Interim payment schedules: dangers when they expire

28 October, 2016
by: Cripps Pemberton Greenish

61559178 - london, uk - july 5, 2016 - view of river thames, north greenwich and o2 arena.

The Court of Appeal has affirmed the judgment of the TCC about a contractor’s entitlement to interim payments when dates in an agreed payment schedule expired before Practical Completion (PC).

 

A developer, Grove Developments, engaged Balfour Beatty Regional Construction Ltd (“BB”) under a JCT Design and Build contract 2011 which contained a series of bespoke amendments. These amendments included an agreed schedule of 23 interim valuation and payment dates, the last of which tied into the date of completion of the works.  BB issued interim application no 24 in accordance with the procedure followed to date.  On failure to reach agreement on a mechanism for future interim payments, the parties took their disagreement to the TCC, which held that BB was not entitled under contract to further interim payments beyond those set out in the agreed schedule to the building contract, despite the fact the works were not complete.

 

The Court of Appeal agreed and confirmed the TTC’s decision was not contrary to commercial common sense:

 

  • The express terms made it clear that the parties were only agreeing a regime of interim payments up to the contractual date for PC: it was impossible to deduce from the hybrid arrangements made after PC what would be the dates for valuations, payment notices and such like with sufficient certainty after this date;
  • The court refused to imply a term regarding interim payments after PC. It was not obvious what the proposed term would say or the critical dates for serving notices and no overriding need to imply a term based on business efficacy. One cannot say the contract lacked commercial or practical coherence without such term.
  • The Construction Act’s requirements for payment (section 109) could not plug this gap. Here section 109 mandated a regime of interim payments but it was not necessary to provide for a regime covering the whole of the works to be performed under contract. If parties chose to exclude its regime, any replacement scheme must be drawn up in good faith but the section allows considerable latitude as to what may be agreed.

 

At the outset, parties need to anticipate the potential for delay, suspension or disruption to a project and to build flexibility into any payment regime.   This applies equally to appointments for consultants as it does to contractors. Failure to put protections in place leads to potentially serious cashflow issues and, as Sir Michael Latham identified “cashflow is the life blood of the construction industry”. Waiting until settlement of the final account may be a fatal constriction.

 

Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWCA Civ 990.