A recent judgment has confirmed that construction contracts must fix the final date for payment to a period of time following the due date to comply with the Construction Act.
Lidl, a well-known national retailer, entered into a framework agreement with 3CL, an industrial refrigeration and air-conditioning contractor, which enabled the parties to enter individual works orders.
Under interim application 19 issued pursuant to one such works order, 3CL applied for payment of £781,986.22.
Lidl did not pay, and a dispute subsequently arose concerning 3CL’s right to payment. Lidl asserted, inter alia, that the contract made the final date for payment of any applications conditional upon 3CL delivering a compliant VAT invoice. Lidl said 3CL had not provided a VAT invoice with a copy of the relevant application and as such the final date for payment had not arisen and nothing was therefore yet payable to 3CL. 3CL contended that the terms of the contract as regards the final date for payment did not comply with the requirements of the Construction Act, and thus should be replaced with the standard final date for payment under the Scheme of Construction Contracts Regulations 1998 as amended (the “Scheme”) of 17 days from the due date (i.e. making the need for a VAT invoice irrelevant). 3CL also argued that Lidl could not issue a valid pay less notice where it had not issued a payment notice.
The Housing Grants, Construction and Regeneration Act 1996 as amended (the “Construction Act”) provides that all construction contracts must set out an adequate mechanism for determining what payments become due and when and a final date for payment of any sums due. The Construction Act specifically states that the parties are free to agree how long the period is to be between the due date and the final date for payment. However where the parties fail to agree sufficient terms the Scheme for Construction Contracts Regulations 1998 as amended will be implied as far as necessary. For a full note on the payment terms under the Construction Act see our article “Payment and pay less notices – a timely reminder” here.
In an earlier case, Rochford Construction Limited v Kilhan Construction Limited, (covered in our previous article Rochford Construction Limited v Kilhan Construction Limited – watch out for VAT invoices and ambiguous due dates here) the judge made obiter comments that while a due date can be fixed by reference to a document, say, an invoice, to be issued by the receiving party, the final date for payment has to be pegged to the due date, and be a set period of time from the due date, not from an event or another mechanism. Obiter comments are observations that a judge makes which do not create a binding precedent because they are not essential to the decision. As such, after 3CL was successful at Adjudication in obtaining an award for payment of the application in full, Lidl commenced Part 8 proceedings to finally determine, inter alia, the interpretation of the Contract as to the final date for payment.
In Lidl, the contract provided that the final date for payment was either 21 days following the due date or receipt of the Contractor’s valid VAT invoice, whichever was the later. Lidl argued that the final date for payment could be entirely dependent on the date of 3CL’s invoice and didn’t necessarily have to be calculated by reference to the due date.
Whilst Lidl sought to distinguish its case from Rochford, and noted that the relevant comments in Rochford were obiter (and therefore not binding), the judge in Lidl was satisfied that the decision in Rochford was correct.
The key point articulated by Cockerill J in Rochford and repeated by counsel for 3CL was the difference in drafting between s110(1)(b) and s109(2) of the Construction Act.
Section 110(1)(b) (in respect of final dates) only allows the parties to agree “how long the period is to be between the date on which a sum becomes due and the final date for payment”, whereas section 109(2) (in respect of due dates) allows the parties freedom to agree the “amounts of the payments and the intervals at which, or circumstances in which, they become due” (emphasis added).
The freedom to agree in s110(1)(b) is limited to the length of time between the due date and the final date for payment and does not allow the parties to agree that the final date for payment shall be set by reference to some further event occurring between the due date and the final date for payment.
Parties to a construction contract must ensure that their contractual payment mechanisms comply with the requirements of the Construction Act. If a contract does not comply, then the Scheme for Construction Contracts will step in to provide an alternative payment mechanism, which may be contrary to the parties’ wishes and which may result in an application for payment becoming a notified sum (as was the case here). 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, any existing contracts with such clauses will need to be reviewed carefully and parties should consider formally varying the terms to provide clarity as to what the parties now consider the final date for payment to be.
For more information, please contact Lianne Edwards.
