The Danger of Payment Schedules!
The recent decision in the case of Grove Developments Ltd v Balfour Beatty Regional Construction Ltd could have a significant impact on the construction industry. In this case, the parties had agreed a payment schedule that provided for the contractor to make 23 interim applications covering the period from September 2013 to July 2015. The project was delayed and works were still on-going after July 2015, by which time the contractor had already issued 23 interim applications. However, the contractor continued to issue interim applications. Interim application 24 (IA 24) was issued in August 2015, claiming £23,166,425.92.The employer challenged the validity of IA 24 in Part 8 proceedings and Stuart-Smith J found in the employer’s favour. The contractor had no entitlement to be paid in respect of IA 24, nor any subsequent applications.
What Does this Case Mean to the Contractor?
In a nutshell, if the works were to be completed in 12 months and the parties provided for 12 interim payments that is all the contractor is entitled to apply for. If the works are delayed, the contractor is not entitled to make further applications.
Section 109 (1) of the Construction Act 1996, as amended, provides that a party to a construction contract is entitled to payment by instalments, stage payments or other period payments, unless the contract is for less than 45 days.
If the parties do not agree the amounts of the payments and the intervals at which, or circumstances in which, they become due, the Scheme will apply. However, the Scheme is not incorporated into a contract as a whole unless the contract entirely fails to include a compliant payment procedure.
One of the defendant’s arguments was that, that s109(1) of the Act should be interpreted as requiring that all work under a construction contract lasting 45 days or more gives rise to an entitlement to interim payments. In other words, the defendant was entitled to interim payments for all of its works as the contract was for works lasting longer than 45 days.
The court disagreed, stating that “this would be a draconian restriction on the freedom of commercial parties to contract on terms of their choosing”. It is for the parties to agree stage payments by reference to whatever stages and amounts they see fit. For example, if the parties wish to agree a single stage payment during the course of a project, that is their choice. The court added “the mere fact that the agreement does not provide for interim payments covering all of the work under the contract is no reason to import the provisions of the Scheme to supplement their agreement so as to generate interim payments covering all the work that their agreement does not cover”.
The JCT Design and Build Contract 2011 was the preferred contract entered into by the parties. The parties had originally indicated in the contract particulars to their amended JCT Contract that they had elected for stage payments but instead entered into an agreement for periodic payments by agreeing the Schedule.
The court held that on the facts, by agreeing to the payment schedule, the parties had made specific amendment to the contract and Alternative A was no longer the chosen alternative. In other words they had reverted to periodic interim payments. This meant that if parties adopt a payment schedule, even in the context of an interim payment regime it seems to mean that they will be taken to have limited themselves to the interim payments set out in the schedule.
The defendant also argued that there was an implied term that interim payments would continue. The court found that this was said to be inconsistent with the contract’s express terms and commercial sense did not demand or justify the implication of such as term.
How to Avoid This Issue?
Where parties have agreed to include a payment schedule in their contract, express provisions should be inserted into the contract to provide for the payment schedule to be extended (on the same terms) for subsequent months should the works be delayed.