Do the payment provisions of the Construction Act affect the limitation period for payment claims under a construction contract?

A recent TCC decision appears to be first to consider whether the payment provisions of the Construction Act and Scheme for Construction Contracts affect the commencement of the limitation period for payment claims. In the Court’s judgment, provisions specifying the due date for payment and the service of a payment notice by the paying party did not affect the general rule that a claim for payment accrues for limitation purposes upon completion of the work. Although the Court only considered the provisions of the Scheme, similar reasoning might also be said to apply to some standard forms.

Hirst v Dunbar

Mr Hirst carried out construction works at a residential development in Bradford between October 2011 and December 2012. He claimed to have performed the works pursuant to an oral contract with Mr Dunbar and issued a demand for payment in March 2014 for almost half a million pounds.

Mr Dunbar denied having engaged Mr Hirst. He claimed Mr Hirst had performed the works at his own risk in order to improve the value of the development because he later intended to purchase the site. Mr Dunbar also argued that the claim was statute-barred because Mr Hirst’s cause of action accrued when the works were completed in December 2012 and the proceedings were commenced more than six years later in August 2019.

As to whether the claim was statute-barred, Mr Hirst argued that the contract was subject to the Scheme for Construction Contracts (the “Scheme”) and therefore the cause of action accrued when a payment notice ought to have been issued by Mr Dunbar under paragraph 9 of the Scheme – that is, five days after the due date for payment.Mr Hirst’s position was that the due date for payment was fixed by reference to paragraph 6 of the Scheme, which provides as follows:

“Payment of the contract price under a construction contract … shall become due on

(a) the expiry of 30 days following the completion of the work, or

(b) the making of a claim by the payee,

whichever is the later.”

Mr Hirst therefore argued that his first demand for payment on 6 March 2014 constituted “the making of a claim” and thus Mr Dunbar ought to have issued a payment notice on 12 March 2014. On that basis, the proceedings were commenced less than six years after the right to payment arose and were within time.

The TCC ruled against Mr Hirst in relation to the existence of a contract or any other legal basis for his claim, but nonetheless went on to consider whether a contractual claim would have been statute-barred.

Did the Scheme affect the limitation period?

The Court rejected Mr Hirst’s argument that time for limitation purposes began to run when Mr Dunbar should have issued a payment notice under paragraph 9 of the Scheme. Rather, Mr Hirst’s cause of action, which the Court identified as the right to payment of a reasonable sum for the works, accrued as soon as the works were completed.

The Court’s starting point was the ordinary rule that a cause of action for payment for works will accrue when the works are completed and that “clear words” would be required to make payment conditional upon the making of a claim by the creditor. Previous case law had explained the justification for this rule as being the inherent unlikelihood of parties wishing to give a creditor complete control over when time starts running for limitation purposes (see Legal Services Commission v Henthorn). This would render the limitation period entirely uncertain and undermine the purpose of the limitation regime.

The Court was unpersuaded that paragraphs 6 and 9 of the Scheme were sufficiently clear to displace the general rule. The Court considered there to be a “difference between a provision which gives rise to an entitlement or right to payment and one which identifies when payment is due”. The payment provisions in the Scheme were of the latter kind and concerned only “the process of billing and payment”.

The Court rejected Mr Hirst’s argument that the issuing of a payment notice under paragraph 9 of the Scheme was a precondition to the right to payment. Once the works were completed, Mr Hirst would not have needed to take any further action for the right to be crystallised. In that event, Mr Hirst could have assigned his right to payment or sought a declaration that payment would be due at the date identified under the Scheme. It followed that a payment made in response to the “making of a claim” under paragraph 6 of the Scheme involved the discharge of a cause of action which already existed, and which accrued independently of the Scheme.

The Court also distinguished paragraph 9 of the Scheme from a clause in a contract requiring an employer to pay a contractor an amount certified by an independent certifier. In Henry Boot Construction v Alstrom Combined Cycles Ltd, the issuing of an engineer’s certificate was held to be a condition precedent to a contractor’s right to payment.

Conclusions and implications

This decision appears to be the first to consider the impact of the payment provisions of the Housing Grants, Construction, and Regeneration Act 1996 (the “Construction Act”) and the Scheme on the commencement of the limitation period for payment claims under a construction contract. It suggests that those provisions, particularly the need to specify a due date for payment and the service of a payment notice, may not affect the accrual of a cause of action for payment upon completion of the works, save where a payment notice is issued by an independent certifier. Although the Court’s decision on these points is obiter and considers only the Scheme provisions, similar reasoning could be argued to apply to those standard forms which do not involve independent certifiers.

References:

Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] EWCA Civ 814

Legal Services Commission v Henthorn [2011] EWCA Civ 1415

Hirst v Dunbar [2022] EWHC 41 (TCC)