Case confirms NEC4 Y(UK)2 amendments in PSC, TSC and DBOC

Key Points

• A recent court decision has affirmed a previous finding that payment terms which make the final date for payment dependent on an invoice do not comply with the UK Construction Act.
• The October 2020 amendments to the Y(UK)2 clause in the NEC4 PSC, TSC and DBOC already addresses this issue.
• Users of the original 2017 versions NEC4 PSC, TSC and DBOC should consider whether action needs to be taken to amend their payment terms.

Readers may recall an article by David Hunter in Issue 110 on why clause Y(UK)2 was changed in the NEC4 October 2020 amendments (Hunter, 2021). It highlighted the impact of the 2020 decision in Rochford Construction Ltd v. Kilhan Construction Ltd [2020] EWHC 941 on the Y(UK)2 clause in the original 2017 versions of NEC4 Professional Service Contract (PSC), Term Service Contract (TSC) and Design Build and Operate Contract (DBOC), which was then addressed in the October 2020 amendments.

The September 2023 judgment in Lidl Great Britain Ltd v. Closed Circuit Cooling Ltd [2023] EWHC 2243 gives more certainty to the correctness of the Rochford decision. As such it further emphasises the importance to NEC users of making sure their contract terms comply with the UK Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), where it applies.

Remembering Rochford

In the Rochford case, the Technology and Construction Court was required to consider whether payment terms which stipulated a final date for payment of 30 days from invoice were compatible with the requirements of the Construction Act. The court concluded the Act did not allow for a ‘floating’ final date. This was because section 110 requires that the due date is determined by an ‘adequate mechanism’, such as a payment schedule, and the final payment date is a contractually agreed period after the due date.

The decision was made on an ‘obiter’ basis, meaning it did not create a binding precedent. Nevertheless, NEC amended the Y(UK)2 clauses in PSC, TSC and DBOC and associated subcontracts in 2020 to ensure they no longer linked final dates for payment to submission of an invoice. This was to avoid the Scheme for Construction Contracts 1998 applying, which requires payment within 17 days of the due date.

Reinforced by Lidl

In the Lidl case, the client and contractor had entered into a framework agreement under which individual work orders could be issued (as separate contracts) for industrial refrigeration and airconditioning works. The terms of a work order allowed the contractor to make interim payment applications following the achievement of defined milestones, with the final date for payment being the later of 21 days following the due date, or receipt of a valid VAT invoice.

A dispute had arisen between the parties in relation to various matters concerning payment under a work order. The contractor contended that the terms of the contract regarding the final date for payment (linked to delivery of a valid VAT invoice) did not comply with the Construction Act, citing the Rochford case. The client contended that the court should follow earlier authority, which upheld provisions which linked the final date for payment to issue of an invoice.

While accepting the client’s arguments that it made sense for the contractor to be required to provide a VAT invoice, and that submission of an invoice was not ‘obviously and inherently objectionable’ in the same way as a provision making payment contingent on circumstances under another contract, judge Stephen Davies failed to be persuaded that the Rochford decision was inconsistent with previous authority.

He said, ‘If it was open to a paying party to include a provision which required the fulfilment of some further condition between the due date for payment and the final date for payment, that would have the effect of driving a coach and horses through the wording and the clear intention of this part of the Act’. As in the Rochford case, a key reason in the decision was the distinction set out in section 110 of the Construction Act between the requirements for establishing a due date and those for a final date for payment.

Implications for NEC users

From a legal perspective, the decision in the Lidl case goes a long way to remove some of the uncertainty that still remained after the issue of invoice-linked final dates for payment was explored in Rochford. The Rochford decision now has a more solid legal footing as it can only now be overturned by the Court of Appeal or by an amendment to the Construction Act.

The proactive approach taken to address the original 2017 drafting of the NEC4 suite following the Rochford decision means parties using NEC4 contracts which incorporate the October 2020 amendments can be confident that their Y(UK)2 provisions align with an established legal position. It is however vital that parties ensure such amendments (and all other NEC published amendments) are properly incorporated into their NEC4 contracts. This is a particular issue for parties using copies of the PSC, TSC and DBOC (and associated subcontracts) published before October 2020. Parties who are subject to ongoing obligations under such contracts should certainly take note of the Rochford decision and decide to do one of the following.

Proactively manage the risk of having Y(UK)2 provisions which are not compliant with the Construction Act: this may be possible where parties are properly operating in the ‘spirit of mutual trust and co-operation’ required by the contract to ensure accurate payment applications and timely payments.

Amend the Y(UK)2 provisions going forward: this would seem a desirable option for contracts covering works or services which will be ongoing for some time. Even where parties are currently on good terms and there are no contractual performance issues, things change and removing ambiguities in payment provisions removes a possible source of future dispute.

References

Hunter D (2021) Why clause Y(UK)2 was changed in the October 2020 amendments to NEC4, NEC Users’ Group Newsletter 110 (January 2021): 10-11.