A recent High Court case has created uncertainty about when a contractor’s right to payment arises. There now appear to be conflicting decisions as to whether the right arises (a) when the works are completed, or (b) on the (later) date that payment becomes due.
This is potentially very important for both contractors and employers because this date will dictate the deadline by which any legal claim has to be brought, and a failure to commence a claim in time can have draconian consequences.
We highlighted last year the first of the two decisions (Hirst v Dunbar  EWHC 41 (TCC)), which concerned the limitation period for contractors’ claims for payment (the period within which any legal proceedings must be commenced).
In that case, the judge decided that, at least under the Scheme for Construction Contracts payment provisions, 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.
As we pointed out, the practical impact of this is that, under the Scheme and similar provisions, the deadline for a contractor to commence any legal claims for payment may be much earlier than many people will anticipate. At the latest, the relevant 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.
LJR Interiors v Cooper Construction
A more recent judgment now appears to have taken a different line. LJR Interiors Limited v Cooper Construction Limited  EWHC 3339 (TCC) is an adjudication enforcement case. It arose out of a contract under which LJR agreed to carry out dry lining, plastering and screed works for Cooper Construction at a property in Oxfordshire.
LJR’s works were completed by 19 October 2014. LJR made three applications for payment during 2014, the last of which (Application No 3) was made on 31 October 2014. Almost 8 years later, on 31 July 2022, LJR submitted a further application for payment, Application No 4. Cooper Construction did not respond to that application, whether by paying the amount applied for or by issuing a pay less notice.
LJR commenced an adjudication seeking payment of Application No 4. The adjudicator decided that (a) Application No 4 was a valid application for payment and (b) because Cooper Construction had not issued any pay less notice in response, Cooper Construction was required to pay the full amount which LJR had applied for.
LJR sought to enforce the adjudicator’s decision and Cooper Construction resisted enforcement by bringing a separate Part 8 claim – Cooper Construction sought a decision that LJR’s claim was not valid because it had been commenced outside the applicable 6 year limitation period.
The judge ultimately agreed with Cooper Construction and he refused to enforce the adjudicator’s decision. This was on the basis that:
- Application No 4 had largely just re-applied for the final payment covered by Application No 3;
- any right to payment had already arisen by way of Application No 3 – LJR was not permitted to simply apply again for the same sums to ‘renew’ the limitation period; and
- given that the right to payment under Application No 3 had accrued in 2014, the 6 year limitation period to bring any claim had expired in 2020. LJR’s claim in 2022 was, therefore, out of time.
Deadline for contractors’ claims
Interestingly, as part of his decision on that final point, the judge appeared to conclude that LJR’s right to payment (and so the commencement of the limitation period) had arisen on the final date for payment of Application No 3.
This would seem to contradict the earlier decision in Hirst v Dunbar that the right to payment arises on completion of the work, rather than on the due date or the final date for payment.
It might be argued that this case involved different payment terms and that was the reason for the difference in the judge’s approach (the judge decided that the Scheme did not apply because the parties had agreed adequate payment terms). However, it is difficult to see why the bespoke payment terms in this case should have produced a different legal result and, tellingly, the judge also considered the legal analysis if the Scheme had applied and seemed to adopt the same reasoning.
This creates a conflict between the two decisions. That conflict will mean that there is scope for future argument and uncertainty over the correct approach, especially given that the decision in the LJR case may be closer to what many in the industry would have expected to be the answer prior to the Hirst judgment.
Having said that, it is important to note that the judge in this case does not appear to have been made aware of the decision in Hirst v Dunbar. In addition, LJR was not legally represented in the proceedings and so the points may not have been fully argued before the judge. This might suggest that Hirst v Dunbar should be given greater weight in the future.
In any case, when calculating the deadline for commencing legal proceedings, it would be prudent for contractors still to assume the earliest possible date on which a claim may have arisen, ie the date when the relevant works were completed. Employers should also analyse any contractor’s claims carefully to assess whether or not they may be out of time based on the reasoning in either case.