What happens when the payments run out !

Posted by csb@ciberadr.co.uk 

www.cadr.uk

Court of Appeal confirms no interim payments after the schedule expired (Balfour Beatty v Grove)

Construction analysis: The Court of Appeal has upheld, by a majority of two to one, the Technology and Construction Court (TCC) decision that a contractor was not entitled to interim payments after the final date in a schedule specifying dates in the interim payment process (the schedule) had elapsed. The Court of Appeal confirmed that there was no express or implied term extending the schedule and that the contract was not non-compliant with section 109 of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) simply because the interim payment regime did not cover the entirety of the works.

Original news

Balfour Beatty Regional Construction Ltd v Grove Developments Ltd [2016] EWCA Civ 990 (CA)

What are the practical implications of this case?

References:

Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWCA Civ 168 (TCC), 165 Con LR 153HGCRA 1996, s 109

This appeal has been awaited with some interest following the TCC decision earlier this year (see our analysis of that case in News Analysis: No entitlement to make interim application after latest date in payment schedule (Grove Developments v Balfour Beatty)). The discussion by the Court of Appeal on contractual construction in light of the parties’ bespoke payment regime, as well as its comments on the breadth of HGCRA 1996, s 109 will be of particular interest to construction lawyers. Other practical implications that arise out of the case include:

• although schedules and other bespoke payment arrangements can be advantageous/useful to parties, for example in confirming each deadline (in light of the potential consequences of a failure to meet one), parties need to take due care when electing to use these. Parties should review the payment mechanisms under the contract and any related documents/schedules to ensure consistency, that they meet the parties’ expectations, and that such arrangements are flexible enough to deal with circumstances that may arise during the project, such as delays. Where the contract is clear and unambiguous, the court will rely upon the natural meaning of the terms, notwithstanding that they may be inconsistent with commercial common sense or amount to a harsh bargain for one party
• References:

HGCRA 1996, s 109

Section 109 of the HGCRA 1996 is broadly drafted and affords employers and contractors considerable freedom to agree among themselves the frequency and amount of interim payments—there is no requirement that the interim payment regime must cover the entire duration or cost of the works. However, parties must draw up their arrangements in good faith and cannot seek to undermine Parliament’s intention by agreeing a woefully inadequate regime, such as only providing for one insignificant interim payment

What was the background?

Grove engaged Balfour Beatty to design and construct a hotel and serviced apartments pursuant to an amended JCT Design and Build Contract 2011. In the contract particulars, the parties elected for payment to be made on the Alternative A basis (stage payments) with the milestones to be agreed within two weeks from the date of contract. However, the parties were unable to agree the stages and instead eventually prepared a payment schedule that set out 23 dates for interim applications and corresponding notice/payment dates. The last interim application (number 23) was to be made on 16 July 2015, coinciding with the date for practical completion that was originally anticipated as 22 July 2015.

The works were delayed (for reasons that Grove was at least in part responsible for), and from around May 2015 the parties entered into discussions regarding interim payments beyond July 2015. Although both parties agreed these should continue after the schedule elapsed, no agreement was reached as to appropriate dates.

On 21 August 2015, notwithstanding that the schedule had elapsed, Balfour Beatty issued interim application 24 and Grove responded with a pay less notice (making substantial deductions) and made payment of its reduced assessment.

Subsequently, Grove commenced Part 8 proceedings for, among other things, a declaration that Balfour Beatty had no right to issue, or be paid in respect of, interim application 24 (or any other interim application following the expiry of the schedule). The TCC held that Balfour Beatty had no right to interim payments following the last date on the schedule.

Balfour Beatty appealed on the basis that:

• the contract, as amended by the payment schedule, expressly or impliedly provided for continuing interim payments until the date of practical completion
• alternatively, the contract did not comply with the HGCRA 1996, s 109 and therefore the Scheme for Construction Contracts (the Scheme) applied and conferred a right to monthly interim payments from August 2015 until practical completion
• if both the above grounds failed, then the parties’ correspondence and conduct from May 2015 (where they commenced discussions regarding the extension of the payment schedule) gave rise to a fresh contract for monthly interim payments

What did the court decide?

