The deadline for bringing a contractor’s claim for payment may be earlier than you think

The High Court has recently decided that a contractor’s claim was out of time because the right to payment arose when the works were completed, and not on the (later) date that payment became due.

The decision may be surprising to some and could have wide-ranging application in the construction industry. It has a potentially critical impact for both contractors and employers because a failure to commence a claim in time can have draconian consequences.

Background

The case of Hirst v Dunbar [2022] EWHC 41 (TCC) concerned the construction of a number of houses and flats at a site in Bradford. The claimants carried out works on the site in 2011 and 2012. There was no written agreement, but the claimants argued that they had an oral contract with the defendants under which the defendants were to pay a reasonable sum for the works.

The defendants denied this, instead claiming that the claimants had carried out the works at their own risk because the claimants had been intending to purchase the site. Alternatively, the defendants argued that, even if there had been a contract, the claimants’ claim was out of time because the works had been completed in 2012 and the claimants did not bring their claim until 2019, beyond the six-year limitation period (the period within which any legal claim must be brought).

The decision

The judge considered the evidence and decided that there had been no agreement between the parties, and so the claimants were not entitled to any payment.

However, of more general interest is the judge’s decision on the defendants’ limitation argument.

As a preliminary point, the judge decided that, if there had been a contract, then the payment provision at paragraph 6 of the Scheme for Construction Contracts would have applied. That states that payment of the contract price becomes “due” on the later of (a) the expiry of 30 days following the completion of the work; or (b) the making of a claim by the payee.

The question before the judge then was: did the time period for the claimants’ claim begin in 2012, when the works were completed (the defendants’ case), or in 2014, when the payment notice under the Scheme was or should have been issued (the claimants’ case)?

The general legal starting point is that a right to payment for work or services will arise when the work in question is completed.

That position can be changed if the parties agree. However, importantly, the judge decided that the Scheme did not have the effect of changing that usual position. The judge considered that the terms of the Scheme concern only the “process of billing and payment” – they do not change the time when the underlying entitlement, or right, to payment arose.

This means that, under the Scheme, a contractor’s right to payment arises on the date of completion of the work. That date sets when the limitation period begins to run, not the date when the payment becomes “due” or the final date for payment.

The judge drew a distinction with contracts where an independent certifier issues a valuation or payment certificate. Where there is independent certification, the parties do not know how much is due until the certificate is issued, meaning that no right to payment can arise until then. However, that is not the position under the Scheme – there, the application for payment and the payment certificate are issued by the parties, not an independent certifier.

Consequences

The decision is an important one, as it relates to when time starts to run for the purposes of claims for payment under construction contracts. Some in the industry may find it odd that a claim for payment can exist before the date that the counterparty is required to make that payment. However, that is the effect of the judge’s decision, based on a long line of previously reported cases.

Although the decision involved paragraph 6 of the payment terms in the Scheme, the same reasoning would appear to apply to many other payment terms in common use in the industry, especially under contract forms where there is no independent valuation/certification.

The practical impact is that, under similar provisions, the time period for commencing any legal claims for payment may be much earlier than many people will anticipate (meaning that the claims will also expire much earlier than expected). At the latest, this period is likely to run from the date of practical completion of the works. That will often be many months or even years earlier than the date of the final payment under the contract, which is usually not due until after the rectification period expires and defects are made good.

There is also a question about how the judge’s reasoning might apply to, say, sectional completion. There may be an argument that the time period for bringing a claim in relation to a section begins on practical completion of that section. Again, that could be many months or years before completion of the works overall and the date of the final payment.

It will be interesting to see whether, and how widely, the judge’s decision is applied in future cases and to other payment provisions. This part of the judge’s decision was obiter, and so not strictly binding for subsequent cases, although it is likely to be highly persuasive for judges and adjudicators in the future. Also, the judge appeared to be heavily influenced in his thinking by the fact that, under the Scheme provisions, the due date for payment depended on when the contractor issued its payment application, meaning that (if the claimants’ arguments had been correct) the contractor could dictate when the limitation period started (and so expired). It might be that payment provisions which do not provide such power to the contractor will be interpreted differently.

In the meantime, when calculating the deadline for commencing legal proceedings, it would be prudent for contractors to assume the earliest possible date on which a claim may have arisen. Employers should also analyse any contractor’s claims carefully to assess whether or not they may be out of time, given the reasoning in this case.