I was reviewing a contract which reminded me of the issues that arose in the case of Rochford Construction Ltd v Kilhan Construction Ltd. The case highlighted the importance of having clear and unambiguous payment provisions. These provisions must comply with the Housing Grants, Construction and Regeneration Act (the Act).
The contract I was reviewing had the following payment provisions;
“The final date for payment will be thirty days from receipt of the Contractor’s undisputed invoice”.
Not only was the final date for payment conditional on the receipt by the Employer of an invoice, moreover, the invoice had to be “undisputed”. So, the Contractor had a further hurdle: They had to ensure there were no disputes over the amounts claimed before issue.
Rochford v Kilhan
Rochford v Kilhan, centred on a subcontract for the construction of a reinforced concrete frame. A dispute arose out of the validity of the payment notice. Questions arose as to whether it was issued late and that it failed to specify how the calculations for the sum sought.
The subcontract payment provisions stated that the application date was the “end of the month”. Valuations were monthly “as per attached payment schedule, end of the month”. “Payment terms thirty days from invoice as per attached payment schedule.” and “subcontractor payment certificate must be issued with invoice”.
By reference to a payment schedule, the subcontract payment provisions seem to satisfy the requirements of Section 110 of the Act. They appear to provide an adequate mechanism for determining when payments become due. Moreover, they provide for a final date for payment in relation to any sum which becomes due.
However, the subcontract did not include the aforementioned payment schedule. Therefore, payment application dates, due dates, the invoice date and the final date for payment were at large.
A dispute arose and Kilhan commenced an adjudication. The adjudicator concluded that the due date of the Interim Payment Application was 20 May 2019. This being the date on which they served the notice and that the final date for payment was thirty days from that due date.
Rochford disagreed with the adjudicator’s decision and brought Part 8 Court proceedings. The purpose being to obtain a declaration as to the correct interpretation in respect of the due date and final date for payment.
In relation to the final date for payment being consequential on an invoice, the Court held obiter that
“Pegging the final date to service of an invoice, which is itself pegged to a payment certificate, is simply impractical.”
The court further clarified that while you can fix a due date by reference to, say, an invoice or a notice, the final date has to be pegged to the due date. This must be a set period of time, and not an event or a mechanism.
In relation to the sub-sections of section 110 of the Act, the Court held:
“Those sections are designed to put limits on the circumstances in which a payment can be due so as not to give the payer an unfair ability to control the process. It would make no sense if such a limitation were intended in relation to subsection (1A) but not in relation to subsection (1B). The inference is that the possibility to peg final date of payment to an event rather than a fixed period was never considered acceptable under the Act”
The principles of payment provisions
In Rochford v Kilhan the absence of a payment schedule caused the dispute. However, the principal problem lay in the poor drafting of the payment provisions. These should stand in isolation from any payment schedule.
There was clearly an over-reliance on the payment schedule to form the payment provisions. Ordinarily, payment schedules are incorporated into a contract, to bring clarity to the payment provisions and avoid ambiguity.
It’s not uncommon for some toing and froing between the parties before issuing the payment certificate. However, the introduction of conditional events may result in longer than the anticipated monthly payment cycles. They provide no certainty of what the final date for payment could be.
Thus, the Final Date for Payment becomes conditional upon events occurring. If those events never occur, you can never reach the Final Date for Payment.
How can you avoid these issues?
It is important to remember these issues when drafting payment provisions. Particularly when on the receiving end of amended or bespoke contracts. You should review the Contract to ascertain whether the payment provisions are able to work in accordance with the Act.
As a matter of good practice, payment schedules incorporated into the Contract should be incorporated for the purposes of bringing clarity. They should provide clear dates for the payment provisions. In their absence the contract payment provisions still survive intact.
If you have questions about payment provisions in your contracts, get in touch, we are always to happy to have a chat.