10 September 2020 #Construction
The TCC’s recent decision in Rochford Construction Ltd v Kilhan Construction Ltd found that final dates for payment must be a fixed period of time from the due date for payment under a construction contract. The common practice of linking the final date for payment to issue or receipt of an invoice was found to be at odds with the requirements of the Construction Act. However, the court’s findings were obiter and so may be subject to further challenges.
Final Dates for Payment under the Construction Act
The final date for payment is the long stop date for payment. If the paying party fails to make payment by the final date for payment (and has not served a valid pay less notice), the 'notified sum' is the amount due which must be paid without set off or deduction (s.111 of the Construction Act) and the unpaid party can adjudicate for payment. The unpaid party also has a statutory right to suspend performance under the construction contract for non-payment.
The Construction Act provides (s.110) that every construction contract must provide an 'adequate mechanism for determining what payments become due under the contract, and when' and also “a final date for payment in relation to any sum which becomes due'. The Construction Act leaves it open to the parties to agree 'how long the period is to be between the date on which a sum becomes due and the final date for payment'.
It is therefore crucial that every construction contract provides for a final date for payment, which must be a specified period after the due date. If the parties fail to include the necessary payment provisions, the relevant provisions of the Scheme for Construction Contracts 1998 (the Scheme) are implied into the contract. Under paragraphs 3 to 8 of the Scheme payment becomes due seven days after the date of valuation or the unpaid party making a claim, and the final date for payment is 17 days from the date payment becomes due.
In practice, many construction contracts provide for a VAT invoice to be issued after the due date, and for the final date for payment to be a specified number of days after either issue or receipt of the VAT invoice (often with a procedure for a credit note and re-issued VAT invoice if a pay less notice is issued that changes the amount to be paid). Even if there is a requirement for the invoice to be issued within a certain number of days of the due date, the final date for payment is still floating in that it cannot be determined until the invoice has been issued (or received, depending on the contract terms).
Rochford Construction v Kilhan Construction
Rochford engaged Kilhan under a subcontract agreement in August 2018 to construct a reinforced concrete frame at Richmond upon Thames College. In May 2019 Kilhan submitted an interim payment application for just under £1.4 million for the period up to 30 April 2019. Rochford issued a payment notice on 23 October 2019, certifying just over £1.2 million.
The parties fell into dispute on a number of issues, including the effect of the payment notice and whether it was issued late. Rochford claimed that its payment notice was within the period allowed for a pay less notice (and that it took effect as a pay less notice), because Kilhan had not submitted an invoice until October 2019, and there was a provision in the subcontract that payment terms were 'thirty days from invoice'. Kilhan referred the dispute to adjudication and Rochford brought TCC proceedings for declarations, including as to the final date for payment.
The court found against Rochford, concluding that the Construction Act does not permit “floating” final dates for payment. Whereas the Construction Act requires an 'adequate mechanism' to determine the due date, for the final date it simply requires the parties to agree the 'period… between the date on which a sum becomes due and the final date for payment'. The court considered that this distinction was supported by the reference in s.109 to the parties being free to agree the 'circumstances in which' amounts become due and the absence of such language in relation to the final date for payment. Finally, the court noted that whereas s.110 of the Construction Act limits the circumstances that can be used to determine the due date (e.g. pay-when-certified clauses), there are no such limitation for the final date for payment; the court considered that this implied that it was not possible to link a final date for payment to events or circumstances other than the due date.
Final dates for payment in construction contracts are often linked to the issue (or less commonly the receipt) of VAT invoices, frequently driven by the need to link Construction Act-compliant payment provisions with internal accounting policies, invoicing software, and credit control processes. Following Rochford v Kilhan, contracts with these provisions are susceptible to being challenged. If the provisions are invalid the statutory period of 17 days from due date, per the Scheme, will apply, which will usually mean that the final date for payment is sooner than the parties had previously thought it was. This means that pay less notices may be submitted out of time, leading to an increase in 'smash and grab' adjudications.
However, such adjudications would not be guaranteed to succeed: the court’s comments on this point (which was one of several in the case) were obiter, and the court said the decision was reached with 'some diffidence'. The decision may therefore be subject to challenge in subsequent TCC or Court of Appeal proceedings. However, until that happens, parties entering into construction contracts should be aware of the risk that the Scheme provisions for the final date for payment may apply if they try to link the final date for payment to an invoice.