Does your contract have a clear final date for payment?
The risk of ‘smash and grab’ claims if your contract relies on invoices to fix the final date for payment
A recently published judgment from the Technology and Construction Court (TCC) has cast doubt on whether a final date for payment in a construction contract can be linked to the submission of an invoice (by the payee) or, for that matter, any other event other than the due date. The case has important implications for any construction contract under the Housing Grants, Construction and Regeneration Act (1996) as amended (the Act).
In Rochford Construction Ltd v Kilhan Construction Ltd  EWHC 941 (TCC) the Court had to deal with an adjudicator’s decision regarding, among other things, the effect of the payment notice and whether it was issued late.
Rochford relied on a provision in the subcontract stating that payment terms were “thirty days from invoice” and so the final date for payment was 30 days from the submission of an invoice which itself was to be issued with or after issue of the payment certificate.
The Court first wrestled with the issue of whether the contract provided an adequate mechanism for determining how and when payments became due. It concluded that it didn’t. The words “Application date end of month” were not sufficient, therefore, the Scheme for Construction Contracts (Scheme) applied which meant that the due date implied by the Scheme was the date of the making of a claim by the payee. Under the Act, any payment notice from the payer (or a third party) has to be issued not later than 5 days of the due date.
The second issue was when the final date for payment was. The point was 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”.
What these comments mean is that to ensure a contract is compliant with the Act, the final date for payment should be fixed by reference to a set period from the due date and not by another event – such as the issue of an invoice.
Under the Scheme the final date for payment is 17 days from the due date. In Rochford this was at least 13 days earlier than the date one might have calculated under the contract which stated payment was 30 days from the invoice with the invoice to be submitted with the payment notice. Taking that into account, the application of the (obiter) comments in Rochford has two important implications.
First, the deadline for service of a pay less notice is usually fixed as a set period before the final date for payment. Therefore, calculating the final date for payment incorrectly could mean a pay less notice is served late and is invalid. That could mean the payee is entitled to payment in full of the amount stated in any payment notice or, if no payment notice was issued, their application for payment (if it is a valid payee’s default payment notice).
Second, 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 and 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.
Although the comments regarding the final date for payment were obiter they should not be dismissed and are likely to be referred to in adjudications for some time to come unless, and until, they are addressed in a later judgment. Given the current economic situation there is an increased risk of ‘smash and grab’ adjudications founded on a failure to serve a valid pay less notice and Rochford increases that risk.
To reduce this risk you should check your contracts. Is the final date for payment calculated as a fixed period from the due date, or is it triggered by another event, such as the issue of an invoice?
If the latter, then 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 to adopt that date 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 leaving you at risk of a ‘smash and grab’ claim.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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