Background

VDC LHR11 Ltd (VDC) engaged Deerns UK Ltd (Deerns) to provide engineering consultancy services for a development at Chandos Park Estate, London. Deerns was entitled to regular instalment payments, with the contract machinery essentially providing that:-

a) Deerns would make applications for payment on or before the valuation dates specified within the contract, which should include an invoice for the amount that Deerns considered due at the Due Date.

b) The Due Date for payment was as specified in the contract.

c) The Final Date for payment was 30 days after the Due Date – save that if Deerns’ invoice was late, the final date for payment would be postponed by the same number of days the invoice was late.

d) Deerns shall be paid the amount within its invoice, save that if VDC serves a Pay Less Notice no later than 5 days before the Final Date for Payment then VDC shall pay the amount stated in that Notice.

The dispute concerned Applications 7 and 8 which totalled £1,816,668.22. VDC served Pay Less Notices valuing those applications at a combined £910,471.71.

Deerns commenced Part 8 proceedings for what was essentially a smash and grab claim – it averred that the contractual payment provisions were in breach of the Construction Act 1996 and thus the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the Scheme) applied – which meant that VDC’s Pay Less Notices were invalid, and Deerns was entitled to the full amount of its invoices without deduction.

The law and application

Section 110 of Construction Act 1996 requires that where a construction contract allows for stage payments, it shall include a mechanism for determining what payments become due and when and shall include a final date for payment of that sum. The parties are free to agree how long the period is between the due date and the final date for payment, but if it fails to do so then the Scheme will apply.

The Scheme then states that the period between the due date and the final date for payment is 17 days.

These provisions were previously considered in Rochford Construction Ltd v Kilhan Construction Ltd [2020] and Lidl Great Britain Ltd v Closed Circuit Cooling Ltd [2023] following which it was determined that the final date for payment has to be pegged to the due date and for a set period of time.

The current case

The contract, drafted as it was, made perfect common sense – it had a fixed monthly valuation date, it resulted in an invoice every month from Deerns, and then gave VDC 30 days to assess it. It also allowed for some pragmatism – if Deerns invoice was slightly late that wouldn’t make the claim invalid; VDC could still assess it, but they still had the full 30 days to make their assessment.

However, the Construction Act 1996 doesn’t always allow for pragmatic, commercial sense. The Due Date needs to be fixed, and the Final Date for Payment pegged to this by a fixed amount of time. There was therefore an obvious contradiction here – on the face of it the Due Date was fixed, but the Final Date for Payment could be extended by an unknown period depending on when the Invoice was received. Deerns therefore argued that the payment machinery was broken, that pursuant to the Scheme VDC had only 17 days to serve its Pay Less Notices, and these were therefore late and invalid.

To get round this apparent invalidity, VDC tried to argue that a proper interpretation of the contract showed that it was the valuation date i.e. the Due Date that moved if the invoice was “late”. That would have resulted in a contract that complied with the Act. However, the Court were not persuaded by these arguments:-

i) that would require the valuation date (i.e. the Due Date) to be determined by Deerns based on the date that it made its application. However, this was not what the Schedule of Valuations Dates within the Contract suggested; and

ii) that would mean that an invoice could never be “late”, contrary to what the contract stated.

It was accepted that, hypothetically, it would be possible for the contract to state that the due date was determined by the issue of a payment application, but that would have removed the fixed monthly schedule which was stated within the contract and would have effectively meant re-writing large swathes of the contract machinery. As such, the Court was not persuaded that the contract contained valid payment provision.

As a fallback, VDC argued:-

1. that whilst the contract did not comply with the Act, the parties had operated the contract in a manner which was compatible – with a moving valuation date but fixed Due Dates and Final Dates for Payment. However, the court found no written acknowledgement by either party that they were doing so and that an estoppel had arisen, which one would have expected if such an understanding existed.

2. Whilst the Scheme might be incorporated, the parties had clearly envisaged a 30-day period between the due date and the final date for payment and thus the 17 days within the Scheme should not be incorporated. However, as a matter of law, it was decided that where a Final Date for Payment has not been validly provided the Scheme unequivocally requires the Final Date for Payment to be 17 days later.

The Court therefore ordered payment of over £900,000 to Deerns.

Points to note

The High Court’s decision is perhaps not surprising and follows similar judgments in the Rochford Construction and Lidl cases. However, what is apparent is that whilst VDC’s contract terms made pragmatic and commercial sense, they were nevertheless found to be non-compliant with the Construction Act 1996.

It should also be noted that this decision comes almost 6 years after the Rochford Construction case was decided. As such, even half a decade later, parties are still falling foul of the nuances within the Construction Act 1996.

Any party looking to impose their own payment terms, or wanting to amend any of the standard forms, would likely see benefit in having them checked by a professional rather than finding out the hard way that their contract machinery doesn’t work. The costs associated with finding that your payment machinery doesn’t work, even if you had the best of intentions, can be eyewatering.

Need advice on any of the issues raised in this article?

Please get in touch with the author, Will Buckenham, today on 01482 324252 or via email: wdb@gosschalks.co.uk. Alternatively, contact any member of our specialist Construction law team for advice.