Summary

The Technology and Construction Court (TCC) has confirmed that payment terms which peg the final date for payment to the date of receipt of an invoice do not comply with the Construction Act. Whilst this decision clears up some confusion in this area of law, it also means that payment clauses and procedures must be updated to avoid the risk of being caught out by a “smash and grab” adjudication.

Recap on Rochford & The Construction Act ss109 - 111

In Rochford, the TCC considered whether invoice-linked final payment dates were allowed under the Construction Act. The relevant contractual clause in Rochford said that payment had to be made "thirty days from invoice". The Court decided, without making a binding ruling and with "some diffidence", that the Construction Act did not permit final payment dates that depended on conditions or events. In obiter (non-binding statements in passing) comments, the Judge said the parties had to set a fixed period of time between the due date and the final payment date.

The Court considered the difference in the language in section 110 between an adequate mechanism for determining the due date and the reference to a simple period between the date on which a sum becomes due and the final date for payment. This distinction was supported by reference in section 109 to the parties being free to agree the circumstances in which amounts become due and the absence of any such language in relation to the final date for payment. The Court found that section 110 limits the circumstances that can be used for the due date, such as pay-when-certified clauses. The Court inferred from this that it was not possible to link a final payment date to “events or circumstances”.

Lidl

Lidl entered into a framework agreement for works relating to refrigeration and air-conditioning. The first order issued under the framework agreement included a payment schedule which stipulated that final dates for payment would be “21 days following a) the Due Date; or b) receipt of the Contractor's valid VAT invoice … whichever is the later.”

The TCC had to decide if the final payment date agreed by the parties complied with the Construction Act. Lidl said that the Court should ignore Rochford because, firstly, other cases had accepted invoice-linked final payment dates and, secondly, there was nothing wrong with making payment depend on an invoice. Judge Stephen Davies KC agreed that other cases had accepted invoice-linked final payment dates but said that of those cases none of them included submissions on the issue under the Construction Act. Without any clear analysis of the issue, these cases were not very helpful and did not give a reason to reject Rochford – he agreed with the reasoning on Rochford as follows:

“… I am satisfied that the decision in Rochford is correct for the reasons given by Cockerill J in her judgment.”

and said there was

“a very obvious and compelling difference between the wording used and the plain intent of s.110(1)(b) when compared with that of s.110(1)(a) and, that on a proper analysis, that is because the only discretion intended to be and actually given in the former case is for the parties to agree the length of the time period between the due date for payment and the final date for payment.”

Impact

Before Lidl there was some uncertainty around the decision in Rochford largely because the issue was dealt with by Cockerill J in strictly obiter terms.

The TCC’s decision means that the only way to change the Rochford ruling is to appeal to the Court of Appeal, unless Parliament amends the Construction Act. To our knowledge no such appeal has been lodged and no such amendments are likely. The decision therefore impacts on how parties should write payment clauses in construction contracts. Many contracts used to link the final payment date to the date of receipt of a VAT invoice, because that would ensure such an invoice was received and we occasionally see the same clause on the basis the issue was dealt with in Rochford only in obiter comment. But now, those provisions are certainly vulnerable to being challenged and potentially replaced by The Scheme for Construction Contracts, if invalidated. This would mean a much shorter period (17 days) between the due date and the final date for payment being implied into the contract and could lead to missed pay less notices and “smash and grab” adjudications.

Do you require advice?

If you are facing challenges under a construction contract or would like your contracts reviewed in the light of the decision in Lidl, or generally, please contact Sam Thompson or any other member of the Construction Team .