Thou shall not kill (or make your final date for payment subject to the issuing of an invoice)

Ok, so I get the link between murder and invoices triggering the final date for payment is tenuous, but one is forbidden at common law and so is the other. Admittedly the consequences are a little different: one leads to life imprisonment while the other means your payment terms are non-compliant with the Construction Act. But even if you won’t end up with a lifetime at Her Majesty’s pleasure, why do we keep seeing amendments to payment clauses continuing to link invoices to the final date for payment?

Some of you will be aware of the case of Rochford Construction Ltd v. Kilhan Construction Ltd. A case where the payment provisions stated:

“Works are lump sum … RCL will issue activity schedule to KCL, application date end of month … commercial … valuations monthly as per attached payment schedule end of month. Payment terms thirty days from invoice as per attached payment schedule. S/C payment cert must be issued with invoice.”

The lack of clarity of the above, not being helped by the absence of a Payment Schedule and the failure by Rochford to issue Payment Certificates, led to an adjudication and contested enforcement.

The case boiled down to whether a final date for payment linked to the provision of an invoice was valid under the Construction Act.  As the Judge put it, “If one puts oneself in the shoes of Kilhan, when is it to issue its invoice? There was no Schedule, nor any Payment Certificate?”

The Judge agreed that while a due date can be fixed by reference to, say, an invoice or a notice, the final date has to be pegged to the due date, and be a set period of time, not an event or a mechanism. That makes a degree of sense given that it will be important for the payer to be certain how much time it has in which to serve a payless notice, the final date for payment being the date which is critical to that step.

Some recent examples

So why do people still keep linking invoices to final dates for payment?  Recent examples I have seen are:

“If the Contractor does not receive a VAT invoice from the Sub-Contractor in respect of the relevant Interim Payment it shall be regarded as postponed by the same number of days as the number of days after the latest date by which the Contractor should have received a VAT invoice from the Sub-Contractor that the Contractor actually received the Sub-Contractor’s VAT invoice” 

and

In line 1 delete “14 days” and insert “21 days” and at the end of the clause insert “or within 5 days from the date of receipt by the Employer from the Contractor of an appropriate VAT invoice prepared in accordance with the provisions of clause 4.4 whichever is the later.”

The above clauses link the presence of a VAT invoice to the final date for payment.  They are invalid payment clauses (although some may disagree as it is for the payee to issue the invoice).  So what does mean in practice?

Well, it means you may be working to a final date for payment of say 28 days (or later as you are waiting for an invoice) but the common law (following the TCC’s decision in KIlhan) has decided this is a non-compliant clause.  So an Adjudicator faced with this conundrum should do what the Adjudicator did in Kilhan and fall back on the Scheme for Construction Contracts, which will mean the final date for payment is shortened to 17 days after the due date.  If you have issued a Pay Less Notice based on a 28 day period, your notice will be out of time, you may lose a smash and grab adjudication, you may have to pay a party in financial trouble and so on.

Not a great place to be.  The answer is simple.  Do not link the final date for payment to the provision of an invoice.

What about a more general clause that says it is a condition precedent to payment that an invoice is provided?  An example:

“Each application for Interim Payment shall be made to the Employer’s Agent accompanied by a detailed valuation statement and other such details as stated in the Employer’s Requirements and such further information as the Employer’s Agent may reasonably require, including a VAT invoice without which no payment can be made.”

How would this work in practice? Say a Contractor applies for £1,000,000 and submits an invoice for £1,000,000 plus VAT.  A Payment Notice is issued certifying £750,000. Is the Contractor meant to issue a credit note and new invoice for £750,000 plus VAT?  Then the Employer issues a Pay Less Notice saying the sum due at the date of the notice is £500,000 plus VAT.  Is the Contractor meant to issue another credit note and new invoice for £500,000 plus VAT?  What if the Contractor doesn’t issue one at all?  Does the Employer have to issue a Pay Less Notice in the sum of Nil, citing no invoice, otherwise as we know the sum to be paid is the sum stated on the Payment Notice / Pay Less Notice? Is the provision of an invoice as a condition precedent to payment valid at all?

The simple answer is to keep invoices away from the contractual payment terms altogether. While I understand that some accounts departments, particularly those of public bodies or housing associations, might not like to hear that, it’s far better than being on the wrong side of the Construction Act…