A recently published judgment from the Technology and Construction Court (TCC) in Rochford Construction Ltd v Kilhan Construction Ltd  EWHC 941 (TCC) has found that the final date for construction contract payments must be a fixed period of time from the due date.
The court held that a provision which made the final date for payment dependent on the provision of an invoice, or, for that matter, any other event, was non-compliant with the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the Construction Act) and therefore invalid.
The Court’s findings were obiter, but the Court commented that, “Pegging the final date to service of an invoice, which is itself pegged to a payment certificate, is simply impractical” and that if the Court had to deal with the point “the final date has to be pegged to the due date, and be a set period of time, and not an event or a mechanism”. The point may be open to challenge, but if correct, is likely to require a significant rethinking of payment mechanisms across the industry.
Implications on construction contract payments
This decision has the potential to have a significant impact on the construction industry as it highlights that a construction contract that seeks to link the final date for payment to anything other than a number of days from the due date is likely to fall foul of the Construction Act. The most common occurrence of this issue is where the final date for a construction contract payment is stated to be a number of days after an invoice is supplied by the payee.
Construction contracts which contain these provisions may be susceptible to attack, with the result that the statutory time period of 17 days from the due date contained in the Scheme for Construction Contracts 1998 (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 failure by the paying party to submit pay less notices on time. That could mean the payee is entitled to payment in full for the amount stated in any payment notice or, if no payment notice was issued, their payment application (if it is a valid payee’s default payment notice).
The right to suspend (and claim de-mobilisation and mobilisation costs) is triggered by a failure pay the sum due by the final date for payment. If the Scheme applies then the right to suspend could arise earlier than expected. A valid suspension under the Act could have an impact on the wider programme and could result in a paying party being liable for liquidated damages up the contractual chain and/or liable to compensate other subcontractors affected by the suspension.
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. In light of this judgment, it is recommended to take legal advice as to how this will affect any construction contract payments that you are paying or being paid.
For existing contracts, the parties should consider what would happen if the final date for payment was calculated using the Scheme i.e. 17 days from the due date for payment. It may be prudent for the payee to adopt that date, in practice, as the final date for payment for the service of any pay less notice to avoid a later argument as to whether a pay less notice was served late and so is invalid.
This was an article by Adriana Badescu, Senior Consultant Solicitor at Alston Asquith specialising in construction law.
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