Could your payment provisions survive a court challenge?

When payment clauses backfire

Construction contracts are often carefully tailored to reflect the commercial priorities of a project, but a recent decision in the Technology and Construction Court shows how even a seemingly sensible payment provision can have costly consequences. In Deerns v VDC, a consultancy appointment provided that the final date for payment would be extended if the consultant submitted its invoice late. The court held that, although the due date for payment was fixed, the final date for payment could move depending on when the invoice was issued. As a result, the period between the due date and final date for payment was not fixed, meaning the payment mechanism failed to comply with the Construction Act. The non-compliant payment provisions were therefore replaced by the statutory Scheme for Construction Contracts, which provided for a final date for payment of 17 days after the due date, with any pay less notice required to be served not less than 5 days before that date. Although the client served pay less notices in response to the consultant's payment applications, they were served after the deadline imposed by the Scheme and were therefore ineffective.  

The decision highlights a useful drafting point: where the timing of payment is intended to depend on a particular event (such as the issue of an invoice), it is generally safer for that event to determine the due date for payment, rather than alter the period between the due date and final date for payment.

The Construction and Engineering team at Burges Salmon are highly experienced in advising on payment mechanisms in construction contracts and would be happy to speak to you with any queries on this or any other related topics.