Consequences of not updating a payment schedule

In Balfour Beatty Regional Construction Ltd v Grove Developments Ltd v [2016] EWCA Civ 990, the Court of Appeal upheld the earlier decision of the Technology and Construction Court ("TCC"). 

Background

The parties contracted under a JCT Design and Build 2011 contract ("D & B 2011"), with bespoke amendments that provided for 23 interim stage payments to be made to the contractor, one in each month up to the month before the planned completion date. The project was delayed and the works were scheduled to take significantly longer than originally programmed.  When the 23 listed dates for interim payment applications had been exhausted, the contractor made an application for a further interim payment (a 24th payment) and a dispute arose when the employer refused to accept it, insisting that it was not required to do so under the contract. 

Decision in the TCC

The court at first instance found for the employer and decided that the contractor had no right to apply or be paid for interim payments after application 23. It 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.

Decision at the Court of Appeal

At the Court of Appeal, the contractor argued that the judge at first instance was wrong for the following reasons:

1. Firstly, the effect of the payment schedule, providing 23 dates, one in each month up to the month before completion, was to imply that interim payments were to continue at monthly intervals beyond the planned completion date if the project did not complete on time. 
2. In the alternative, the contractor argued that the contract did not comply with section 109 of the Housing Grants Construction and Regeneration Act 1996 ("HGCRA"), 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”. As the contract did not allow for interim payments after application 23 despite the ongoing works, the contractor said the Scheme for Construction Contracts 1998 ("the Scheme") should be applied instead.  
3. Finally, the contractor also argued that the conduct and correspondence between the parties in the months following the 23rd interim valuation, in which they discussed what further payments might be due, gave rise to a fresh contract for monthly interim payments.

The Appellate court rejected the contractor's third argument swiftly, concluding that there was no evidence that the parties ever agreed new terms for which further interim payments would be made. 

The court had more difficulty in dismissing the contactor's first line of argument.  In a majority decision (Vos LJ dissenting) the court found that on a proper construction of the payment schedule, the parties had agreed that the contractor was only entitled to 23 interim valuations. The fact that the contractor had made a bad bargain for itself was not cause for the court to invoke commercial common sense unless the words used in the contract were unclear.  It concluded that the words were not unclear, and furthermore, that the case fell short of satisfying the requirements for implication of the proposed term, since it was not obvious what that term would say or what would be the critical dates for serving notices etc.  Finally, the court concluded that such a term was also not necessary to secure business efficacy. 

However, it is interesting to note Vos LJ's dissenting view; he considered that the effect of agreeing a payment schedule meant that interim payments under clause 4.7 of the D & B 2011 should be calculated in accordance with Alternative B (monthly periodic payments) rather than Alternative A (stage payments) (the parties had stated Alternative A in their Contract Particulars). He noted that the schedule did not state whether the dates listed were to be the only interim dates. He argued that the inclusion of the words “Valuation Application on Third Thursday of the month” demonstrated that the list of dates was not meant to be exhaustive.  The contract was therefore ambiguous as to what should happen when the listed dates "ran out".  He argued that in such circumstances the court should construe the contract as if the word "etcetera" had been included at the end of the payment schedule, thus allowing for further interim applications to be made on a monthly basis.

Finally, the court considered the contractor's second argument, concerning section 109 of the HGCRA.  The court rejected the argument that the employer's construction of the payment schedule infringed the rights granted under section 109.  Jackson LJ stated that section 109(2) gives the parties “considerable latitude” as to the structure of interim payments that they may agree, including the frequency of the payments and the amounts to be paid.  However, such a regime of interim payments must be drawn up in good faith.

Lessons

It is vitally important that parties review their payment schedules to ascertain whether a delay in construction will affect their entitlement to make further applications for interim payments.  Whilst payment schedules listing the dates of interim valuations can be extremely useful in practice to identify the precise dates on which applications, notices and payments must be made, parties should be careful to ensure that the wording of such schedules does not limit the number of interim valuations that can be made.  Use of the word "etcetera" or words to that effect should be considered to avoid any ambiguity in the parties' intentions.
It is positive to note the court's comments with regards to section 109 of the HGCRA. Parties remain free to agree the precise terms of their interim payment regimes providing such regimes are drawn up in good faith.