2020-02-17
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A harsh approach to interim payments

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Posted by Philip Harris on 04 April 2016

Philip Harris - Construction Solicitor
Philip Harris Partner & Solicitor-Advocate

Grove Developments Ltd -v- Balfour Beatty Regional Construction Ltd

In Grove Developments Ltd v Balfour Beatty Regional Construction Ltd, Mr Justice Stuart-Smith decided that the agreed interim payments schedule was exhaustive of the contractor’s entitlement to interim payments, even though the contract substantially overran the valuation and payment dates agreed.

After the period covered by the agreed schedule, Balfour Beatty pursued an application for further interim payment, seeking payment of £23,166,425.29 plus VAT.

The intention of the parties was that stage payments were to be agreed within two weeks of the date of the contract but that did not happen. Instead, the parties agreed a schedule of valuation numbers with specific dates for application, valuation, certification and payment.

Before this schedule of valuations expired, the parties attempted to agree an extended regime but failed to achieve agreement.

Scheme for Construction Contracts

So the Judge had to consider whether, for the period after the payment schedule had expired, whilst the works were continuing, there was a right to continued payments. Did the Scheme for Construction Contracts apply to extend the regime for payment, or was there an implied term in the contract based on commercial common sense that there was a right to continued interim payments?

The Judge quoted from the case of Arnold v Britton [2015] AC 1619 in which it was stated that, “the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language [of the contract]” and, “a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed”.

As regards the application of the Scheme for Construction Contracts, the Judge concluded that the Scheme is only applicable so as to make good omissions or inadequacies in the construction contract. It is not necessary to replace the contractual payment provisions wholesale if, in part, they can remain operative.

The Construction Act

The Judge looked at both Section 109 and Section 110 of the Construction Act. He referred to Section 109(2) and 109(3) which state:

“(2) The Parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due;

(3) In the absence of such agreement, the relevant provisions of the Scheme for Construction Contracts apply”.

Section 110(1) says:

“(1) Every construction contract shall –

(a) provide an adequate mechanism for determining what payments become due under the contract, and when.”

Balfour Beatty had submitted that Section 109(1) requires interim payments to be made for all works under a construction contract lasting 45 days or more.

The Judge decided that, “This would be a draconian restriction on the freedom of commercial parties to contract on terms of their choosing even in the absence of s. 109(2)”.

The Judge said that under Section 109(2) it would be open to the parties to agree stage payments at highly irregular intervals and with highly variable amounts to be paid.

He also said that if the parties enter into an agreement about the amounts of payments and the intervals at which they become due, the mere fact that the agreement does not provide for interim payments covering all the work is no reason to import the provisions of the Scheme to supplement their agreement.

Regime for payment

Since the parties had agreed the regime for payment under their schedule, the Scheme for Construction Contracts did not apply.

Furthermore and importantly, there was no implied term that interim payments would continue after the schedule of payments had expired. This was for two reasons:

  1. Such an implied term would be inconsistent with the express terms of the contract.
  2. It was not contrary to commercial common sense for progress payments to cease. Balfour Beatty could have negotiated for terms that would have given it a right to further interim payments. It was reasonably foreseeable that if practical completion was not achieved by the contract completion date, there would be a period for which no interim payments would be available and this would be commercially disadvantageous to Balfour Beatty.

Commentary

The logic of the Court’s judgment is robust.

However, it raises some questions which are of concern.

At a practical level, payees must now ensure that there is a mechanism in construction contracts (as defined by the Construction Act) which allows interim payments to continue based on an adequate mechanism for payment if the duration of the contract extends beyond the initially agreed completion date.

The main questions of concern are:

  1. To what extent must the payee party entering into a construction contract anticipate the payer’s breach (in terms of culpable delay), so as not to be disadvantaged once the duration of an agreed payment schedule expires?
  2. Does the Grove case, contrary to established principles of common law, permit the payer to benefit from his own breach by culpably delaying the project beyond an agreed schedule of payment and then denying the payee any entitlement to continued payment?

Then there is the difficult question of the precise relationship between Section 109(2) and (3) on the one hand and Section 110(1) and (3) on the other.

There are two default scenarios in which the Scheme for Construction Contracts will apply. The first is in the absence of agreement between the parties on the amounts and intervals and circumstances in which payments become due, in accordance with Section 109(3). The second is under Section 110(3) to the extent that a contract does not provide an adequate mechanism for determining what payments become due and when and provide a final date for payment.

The mechanism under Section 110(1) is merely for determining the due and final dates for payment.

There is no doubt that under Section 109(2) the parties have the freedom to decide the intervals at which payments fall due.

Section 109 and Section 110

But perhaps, even so, the interaction between Section 109 and Section 110 is more complex than immediately apparent. For example, it may be that the parties have excluded the Scheme by agreeing when payments become due for the purposes of Section 109(2) and the amounts of payment. But nevertheless if the payer, by his own default, can procure continued work without payment falling due, then the mechanism itself for determining what payments fall due and when is inadequate – as it militates against the general principal that a party should not benefit from his own breach. If, on that basis, the Scheme is imported by Section 110(3), one may have to look beyond the agreement that the parties reached under Section 109(2).

Assuming that the precise relationship between Section 109(2) and Section 110(1) is problematic, then even if the parties are free to agree on the amount of payments and the intervals, the contract must still contain an adequate mechanism for determining what payments become due and when. The ready foreseeability of circumstances which might cause delay and disadvantage the payee does not preclude an initially adequate payment mechanism which falls within the contract period from becoming inadequate when that period is exceeded.

