What came first, the payment or the invoice?

20 August 2020

Author: John Dugdale
Practice Area: Construction Law

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Rochford Construction Limited v Kilhan Construction Limited

A recent judgment of the High Court of England and Wales has cast doubt on whether a construction contract that provides for a final date for payment linked to the provision of an invoice is compliant with the requirements of the Construction Contracts (Northern Ireland) Order (the 1997 Order).

Background

The case arose out of a project known as "Richmond Upon Thames College", on which Rochford Construction Ltd (Rochford) engaged Kilhan Construction Ltd (Kilhan) to construct a reinforced concrete frame.

The contract between the parties contained the wording of "payment terms thirty days from invoice as per attached payment schedule". However, the contract was incomplete as no payment schedule had been issued.

A dispute arose in relation to an application for payment just shy of £1.4 million, made on 20 May 2019.

A payment notice was issued on 23 October 2019 and certified a sum of just over £1.2 million. However, an adjudicator decided that the payment notice was invalid and as Rochford had not served a valid payment or pay less notice, Kilhan was entitled to be paid the amount stated in its application of 20 May 2019.

Rochford paid up on foot of the adjudicator’s decision, but started court proceedings to seek to recover the sums paid to Kilhan and for a declaration that the final date for payment of any sums due under its contract with Kilhan was "30 days from the date of service of a relevant invoice".

The Judge was tasked with reconciling the requirements of the GB equivalent of the 1997 Order and the provision in the contract which stated, "Payment terms thirty days from invoice as per attached payment schedule".

The Law

The 1997 Order is the legislation that governs adjudication and payment in "construction contracts" in Northern Ireland.

There is no escaping the statutory rules on payment. If a construction contract does not comply with the rules, then the relevant provisions of the Scheme for Construction Contracts in Northern Ireland will take effect as an implied term.

Those statutory rules include a requirement that a construction contract must:

  1. Provide an adequate mechanism for determining what payments become due under the contract and when; and
  2. Provide for a final date for payment in relation to any sum which becomes due.

The parties to a construction contract 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 regime in England and Wales is similar, albeit different legislation applies.

Smash and Grab

A failure by the paying party (in this case, Rochford) to serve either a payment notice or a pay less notice has consequences, as it enables a contractor to claim payment of the amount stated in an interim application (whether or not, it represents the "true" valuation of the work).

Such claims can be speedily decided through adjudication and have been termed as “smash and grab” adjudications.

Decision

The Judge was apparently unimpressed by the incomplete contract, describing the result as a "misfire". In the absence of a payment schedule, the Judge decided that it was "impractical" to observe the parts of the contract that referred to an invoice. The relevant provisions of the Scheme therefore took effect as implied terms.

However, it was the Judge’s comments on whether a final date for payment can be "pegged" to an event or mechanism (such as the issuing of an invoice) that will be of wider significance for the construction industry.

The Judge accepted Kilhan’s submission that a final date for payment ought to "be pegged to the due date and be a set period of time, and not an event or a mechanism." It was said that this "makes a degree of sense given that it will be important for the payer to be exactly certain how much time he or she has in which to serve a pay less notice, the final date for payment being the date which is critical to that step."

On that logic, a final date for payment that was pegged to provision of an invoice would not comply with the 1997 Order.

Carson McDowell View

Although the judgment was given by an English court, it is likely to be considered by a court in Northern Ireland tasked with determining the same issue. However, it is not certain that a court in Northern Ireland would follow the decision, the Judge herself admitted that it was made "with some diffidence".

The decision will still cause alarm for many in the construction industry, with the practice of linking final dates for payment to the provision of invoices relatively commonplace.

It is likely that we will see more "smash and grab" adjudications commenced following an alleged failure to serve either a payment notice or a pay less notice before the final date for payment, regardless of whether an invoice has been submitted.

Prudent paying parties ought to review their payment provisions. It will still be feasible to have an invoice as part of the payment process, but any provisions that peg the final date for payment to the provision of an invoice may be subject to challenge.

If you have any queries the Construction team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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