Cornerstone - Fixed payment schedules

11 March 2016

A warning to all contractors: if you’ve agreed a fixed payment schedule for interim payments in a construction contract and if that schedule expires on a defined date, you may be left with no right to make further interim payment applications if the project overruns.

Fixed payment schedules - no right to apply, no right to payment

In Grove Developments Ltd v. Balfour Beatty Regional Construction Ltd [2016] the parties entered into an amended JCT Design and Build Contract 2011 for Balfour Beatty (BB) to construct Grover Developments (Grover) a large hotel/apartment complex next to the O2 Arena in London. The contract price was £121m. Work began in July 2013 and was due to complete in July 2015. The parties agreed a schedule of 23 valuation and payment dates covering the period through to July 2015. Lo and behold, the work did not complete by July 2015.

From May 2015 (when it was apparent that the work would not finish by July 2015), the parties discussed the possibility of extending the fixed payment schedule past July 2015, but nothing was agreed. On 21 August 2015, i.e. after the period covered by the fixed payment schedule, BB issued an application for an interim payment claiming in excess of £23m plus VAT. Grove issued documents described as a payment notice and a pay less notice in response to the application.

But BB commenced an adjudication on the basis that Grove’s notices were issued out of time. In response, Grove commenced Part 8 proceedings seeking the court’s determination that BB had no contractual right to make further interim payment applications after the expiry of the fixed payment schedule.

In his judgment, considered by many commentators to be harsh (but logical), Mr Justice Stuart-Smith found that BB had no contractual right to make any further interim payment applications after the intervals set out in the fixed payment schedule between the parties, and in the absence of other agreement.

The court rejected a number of arguments put forward by BB. One such argument was that there was an implied term that interim payments would continue after the fixed payment schedule. BB argued that it was contrary to commercial common sense for interim payments to stop before completion of the works, as it would leave the contractor to finish the works without the benefit of interim payments. Mr Justice Stuart-Smith noted that the parties could have negotiated and agreed terms that allowed BB to make interim payments after the expiry of the fixed payment schedule (for example, where practical completion was delayed), but they had not.

What about the Scheme for Construction Contract? BB said the Scheme should fill the gap between the expiry of the fixed payment schedule and the actual completion of the contract works. No such luck. The court held that where parties enter into an agreement concerning interim payment intervals, the fact that the agreement does not provide for interim payments covering all of the work under the contract is no reason to import the provisions of the Scheme to supplement any such agreement.

So the moral of the story is this: if you are payee and you enter into a payment schedule for interim payments, it is vital you ensure that schedule accommodates a possible overrun of the contract works. Either include dates far beyond when the work is expected to complete or, perhaps the safer option, include very clear wording setting out how further interim payment dates are to be calculated once the schedule expires. For contracts already entered into, an extension of any fixed payment schedule should be sought as soon as it looks like the contract works might overrun – but this judgment might make some payers think twice as to whether they need to agree.

For further information on fixed payment schedules, please contact Josh Ripman. This article provides only a general summary and is not intended to be comprehensive. Specific legal advice should be taken in any individual application. Law covered as at March 2016.



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