Payment after termination: the machinery stops

The ordinary payment cycle runs on a rhythm. A valuation each period, a payment notice, a final date for payment, and a sum that becomes due whether or not anyone is happy with it. That rhythm assumes one thing above all: that the works are carrying on.

Termination breaks the assumption, and with it the rhythm. Two events change how payment works, and they change it in different ways.

Termination for default

When the employer terminates for the contractor's default under the Section 8 provisions, the ordinary machinery does not simply carry on with a smaller scope. It stops. No further sum becomes due to the contractor, and the employer is not obliged to make any further payment, until the works are complete and the account is drawn up.

So the last interim certificate before termination is not followed by the next one. There is no next one. What follows instead is the single reckoning at the end, which weighs what the employer has paid and spent and lost against what the contractor would have been due had the contract run its course.

Termination by the contractor or on neutral grounds

The picture reverses when the contractor terminates, or when either party terminates on a neutral ground that carries no fault. A different account is drawn, and here it is usually the employer that pays the contractor.

That account covers the value of work properly executed, any loss and expense the contractor has suffered, and the cost of removing plant and equipment from the site. The mechanism is still not the ordinary interim cycle, but the direction of travel is the familiar one: money owed to the contractor for what it did and what the termination cost it.

Insolvency suspends payment before anyone terminates

Insolvency is the case that surprises people, because it does not wait for a termination notice to bite.

From the insolvency event, the employer's duty to make further payment, or to release retention, is suspended. That suspension applies whether or not the employer goes on to terminate the contract. The trigger is the insolvency itself, not any decision the employer makes afterwards.

The practical consequence is immediate. An employer that keeps certifying and paying in the ordinary way after the contractor becomes insolvent is paying money it was entitled to hold, and it will struggle to recover that money from an insolvent estate. The same goes for retention: releasing it after the insolvency event hands over security the employer was entitled to keep.

Why the record has to show the switch

The reckoning at the end depends on knowing exactly what was paid and what was held, and on knowing it at the right dates. If the switch into the post-termination position is not visible on the record, it gets reconstructed by hand later, from memory and email, at the worst possible time.

• The last sum that properly became due, and whether it was paid
• The retention held at the point of the insolvency event or the termination
• Any payment or release that went out after the suspension should have started
• The date each of these happened, because the sequence decides recoverability

The notice discipline does not disappear

Suspending the ordinary cycle does not mean the employer can stop keeping the record straight. Sums that were already due before the switch are still due, and the payment and pay-less notice discipline still governs them. What changes is that no new sums accrue in the ordinary way once the works stop.

Getting this wrong at the margin, by treating a sum that had already become due as if it were caught by the suspension, invites its own dispute. The clean position is to fix the switch point precisely and treat everything before it under the ordinary rules and everything after it under the termination account.

The check before the next payment goes out

• Has a termination taken effect, or has an insolvency event occurred, that suspends further payment?
• If so, is this sum one that had already properly become due before that point?
• Is any retention about to be released that should now be held?
• Is the date of each payment and each release recorded, so the sequence can be shown later?

If the payment is a sum that became due before the switch, it stands. If it is a new sum accruing after it, the machinery that would have produced it has stopped, and paying anyway is paying out of the employer's own settlement.