Further judicial commentary on certainty in construction contracts and the application of the Scheme: Rochford Construction Limited v Kilhan Construction Limited [2020] EWHC 941 (TCC)

Certainty in construction contracts is paramount in order to comply with the Housing Grant, Construction and Regeneration Act 1996 and avoid wholesale replacement of the contractual terms. Rochford Construction Limited v Kilhan Construction Limited [2020] EWHC 941 (TCC) emphasises the importance of submitting a schedule, especially if it is referenced in the contract, and ensuring there is only one interpretation in the provisions when referring to the relevant due date and final date of payment. See our case commentary here:

The parties entered into a subcontract on 3 August 2018 for the construction of a reinforced concrete frame, which stated: “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.” Unfortunately, no payment schedule was ever produced.

This claim was brought by Rochford against the Kilhan, in respect of Interim Payment Application 9 (“IPA 9”), arising out of an adjudication dated 24 December 2019. As the adjudicator put it, the main issue was whether the payment provisions in the subcontract were compliant with the Housing Grant Construction and Regeneration Act 1996 (“Act”)? In particular, the dispute concerned the validity of that payment notice, whether it was issued late, and failed to specify how the sum sought was calculated. If the payment provisions were not compliant with the Act, what terms were to be implied by the Scheme for Construction Contracts 1998 (“Scheme”)?

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 the final date for payment was thirty days from that due date, being 19 June 2019. He concluded that the Claimant had neither served a Payment Notice within five days of the due date nor a Pay Less Notice no less than seven days prior to the final date for payment. On that basis, the adjudicator found that the sum claimed was owing in default.

Payment was eventually made but Rochford brought Part 8 proceedings because it did not concur with the decision, and sought ligation to decide a fresh issue in relation to the due date and the final date for payment.

In respect of the due date, Rochford submitted that under the express terms of the subcontract, the Defendant was obliged to serve any interim application for payment on the last day of each calendar month, but no payment became due under the subcontract. In respect of the Final Date of Payment, under the express terms of the subcontract, the final date for payment of any sum that has become due in 30 days from the date of service of a relevant invoice. However, without prejudice to the fact that no sums had in fact become due, the Defendant did not serve an invoice until 7 January 2020.

Rochford stated that the adjudicator’s decision was clearly wrong because he failed to give effect to two key expressed clauses of the subcontract: As to the date for making a claim, and as to the requirements for a final date for payment.

Decision

Section 109 of the Act entitles parties of a construction contract to seek ‘payment by instalments, stage payments or other periodic payments’. Section 110 stipulates that:

Every construction contract shall—

(a)  provide an adequate mechanism for determining what payments become due under the contract, and when, and

(b)  provide for a final date for payment in relation to any sum which becomes due.

The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment.

In relation to the due date of interim payments, Rochford submitted that there is a clear requirement in the subcontract that application for the payment must be made on the last day of each month. It submits that the contract particulars state: “Application date end of month”. So, that, they say, literally means “the date at the end of the month “.

However, Cockerill J stated that Rochford’s submission, by reference to business common sense, was ‘either absurd or very close to it.’ [para 25] There were a number of practical qualms with the wording “end of the month”: 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 to make the application? [para 30] The due date might bleed over into the next month by a couple of days which on the part of Kilhan would result in the loss of the ability to issue an invoice for another month. [para 31] Additionally, ‘it will rarely be practicable to compile a claim or invoice accurately for the entirety of the month, including that day, and submit it within that day.’ [para 34] Therefore, Rochford’s construction creates considerable practical difficulties.

Cockerill J also pointed out that the wording of the subcontract contained reference to a schedule. Whilst no payment schedule was produced, the plain inference from these provisions was that the parties objectively intended for claims and invoices to be submitted not necessarily on the last day of the month, but by reference to whatever was set out in the payment schedule, which was never ultimately issued.

Thus, Cockerill J stated with little hesitation that Rochford’s case on this issue was incorrect and unsustainable. On deciding which part of the of the Scheme must be imported, since there was no agreement between the parties when each interim payment would become due, paragraph 4 of the Scheme became relevant which states that the due date is the date on which the claim was issued, that being the 20 May 2019.

In relation to the final date for payment, the subcontract stated: “Payment terms thirty days from invoice as per attached payment schedule”. However, as there was no mechanism for when an invoice should be issued, and a non-existent payment schedule, it was ‘impractical to observe the parts of the contract that refer to the invoice’. [para 56] Therefore, in order to mend the misfire caused by the parties’ incomplete drafting of the contractual documents, paragraph 8 of the Scheme had to be implied.

Rochford’s claim for Kilhan to repay the sums paid by Rochford pursuant to the adjudicator’s decision, was subsequently dismissed.

Commentary

Cockerill J stipulated at paragraph [32] that there were several possible ways in which the wording of the subcontract could comply with business efficacy. And yet, it is imperative that the answer is clear because of the consequences. There must be only one option. Draftsmen to contracts, or parties seeking to adapt standardised contracts, should be absolutely certain that the wording of the provisions are clear, and that there is only one possible way of interpreting the wording. Any uncertainty or possibility of another interpretation invites dispute via adjudication, and possibility even litigation, with all the costs intact and a change in the contract to the implied terms of the Scheme.

Throughout this judgment, emphasis was made to the Scheme not trespassing on any legitimate expressed agreed terms between the parties. As stated by Coulson LJ in Bennett (Construction) Ltd v CMC MBS Limited [2019] EWCA Civ 1515 at [54], the provisions of Part II of the Scheme should only apply “to the extent that such implication is necessary to achieve what is required by the Act.” A piecemeal incorporation is permitted, and the wholesale replacement of the contractual terms must only be implied where the agreement was so deficient that a full replacement is the only viable option.

In Rochford v Kilhan, there was no payment schedule issued between the parties, meaning a piecemeal incorporation was not possible. Parties should ensure a payment schedule is issued, especially if it is referred to in the contract, for greater certainty of interim payments and final payment. In fact, Cockerill J pointed out that ‘had there been a payment schedule, it seems far less likely that this dispute would have arisen.’ [para 12]

Additionally, Cockerill J added obiter, and with some diffidence, 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.’ [para 58] While the Act may permit this, parties should still be aware of the need to submit a payment or pay less notice in order to remain compliant with the Act and avoid unnecessary adjudications (see section 110A of the Act regarding parties’ contractual requirements of payment notices).