A regime for payment may be adequate in the event that there is no default by the payer which results in delay. It may then become inadequate in the event of such delay. The payee does not make his bargain on the assumption that the payer will break his promises so as to render a good bargain bad.

It cannot be right that an employer who promises to allow a payee/contractor to complete his work by an agreed contract completion date can deliberately or accidently delay the contractor from completing by the date bargained for and then take the benefit of that delay by restraining the contractor to a now-expired payment schedule, when the contractor would have been paid in full under that schedule were it not for the employer’s delay.

If the Scheme does not cure this, then an implied term may well be required of necessity.

As regards the relationship and interaction between Section 109(2) and Section 110(1) it is possible to argue that if the parties have agreed payment intervals and amounts under Section 109(2), all that is required to satisfy Section 110(1)(a) is to have clarity in determining when payments become due. That is a facile analysis. Section 110(1) requires more than clarity. It requires adequacy. Under Section 110(1A) adequacy is not satisfied where payment is conditional on the performance of obligations under another contract. Under Section 110(1D) adequacy is not satisfied where the due date is triggered by a payer’s payment notice. So adequacy is defined by policy and what is conscionable. It appears contrary to normal judicial policy that a payer can delay the works and receive a windfall in not having to continue interim payment.

Delay under a construction contract can occur in at least three ways:

Contractor’s delay

  1. There may be delay for which the contractor is culpable. Where the contractor causes the delay and there is no express mechanism for extending interim payments beyond the contract completion date, there is no basis to import the payment regime of the Scheme for Construction Contracts or to infer an implied term that the contractor should continue to receive interim payments. The payment mechanism is not inadequate merely because the contractor has delayed the works and precluded himself from interim payments. There is no business necessity to imply a term of continued payment to assist the contractor who is also a wrong-doer in the context of that delay.

    Time becomes at large, through employer default

  2. The employer/payer may cause the mechanism of the contract for extending time to break down, for example by not appointing a new Architect/Contract Administrator, or by interfering with the Contract Administrator in his decision-making role regarding extensions of time.

If there is then an act of prevention by the employer, time becomes at large. The contractor therefore has a reasonable time to carry out his work. If that reasonable time extends far beyond the last payment in the agreed payment schedule, it is unconscionable that the employer can benefit from his own breach by not making further payments.

In those circumstances there are two possibilities:

a) To import the scheme.
b) To import an implied term.

The better view seems to be that in these circumstances what began as an adequate payment mechanism has now become inadequate for determining what payments become due under the contract and when. The Scheme should operate to rectify this inadequacy, to make up for an inadequacy or omission in the construction contract. The statutory regime of the Construction Act and the regulatory regime of the Scheme supplant the common law so there is no room for, or need for, any implied term to correct the contract.

If, however, the Scheme is inapplicable and the mechanism for payment is not itself inadequate for the purposes of Section 110 of the Act, there is then a necessity to imply a term that there is a continued entitlement to interim payments to prevent the employer/wrongdoer benefitting from his breach of contract.

The term is frequently implied by the Courts into building contracts that the employer will not hinder or prevent the contractor from completing his works by the agreed completion date. It would be strange if the Courts would imply such a term out of obviousness or business efficacy (the tests recently upheld by the Supreme Court in Marks & Spencer plc v PNB Paribas) but not imply a term that interim payments should be continued to alleviate the employer’s culpable delay.

Relevant Events

3. A delay may occur for which an extension of time is required to be granted.

The JCT Design and Build 2011 Form of Contract which was employed in the Grove case expressly contemplates delay and allows for a number of relevant events which would entitle the contractor to an extension of time. The contract mechanisms provide additionally for increasing the price by additional preliminaries, reflecting the extension of time granted. The contract mechanisms also provide for loss and expense to be paid for disturbance occasioned by the delay but not otherwise paid for.

The existence of these provisions and mechanisms for supplemental payments highlights:

a) That there is an inadequacy in the payment regime to the extent that there is not also a mechanism for continuing interim payments into the extended period.

b) Alternatively, if there is no inadequacy because the parties are free to agree but have not agreed a mechanism for continuing payment, then an implied term is to be inferred so that the payee is not excluded from cashflow by a circumstance which entitles him to additional payments – at least where the relevant event is in the employer’s control and the employer benefits from that delay by getting continued works without having to make further continued payments.
Summary

The difficulty with the judgment in the Grove case is that:

a) It assumes that an innocent party to a contract who agrees a completion date in good faith must anticipate the other party’s contingent or future breach or else be held to have agreed a mechanism for payment which is adequate, even though he innocently suffers from that breach where it delays the project. It is strongly arguable that parties to a contract are entitled to proceed on the basis that the contract will be honoured. The bargain is made and the price agreed on this basis. If the payee had to anticipate the payer’s every breach, the risk and the price may be very different.

b) It fails to take into account that the application of the Scheme to a contract occurs not only where the parties fail to agree the amount, intervals and circumstances of payment but also where they provide a mechanism for determining what payments become due and when, which is inadequate.

c) It also fails to recognise that the mechanism for determining what payments become due and when may be adequate in the event that both parties comply with the contract but become inadequate where one party breaches the terms of the contract and then seeks to exploit the mechanism so as to benefit from his own breach.

About the author

Philip Harris

Partner & Solicitor-Advocate

Philip has 30 years’ experience as a construction solicitor and advises on all aspects of construction law.

Philip Harris

Philip has 30 years’ experience as a construction solicitor and advises on all aspects of construction law.

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