Court finds pegging the final date to service of an invoice is unworkable

The case of Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC) has brought into the question the validity of making the final date for payment in construction contracts dependent on the provision of an invoice. The decision has the potential to force parties to re-evaluate their payment mechanisms to be more compliant with the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”).

Case Facts 

The case involved a subcontract which was entered into by Rochford, the contractor, and Kilhan, the subcontractor, for the construction of a reinforced concrete frame on a project known as Richmond upon Thames College. Kilhan submitted an interim payment application dated 20 May 2019 for nearly £1.4 million which concerned the period ending 30 April 2019. Rochford failed to make payment and then issued a payment notice on 23 October 2019 for just over £1.2 million.

Adjudication

A dispute arose between the parties about the validity of the payment notice submitted on 23 October 2019 and whether it was issued late. The invoices submitted by Kilhan were dated in October 2019, and later in January 2020 and Rochford claimed that its notice was within the period allowed for a pay-less notice.

Kilhan successfully referred the matter to adjudication where is was concluded that the due date of the interim payment application was 20 May 2019, being the date on which the notice was served, and that the final date for payment, as per the terms of the subcontract, was thirty days from that due date, being 19 June 2019.

After satisfying payment (albeit in the face of enforcement proceedings by Kilhan), Rochford brought a Part 8 claim against Kilhan seeking various declarations concerning the due date and the final date for payment in respect of the application dated 20 May 2019 which Rochford disputed was ever properly due and owing to Kilhan.

Payment in Construction Contracts

Under Section 10 of the Housing Grants, Construction and Regeneration Act ("The Construction Act"), construction contracts are required to provide:

  1. an adequate mechanism for determining what payments become due under the contract and when these payments should be made; and
  2. a final date for payment in relation to any sum which becomes due.

Exactly when the payments are due to take place is normally left to the discretion of the contracting parties and the contract should specify that, either by reference to a business day in the month or a payment schedule or timetable.

For contracts which do not contain or comply with the above provisions, paragraphs 4 and 8 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 ("the Scheme") will apply.

Under paragraph 4, the "due date" for payment shall become due on the later of:

  1. 7 days after the end of the relevant period, or
  2. The making of a claim by the payee

Under paragraph 8(2), the final date for payment will be 17 days from the due date.

It is not uncommon for the payee to make its claim for payment by submitting an invoice to payer for the money that it believes it is owed.

TCC Findings

Rochford's claims for the declarations sought, and for an order that Kilhan repay the sums paid by Rochford further to the adjudicator's decision, were dismissed by the TCC.

Due date for payment

When considering the due date, the Court looked at the wording of the subcontract which stated insofar as relevant:

"The brief description of subcontractor works to be carried out

Works are lump sum … RCL (Rochford) will issue activity schedule to KCL (Kilhan), application date end of month … commercial … valuations monthly as per attached payment schedule end of month. Payment terms thirty days from invoice as per attached payment schedule. S/C payment cert must be issued with invoice."

A point to be noted here is that there was no payment schedule. Had there been, it seems far less likely that this dispute would have arisen.

The Court found the term "application date end of month" to be unclear, with there being several possible ways in which the wording could be interpreted. On a practical level, the phrase, the judge said, lacked contractual certainty:  

“Does it mean ‘on the end of the month’, ‘by the end of the month’, ‘after the end of the month’, ‘the final business day’ or ‘the final calendar day’? What if the final day of the calendar month is not a business day? How does one square the circle as to know when to make the application?”

The Court stated that it was "imperative that the answer is clear" but because it did not address the above ambiguities, the subcontract alone did not "provide an adequate mechanism for determining when" each monthly payment became due. Paragraph 4 of the Scheme therefore needed to be implied into the subcontract, insofar as was possible without trespassing on any legitimate express terms in the subcontract. Consequently, the due date in this case was, as the adjudicator found, 20 May 2019, the date on which the claim for payment was made.

Final date for payment

Although the subcontract set the date for final for payment at "thirty days from invoice", the subcontract failed to specify when the invoice should be issued. Whilst the Court acknowledged that the parties contemplated invoice and payment certificate coming together sometime after the claim was to be notified, in accordance with a schedule of dates, the Court simply did not know quite how the parties had intended to schedule matters.

The Court focussed the distinction in the language in section 110 of the Construction Act and concluded that, whilst parties were free to agree on the period of time between the due date and final date for payment, this period must be "a set period of time, and not an event or a mechanism." This is in contrast to subsection a) where parties had more freedom to provide an "adequate mechanism" for the setting of the due date, which the Court agreed "can be fixed by reference to, say, an invoice or a notice".

In support of its decision, the Court also highlighted the difference between the language in section 109 (2) of the Act whereby parties are free to agree the circumstances in which the payments become due as opposed to section 110 (1) (b) simply requires parties to "provide for a final date for payment".

Establishing exactly when the final date for payment was made sense to the Court because it would be important for the payer to be "exactly certain how much time he or she has in which to serve a payless notice, the final date for payment being the date which is critical to that step."

Consequently, given the need for certainty with large sums of money in issue, and the need for clarity on when the invoice should be issued, again the relevant terms of the Scheme should be implied. This, in the Court's view, was the best way of “mending the misfire caused by the parties’ incomplete drafting”.

Conclusion

Interestingly, the Court's observation that "the final date has to be pegged to the due date, and not an event or a mechanism" is contrary to the widespread practice throughout the industry of regarding the presentation of invoices as the trigger for payment (and the reference point for the final date for that payment).  This is supported by the fact that parties are often contractually obliged to submit an invoice which prompts the payment process, to tie in with the payer's internal accounting software and procedures.

Following the Court's observation, parties that insist in their contracts on the presentation of an invoice as a prerequisite to the final date for payment may find their payment mechanism is unworkable. Consequently, the Scheme will imply a due date and a period of 17 days between this due date and final date for payment. This is very short time frame for some parties to receive, assess and progress an application for payment through their internal administration procedures. Parties which fail to serve a payment notice within 5 days of the due date, or a pay-less notice 7 days prior to the final date for payment risk facing smash and grab adjudications because the claim for payment will, in the absence of a valid payment notice or pay less notice, specify the 'notified sum' which is payable.  

The case was decided at first instance and the Court expressed its opinion as being reached with “some diffidence” which may prompt parties to consider challenging arguments in any later proceedings. However, proceeding to the Court of Appeal is an expensive and time-consuming risk and until this case or one with similar facts reaches this stage then, adjudicators may follow the rule of thumb set out by the Court in this case.

To avoid this pitfall, parties could draft a clause into their contracts which makes the due date for payment dependent on an invoice, as opposed to the final date. This was acceptable in the Court's view in this case because of the specific wording of subsection 110(1)(a) of the Construction Act which permitted an "adequate mechanism" for payment.   However, because the Act provides that a payer may issue a payment notice and/or a pay-less notice which may (and often do) result in a 'notified sum' which is a lower figure payable than that contained in the invoice, it would be prudent for the issue of invoices to be deferred altogether until a payment cycle is concluded and that 'notified sum' is known.

If you have any queries around the content of this article or any general queries around Construction and Engineering Law please do not hesitate to contact a member of our construction team.