A Final Date of Payment should not be linked to the supply of an invoice

Fieldfisher recently represented the successful party, Kilhan Construction Limited, in an important decision for the whole of the construction industry, regarding statutory payment requirements. The decision is significant, as it may require some businesses to revisit their payment terms.

 
Specifically seeking to link the final date for payment to the receipt of something else, such as an invoice, would fall foul of the requirements of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the Construction Act).

Background

Kilhan was engaged by Rochford as the subcontractor to provide a reinforced concrete frame at a project for Richmond upon Thames College. Rochford instructed various variations and the value of the subcontract increased substantially.

On 20 May 2019, Kilhan submitted an interim payment application for c.£1.4 million. Rochford did not make payment of the sum set out in Kilhan's application, but instead purported to issue a payment notice for a lesser sum much later, on 23 October 2019.

A dispute arose as to the validity of the payment notice and the sums payable to Kilhan. In an adjudication, Kilhan was represented by Avalon DRS and the Adjudicator (Mr Gary Kitt) had to consider whether the express terms of the subcontract complied with the requirements of the Construction Act, or if elements of "the Scheme" (the Scheme for Construction Contracts (England and Wales) Regulations 1998) had to be implied.

Ultimately, the Adjudicator determined that elements of the Scheme had to be implied, Rochford's payment notice was invalid and awarded payment of the sum applied for by Kilhan in its application.
 
The Construction Act

The Construction Act contains various requirements for the payment terms of a construction contract, aimed at assisting with cash flow and ensuring a receiving party knows what they are due to be paid and when.

Section 110(1) of the Construction Act provides that:

"Every construction contract shall—

(a) provide an adequate mechanism for determining what payments become due under the contract, and when, and
(b) provide for 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."
 
If a construction contract does not include the necessary payment provisions, the relevant provisions of the Scheme are implied as far as necessary into the contract, including for example a final date for payment that is 17 days from the date that payment becomes due.
 
The TCC proceedings

Rochford refused to pay in accordance with the Adjudicator's decision and Kilhan commenced enforcement proceedings in the TCC.

Rochford separately commenced Part 8 proceedings seeking various declarations in respect of the subcontract, including a declaration that:

"Under the express terms of the Subcontract, the Final Date for Payment of any sum that has become due in 30 days from the date of service of a relevant invoice."

It is the outcome of the Part 8 proceedings that will be of widest interest to the industry.

Rochford sought to rely on a term in the subcontract that said payment terms were “thirty days from invoice” and argued that the final date for payment could not arise as Kilhan had not submitted an invoice until much later.

In the TCC, Kilhan demonstrated why Rochford's interpretation of the subcontract was incorrect on the facts and, in any event, why its position on the final date for payment was contrary to the requirements of the Construction Act, as it would link the final date for payment to something other than a number of days after the due date (i.e., the provision of an invoice).

Mrs Justice Cockerill in the TCC found in favour of Kilhan and disagreed with Rochford's interpretation of the subcontract. However, most notably, the court agreed with Kilhan's position (albeit by way of obiter comment) that:

"while a due date can be fixed by reference to, say, an invoice or a notice, 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 impact of the decision

The decision has broad implications for the 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 payment is stated to be a number of days after an invoice is supplied by the receiving party.

Domestic standard forms of contract (such as the JCT and NEC suites of contract) do not generally fall foul of this requirement, however we have seen numerous amendments to those forms of contract and bespoke contracts that do.

The potential impacts of the decision are notable for both those involved in the preparation and negotiation of contracts, who would be well advised not to link the final date to payment to anything other than a number of days from the due date. In addition, those involved in the resolution of disputes should consider whether there are deficiencies in how the final date for payment is determined and whether the Scheme should apply.
 
Procedural point

The case also provides helpful clarification for practitioners involved in the enforcement of Adjudicator's decisions.

Rochford had sought to resist paying the Adjudicator's decision on the basis it considered the decision was wrong, that it should not have to pay until its Part 8 proceedings had been determined and that the Part 8 proceedings should be heard together with the Adjudication enforcement.

In a separate decision earlier in the year, Mr Justice Fraser dealt with that point, noting:

"The subject matter of the Part 8 proceedings really is that the Adjudicator was wrong. In those circumstances, one might ask oneself why both the express terms of the Act and indeed its intent have not been complied with, because that sum has not been paid. 

However, I am not going to go any further into that, other than observe that if it is a valid Adjudicator's decision, it should be paid. The authorities are crystal clear about that, and have been for some years."

He noted there was simply not time to address the Part 8 proceedings in the usual time period set down for an adjudication enforcement hearing.

Regarding the suggestion the enforcement hearing should be postponed he noted:

"The question therefore becomes: should the winner in the adjudication have to wait to have its opposed enforcement application heard, to a date much later in the term when the court can accommodate a whole day hearing?

In my judgment, not only would that be the wrong approach, it is contrary to the authority of Hutton, and it is contrary to the approach of the TCC. I would go so far as to say it would be wrong in principle to adopt such a course."
 
Jamie Key, partner and Sarah Shafiq, associate in the construction team at Fieldfisher, advised Kilhan and Rebecca Drake of 39 Essex Chambers was instructed as Counsel.