It isn’t unusual to see one party start Part 8 proceedings asking the court to determine what the parties have agreed in their contract and to grant declaratory relief to that effect. In the adjudication enforcement context, we’ve seen it multiple times. Sometimes it feels like one party is “appealing” the adjudicator’s decision, since it is asking the court for a final determination on an issue it thinks the adjudicator has got wrong.
In Rochford Construction Ltd v Kilhan Construction Ltd, that is pretty much what Rochford did, since it refused to pay the sums the adjudicator awarded and, instead, issued Part 8 proceedings asking the court for a number of declarations, all of which (if successful) would have had the effect of reducing its liability to Kilhan to zero.
However, as is often the case when matters reach the TCC, things didn’t go quite to plan.
Rochford Construction Ltd v Kilhan Construction Ltd
This was a dispute arising out of Kilhan’s interim application 9 (IA 9), which was “just shy of £1.4 million” and was dated 20 May 2019. It covered the period ending on 30 April 2019. The payment notice (IPN 9) was issued on 23 October 2019 and certified a sum of just over £1.2 million. The parties’ dispute centred on whether IPN 9 was a valid payment notice – was it issued late and did it specify how the sum was calculated?
When the matter was considered by an adjudicator, he decided the “due date” was 20 May 2019, being the date on which the notice was served, and the “final date for payment” was 30 days later, being 19 June 2019. As Rochford had not served its payment notice within five days of the due date or a pay less notice at least seven days before the final date for payment, the sum claimed in IA 9 was the sum Rochford owed Kilhan (because it’s application became the default payment notice).
Rochford did not pay and issued its Part 8 proceedings in response to the Part 7 enforcement application Kilhan started.
Contract’s payment terms
The problem here was caused by the language used in the parties’ contract:
“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.”
As the judge noted, had the payment schedule been included, “it seems far less likely that this dispute would have arisen” (and I wouldn’t have something to write about this week!).
So, the adjudicator had decided what those payment terms meant, and had relied on the payment provisions in the Scheme for Construction Contracts 1998 to plug the gaps in the parties’ payment mechanism where he decided it did not comply with the Construction Act 1996.
Rochford said the adjudicator’s decision was “clearly wrong” because he failed to give effect to two express clauses in the contract:
- The date for making a claim, which it said fell on the last day of each month – “application date end of month”.
- The requirements for the final date for payment, which was to be fixed by reference to Kilhan providing an invoice – “Payment terms thirty days from invoice”… S/C payment cert must be issued with invoice”.
What was the due date and final date for payment?
After looking at a number of judgments (Bennett (Construction) Ltd v CIMC MBS Ltd (formerly Verbus Systems Ltd), Grove Developments Ltd v Balfour Beatty Regional Construction Ltd, C Spencer Ltd v MW High Tech Projects UK Ltd and Manor Asset Ltd v Demolition Services Ltd), and the relevant provisions in the Construction Act 1996 and the Scheme for Construction Contracts 1998, the judge set about working out what the due date and final dates for payment should be.
With regard to the due date, she said she thought the phrase “application date end of month” was unclear and ambiguous, at least without a payment schedule to support it. Also, even the parties’ own course of dealings did not give rise to a convention that payment applications would be submitted on the last day of the month, since all eight had been submitted later. At a practical level (as Kilhan submitted), there was also the question of exactly what “end of month” really means:
“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?”
She said there had to be only one option and the drafting of the clause had to be clear. As the parties did not have a payment schedule, they had nothing to refer to. This meant that rather than having “an impractical and unworkable solution”, the relevant parts of the Scheme should be implied. Since the parties did not agree on when each interim payment would become due, paragraph 4 of the Scheme for Construction Contracts 1998 was relevant, and here the due date was the date Kilhan made its claim, just as the adjudicator had decided.
Attention then turned to the phrase “Payment terms thirty days from invoice”, which purported to set the final date for payment. As Kilhan had not issued an invoice until October 2019 and then January 2020, Rochford said it couldn’t argue that IPN 9 was issued late.
