It is imperative that a construction contracts payment provisions are clear and comply with the minimum standards in the Housing Grants, Construction and Regeneration Act 1996 (“the 1996 Act”). If the provisions are ambiguous, there can be wholesale substitution of the contractual terms for the relevant provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (“the Scheme”). The recent case of Rochford Construction Ltd v Kilhan Construction Limited  reinforces the importance of ensuring payment terms are compliant.
Rochford Construction Ltd (“Rochford”) and Kilhan Construction Ltd (“Kilhan”) entered into a subcontract for the construction of a reinforced concrete frame. The subcontract stated that Rochford was to issue a schedule of payments to Kilhan, application dates were the at ‘end of month’ and payment was to be made ‘thirty days from invoice as per attached schedule’ (although no schedule was ever actually produced).
Kilhan submitted an interim payment application on 20 May 2019 for around £1.4 million. Rochford issued an interim payment notice on 23 October 2019 that certified a sum of around £1.2 million.
An adjudicator was appointed to determine whether the payment provisions in the subcontract were compliant with the 1996 Act; in particular, whether Kilhan’s application was valid and whether Rochford’s payment notice was issued on time. If non-compliant, then the relevant payment provisions of the Scheme would be implied into the subcontract.
The adjudicator determined that Kilhan’s application was valid, due on the date it was served (20 May 2019) and the final date for payment was 30 days later pursuant to the express contractual term (e.g. 18 June 2019). Rochford did not serve a payment notice within 5 days of the due date or a Pay Less Notice 7 days before the final date for payment, in accordance with the 1996 Act, so it was found that Rochford were obliged to pay Kilhan the full application sum of £1.4 million.
Rochford submitted that, pursuant to the express wording of the subcontract, Kilhan was obligated to serve an interim application for payment on the last day of each calendar month. Therefore, no payment had become due under the subcontract. Accordingly, they did not pay the sum awarded by the adjudicator. As a result, Kilhan issued Part 7 enforcement proceedings. In Rochford’s opinion the adjudicator’s decision was clearly wrong, so Part 8 proceedings were issued by it in response.
The Court’s Decision
Section 110 of the 1996 Act requires every construction contract to:
- provide an adequate mechanism for determining what payments become due under the contract, and when; and
- provide a final date for payment in relation to any sum which becomes due under the contract.
Rochford suggested that the wording ‘application date end of month’ is a clear, literal requirement in the subcontract that applications to be made on the last day of the month. However, Cockerill J thought that this submission was ‘either absurd or very close to it’.
Ambiguous wording, such as ‘end of month’, could mean any number of dates; such as final calendar day, final business day or simply by the end of the month. As Cockerill J noted, it is rarely practical to compile a claim or invoice accurately for the entirety of the month, including that day, and submit it within that day. Further, the reference to a schedule which was never provided indicated that the parties intended for claims to be submitted in accordance with it and not on the final day of each month. Therefore, this interpretation was not sustainable, the relevant parts of the Scheme were implied and Rochford’s claim that Kilhan should repay the adjudicator award was dismissed.
This case highlights the importance of certainty within construction contracts and the advantages of including a payment schedule from the outset (especially if it is referred to within the contract). There can be only one interpretation of the provisions; ambiguity invites disputes and the inevitable costs that disputes bring.
In obiter comments, Cockerill J noted that ‘while a due date can be fixed by reference to, say, an invoice or a notice, the final date has to be pegged to the due date, and be a set period of time, and not an event or a mechanism’. While the 1996 Act does permit this, and final dates for payments are sometimes linked to the issue of VAT invoices, it would now appear good practice to ensure that contractual final dates for payment are calculated by reference to due dates and not other events to avoid unnecessary disputes.