Final Date for Payment: Time to revisit Payment Terms

Executive Summary

1. In Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 1947 (TCC), the Court confirmed, albeit on a obiter basis, that linking the final date for payment in a construction contract to the due date would provide an adequate mechanism for determining when the payment becomes due.

2. In particular, the Court found that it was often impractical for the final date for payment to be linked to an event or performance of some kind (e.g. the provision of an invoice) as it could mean it was not an “…adequate mechanism…” for the purposes of the “Construction Act”.

3. The Court’s obiter remarks may be subject to challenge, but if correct, and in order to reduce the risk of ‘smash and grab’ adjudications, it may be prudent for parties to check their contracts to ensure that the payment provisions provide a clear mechanism for determining what payments become due and when, in particular, final date for payment.

Background

4. On 3 August 2018, Rochford entered into a subcontract with Kilhan for the construction of a reinforced concrete frame on a project known as “Richmond upon Thames College”.

5. Kilhan submitted an interim payment application dated 20 May 2019, for just shy of £1.4 million. Rochford subsequently issued an interim payment notice on 23 October 2019, certifying a lesser sum of just over £1.2 million.

6. A dispute arose between the parties concerning, among other things, the effect of the payment notice and whether it was issued late.

7. Rochford relied on an express provision in the subcontract stating that “the Final Date for Payment of any sum that has become due is 30 days from the date of service of a relevant invoice”. It claimed that the final date for payment could not arise as Kilhan had not submitted an invoice until October 2019, and in the circumstances its payment notice was within the period allowed for a pay less notice.

8. The lack of a payment schedule meant that there was no way for Kilhan to determine when it was required to issue an invoice under the terms of the contract.

9. Kilhan referred the dispute to adjudication. The adjudicator concluded that the due date of the interim payment application was 20 May 2019 (being the date on which the notice was served) and payment was due 30 days thereafter. In doing so, the adjudicator determined that elements of the Scheme had to be implied into the subcontract. On that basis, the adjudicator found that the sum claimed was owing in default.

10. The adjudicator’s decision prompted Rochford to bring Part 8 proceedings for various declarations, among other things, as to the final date for payment.

The Court’s decision

11. The Court found in favour of Kilhan and dismissed Rochford’s claim on the basis that there was no clear means for the subcontractor to determine when it was supposed to issue an invoice. However, the Court went on to consider the legal position in relation to the final date for payment under section 110 of the Construction Act.

12. The Court noted the difference in language between section 110(1)(a), which allows an “adequate mechanism” for the determining the due date, and section 110(1)(b), which refers to a “period… between the date on which a sum becomes due and a final date for payment”.

13. The Court accepted that this permits the due date to be fixed by reference to the occurrence of an event (as is seen in projects using milestone payments). However, the final date for payment has to be a set period of time after the due date, which is difficult, and sometimes impossible to determine, where it is set by an event or other mechanism (such as the issue of an invoice). The court reached this conclusion taking into consideration that:
    1. It is important for the payer to be exactly certain how much time it has in which to serve a payless notice, the final date for payment being the date which is critical to that step.
    2. The additions to section 110 in the form of sections (1A) and (1D), which were designed to put limits on the circumstances in which a payment can be due so as not to give the payer an unfair ability to control the It would make no sense if such a limitation were intended in relation to subsection (1)(a) but not in relation to subsection (1)(b). The inference is that the possibility to peg the final date of payment to an event rather than a fixed period was never considered acceptable under the Construction Act.

Lessons for the construction industry

14. Although the decision on the final date for payment was obiter, and was expressed at being reached with “some diffidence”, it potentially has broad importance for the industry.

15. In particular, it is not uncommon for employers and main contractors to link the final dates for payment to the provision of a VAT invoice. Contracts/subcontracts which contain these provisions may be susceptible to challenge.

16. It appears likely that we will see more ‘smash and grab’ adjudications on the basis that there has been an alleged failure to serve a payment and/or payless notice before the final date for payment.

17. Given the potential impact on the current working practices in the industry, these obiter comments are likely to be scrutinised in future proceedings. In the meantime, it is a sensible precaution to check how the payment mechanism in any contract operates and that there is a clear way of determining dates.