Rochford affirmed: invoice-linked payment provisions struck down again

A recent TCC decision has affirmed a previous finding that payment terms which make the final date for payment dependent on the provision of an invoice are non-compliant with the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”). Whilst providing much needed clarity in this area of law, this decision reinforces the need for parties to significantly re-work payment clauses which are dependent on the provision of invoices. The failure to do so is likely to result in clauses being struck down and a consequent risk of “smash and grab” adjudications being brought.

The Construction Act and Final Dates for Payment

Section 110 of the Construction Act provides that every construction contract shall “provide an adequate mechanism for determining what payments become due under the contract, and when” and also “provide a final date for payment in relation to any sum which becomes due”. The parties are free to agree “how long the period is to be between the date on which a sum becomes due and the final date for payment”.

The final date for payment acts as a long-stop date for payment. If the paying party does not make payment by the final date for payment and does not serve a pay less notice, the amount due becomes the “notified sum” under section 111 of the Act and must be paid without set-off or deduction. The unpaid party may adjudicate for payment of this amount and may also have a statutory right to suspend performance of its obligations under the construction contract.

If the parties do not include in their construction contract the payment provisions required under section 110, the relevant provisions of the Scheme for Construction Contracts 1998 (the “Scheme”) are implied into the contract. Paragraphs 3 to 8 of the Scheme create a due date and a final date for payment, with payment becoming due seven days after the date of valuation or the unpaid party making a claim. The final date for payment is 17 days from the date payment becomes due.

Often in practice the final date for payment isn’t designated as a set date but rather “floats” by being linked to the issue of a VAT invoice or some other event.

Rochford: a recap

In Rochford Construction Ltd v Kilhan Construction Ltd the TCC considered the validity of invoice-linked final dates for payment under the Construction Act. The clause in question stated that payment was to be made “thirty days from invoice”. The Court found, albeit on an obiter basis and with “some diffidence”, that the Act did not permit conditional or “floating” final dates for payment; the parties were required to agree a fixed period of time between the due date and the final date for payment. 

In support of its decision the Court noted the difference in 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, in the Court’s judgment, supported by the 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 also noted that section 110 also places limits on the circumstances which can be used to determine the due date, such as pay-when-certified clauses. The absence of such limitations being extended to the final date for payment implied, in the Court’s view, that it was not possible to link a final date for payment to events or circumstances in the first place.

For a more detailed summary of the Rochford decision, please see our earlier Law-Now here.

Lidl Great Britain Ltd v Closed Circuit Cooling Ltd 

In this most recent TCC decision, a direct challenge was made to the reasoning in Rochford.

Lidl entered into a framework agreement for industrial refrigeration and air-conditioning works. The first order issued under the framework agreement contained 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.”

Following an adjudication decision, various matters came before the Court for determination, including whether the agreed final date for payment complied with the Construction Act. Lidl argued that the Court should not follow Rochford on the basis, firstly, that it was contrary to previous cases which had upheld invoice-linked final date for payment provisions and, secondly, that there was nothing inherently objectionable in conditioning payment on the provision of an invoice.

His Honour Judge Stephen Davies accepted that the previous cases relied upon by Lidl had upheld invoice-linked final date for payment provisions, but noted that in none of those cases had a challenge been made under the Construction Act. Without any express consideration of the issue, these cases were of limited assistance and did not provide a reason for refusing to follow Rochford.

The Court also expressed its agreement with the reasoning in Rochford, noting that 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.”

The fact that invoice-linked payment provisions might not be inherently objectionable or open to abuse was not, in the Court’s judgment, sufficient to overcome the blanket prohibition imposed by Parliament on the parties agreeing anything other than a simple period of time for the final date for payment.

Conclusions and implications

This judgments removes some of the uncertainty which existed around the Rochford decision by ruling on the tension with previous cases where invoice-linked final date for payment provisions had been upheld. It is now clear that, if the ruling in Rochford is to be overturned, this only be achieved by decision from the Court of Appeal or an amendment to the Construction Act. The Court’s judgment also records that Counsel for Lidl, an eminent King’s Counsel and a current Deputy High Court Judge, did not in written submissions articulate any basis for contending that the decision in Rochford was wrong. This also lends weight to the suggestion that parties will be required to grapple with the rule in Rochford for the foreseeable future.

As indicated in our previous Law-Now, the Rochford decision has had a considerable impact on the drafting of payment provisions in construction contracts subject to the Construction Act. Final dates for payment were often linked to the provision of VAT invoices, driven in large part by the need to link the payment provisions of the Construction Act with accounting policies and software built around invoicing. Construction contracts which contain these provisions are now susceptible to attack, with the result that the statutory time period of 17 days contained in the Scheme may apply instead. In many cases this period will be shorter than the contractual period that the parties had previously agreed to, which in turn may result in a failure to submit pay less notices on time and a consequent exposure to “smash and grab” adjudications.

References:

Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC)

Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 (TCC)