Are payment provisions linked to the supply of a VAT invoice compliant with the Construction Act?

11 August 2020

The Technology and Construction Court (TCC) judgment in Rochford Construction Ltd v Kilhan Construction Ltd [2020] (only recently published) includes significant obiter[1] views in relation to payment clauses and compliance with the Housing Grants, Construction and Regeneration Act 1996 as amended (the Construction Act). Those views raise questions about the validity of clauses that link the final date for payment to the provision of VAT invoices.

We highlight the key parts of this decision, focusing on the obiter views of Mrs Justice Cockerill.



Background

  • In August 2018, Rochford and Kilhan entered into a sub-contract for the construction of a reinforced concrete frame in relation to Richmond upon Thames College (the Sub-Contract).
  • The relevant payment provisions of the Sub-Contract (as later cited by the TCC) were as follows:

    "The brief description of subcontractor works to be carried out Works are lump sum ... [Rochford] will issue activity schedule to [Kilhan], application date end of month ... commercial ... valuations monthly as per attached payment schedule end of month. Payment terms thirty days from invoice as per attached payment schedule. S/C payment cert must be issued with invoice."

    In fact, no "payment schedule" was ever produced.
  • Interim payment application 9 (IPA 9) was issued in May 2019 for just under £1.4 million. Interim payment notice 9 (IPN 9) was later issued in October 2019 for a sum of just over £1.2 million. A dispute arose concerning the validity of IPA 9; also of IPN 9 - was it issued late and did it set out adequate details of the calculation of that sum? Additionally, were the payment provisions in the Sub-Contract compliant with the Construction Act?
  • An adjudication was commenced. In his decision of May 2019, (in summary) the adjudicator concluded that:
    • the due date of IPA 9 was 20 May 2019, being the date on which the notice was served by Kilhan, and the final date for payment was thirty days from that due date, being 19 June 2019; and
    • Rochford had failed to serve (1) a payment notice within 5 days of the due date and (2) a pay less notice no less than 7 days prior to the final date for payment.

           Therefore, the sum applied for in IPA 9 was payable by Rochford to Kilhan.

TCC proceedings

No payment was made by Rochford until the adjudicator's decision was enforced by the TCC.

Rochford commenced these (separate) proceedings in the TCC seeking various declarations concerning the due date and the final date for payment in relation to IPA 9 plus repayment of the sum paid by Rochford to Kilhan further to the adjudicator's decision. Rochford contended that the adjudicator had failed to give effect to the express terms of the Sub-Contract.

TCC decision in summary

  • In terms of determining the due date for payment, Mrs Justice Cockerill concluded that the Sub-Contract contained "no adequate mechanism" as required by the Construction Act[2]. Therefore, paragraph 4 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended (the Scheme) would instead take effect.
  • On the final date for payment, again, the Scheme's provision on this point (paragraph 8) would take effect as the provisions of the agreement on this (such as they were) were "unworkable", in practical terms.
    It was the legal arguments put forward on this point that were considered on an obiter basis, as reviewed below.

Rochford's claims for the declarations sought, and for an order that Kilhan to repay the sums paid by Rochford further to the adjudicator's decision, were therefore dismissed by the TCC.

Obiter views

Although not necessary for the resolution of the claims, Mrs Justice Cockerill also gave substantive consideration to the legal arguments put forward in respect of whether or not the Sub-Contract provided an effective final date for payment.

The Judge accepted that s110 of the Construction Act requires there to be a fixed time period between the due date and the final date for payment. What flows from this in the Judge's view is that:

"…..while a due date can be fixed by reference to, say, an invoice or a notice, 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."[3] [Emphasis added]

Commentary

If the obiter views expressed in this decision are correct, this means that clauses in construction contracts that seek to base the final date for payment solely on the provision of a VAT invoice are not compliant with the Construction Act. In that scenario, the provision of the Scheme relating to the final date for payment (paragraph 8) will be implied into the contract (in place of the invalid clause referring to a VAT invoice). The final date for payment would then be 17 days from the date that payment becomes due.

Practical points

This part of the decision is not binding precedent, but it may still represent the correct construction of the Construction Act on this issue - how can you best protect your position?

  1. Take a cautious view in relation to contracts that have not yet been finalised - avoid the final date for payment turning on the provision of a VAT invoice.
  2. Fixing the due date for payment on the date of an invoice or notice is (in the view of Mrs Justice Cockerill, obiter) Construction Act compliant, as long as the final date for payment is not dependent on an event or mechanism. Consider whether processes can be altered to adapt to those parameters where necessary.
  3. Where you have contracts already in place that contain the VAT invoice provisions referred to, take account of the fact that they may be challenged if that approach suits the other party. Take a pragmatic view and seek early resolution to avoid unnecessary delay and wasted costs.

We are likely to see another TCC decision that considers this issue further in due course, but timescales are of course unknown.

We will keep you updated. If you have any queries on this or any other construction issue, contact Ashley Pigott.

Footnotes

[1] Not essential and therefore not binding precedent.
[2] Housing Grants, Construction and Regeneration Act 1996
[3] Paragraph 58


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