Cornerstone – A Grove Warning

The Court of Appeal (CA) has upheld the decision of the TCC in the case of Balfour Beatty Regional Construction Limited v. Grove Developments Limited [2016] EWCA Civ 990.

The CA confirmed that upon expiry of a bespoke interim payment schedule, the contractor Balfour Beatty (BB) was not entitled to further interim payments. As a result, BB will have to wait until its final account to receive further payment.

The decision is fact-specific but could have cash flow ramifications for contractors and sub-contractors if they have similar bespoke payment schedules which fail to provide an extension mechanism. In addition the decision sends a clear message that the courts will be reluctant to interfere with agreed provisions in a contract to simply save one party from a bad bargain.

Background

In 2013 Grove Developments Limited (Grove) instructed BB to design and construct a hotel and serviced apartments at Greenwich Peninsular in South East London. The contract was a JCT Design and Build Contract 2011, subject to a number of bespoke amendments.

One of the key amendments was the agreement of an interim payment schedule (Schedule) which provided for 23 monthly interim payments up to July 2015 which was the anticipated time of practical completion. Interestingly, this agreement post-dated the contract itself, and conflicted with the express terms of the contract which stated that interim payments would be on a stage rather that periodic basis. The Schedule did not make any provision for what would happen after July 2015: perhaps both parties confidently predicted there would be no project overruns. However, practical completion wasn’t actually reached until July 2016.

BB made an application no. 24 in August 2015, extrapolating from the dates in the Schedule. Although Grove certified an amount payable, a dispute arose as to the timing of that notice and an adjudication was commenced. Grove then said that regardless of the timing of any notices, BB had no right to apply for interim payments beyond the expiry of the Schedule anyway.

The TCC agreed, saying that BB had no contractual right to make interim application 24 (or any subsequent application), and as such had no right to be paid in respect of the application. It also said that the contract as amended by the Schedule satisfied the requirements of Sections 109 and 110 of the Housing Grants, Construction and Regeneration Act 1996 (the Act) by providing an adequate mechanism for payment, and therefore the Scheme for Construction Contracts did not apply. BB appealed.

Court of Appeal

BB argued that it was a “commercial nonsense” to read the contract in a way which prevented interim payments after July 2015. Lord Justice Jackson disagreed, saying:

• it was clear that the parties only agreed interim dates up to July 2015
• it was impossible to deduce after the Schedule expired what the dates for
• valuations, notices and payments should be
• it was a “classic case of one party making a bad bargain” which the courts
• would not interfere with.

Lord Justice Vos in a dissenting judgment disagreed with this point and said that the contract was ambiguous. He suggested the word “etcetera” should be implied at the end of the Schedule, although it was doubted by the other judges that such an implication was necessary to give effect to the contract.

BB also argued that in that case, the contract didn’t comply with the provisions of the Act because it failed to provide an adequate mechanism for interim payments for the duration of the works. The CA concluded that the Act gave the parties considerable flexibility to decide between themselves the system of interim payments. It held that there was no requirement for the interim payment dates to cover the whole of the works, so the Schedule was adequate and the Scheme did not need to apply.

However, the CA debated whether an interim payment system which only provided for one payment of an insignificant amount would satisfy the Act. It was suggested that parties have the flexibility to decide their own interim payment system as long as it is not a “cynical device” designed to undermine the Act, but it did not have to decide the point because it was not an issue in this case.

Conclusion and commercial impact

The CA’s judgment, ultimately deciding 2:1 in favour of Grove, provides some finality on this dispute, but the fact-specific nature of how the Schedule was agreed and what it provided for does not mean that all payment schedules are doomed to a similar outcome.

Nevertheless, parties must take this as a further warning to take care when drafting payment provisions: uncertainty can lead to costly legal battles and, as for BB in this case, significant financial fall out. Smaller contractors may well not have survived with no right to interim payments for a year. Parties with existing time-limited payment schedules should take advice on how to approach future interim payments.

It is also a reminder that the courts will not come to a party’s rescue because the system chosen for interim payments turned out to be a bad bargain, provided that bargain complies with the Act. Unfortunately, the CA’s suggestion that a single interim payment will be insufficient to comply with the Act while making it clear that there is no need for payments throughout the course of a project leaves doubt precisely what must be provided for to comply: would two payments be enough; what about three? But for parties looking to be paid, the message is obvious: ensure contracts are sufficiently clear to provide for a right to interim payments right up to practical completion, and beyond.

The content of this article is for general information only. For further information regarding interim payments, please contact a member of our Construction and Engineering Team. Law covered as at January 2017.