Cornerstone - Payment terms and invoices: be careful what you bargain for

Published: 11/03/2016

“Payment to be made within 72 hours of receipt of invoice, issued when the milestone is achieved.”

Not an uncommon provision to find in a construction contract. Often that kind of statement stands alone as the only note on payment, sometimes other provisions are provided.

It was the former scenario that caused problems in a recent case: Manor Asset Limited v. Demolition Services Limited [2016] EWHC 222 (TCC). There, a JCT form had been amended to provide for milestone payments, with payment on first milestone – demolition by Demolition Services Limited (DSL) up to a certain line on a photograph – due in accordance with the above quote.

DSL duly submitted its first invoice on 23 October 2015, but on 28 October 2015 Manor Assert Limited (MAL) issued a pay less notice (PLN). DSL said the PLN didn’t comply with the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) and, as was its right, referred the dispute to adjudication.

The adjudicator found in DSL’s favour, finding that the PLN should have been issued five days before the final date for payment, which was three days after the date of the invoice. So, the adjudicator said, to be valid, MAL should have issued its PLN before the due date, before the invoice was issued, and indeed before the milestone that triggered payment had even been achieved.

On the face of it, it was a curious decision, but absent a breach of natural justice or lack of jurisdiction, MAL was stuck with it until the court finally determined otherwise. No jurisdictional challenge was suggested, but MAL did claim that the adjudicator breached natural justice; but the court said it hadn’t. As an alternative, and as is becoming more common, MAL asked the court to declare the correct payment dates. Procedurally, this has the effect of finally determining the matter and therefore superseding the adjudication decision, which is only binding on an interim basis. Where factual disputes are limited or non-existent, narrow points like this can be decided by the court on a fast-track basis and so do allow a party to, in effect, resist enforcement – so they can be an effective tool.

The court said that the parties’ amendment – the ‘72 hours’ clause – was clear in setting that time as the final date for payment. Equally, the court said that it was clear the due date could only have been the issue of the invoice, because the trigger for that was the achievement of the milestone, and a milestone payment couldn’t logically become due before the milestone was achieved. The court said this all complied with the payment provisions of the Act and was therefore compliant – but the only question was when, if at all, a PLN could be issued.

The Construction Act entitles a paying party to issue a PLN up to the ‘prescribed period’ before the final date for payment (which by default is seven days). But the Construction Act also says that a PLN can’t be issued before the notice to which it relates – which the adjudicator had found was the case. The judge’s solution was to say that the parties impliedly agreed that the ‘prescribed period’ was in effect nil, and therefore MAL could have issued a PLN at any time up to the end of the 72 hour period from invoice presentation. It said that the parties must have intended their amendment to be lawful, and given that DSL was getting favourable payment terms, it couldn’t reasonably reject to MAL being given as long as possible to serve a PLN.

All that said, it made no difference in the case because MAL’s PLN – which the court said had to be served no later than 26 October 2015 (the final date for payment) - was late anyway.

For further information on payment terms and invoices, please contact Oli Worth. This article provides only a general summary and is not intended to be comprehensive. Specific legal advice should be taken in any individual application. Law covered as at March 2016.

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