For entirely understandable reasons, contract drafters have set the receipt of an invoice from a payee as a reference point for determining when the final date for a payment arises.
But under the Housing Grants, Construction & Regeneration Act 1996 (as amended) – otherwise known as the Construction Act – is that allowed?
There have been cases where such arrangements have been accepted without comment and one case (Rochford Construction Ltd v Kilhan Construction Ltd) where the point did not have to be decided but the judge explained why it was not allowed.
The recent decision in Lidl Great Britain Limited vs Closed Circuit Cooling Limited (trading as 3CL) affirms the reasoning in Rochford; that the final date for payment must be a specified period from the due date for payment in order to be compliant with s.110(1)(b) of the Construction Act. Setting the final date for payment by reference to some other event (such as receipt of an invoice) is not permissible.
Lidl v 3CL: the facts
3CL is a refrigeration and air-conditioning contractor that entered into a framework agreement with Lidl. The framework agreement made provision for 3CL to make applications for interim payment on reaching defined milestones. 3CL applied for an interim payment of £781,986.22 that Lidl refused to pay. One of its reasons was that the framework agreement made the final date for payment dependent on the delivery of a valid VAT invoice; Lidl contended that 3CL did not satisfy that requirement. Therefore, Lidl argued, the final date for payment never arose and no sums became payable under the contract.
3CL contended that the payment provisions in the framework agreement were not compliant with the Construction Act. In particular, the Construction Act requires the parties to a contract to agree an adequate mechanism for determining payment and to provide a final date for payment. 3CL argued that a provision specifying a final date for payment of 21 days following the due date or receipt of a valid VAT invoice (whichever came later) met the requirements of the Construction Act.
The court found in favour of 3CL. The court drew on the rationale in Rochford, that although it may have been the intention of the parties that the issuing of an invoice would trigger the period for the final date for payment, there was uncertainty as to when the final date for payment actually fell.
The court considered the intention behind s.110 of the Construction Act. It affords parties the freedom to decide the length of time between the due date and the final date for payment, but this is the only freedom that is intended. It does not allow the date to be determined by reference to any other event. The Construction Act affords much greater latitude for setting the due date and the lack of such latitude in section 110 indicates that none was intended.
When drafting payment provisions in contracts, ensure those provisions comply with the requirements of the Construction Act and that the intended final date for payment is clearly identified by reference to the due date. Some accounting systems render it difficult to make payment without an invoice and, in those cases, thought will need to be given to how the requirements of such a system can be met without linking the final date for payment to the delivery of an invoice.
About the authors: Natalie Cane and Stephanie Knapman are from law firm Irwin Mitchell’s Construction & Engineering Department