Eleven days lost

The construction part of the Construction act has been in force for five years, and the flow of new cases shows no sign of abating. Perhaps it is not surprising that the new legislation spawned so much litigation – it was so radical and so badly drafted.

Slowly but surely, uncertainties about what the act means are being ironed out in expensive court actions, although many new uncertainties are generated by inconsistencies between judgments.

The latest puzzle to bite the dust has to do with payment provisions. We all know that a construction contract has to have "an adequate mechanism" for sorting out how much is paid and when, and it has to have a final date for payment for any sum that becomes due. So long as the contract has these things (and a few others), the act has nothing more to say. But, if it does not, the act brings in the Scheme for Construction Contracts and imposes a method of calculation and a final date for payment.

There has been some doubt about what happens if the contract gets some of it right, but not all. Does the Scheme just supplement the contract, filling in the gap so that the payment system is part contract, part Scheme, or does it replace the contract entirely so that it is unadulterated by any part of the original contract payment system?

That was the issue before a Scottish judge, Lord Clarke, in April. The case was Hills Mechanical & Electrical plc vs Dawn Construction Ltd. Dawn's contract provided a final date for payment – 28 days after the sum became due. If that term had gone because the Scheme's payment provisions were being brought in complete, the final date for payment would be 17 days after the sum became due.

Those 11 days were significant. During that period, the employer under the main contract went into administration. The act effectively bans pay-when-paid clauses except in the situation where a party further up the payment chain goes bust, which was exactly the position here. So, if the Scheme applied, Hills would be paid. If the contract provision applied, Hills would not be paid.

Hills argued that you could not tinker with payment terms, picking and choosing bits to keep and bits to dump

Hills argued that the contract had failed to provide "an adequate mechanism" for deciding what was to be paid and when. It had not given dates by which Hills was supposed to make applications for interim payments, and it had said that the timing of money becoming due was linked to certification under the main contract. The Scheme therefore had to be applied to introduce a method of deciding the timing and amount of interim payments.

Dawn did not accept that there was anything wrong with its terms of payment, but said that the point was irrelevant. However you decided to work out how much was due, the 28-day period was clearly a valid provision with which the Scheme did not need to interfere.

A simple reading of the act suggested that Dawn was right and Hills wrong, but Hills argued that you could not tinker around with payment terms, picking and choosing bits to keep and bits to dump. The whole lot should stand or fall together. Dawn's counsel referred to an earlier decision of the English court, CB Scene Concept Design Ltd vs Isobars Ltd. In that case, the parties had failed to select alternative A or B in a JCT With Contractors Design contract, and therefore there was no "adequate mechanism" for payment. The adjudicator had decided to replace the whole of the payment provisions in the way that Hills wanted the judge to do in its case. The first court had decided he was right. The Court of Appeal had then overturned the decision, but on different grounds, so there was no clear authority.

Lord Clarke decided that the Scheme is only brought in to supplement the contract wording. If any of the act's requirements are missing, the Scheme fills the gaps. The rest of the contract's provisions are left intact.