The judge acknowledged that the parties “contemplated invoice and payment certificate coming together sometime after the claim was notified” and the 30 days referred to had been intended as a final date for payment provision. However, there was a need for certainty in the payment mechanism and, as it wasn’t clear when Kilhan should issue an invoice, again the relevant terms of the Scheme for Construction Contracts 1998 (paragraph 8) had to be implied. This was the best way of “mending the misfire caused by the parties’ incomplete drafting”. Again, this is what the adjudicator had decided.
Final date for payment must be pegged to due date
While in one sense what Cockerill J decided is unsurprising and it is relatively common for the Scheme’s payment provisions to be implied into incomplete or non-compliant payment mechanisms in construction contracts, her obiter comments about pegging the final date to the due date, and not to an invoice served in between, may come as a shock to some in the industry.
I’ve always thought section 110(1) was one of the more straightforward of all the provisions in the Construction Act 1996 (and it is one that wasn’t amended in 2011). Regardless of whether she reached this conclusion “with some diffidence” or not, I think it must be the right interpretation.
Although her comments were obiter, I think it will not be long before we start to see parties falling foul of this, with smash and grab adjudications claiming the final date for payment has passed without a payment or pay less notice (regardless of whether an invoice has been provided). If the final date for payment is pegged to receipt of an invoice, even if stipulated in a payment schedule as being given on a specific date, one party can easily cry foul and adjudicators will probably have little more to do than look at this judgment and apply paragraphs 4 and 8 of the Scheme, just like this adjudicator did.
One way to avoid this is for parties to peg the due date to receipt of an invoice, rather than pegging the final date for payment to receipt of an invoice. That allows parties to have an invoice as part of the process and for the contract’s payment mechanism to remain Act-compliant.
Issuing an invoice creates a VAT liability which is fine if it is for an agreed amount. Usually a Payment Notice will be for a lesser amount than the Application For Payment (hence the introduction of self- billing). If a PN is not issued the payee could issue an invoice for the AFP amount but a Payless Notice may follow, in which case the payee’s obligation to pay HMRC is greater (affecting cash flow). It may be preferable for invoices to fall outside of the Act payment regime – trying to incorporate them to determine due and final dates has always caused problems in my experience. Best wishes.
I fully agree with you Paul. Spot on.
Thanks for the article Matt.
Noted that the ‘linking’ comments were obiter but that this has attracted the bulk of the commentary on this case, but perhaps unsurprisingly. A more worrying aspect of this case, in my view, can be found at Mrs Justice Cockerill’s paragraph 43, which I find somewhat unfathomable. What she was here suggesting was that by dispensing with two clear contract terms stating that valuation should be monthly and that the application date was the end of the month, this of course being against the higher authority of Coulson LJ in Bennett (Construction) Ltd v CMC MBS Limited [2019] EWCA Civ 1515 on the question of piecemeal incorporation of payment terms, this would (a) produce a more “practical and workable solution”, (b) not make “the date for submission of the claim at large” and (c) would promote “contractual certainty and fairness”. Surely it cannot be said that a party’s ability to submit an application at its own whim is either more practical, does not make submission of the claim ‘at large’, or, particularly, that this promotes certainty? It is also strange that the TCC felt unwilling or unable to apply business common sense to the terms ‘Valuation monthly’ and ‘Application date end of month’ in the context of a construction contract, preferring instead to write these terms out of the parties’ contract altogether. A range of question marks over this judgment, in my opinion.
Thank you for your post, Matt. It seems a pity that the court was not referred to Volkerlaser Ltd v Nottingham CC. There Edwards-Stuart J upheld a VAT linked payment procedure, finding that the final date for payment had not arisen due to the failure to provide a VAT invoice. The Construction Act issue was not raised directly, but both sides were represented by well known QCs and the court explains the commercial rationale for VAT-linking. I suspect this won’t be the last decision on the topic.
Your article is very informative. It’s a welcome change from other supposed informational content. Your points are unique and original in my opinion. I agree with many of your points.