English court reminds construction contract payment provisions to be ‘compliant’

While it is common for construction contracts to provide for the due date and the final date for payment (FDP) to be a certain number of days after submission of a valid VAT invoice from the payee the Technology and Construction Court (TCC), in its judgment, said that the parties to a construction contract have limited freedom in relation to the way in which the FDP is fixed.

In a recent case involving retailer Lidl and 3CL, an air-conditioning contractor, Judge Stephen Davies said that while a due date can be fixed by reference to 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”.

In this case, a dispute arose when 3CL sought payment of around £781,986 from Lidl after certain milestones were met under the parties’ framework agreement. Lidl ran a number of arguments to avoid making payment.  One of those arguments was that the FDP in respect of the application had not yet been fixed due to 3CL’s failure to serve a valid invoice: the agreement provided that the FDP was triggered by the service of such an invoice.

3CL argued that tying the FDP to submission of an invoice was not compliant with the 1996 Act. Judge Stephen Davies agreed with 3CL. The FDP terms of the agreement were non-compliant and – by virtue of the 1996 Act – those non-compliant FDP terms were struck down. Lidl could therefore not rely on the absence of a valid invoice to postpone the FDP.  

Construction disputes expert Craig Morrison of Pinsent Masons said the judgment clarified an important area of payment law, and would likely lead to members of the construction supply chain reviewing the FDP provisions in their contracts.

He said that construction contracts which calculate the FDP by reference to an event or a mechanism, such as service of a valid VAT invoice, will not be compliant with the 1996 Act. 

“In the event that FDP provisions are found to be non-compliant with the Act, they will be replaced by the relevant provisions of the Scheme for Construction Contracts. The Scheme provides that the FDP will be 17 days from the due date,” he said.

“If members of the supply chain find that their FDP provisions are non-compliant with the 1996 Act, we might very well see a new surge in the fabled ‘smash and grab’ type claims,” he added.

‘Smash and grab’ is a term applied to claims where the payee under a construction contract is able to claim the full amount set out in its payment application due to the payer having failed to serve a valid payment notice or ‘pay less’ notice by the prescribed deadlines. The deadline for pay less notices tends to be a certain number of days before the FDP.  If the basis upon which the FDP is calculated in a contract is found to be non-compliant, with those non-compliant provisions being replaced by the relevant provisions from the Scheme, it is easy to see that the deadline for serving pay less notices may have been missed.

The recent judgment followed the approach in an earlier ruling by the TCC concerning a similar dispute between Rochford Construction and Kilhan Construction.