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If at first you don’t succeed…

14 Dec 20 Luke Wygas and Mark Manning explore the implications for construction managers of Rochford v Kilhan

In August 2018 Rochford Construction awarded a subcontract to Kilhan Construction for a reinforced concrete frame on a project at Richmond upon Thames College. A payment dispute arose, which centred on the validity of the payment notice.

The case of Rochford v Kilhan has subsequently left people scrabbling to check the payment provisions in their contracts comply with statutory requirements.  Even the NEC has amended the provisions of certain contracts in the NEC4 suite; but do they work? 

Given the years of cases discussing and interpreting the payment provisions in the Housing Grants, Construction & Regeneration Act 1996 (as amended) (the “Act”) and the associated Scheme, you may well have thought that there was not much more to know.   However, comments in the judgment in the case of Rochford v Kilhan [2020] EWHC 941 (TCC) have caused people to consider the finer points of how the final date for payment is linked to the due date. 

The case involved a contract that was not happily drafted.  There were payment schedules referred to in the contract, but never prepared.  Therefore uncertainty reigned and it was not long before the parties fell into a dispute.  The dispute turned on how to interpret the contract given all the incomplete drafting surrounding payments.  An adjudication was commenced to determine the matter.  The adjudication did not satisfy the parties and so they then went to Court. 

Mrs Justice Cockerill of the Technology and Construction Court in London heard the case and decided how the contract should be administered given its incomplete state.  What Mrs Justice Cockerill actually decided on the contract is not really of too much interest as it is based on the specific contract in question.  Instead, what is interesting are her further general comments about how the ‘due date’ and the ‘final date for payment’ must be linked.  The reasoning is set out in paragraphs 57 and 58 of the judgment, but it takes the following steps:

  1. Subsection 1B of section 110 of the Act requires a construction contract to fix the period between the due date and the final date for payment.
  2. That fixed period between the due date and the final date for payment has to be a set period of time, not driven by an event or a mechanism.

Under certain contracts in the NEC4 suite (including the PSC and TSC), as they were originally drafted, the final date for payment was set (under clause Y2.2) by the later of:

  1. 14 days from the due date, or
  2. seven days after an invoice was issued.

That was a pragmatic solution as an employer (or a contractor) often does not have processes for making payments until invoices are issued. 

However, that drafting would fall foul of Mrs Justice Cockrill’s comments in Rochford v Kilhan.  This is because her view was that the time between the due date and the final date for payment had to be a constant period, which it was not.  So the NEC has now issued amendments to the relevant NEC4 forms of contract.  These amendments replace clause Y2.2 with a simple clause which sets the final date for payment as being seven days after the due date (or any other period decided by the parties). 

So that deals with the Rochford v Kilhan issue, but it does not deal with the practical issue that parties often cannot make a payment unless they have an invoice.  It appears that the NEC was mindful of this and it also made further amendments in relation to the due date.  The due date is now the later of 14 days after the assessment date or the date of receipt of an invoice “issued in accordance with these conditions of contract”. 

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This then causes a potential further problem.  The issue is that an invoice cannot be issued “in accordance with” the contract unless a Service Manager’s certificate has been issued.  The amendments make that clear because they say “The Service Manager’s certificate is the notice of payment specifying the amount due at the payment due date…”.  So the consultant or contractor cannot issue their invoice until they have the figure which will be due, which will be included on the Service Manager’s certificate. 

Now, Section 110(1D) of the Act says:

“…an adequate mechanism for determining when payments become due under the contract is not satisfied where a construction contract provides for the date on which a payment becomes due to be determined by reference to the giving to the person to whom the payment is due of a notice…“.

An invoice is not a notice from the person receiving the payment; but the invoice is contingent on the Service Manager’s certificate, which is a notice to the person to whom the payment is due.  Therefore taking a broad view, the prerequisite to the invoice, namely the provision of the Service Manager’s certificate, would mean the amendments could fall foul of the Act (again).  This is because the Service Manager’s certificate is a notice by the paying party and the service (or not) of that certificate has a practical impact on the due date.  

There is also another potential issue.  “The Service Manager’s certificate is the notice of payment specifying the amount due on the due date…”.  If the due date is going to be specified by the date of receipt of an invoice (which the Service Manager cannot necessarily control), it seems potentially difficult to marry the two dates up.  If those two dates are not the same then the Service Manager’s certificate will be invalid as it will state the sum due on a date which may not be the due date.

Clearly this is uncharted waters.  This is particularly so in relation to the Judge’s comments made in Rochford v Kilhan itself.  This is because it seems open to argument as to whether section 110 actually requires the period between the due date and the final date for payment to be a fixed period.  However, it would be brave to ignore Rochford v Kilhan now, given that it is the most up to date statement of the law on the topic.  That is particularly because whatever section 110 does or does not state, it clearly provides the parties to construction contracts with more certainty if the period between the due date and the final date for payment has to be a fixed period.  Therefore, there is a real practical advantage to what is stated in Rochford v Kilhan.

So the issue is what to do?  It seems, for the moment, the safest thing to do is to remove from the new amendments to NEC4 (‘October 2020’ amendments) the option for the due date to be set by the receipt of an invoice and leave it to always be 14 days after the assessment date.  That also has the advantage of giving the parties more certainty as to the due dates which apply.  As for other forms of contract which fall foul of the rule in Rochford v Kilhan, it seems best to try and agree an amendment to them which complies with this new position so that the parties can have some certainty.

About the authors

Luke Wygas is a barrister with 4 Pump Court; Mark Manning is a partner in the construction & infrastructure team at Ashfords LLP

Got a story? Email news@theconstructionindex.co.uk

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