Danger of relying on invoices to determine the date for final payment

Danger of relying on invoices to determine the date for final payment

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Rochford Construction Ltd v Kilhan Construction Ltd

The use of invoices is standard practice for most businesses and construction is no exception. Common wording one might see could be “payment due within [X] no. of days of receipt of invoice” with the expectation by both parties being that:

  1. The payer does not have to pay until it has received an invoice​
  2. The payee can only take legal action for non-payment once the period stated in the invoice has passed

However, this contractual mechanism can fail when it has to interact with the payment provisions of the Housing Grants, Construction and Regeneration Act 1996 (the Act), which will be the case for the vast majority of construction contracts. 

One example of the problems that can arise was demonstrated earlier this year in the case of Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC). The dispute here was whether or not a pay less notice had been served in time by the main contractor (Rochford) on its sub-contractor (Kilhan). Depending on the answer Kilhan was either due £1.2m or £1.4m.

In the adjudication that preceded the court case the Adjudicator had found that Rochford had attempted to serve a pay less notice, but failed to do so seven days before the final date for payment as is required by the Act. The full £1.4m had therefore become payable.

Rochford did not accept the Adjudicator’s finding and sought redress in the TCC. It relied in part on the argument that the contract contained a clause that stated the final date for payment was 30 days from service of the relevant invoice. If this clause applied it would mean Rochford’s pay less notice had been in time because Kilhan was reliant on the time period set out in the Scheme for Construction Contracts (the Scheme), which states the final date for payment is 17 days from the due date.

On this occasion, the determining factor was that the court found there was no clarity in the contract as to when the invoice triggering final payment was to be submitted. The contract was effectively silent on the point. Under the Act there had to be a mechanism for determining the final date and because the contract had no workable means of achieving this the Scheme would instead apply. Consequently, Rochford’s pay less notice was out of time.   

What is of interest in this case is not just the importance of having clear wording as to the timing of invoices, but that the court commented (on an obiter basis) that the intent of the Act was that the final date for payment should be by reference to a period of time from the due date and not some other event, such as the submission of an invoice.

Perhaps if the facts had been slightly different and the date the invoice was to be issued had been beyond doubt, then the court would have found differently, but the inference is that employers should be wary of seeking to rely on the absence or late delivery of an invoice as justification to withhold payment or as an excuse for late service of a pay less notice. Moreover, contracts are more likely to be deemed to have an adequate mechanism if the final date is determined by reference to the due date.

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