Court of Appeal says you may be running out of time for interim payments

In Balfour Beatty v Grove Developments, the Court of Appeal has upheld, by a majority of 2-1, the TCC’s first instance decision and concluded that the contractor had no right to receive interim payments after the planned date of practical completion.

The judgment not only addresses a number of interesting points of contractual construction arising out of the parties’ bespoke contract amendments, but also contains a discussion of section 109 of the Construction Act 1996, which will be of more general importance to practitioners.

Grove Developments Ltd v Balfour Beatty

The first instance decision was well publicised and is one with which many of us are now familiar.

The parties contracted on the JCT Design and Build Contract, 2011 Edition, with bespoke amendments. In the contract particulars, the parties selected that Alternative A (stage payments) was to apply and crossed out Alternative B (monthly periodic payments). Instead of listing the stages at which payments were to be made, the parties recorded that these were to be agreed within two weeks from the date of the contract.

However, instead, some weeks later the parties agreed a schedule setting out the dates on which payments were to be made. The schedule stated that the contractor was to make an application for payment on the third Thursday of the month, and then identified a series of 23 such dates, the last of which was shortly before the contractual completion date for the works.

The works suffered significant delay. Once the planned completion date had past, and the 23 listed dates for the contractor’s interim applications had thus been exhausted, a dispute arose between the parties as to the dates (if any) on which the contractor was entitled to submit further interim valuations.

The decision at first instance

At first instance, Stuart-Smith J decided that the contractor had no right to apply or be paid for interim payments after application 23. He held that, by agreeing the payment schedule, the parties had agreed that the contractor would have 23 particular dates on which to submit interim valuations but no more. The fact that those 23 dates only went up to the planned completion date, and had “run out” as a result of the delay to the works, was irrelevant.

The issues in the Court of Appeal

The contractor argued that the judge’s conclusion was incorrect for three reasons:

  • The effect of the parties’ contract, as amended by the payment schedule, was that interim payments were to continue at monthly intervals beyond the planned completion date, and thus after the dates set out in payment schedule had been exhausted.
  • If that was wrong, then the contract did not comply with section 109 of the Construction Act 1996, which provides that a party to a construction contract “is entitled to payment by instalments, stage payments or other periodic payments for any work under the contract”. Accordingly, the Scheme for Construction Contracts 1998 applied instead.
  • As a further alternative, the parties’ correspondence and conduct in the months after the dates in the payment schedule had “run out”, in which they discussed what was to happen next, gave rise to a fresh contract for monthly interim payments.

The Court of Appeal was able to reject the third of those three arguments with little difficulty. The parties never agreed the terms on which such interim payments would be made. Neither did they agree the dates for valuations, notices or payments. Accordingly, no fresh contract had arisen.

The construction issue – what had the parties agreed?

The court did not find the first of those arguments so easy to deal with.

Jackson LJ, with whom Longmore LJ agreed, concluded that on a proper construction of the payment schedule, the parties had agreed that the contractor was only entitled to 23 interim valuations. The contractor had undoubtedly been “imprudent” in agreeing to an arrangement in which, if practical completion was delayed, it would have to wait potentially months or years for the date of the final payment. However, the majority reasoned (in reliance on Arnold v Britton), that it could not invoke commercial commonsense unless the natural meaning of the words the parties had used was unclear. Here they were not and it would be wrong for the court to re-write the parties’ bargain.

Vos LJ, dissenting, disagreed with that construction. He reasoned as follows:

  • The effect of agreeing the payment schedule was to switch from Alternative A (stage payments) to Alternative B (monthly periodic payments).
  • The payment schedule did not state expressly whether the dates listed were to be the only interim payments envisaged.
  • Further, the payment schedule stated “Valuation Application on Third Thursday of the month”. Those words would have been unnecessary if the listed interim payment application dates were to be exhaustive. That suggested that the monthly dates were to continue.
  • For those reasons, the contract was ambiguous as to what was to happen if and when the listed payment dates “ran out”.
  • In those circumstances, the court could have regard to commercial common sense in determining the proper construction of the contract.
  • The only sensible construction of what the parties agreed was:

    “…to construe the Contract as if the word ‘etcetera’ was included at the end of  the [payment] schedule.”

  • Accordingly, the contractor continued to have the right to submit interim valuations on the third Thursday of the month.

It is difficult not to sympathise with the contractor. There does seem an inherent improbability in the parties having understood themselves to have agreed that interim payments were to be made on a monthly basis, but only for 23 months, regardless of the date on which practical completion was achieved.

Payment schedules of the type the parties agreed can have real advantages in identifying the precise dates on which applications are to be made, notices are to be given and payments are to be made. The obvious lesson is to ensure that any such schedule (or other similar amendment) spells out the parties’ intentions in respect of the sort of lacuna expressly highlighted by this case.

The court’s discussion of section 109

Perhaps the most interesting elements of the judgments, and certainly those that are of wider relevance, are those concerning section 109 of the Construction Act 1996.

The contractor’s second argument was that the employer’s construction of the payment schedule would infringe the rights afforded a party to a construction contract by section 109 to stage or periodic payments. In those circumstances, the Scheme for Construction Contracts 1998 was to apply instead.

In rejecting that argument, Jackson LJ noted that section 109(2) gives the parties “considerable latitude” as to the system of interim payments that they may agree. The parties are free to determine the frequency of interim payments and the amounts to be paid.

That raised the question of whether:

“…contracting parties could frustrate Parliament’s intention by agreeing a pitifully inadequate scheme of interim payments.”

Jackson LJ:

  • Doubted whether a cynical device to exclude the operation of the Scheme by prescribing one interim payment of an insignificant amount would comply with section 109(1).
  • Suggested that, if the parties are going to depart from the Scheme

    “…they must draw up a system of interim payments in good faith.”

Again, the lesson for contracting parties is clear. The court is going to be astute to ensure that parties do not frustrate the policy objectives behind the Construction Act 1996 by taking advantage of the broad drafting of section 109. The parties are given “a wide measure of freedom” as to the nature of the interim payment regime which they may agree. But there are limits to that freedom. The regime must be drawn up in good faith.

Keating Chambers Tom Coulson

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