The Court of Appeal upheld the TCC decision by a two to one majority. Lord Justice Jackson delivered the substantive majority decision, with which Longmore LJ agreed, and addressed the issues as follows:

No express or implied contractual entitlement to interim payments after the payment schedule ended

References:

Arnold v Britton [2015] UKSC 36

The express words of the contract and the schedule (including the absence of any provision for continuing dates) made it clear that the parties were only agreeing a regime of interim payments which would last until the original date for practical completion. There was no ambiguity which would entitle the court to reinterpret the contract in accordance with commercial common sense. In any event, commercial common sense would only be of aid if what the parties had actually intended, or would have intended, was clear. Jackson LJ did not consider this applied as it was uncertain whether the parties would have derived a timetable by extrapolating the schedule or by applying the time frames in the standard form relating to Alternative B (periodic payments). The court would therefore not intervene to save a party from a bad bargain that had clearly been agreed.

References:

Marks and Spencer v BNP Parabis Securities Service Trust [2015] UKSC 72

The Court of Appeal also rejected Balfour Beatty’s argument that an implied term arose to extend the interim payments. Jackson LJ considered that the facts fell far short of the requirements set out in Marks and Spencer v BNP Parabis—the proposed term and payment dates were not obvious, such a term was not necessary to secure business efficacy and the contract did not ‘lack commercial or practical coherence’ without it.

However, Vos LJ dissented on this point and held that the contract was not clear and the court was therefore entitled to construe it:

• the effect of agreeing the schedule was to vary the contract from the original agreement, Alternative A (stage payments), to Alternative B (monthly payments). This was reinforced by the fact that the parties generally applied the terminology and process contained in the standard form in relation to Alternative B
• the schedule was not a standalone document and did not, on its face, specify that the payments listed were to be the only interim payments. In addition, the heading ‘valuation application on third Thursday of the month’ would have been unnecessary if the parties intended the listed dates to be exhaustive
• clear words would have been necessary on the schedule to construe it as if the parties had intended to exclude interim payments after interim payment 23. Such a construction was uncommercial and did not accord with the financial and security risk allocations under the contract

In these circumstances, Vos LJ considered the only sensible construction of what the parties agreed would be to construe the contract as if the word ‘etcetera’ was included at the end of the schedule, although this did not necessarily extend to interim payments after practical completion was certified.

Did the HGCRA 1996 and the Scheme enable Balfour Beatty to recover further interim payments?

References:

HGCRA 1996, s 109

Section 109 of the HGCRA 1996 creates a statutory entitlement to interim payments but also provides that parties are free to agree the amount and frequency of these payments, or the circumstances in which they become due (HGCRA 1996, s 109(2)). The Court of Appeal held that this section affords the parties ‘considerable latitude as to the system of interim payments which they may agree’, including the option for interim payments to be less than the full value of work completed. Therefore the contract satisfied the requirements of HGCRA 1996, s 109, even though the consequence was that Balfour Beatty was not entitled to any interim payments from August 2015 until practical completion in July 2016.

However, the Court of Appeal did acknowledge that the broad drafting of HGCRA 1996, s 109 was open to exploitation and noted, albeit only as obiter, that a contract would probably not be compliant with the HGCRA 1996 if it was used as a ‘cynical device’ to frustrate Parliament’s intention by only providing for a woefully inadequate scheme of interim payments, such as one payment of an insignificant amount. The Court of Appeal did not need to consider where this threshold would be set, but did reiterate that although parties have considerable freedom as to the particular regime they agree, it must be drawn up in good faith.

No separate agreement for further interim payments

The Court of Appeal dealt with this point very briefly. Although the parties had discussed permitting further interim payments after July 2015, they had failed to agree the terms upon which such payments would be made, including the dates for applications, valuations and notices. Nor had Grove waived its need to agree on dates by issuing payment notice 24—it had issued the notice and made payment to protect itself in case its interpretation of the contract was incorrect. Accordingly, no new agreement had been concluded.

Case details

• Court: Court of Appeal (on appeal from the judgment of Mr Justice Stuart-Smith in the TCC)
• Judge: Lord Justice Longmore, Lord Justice Jackson and Lord Justice Vos
• Date of judgment: 13 October 2016