If the payment schedule ends before completion, do interim payments apply?
Payment disputes continue to abound in the Technology and Construction Court and at the start of this year the TCC was asked to decide a question which I have not seen previously considered by the courts. What happens when dates set out in a payment schedule have passed but the works are still not complete? Is the contractor entitled to further interim payments after the final interim payment date in a payment schedule? If so, on what basis?
In Grove Developments Ltd v Balfour Beatty Regional Construction Ltd, the parties agreed, after the contract had been entered into, a schedule of 23 interim payment dates. The schedule (which did not cater for what would happen if the works were not completed by the final instalment date) replaced the monthly interim payment date mechanism (alternative B) in the standard JCT contract.
The last date in the payment schedule passed with practical completion some time off and the contractor continued to seek payment arguing that once the payment schedule had expired, as there was no further payment mechanism, it was entitled to interim payments in accordance with the statutory scheme under the Housing Grants Construction and Regeneration Act. The contractor also used the statutory scheme as the basis for arguing that a pay less notice served by the client (in accordance with the timescales contained in the standard JCT contract) had been served out of time.
Contractual periods for payment and pay less notices could continue to apply and there would be no need to revert to the statutory scheme
The judge rejected the contractor’s arguments and held that the payment schedule was a definitive list of the interim payment dates and that no further payments would become due to the contractor once the schedule had expired until after practical completion of the works had been achieved.
Also rejected were the contractor’s arguments that there should be an implied term allowing it to apply for payment or, alternatively, that the contract should be interpreted to allow it payment before the works reached practical completion.
The judge ruled that the contract could not be construed as including an implied term that interim payments would continue once the payment schedule had expired as such a term would have been inconsistent with the express terms of the contract. If this was wrong and there was an implied term, the arrangements would not automatically default to the statutory scheme (17 day payment period with pay less notices to be issued not less than seven days before the final date for payment) as the contractor had argued. The judge’s view was that the contractual periods for payment and pay less notices could continue to apply and there would be no need to revert to the statutory scheme. Given this, the employer’s pay less notice would have been served in time.
Further, although it would adversely affect the contractor’s cash flow, it was not against commercial common sense for progress payments to cease before completion of the works. The judge accepted the employer’s argument that it may wish to use an interim payment structure to try to incentivise the contractor to finish the works on time.
The decision has implications for those administering building contracts with payment schedules rather than stage or periodic payment mechanisms. If the schedule/associated drafting does not mention what will happen in the event that the works are not finished by the last instalment date, the contractor may not be entitled to further payment until the final account. Anyone administering a contract such as this should take care not to inadvertently authorise payments which may not otherwise be due.
Angus Dawson is partner Macfarlanes LLP
IN PLAIN ENGLISH: THE STATUTORY SCHEME
The Housing Grants Construction and Regeneration Act 1996 (as amended) sets out minimum requirements which payment clauses in ‘construction contracts’ (as defined in that Act) have to comply with. If a contractual payment mechanism does not comply, the non-compliant part will be replaced with the relevant part of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended). It is better to avoid this as the timescales in the scheme tend to be more favourable than contractual timescales to a contractor but not to an employer; and they may be inconsistent with other parts of the contractual payment clause which still apply.