A recently published TCC decision has found that final dates for payment must be a fixed period of time from the due date under a construction contract. The court held that a provision which made the final date for payment dependent on the provision of an invoice was non-compliant with the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”) and therefore invalid. The decision appears to be at odds with widespread practice of linking final dates for payment to the provision of VAT invoices. The court’s findings, made obiter and reached with “some diffidence”, may be open to challenge, but if correct are likely to require a significant rethinking of payment mechanisms across the industry.
The Construction Act and Final Dates for Payment
The Construction Act under s110 provides that every construction contract shall “provide an adequate mechanism for determining what payments become due under the contract, and when” and also “provide a final date for payment in relation to any sum which becomes due”. The parties are free to agree “how long the period is to be between the date on which a sum becomes due and the final date for payment”.
The final date for payment acts as a long-stop date for payment. If the paying party does not make payment by the final date for payment and does not serve a pay less notice, the amount due becomes the “notified sum” under section 111 of the Act and must be paid without set-off or deduction. The unpaid party may adjudicate for payment of this amount and may also have a statutory right to suspend performance of its obligations under the construction contract.
If the parties do not include in their construction contract the payment provisions required under s110, the relevant provisions of the Scheme for Construction Contracts 1998 (the “Scheme”) are implied into the contract. Paragraphs 3 to 8 of the Scheme create a due date and a final date for payment, with payment becoming due seven days after the date of valuation or the unpaid party making a claim. The final date for payment is 17 days from the date payment becomes due.
Often in practice the final date for payment isn’t designed as a set date and can “float” by being linked to the issue of a VAT invoice for example.
Rochford Construction Ltd v Kilhan Construction Ltd
In August 2018 Rochford and Kilhan entered into a subcontract agreement for the construction of a reinforced concrete frame at the Richmond upon Thames College. Kilhan submitted an interim payment application dated 20 May 2019, with a value just shy of £1.4 million and concerning the period ending 30 April 2019. Rochford then issued what was said to be a payment notice on 23 October 2019 and certified a sum of just over £1.2 million.
A dispute arose between the parties concerning, among other things, the effect of the payment notice and whether it was issued late. Rochford relied on a provision in the subcontract stating that payment terms were “thirty days from invoice”. As Kilhan had not submitted an invoice until October 2019 , Rochford claimed that its notice was within the period allowed for a pay less notice. Kilhan successfully referred the dispute to adjudication, prompting Rochford to bring TCC proceedings for declarations, among other things, as to the final date for payment.
The court rejected Rochford’s claim and concluded that the Construction Act did not permit “floating” final dates for payment. In support of its decision the court noted the difference in language in s110 between an “adequate mechanism” for determining the due date and the reference to a simple “period … between the date on which a sum becomes due and the final date for payment”. This distinction was, in the court’s judgment, supported by the reference in s109 to the parties being free to agree the “circumstances in which” amounts become due and the absence of any such language in relation to the final date for payment. The court also noted that s110 also places limits on the circumstances which can be used to determine the due date, such as pay-when-certified clauses. The absence of such limitations being extended to the final date for payment implied, in the court’s view, that it was not possible to link a final date for payment to events or circumstances in the first place.
Conclusions and implications
This decision has the potential to have a significant impact on the construction industry. As noted above, final dates for payment are often linked to the provision of VAT invoices, driven in large part by the need to link the payment provisions of the Construction Act with accounting policies and software built around invoicing. Construction contracts which contain these provisions may be susceptible to attack, with the result that the statutory time period of 17 days contained in the Scheme will apply. In many cases this period will be shorter than the contractual period that the parties had previously agreed on which in turn may result in a failure to submit pay less notices on time and an increase in “smash and grab” adjudications.
The court’s decision on this point was obiter and expressed as being reached with “some diffidence”. It may therefore be capable of challenge in subsequent TCC or Court of Appeal proceedings. In the meantime, parties entering into new construction contracts should take note of the risk that final dates for payment linked to invoices or other events may not be compliant with the Construction Act.
Rochford Construction Ltd v Kilhan Construction Ltd  EWHC 941 (TCC).