REUTERS | Kim Kyung-Hoon

Beware, you may not be entitled to interim payments right up until practical completion

Unlike some meetings held during the course of construction projects, pre-start meetings can be quite refreshing. There is normally an air of positivity and of everyone wanting to work together to make the project a success (the bitterness of disputes has not yet set in).

I want you to imagine that such a pre-start meeting is taking place for a 12-month project, with Jack representing the main contractor and Jill the employer. They have agreed that there will be periodic monthly payments and, thanks to the Construction Act 1996’s complicated payment provisions, they have agreed a payment schedule recording for each of the 12 months the dates when Jack’s applications for payment can made, the due date for payment and when Jill’s payment notice and any pay less notice should be served.

I now want you to imagine that you walk into the meeting at this point and say:

“What if Jack is delayed by an event that entitles him to an extension of time, or possibly his own risk event. Will the monthly payments continue past the dates agreed in your schedule?”

I’m willing to take a guess that 9 times out of 10, both Jack and Jill would say, “of course, the monthly payments will continue up to completion of the works”. However, while that be may Jack and Jill’s view, Stuart-Smith J’s judgment in Grove Developments v Balfour Beatty has shown us that this won’t necessarily be the case under the Construction Act 1996.

Grove Developments v Balfour Beatty

The parties entered into an amended version of the JCT Design and Build Contract, 2011 Edition for a major development next to the O2 complex. The contract recorded the parties’ intention to have stage payments but, instead, they agreed to a schedule of 23 periodic monthly payments (the agreed schedule), with the 23rd payment in July 2015 (consistent with the contract’s completion date).

The project suffered from delays and the parties attempted to agree further payment dates beyond those in the agreed schedule. Balfour Beatty issued its 24th interim application (IA 24) in August 2015 and, although Grove issued a payment certificate and payless notice, Balfour Beatty argued they were both invalid. Therefore, it claimed payment of £22.7 million, alternatively £2 million. Balfour Beatty started an adjudication and the adjudicator awarded it £2 million. Grove therefore applied for declarations in Part 8 proceedings in the TCC.

The main point that Stuart-Smith J had to decide was whether Balfour Beatty had a contractual right to make IA 24, and his decision was that it had no such right:

“The parties’ agreement was clear and provided for 23 interim payments on the dates set out in the agreed Schedule and no more.”

Further, the parties’ agreement satisfied the requirements of section 109(2) of the Construction Act 1996, which states:

“The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due.”

The judge said that it did not matter that the works were in delay. The parties were free to agree that interim payments would stop in July 2015. As such, it was unnecessary for the Scheme for Construction Contract 1998’s payment provisions to fill the void after July 2015. The judge also rejected Balfour Beatty’s submissions that commercial common sense would demand or justify the implication of a term that there would be further interim payments after July 2015.

What about the requirements of clause 4.8.3?

I’m quite surprised that Balfour Beatty did not argue about the requirements of clause 4.8.3 (or, if they did, it is not evident from the judgment), which states that:

“Where alternative B applies, for the period up to practical completion of the Works, Interim Applications shall be made as at the monthly dates specified in the Contract Particulars for Alternative B up to the date of practical completion.”

While the parties had originally agreed to adopt Alternative A (stage payments), they later agreed to periodic payments. As the judge confirmed:

“Alternative A (Stage Payments) was therefore no longer the chosen alternative under the agreed schedule.”

Surely in those circumstances, the chosen alternative must have been B, meaning that clause 4.8.3 applied, and this clause makes it clear that the monthly periodic payments are to continue up to practical completion. Objectively viewed, doesn’t this demonstrate the parties’ intention for the monthly interim payments to continue up to practical completion?

Although I acknowledge that the monthly dates in the parties’ agreed schedule arguably contradicts clause 4.8.3, clause 1.3 makes it clear that nothing in the Employer’s Requirements, Contractors Proposals or Contract Sum Analysis shall override the provisions in the JCT contract (which includes clause 4.8.3).

This interpretation also makes commercial common sense to me, as it means that a contractor is still entitled to payment in circumstances where the employer may have caused the delay, resulting in the works not being completed until after the final interim payment date. A lack of interim payments in such circumstances could result in a contractor going out of business (as it may be unable to afford to fund the remaining works), and that does not make commercial common sense to me.

Where does that leave us now?

Contractors and sub-contractors should carefully check their payment schedules and note the date of the final interim payment. If a project is in or is likely to slip into delay (meaning that the works will finish after the final date in the payment schedule), contractors and sub-contractors should try and agree an extension of the payment dates as necessary.

I also think this case provides us with a further opportunity to reflect upon the merits of the current payment provisions in the Construction Act 1996. Are the amendments introduced in 2011 actually working? Is it time they were reviewed again?

While I’m not a fan of all aspects of Hong Kong’s proposed security of payment legislation, I do like their proposed payment provisions. If you want to get paid under a construction contract you submit a payment claim, and if the other side wants to pay less than the sum claimed they must submit a payment response. Simples!

MCMS Ltd Jonathan Cope

2 thoughts on “Beware, you may not be entitled to interim payments right up until practical completion

  1. A very interesting case, and a very strange judgment in my opinion. I had always thought that, in the event that a payment schedule expired and no further dates had been agreed, the provisions of the Scheme would come to the rescue. Clearly I was wrong! Thanks for your thoughts on this case Jonathan

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