The recent case of Rochford Construction Ltd v Kihan Construction Ltd reinforces importance of clear payment dates and suggests that fixing the final date for payment by reference to an invoice (as is the case in the NEC4 PSC) is inconsistent with the Construction Act.
On 3 August 2018 Rochford Construction Ltd ("Rochford") and Kilhan Construction Ltd. ("Kilhan") entered into a subcontract for the construction of a reinforced concrete frame. The subcontract stated as follows:
"Works are lump sum . RCL will issue activity schedule to KCL, application date end of month . commercial . valuations monthly as per attached payment schedule end of month. Payment terms thirty days from invoice as per attached payment schedule. S/C payment cert must be issued with invoice."
Kilhan submitted an interim application for payment (IPA 9) on 20 May 2019 in the sum of £1.4 million. Rochford issued Interim Payment Notice (IPN 9) on 23 October 2019, which certified a sum of just over £1.2 million.
The adjudicator had to determine whether the contractual payment provisions in the subcontract were compliant with the Housing Grants Construction & Regeneration Act 1996 ("the Act"); specifically, whether or not IPA 9 was valid and whether IPN 9 constituted a valid payment notice - was it issued late and did it specify how the sum was calculated?
The adjudicator concluded that the due date of IPA 9 was 20 May 2019, being the date on which the notice was served, and that final payment was due no later than 19 June 2019 (being 30 days from the due date). As Rochford had not served either a Payment Notice within 5 days of the due date or a Pay Less Notice no less than 7 days prior to the final date for payment, the adjudicator found that the sum of £1.4 million was owing to Kilhan in default.
Part 8 claim
Rochford did not pay and, instead, issued Part 8 proceedings in response to the Part 7 enforcement application made by Kilhan. Rochford argued that the adjudicator's decision was "clearly wrong" because he failed to give effect to two express contractual terms: the date for making a claim, which fell on the last day of every month - and the requirements for the final date for payment, to be fixed by reference to the provision of an invoice from Kilhan. Rochdale contended that, as Kilhan had not submitted an invoice until October 2019, IPN 9 was within the period allowed for a pay less notice and it was not therefore in default of payment terms.
Cockerhill J referred to the contractual payment provisions and concluded that the requirement that an application for payment must be made on the last day of the month was ambiguous:
"Does it mean 'on the end of the month', 'by the end of the month,' 'after the end of the month', 'the final business day' or 'the final calendar day'? What if the final day of the calendar month is not a business day? How does one square the circle as to know when they make the application?"
The parties intended claims, invoices and payment certificates to be submitted as per the payment schedule referred to in the contractual payment terms but, in fact, no such schedule materialised. This left an impractical and unworkable solution, the effect of which was to leave the date for submission of the claim "at large". Cockerhill J noted the fact that the parties did not in fact adhere to any system of submitting payment applications on the last day of the month anyway, as all eight had in fact been submitted later.
Accordingly, the contractual provisions were substituted by relevant payment provisions set out in the Scheme for Construction Contracts 1998 ("the Scheme"). This was the best way of "mending the misfire caused by the parties' incomplete drafting". It followed that the due date was the date on which Kilhan had made its claim, as the adjudicator had decided. The date of final payment should also be implied by the Scheme.
Although she did not need to rule on the point, Cockerhill J also said that she would have accepted "with some diffidence" Kilhan's submission that the final date for payment has to be pegged to the due date, and be a set period of time, and not linked to an event or a mechanism (such as the provision of a VAT invoice). Referring to provisions in the Act, Cockerhill J concluded that "the possibility to peg the final date of payment to an event rather than a fixed period was never considered acceptable under the Act" . The Court dismissed Rochford's claim.
The case provides further confirmation that contractual payment terms must be clear and unambiguous. Requirements to submit applications or invoices on the last day of the month should be avoided. This case also underlines the advantage of a payment schedule being agreed at the outset and included in contracts.
Perhaps more interestingly, the case also suggests that final dates for payment should be linked to due dates and should not be contingent on any form of action. This is significant given how often final dates for payments in construction contracts are linked to the issue of VAT invoices, as is the case in the NEC4 Professional Service Contract for example. These comments were obiter so it remains to be seen how the courts will decide this issue.
However, as there has been no other judicial consideration of this point, going forward we suggest that parties to construction contracts request that the contractual final dates for payment are fixed by reference to set periods from due dates, and not by reference to an event such as the issue of an invoice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.