The danger of linking a final date for payment to the submission of an invoice

Introduction

The recent case of Rochford v Kilhan (2020) highlights the importance of ensuring that the final date for payment stated in your construction contract is compliant with Housing, Grants, Construction And Regeneration Act 1996 (often referred to as the Construction Act) and is not in itself conditional on the provision of an invoice.

The facts

The facts of the case are fairly familiar in the industry – a contractor (Rochford) employed a groundworks subcontractor (Kilhan); works progressed but the parties fell out over a payment application; they ended up in adjudication arguing over whether or not a valid payment notice and/or pay less notice had been served. Kilhan were successful in the adjudication on the basis that Rochford did not serve a valid payment notice or pay less notice. Rochford disagreed with the adjudicator’s decision and the parties ended up before the Technology and Construction Court in London.

As commonly occurs in the industry, the contractual payment terms linked the final date for payment to the service of an invoice stating that the payment terms were “…thirty days from invoice”. The contract also made reference to a payment schedule but critically, the schedule itself was not included in the contact.

The law

If contractual payment terms are not compliant with the Construction Act, the payment provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the “Scheme”) will be implied into the contract instead.

Section 109 of the Construction Act sets out that a contractor is entitled to stage payments (sub-section 1) and that the parties are free to agree the intervals at which they fall due (ss2) but in practice, this is usually agreed monthly. In the absence of such agreement, the relevant provisions of the Scheme apply instead (ss3).

Section 110 of the Construction Act then states that any construction contract will set out the basis of determining a due date and the final date for payment (ss1). The parties are free to agree the basis of the due date and the period for the final date for payment any way they choose, provided it complies with the minimum requirements of Construction Act. Note that the ‘due date’ and the ‘final date for payment’ are two distinct and very different things – the due date is the date from which the final date for payment is calculated (amongst other things) and not when payment must be made i.e. the final date for payment. This is a mistake we see regularly and can have serious consequences. In this case, the final date for payment was linked to the submission of an invoice by Kilhan.

Where no agreement is reached, or where ambiguity on payment terms is found in the contract, the Scheme will apply instead. Part II of the Scheme provides that (1) the due date is seven days following the relevant period or, alternatively, the date which the claim is made (whichever was the later) and (2) the final date for payment is 17 days after the due date.

Findings

The judge found that:

“Pegging the final date [for payment] to service of an invoice, which is itself pegged to a payment certificate, is simply impractical”

i.e. it did not comply with the Construction Act.

In the end, the judge went onto state that as a result:

“…the statutory Scheme comes into play as regards the final date for payment” and that “…while a due date can be fixed by reference to…an invoice or a notice, the final date [for payment] has to be pegged to the due date, and be a set period of time, and not an event or a mechanism.” [Emphasis added]

Practical tips

Whilst this part of the judge’s decision was obiter (i.e. outside the main decision of this case of whether or not Kilhan should repay the decided amount), employers, contractors and subcontractors would do well to take heed of the following:

  1. There is a substantial risk that linking final dates for payment to the submission of an invoice will be found to be non-compliant with the Construction Act and such linkage should be avoided;
  2. The provision of a payment schedule (or in this case the absence of one) is key if it is referred to in the contact. Its absence created ambiguity and substantially contributed to the parties’ dispute. This point perfectly illustrates our experience that all disputes can be traced back to the time of contract formation;
  3. The payment due date does not mean the date by when payment must be made, that is the final date for payment. The due date is a key date from which other things are assessed such as payment notices or in this case particularly, the final date for payment;
  4. On your applications and/or invoices, we recommend that you state ‘Final date for payment’ instead of ‘Payment due’ – this will avoid confusing the terms as noted above; and
  5. It is important to understand the relationship between the Construction Act and the Scheme and when the Scheme may apply instead of your contractually agreed terms.

Rochford Construction Limited -v- Kilhan Construction Limited [2020] EWHC 941 (TCC) https://www.bailii.org/ew/cases/EWHC/TCC/2020/941.html

Disclaimer: this content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by HD Construction Solutions

Posted on 12/11/2020 in Payment

David

David Daly, Director

David is a Chartered Quantity Surveyor and testifying expert witness with a breadth of domestic and international commercial experience. He is experienced in dispute...

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