Getting payment clauses wrong: drafting pitfalls in construction contracts

This year marks thirty years since the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”) received Royal Assent.

Despite three decades of adjudication, litigation and legislative refinement, many of the issues giving rise to payment disputes remain remarkably familiar.

Three of the issues those operating construction contracts still seem to be grappling with are:

• drafting the payment mechanism;
• issuing valid notices; and
• complying with notice deadlines.
  

Over the next three weeks we will cover each of those issues and provide some practical advice to avoid common pitfalls. Firstly, we look at the recent TCC decision in Deerns UK Ltd v VDC LHR11 Ltd: a timely reminder that sometimes the problem is not the payment notice at all. It is the payment machinery sitting behind it.

On one view, the case was about late pay less notices. On another, it was about a payment clause that failed to comply with the Construction Act. The two turned out to be inseparable. Once the contractual payment mechanism fell away and the Scheme for Construction Contracts applied, the paying party’s notices were no longer being measured against the timetable it thought applied. The result was that the notices were served too late.

In other words, the payment mechanism cost a party its pay less notice.

The requirement for certainty

Section 110 of the Construction Act requires a construction contract to provide an adequate mechanism for determining when payments become due and the final date for payment.

The authorities have consistently been interpreted as requiring an identified and fixed period between the due date for payment and the final date for payment. The rationale is straightforward: parties should be able to identify with certainty when payment falls due and when it must be made.

The courts have repeatedly demonstrated a reluctance to permit payment regimes which introduce uncertainty into that process. Whilst parties are generally free to agree their own payment mechanisms, they cannot do so in a way that undermines the statutory requirements.

That principle has been reinforced in a number of cases over recent years, including Rochford Construction Ltd v Kilhan Construction Ltd and Lidl Great Britain Ltd v Closed Circuit Cooling Ltd. The message emerging from those authorities is clear. The payment cycle must be sufficiently certain for parties to identify the relevant deadlines without ambiguity.

What happened in Deerns?

The dispute arose under a consultancy agreement rather than a building contract. The consultancy agreement contained fixed interim valuation dates and fixed due dates for payment. However, it also contained a mechanism which allowed the final date for payment to move if the consultant submitted its application late.

At first sight, that arrangement may appear commercially sensible. After all, parties often wish to discourage late applications and may seek to adjust the timetable accordingly.

The problem was that whilst the final date for payment could move, the due date remained fixed. This meant that the period between the due date and final date for payment varied depending upon when the consultant submitted its application.

Following Rochford and Lidl, the court held that the payment provisions were non-compliant because they failed to provide a fixed and identifiable interval between the due date and final date for payment.

The non-compliant provisions were therefore replaced by the relevant provisions of the Scheme for Construction Contracts.

Why did it matter?

The drafting defect was not simply a technical point.

Once the Scheme applied, the payment timetable changed. As a result, the pay less notices were out of time and ineffective. The mistake was not failing to serve the notice. The mistake was assuming the relevant deadline was the one set out in the contract.

That distinction is important.

Many parties focus heavily on the administration of payment notices whilst devoting comparatively little attention to the underlying payment machinery. Yet a notice served precisely when the contract appears to require may still be ineffective if the payment regime itself turns out to be non-compliant.

Most payment disputes arise because a payment notice or pay less notice was not served correctly or on time. What is perhaps more surprising is how often the root cause is not contract administration but contract drafting.

The decision is therefore a useful reminder that drafting defects generally only emerge after a dispute has already arisen about notices. By that stage, the consequences can be significant.

Why consultant appointments deserve attention

One particularly interesting aspect of Deerns is that it concerned a consultant appointment rather than a building contract.

Attention is often focused on payment provisions contained in standard form building contracts and sub-contracts. Consultant appointments can receive less scrutiny, particularly where payment provisions have evolved through successive amendments and negotiated changes.

The principles, however, apply equally.

The decision demonstrates that professional appointments are just as capable of containing non-compliant payment mechanisms as any other construction contract. Parties should therefore approach amendments to consultant payment provisions with the same degree of caution as amendments to building contracts.

That is particularly true where bespoke drafting has been introduced to deal with perceived commercial concerns surrounding the timing of applications or payments.

Lessons for drafting

Three practical points stand out.

1. Keep the payment cycle fixed
   
   Parties can agree their own payment regime, but the relationship between the due date and final date for payment must remain fixed and ascertainable.
   
   Where one date can move whilst the other remains fixed, there is a risk that the regime may be non-compliant.
   
   
2. Be cautious when modifying standard payment machinery
   
   Many drafting problems arise not because the original payment provisions were defective, but because apparently modest amendments create unintended consequences.
   
   The more bespoke the payment mechanism becomes, the greater the need to test it against the statutory requirements.
   
   
3. Remember that payment disputes often begin with drafting
   
   It is tempting to view payment provisions as boilerplate drafting and focus attention instead on operational issues such as valuation and notice administration.

Deerns illustrates the risk of that approach. A payment dispute that appears to be about notice timing may ultimately be traced back to a drafting issue introduced years earlier.

Final thoughts

The decision in Deerns is not a departure from existing authority. The courts have long required certainty in the operation of the statutory payment regime and continue to scrutinise contractual provisions that undermine that objective.

Thirty years since the Construction Act , that remains a familiar theme. Parties tend to focus on whether they have served the right notice at the right time. Deerns is a reminder that the first question should often be whether the contractual payment machinery works at all.

That is particularly important where standard payment provisions have been amended or bespoke drafting introduced. What may appear to be a relatively modest adjustment to the payment timetable can have significant consequences if it alters the relationship between the due date and final date for payment, with the result that the contractual machinery no longer complies with the Act.

In Deerns, the real problem was not the pay less notices themselves. It was the defective payment mechanism that sat behind them. Once the contractual regime fell away and the Scheme applied, the relevant deadlines changed and the notices were rendered ineffective.

In short, the pay less notice was not the problem. The payment clause was. The defective drafting meant an otherwise timely notice arrived too late.

Looking ahead, our next article explores another recurring issue in payment disputes: what makes a payment notice valid?

This topic will be explored in more detail at our in-person seminar on the financial and commercial risks in construction, taking place in Edinburgh on Thursday 19 November 2026. To RSVP, please register here.

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