.

Under a lump sum contract, for example, to build a factory for £5m, if the factory is not competed, detailed clauses may provide the amount the contractor is to receive. In the absence of such clauses, what payment can the contractor recover? What is the position if the contractor fails to install only one exterior light of the otherwise complete facility? Is the work to the regarded as incomplete, disentitling the contractor to payment? The courts have been greatly exercised over the years with the concept of entire contracts and substantial performance.

An entire contract is one in which one party must complete its part of the contract in full before the other party has any liability to make payment, for example, if a builder is to build a wall, he must build the whole wall to trigger a right to payment. The act will make such contract payment structures illegal where the duration of the works is beyond a defined period. This means nearly all construction contracts will soon contain a statutory right to instalments. However, the act further provides that the parties will be free to agree the amounts of the payments and the circumstances under which they become due. Thus their full rigour can also be watered down - for example, it could be provided that the contractor will only receive 2% of the contract sum during the works and the balance upon completion.

Under an ordinary lump sum contract, the contractor is entitled to payment if he achieves "substantial completion".

The modern position regarding substantial performance contrasts with the decision in Cutter v Powell (1795) where the Defendant agreed to pay Cutter 30 guineas for acting as second mate on a voyage from Jamaica to Liverpool. Cutter died when the ship was about a week’s sail from Liverpool, and his widow sought a proportion of his wage. The Court harshly held against her, as Cutter had performed but only a part of his contract.

In considering whether substantial performance has been achieved, it is necessary to take into account both the nature of the defects or omissions and the proportion between the cost of rectifying them and the contract price.
Despite the changes under the act, buttressed by the right to suspend works for non-payment, and the outlawing, except in the case of insolvency, of pay-when-paid clauses, the key to payment is till full performance, qualitatively and quantitatively, on the part of the contractor.