Linking payment conditions to invoices

I have always been fascinated by the construction industry's fixation with invoices and the subject of payment. I often see bespoke payment provisions drafted that link an obligation to pay with the submission of an invoice.

I have never fully understood this as the requirement for an invoice has always been more to do with accounting for VAT or in complying with company procedures rather than creating any legal obligation to pay.

Construction case

I was therefore interested to read the recent case of Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC) handed down by the Technology and Construction Court division of the High Court.

This case is important because it provides clarification on the status of an invoice with respect to the payment notice obligations set down in the Housing Grants, Construction and Regeneration Act (1996) as amended by the Local Democracy, Economic Development and Construction Act 2009 ("the Act").

Rochford Construction Limited ("Rochford") wished to rely on provision within the Parties' Sub-Contract to resist a payment demanded by Kilhan Construction Limited ("Kilhan"), arguing that the payment terms set out in the sub-contract applied. These conditions required Kilhan to issue its payment applications on the last day of each month and that the final date for payment was to be fixed by reference to Kilhan's service of its invoice ("thirty days from invoice").

As is often the case, the Parties fell out overpayment and Kilhan referred the dispute to adjudication. The appointed Adjudicator decided, and the Court subsequently affirmed, that a requirement to issue payment applications on the last day of each month was neither a clear or an effective payment mechanism. The relevant paragraphs of the Scheme for Construction Contracts (England and Wales) Regulations 1998 ("the Scheme") relating to payment provisions therefore applied and the due date for payment of applications implied by the Scheme was the date of the making of a claim by the payee.

The second issue addressed by the Court was when was the final date for payment? 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".

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, and the linking of an obligation to pay with the submission of an invoice is unlawful.

Summary

To ensure compliance with the Act, a construction contract must set down the final date for payment by reference to a set period from a clearly defined due date, and not by another event such as the issue of an invoice.

The deadline for the 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. This could mean that a payee becomes entitled to payment in full of the amount stated in any Payment Notice or, if no Payment Notice was issued, the payee's application for payment, assuming that it is a valid payee's default Payment Notice. If no payment is made then the payee is entitled to suspend performance of the works and to claim its costs of demobilisation and its subsequent remobilisation costs.