REUTERS | Ilya Naymushin

Do payment notices affect the date of accrual of a cause of action for limitation purposes?

The TCC is no stranger to resourceful arguments. Recently, a particularly ingenious submission proposed that, in construction claims, time begins to run for limitation purposes when a payment notice is, or should have been, issued. In Hirst and another v Dunbar and othersEyre J confirmed that the usual position prevails and that the limitation period commences on completion of the work.

This was an absorbing and wide-ranging judgment, which is particularly pertinent to practitioners who deal with claims for construction work that are filed some time after the works were completed.

Hirst and another v Dunbar and others

Mr Hirst and his company, Mountain Development Co Ltd (the claimants), carried out works on a site in Bradford, achieving practical completion on 4 December 2012. The claimants maintained that the works were performed pursuant to an oral contract with Mr Dunbar and his companies (the defendants), who denied liability, saying that no such contract existed.

The claimants eventually demanded payment in a letter to the defendants on 6 March 2014, then filed a claim form at the court on 2 August 2019. The relevant issue was whether those proceedings were issued within the limitation period.

I should mention briefly that Eyre J found that no contract had arisen between the parties, and consequently the discussion on limitation was, in his words, “academic”. However, Eyre J outlined his reasoning to show that the claim would have failed even if he had been wrong about the non-existence of a contract.

The effect of the Scheme for Construction Contracts on limitation

It was common ground between the parties that the relevant limitation period was six years from the date of the accrual of the claimants’ cause of action – but when did the cause of action accrue? The claimants submitted that the contract was subject to the Scheme for Construction Contracts 1998, where the relevant provisions of paragraph 6 of Part II of the Scheme state that:

“Payment of the contract price under a construction contract (not being a relevant construction contract) shall become due on

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

Paragraph 9(2) of the Scheme concerns the requirement for the paying party to provide payment notices:

“(2) The payer must, not later than five days after the payment due date, give a notice of the payee complying with sub-paragraph (3).”

The claimants argued that, pursuant to paragraph 6, payment only became due when they made their claim on 6 March 2014, and the issuing of a payment notice constituted a precondition of the accrual of their right to payment. Therefore, time only began to run on the date by which the defendants should have provided a payment notice. That was five days after payment became due, on 12 March 2014.

Eyre J’s analysis provides clear guidance that construction claims accrue from the date on which works are completed, not the date on which payment notices are sent or become due.

The law on the date of accrual

Eyre J quoted HHJ Coulson QC in Birse Construction Ltd v McCormick (UK) Ltd, where he stated the established principle for determining the date of the accrual of a cause of action:

“… in the absence of any contractual provision to the contrary, a cause of action for payment for work performed or services provided will accrue when that work or those services have been performed or provided. In such circumstances, the right to payment does not depend on the making of a claim for payment.”

This principle was derived from Coburn v Colledge, where the Court of Appeal held that a cause of action accrued as soon as the work was completed, not when a bill was sent or at the expiry of any period during which a party was prohibited from commencing an action for repayment. In Coburn v Colledge, the Court of Appeal drew a distinction between the right to bring an action for a particular payment and the right to that payment. The Court of Appeal held that only the accrual of the latter constituted the accrual of the cause of action for limitation purposes.

As Eyre J noted, there will sometimes be occasions when the proper construction of the parties’ contract means that the payee’s cause of action accrues when a further condition is satisfied. For example:

  • In Henry Boot Construction Ltd v Alston Combined Cycles Ltd, the Court of Appeal considered a contractor’s cause of action in a contract incorporating clause 60 of an ICE Standard Form (6th Ed.). The clause provided that the employer was to make payment in the amount certified by the engineer as being due. Dyson LJ held that the issuing of the certificate by the engineer was a condition precedent to the contractor’s entitlement to payment. The cause of action only accrued when the certificate was issued (or should have been issued), not when the work was completed.
  • In ICE Architects Ltd v Empowering People Inspiring Communities, Lambert J identified a further important distinction between agreements or terms determining when an entitlement to payment arose, and agreements or terms “concerning only the process of billing and payment”. As she explained, only the former would be relevant to the question of when a cause of action for payment accrued.

Do payment notices affect the accrual of the right to payment?

In Hirst v Dunbar, Eyre J found that payment notices should not be equated with the engineer’s certificate considered in Henry Boot Construction. He held that the provision at paragraph 9 of the Scheme for the paying party to provide a payment notice is concerned with the process of billing and payment, not the question of entitlement to payment, for the following reasons:

  • There was no persuasive argument that Eyre J should deviate from the general principle that the right to payment arises when the work is completed. He noted that, as Lord Neuberger MR stated in Legal Services Commission v Henthorn, “clear words would normally be required” before a contract should be held to give a creditor control over the limitation period. This is because such a situation removes certainty from the debtor, and could force the courts to make determinations on whether any delay for bringing a claim was reasonable. In this case, as a payment notice would only be provided after the claimants made their claim, the limitation period was completely in the hands of the claimants!
  • The situation in Hirst v Dunbar was wholly different from that in Henry Boot Construction. In that case, there was no way for the parties to know what was due without the certificate: the engineer performed a determinative role using the contractual rates, and the certificate gave rise to payment. In contrast, the payment notice under Paragraph 9 of the Scheme was to be provided by the defendants.
  • The claimants’ cause of action was already complete when the works finished. Eyre J considered Lord Esher MR’s definition of “cause of action” in Coburn v Colledge as “every fact which it would be necessary for the plaintiff to prove… in order to support his right to the judgment of the court”. Eyre J identified the cause of action as the right to payment of a reasonable sum for the works. The only element needed to complete the cause of action was the completion of the works, with no further action required for the right to payment to be crystallised.

As Eyre J summarised the issue:

“There is a difference between a provision which gives rise to an entitlement or right to payment and one which identifies when payment is due … A provision of the former kind which identifies when an entitlement to payment has arisen is relevant for determining whether a cause of action has or has not accrued. A provision of the latter kind which lays down a mechanism for identifying when payment is due or for identifying disagreement about the amount due is not.”

Final thoughts

Ultimately, as I mentioned at the outset, this discussion was “academic”, but Eyre J’s decision has practical implications for construction practitioners. It is now beyond doubt that the date on which construction works are completed is the date of accrual for a cause of action related to those works. The limitation period runs from this point. The payment provisions in the Scheme for Construction Contracts 1998 are merely “a mechanism for identifying when payment is due or for identifying disagreement about the amount due”.

Share this post on: