Why clause Y(UK)2 was changed in the October 2020 amendments to NEC4

This article reviews the case, highlights potential problems with the June 2017 payment regime and explains the changes made to Y(UK)2 in the October 2020 amendments.

The case

A dispute on a recently completed London building project arose over an application for payment made by subcontractor Kilhan Construction to groundworks and reinforced concrete frame contractor Rochford
Construction. As the subcontract works involved ‘construction operations’, the UK Housing Grants Construction and Regeneration Act 1996 applied. The subcontractor referred the matter to an adjudicator, who concluded the subcontract did not comply with the payment provisions of the Act and the Scheme for Construction Contracts 1998 should apply instead. The adjudicator also decided the contractor had not complied with the Scheme and, as a result, the payment claimed by the subcontractor was owed by default.

The contractor then asked the Technology and Construction Court to decide on new issues in connection with the due date and final date for payment, and sought repayment of the sums previously paid to the subcontractor. The court dismissed the contractor’s arguments on the due date, stating its case was ‘incorrect and unsustainable’ due to the absence of a payment schedule referred to in the contract and uncertainty as to the date by which the subcontractor was to make its application.

Accordingly, the court decided the Scheme should apply and the due date for payment was the date of the subcontractor’s application. Regarding the final date for payment the court also held that the Scheme should apply. Citing Sir Peter Coulson in Bennett (Construction) Ltd v. CMC MBS Limited [2019] EWCA Civ 1515, the court reaffirmed the purpose of the Act is to achieve certainty and regular cash flow. The court criticised the subcontract’s payment provisions as ‘unworkable’. The problem again for the contractor was linkage to an absent payment schedule and uncertainty over a payment certificate, which the subcontract required to be issued with an invoice.

The subcontractor also presented a legal argument that section 110(1)(b) of the Act requires the final date for payment to be linked to the due date by a fixed time period. It should not be an event controlled by one of the parties, such as payment notice or invoice. This is in direct contrast to section 110(1)(a), which requires, ‘an adequate mechanism for determining what payments become due under the contract, and when.’

Judge Sara Cockerill agreed with the subcontractor, expressing the view that, ‘the final date has to be pegged to the due date, and be a set period of time, and not an event or a mechanism.’ Such views do not form binding precedent but are considered by the courts as persuasive authority.

June NEC4 contracts

The June 2017 editions of the NEC4 Term Service Contract (TSC), Professional Service Contract (PSC) and Design Build and Operate Contract (DBO) include payment mechanisms which link the final date for payment to submission of an invoice.

Secondary option Y(UK)2 is a payment clause for use when the Act applies. Clause Y2.2 in the NEC4 TSC includes the words, ‘The final date for payment is the later of… fourteen days after the date on which payment becomes due, or a different period for payment if stated in the contract data and…seven days after receipt by the party making the payment of an invoice, issued in accordance with these conditions of contract’ (bullets omitted). Y2.2 also states that the service manager’s certificate is the notice of payment.

Core clause 51.1 requires the payee to submit an invoice for the amount to be paid within one week of the service manager’s certificate. The final date for payment is therefore pegged to the submission of a valid invoice which is in turn is pegged to the notice of payment (Figure 1(a)). If the service manager does not issue the payment certificate, the contractor’s application for payment becomes the payment notice (section 110B(4) of the Act). However, if the contractor issues its invoice late or the invoice is invalid, this will extend the final date for payment. If the contractor does not submit its invoice, the final date is never reached.

Making submission of a valid invoice a condition to payment is not unusual and it has been common practice for clients to amend NEC forms to incorporate invoicing. This is principally to allow both the supplier and client comply with their obligations under the Value Added Tax (Amendment) (No 5) Regulations 2007. In the UK, all VAT registered businesses are required to provide a VAT invoice to their customers on request.

Figure 1. Due dates and final dates for payment when the Housing Grants, Construction and Regeneration Act 1996 applies using Y(UK)2 of the original June 2017 NEC4 TSC (a) and (b) after the October 2020 amendments.

October 2020 amendments to Y(UK)2

The October 2020 amendments to clause Y(UK)2 affect the NEC4 TSC, PSC and DBO. The new clause states, ‘The date on which a payment becomes due is the later of…the date of receipt by the Party making payment of an invoice, issued in accordance with these conditions of contract and…fourteen days after the assessment date’ (bullets omitted).

The contracts now use submission of the contractor’s invoice to provide a mechanism for determining the payment due date. Core clause 51.1 has not been amended, so the service manager is still required to issue its payment certificate within one week of the assessment date. The final date for payment is now pegged to the due date by a fixed period of seven days unless a different period is stated in contract data part one.

The seven days between the due date and final date for payment ensures 21 day payment terms are maintained. However, clients should note this now means the latest date for serving a payless notice coincides with the due date for payment (Figure 1(b)).

Conclusion and recommendations

If the judge’s view in Rochford v. Kilhan is correct, clients still using the June 2017 editions of the NEC4 TSC, PSC or DBO should be mindful that where a valid invoice has not been submitted within seven days of the payment certificate, the Scheme may apply rather than the Act. This will result in an earlier date for both the final date for payment and the payless notice than that intended by the contract.

Whether the June 2017 or amended October 2020 version of Y(UK)2 is being used, to ensure the payment process provides certainty of payment and regular cash flow, the parties should follow the contract. In particular they should ensure that:

• the contractor/consultant submits its application before the assessment date, clearly setting out the amount it considers is due (clause 50.2)
• the service manager considers the payment application when assessing the amount due and issues a certificate within one week of the assessment date (clause 50.2/51.1)
• the contractor submits its invoice within seven days of the service manager’s certificate, showing the amount due as stated on the certificate (clause 51.1)

Key Points

• Option Y(UK)2 in 2017 NEC4 TSC, PSC and DBO contracts in the UK link the final date for payment to submission of an invoice.
• Based on a recent UK court decision, the NEC4 October 2020 amendments to Y(UK)2 change the due date to the later of the date an invoice was received and 14 days from the assessment date, and make the final date for payment a fixed period from the due date.
• Clients still using 2017 versions of NEC4 TSC, PSC and DBO should note that if an invoice is submitted after seven days of the payment certificate, the Scheme for Construction Contracts 1998 could apply and dates for final payment and payless notices would be earlier.
• Both parties should carefully follow whichever version of NEC4 TSC, PSC or DBO is being used to ensure the payment process provides certainty of payment and regular cash flow.