Parties to construction contracts often agree to fix the final date for payment to the provision of a VAT invoice and frequently refer to monthly valuations without further reference to a specific due date. As set out in our article due dates and final dates for payment are mandatory requirements in all construction contracts pursuant to the Housing Grants, Construction and Regeneration Act 1996 as amended (the Construction Act). Where a contract fails to comply with these requirements, the Scheme for Construction Contracts 1998 as amended (the Scheme) steps in to replace the non-compliant elements of the payment mechanism, which could have implications for the valid submission of pay less notices and sums becoming “notified sums”. These rather common contractual provisions were considered in the recent case of Rochford Construction Limited v Kilhan Construction Limited  EWHC 941 (TCC).
Rochford Construction Limited (Rochford) and Kilhan Construction Limited (Kilhan) entered into a subcontract relating to the construction of a reinforced concrete frame. A dispute arose as to the sums due in relation to an application for payment (Application 9) issued on 20 May 2019 in the sum of £1.4m. The application related to works up to 30 April 2019 and a payment notice was issued on 23 October 2019 certifying payment in the sum of £1.2m. Following an adjudication, Kilhan was awarded £1.4m on the basis of its application for payment being issued on the due date and the final date for payment being 19 June 2019. The payment notice issued on 23 October 2019 was simply too late and the sum set out in Kilhan’s application was the notified sum that had to be paid by the final date for payment.
Whilst payment was made by Rochford in response to enforcement proceedings commenced by Kilhan, Rochford proceeded with Part 8 proceedings to finally determine the due date and final date for payment. As part of these proceedings, Rochford argued that the final date for payment was 30 days from the date of service of the relevant VAT invoice. No VAT invoice was issued by Kilhan in relation to Application 9 until 07 January 2020 and therefore the pay less notice, according to Rochford, was in time.
The contract in question simply referred to “payment terms thirty days from invoice as per attached payment schedule” (albeit there was no payment schedule actually included). In respect of the due date, the contract merely referred to valuations being undertaken by the end of the month.
The Court was not persuaded by Rochford’s argument that the wording in the contract was clear and unambiguous. In respect of the due date, the reference to the end of the month could mean anything from the last business day to the last calendar day of the month. Given the Court was effectively being asked to imply a meaning into the contract, the Court concluded that the contract was simply not sufficiently clear. For the Court to imply a meaning there could only be one option available and this was evidently not the case here. Consequently the Court implied the terms of the Scheme and held the due date to be the making of a claim on 20 May 2019.
With regard to the final date for payment, the Court commented that s110 of the Construction Act requires a final date for payment to fix a time period. The final date for payment needs to be a set period of time linked to the due date, not some other event. The Court considered it impractical to fix the final date for payment to an invoice which itself is pegged to a payment certificate as “it will 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”. In the circumstances, the Court concluded that the contract could only be interpreted so as to fix a final date for payment 30 days from the due date.
Lessons to be learned
The decision by the Court may well impact existing contracts. Firstly, the Court’s findings in relation to due dates makes clear that what may at first blush be considered an invalid payment application due to the timing of issue, may still lead to a later due date arising on the basis of the making of a claim. These applications will still need to be considered and responded to with an appropriate payment or payless notice.
Secondly, it is very common practice for the final date for payment to be fixed to the issue of a VAT invoice by the payee, and therefore for the date to ‘float’ rather than being fixed. The Court’s judgment makes clear that such provisions will not be considered compliant with the Construction Act and, as such, the period for serving pay less notices may well be substantially shorter than expected.
The judgment does clarify that “a due date can be fixed by reference to, say, an invoice or a notice”. It remains perfectly possible, therefore, for an Employer to render the triggering of a payment cycle contingent upon the Contractor issuing a valid VAT invoice – so long as that requirement is tied to the due date and not the final date for payment. There is also nothing preventing the Employer from including an express requirement for a VAT invoice to be issued in response to the ‘post- due date’ payment or pay less notice – provided that such a requirement is not expressed as effectively being a pre-condition to the final date for payment arising. Nevertheless, these ‘alternative’ solutions are hardly comparable to the benefits for an Employer of knowing with absolute certainty that it will have a VAT invoice for the amount payable well in advance of the date when payment must be made. The decision does seem to be somewhat at odds with typical industry approaches when it comes to invoicing and VAT accounting, and will no doubt require many Employers to carefully consider how their contractual payment mechanisms will operate moving forward.
It is also worth noting that the Court did express “diffidence” in reaching its conclusion on the ‘final date for payment’ issue. It will not come as a surprise, therefore, if the decision is subsequently challenged. In the meantime, however, Employers should be very wary of seeking to link the final date for payment to the issue of a VAT invoice.