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News » Law » Are my payment terms fit for purpose? » published 6 Apr 2016

Are my payment terms fit for purpose?

A party making any amendments to or agreeing terms without consideration of the possible consequences may take a hit to its cash flow, the lifeblood of a company’s operations. Solicitor Adam Hiscox reports.

The dispute related to the Peninsula Tower project Above: The dispute related to the Peninsula Tower project

This was the position that Balfour Beatty found itself in, in the case of Grove Developments Ltd  v Balfour Beatty Regional Construction Ltd. Although Balfour may have been fully aware of the terms that it was signing up to and the possible risks, this case nevertheless highlights the need for parties to be vigilant when negotiating, and to consider the implications of amending the payment terms of standard form contracts such as the JCT.

The project concerned the design and construction of the Peninsula Tower, a 23-storey hotel and serviced apartments adjoining the O2 Arena complex on Greenwich Peninsula in London. The contract sum was in excess of £120m.

The contract was based on a JCT Design and Build Contract 2011. The contract included amendments to the payment provisions.

The works commenced in July 2013 with a date for completion of 22 July 2015. The works were delayed.

Notably the parties agreed that the contract was to provide for stage payments, the details of which were “to be agreed within two weeks from the date of contract”. Whilst the parties’ agreed a schedule of payments later than two weeks from the date of the contract, the parties were in agreement that their “Agreed Schedule” formed part of the contract. The Agreed Schedule specified 23 dates on which Balfour could make applications for interim payments. The dates covered the period from September 2013 up to July 2015, in line with the anticipated contract duration.

The final date for each interim payment was 28 days from the due date (being the Valuation Date in the Agreed Schedule), although the Agreed Schedule referred to a final date for payment of 30 days from the due date. The payer was obliged to issue its pay less notice no later than 3 days before the final date for payment.

The dispute

The contract works were delayed beyond the date for completion. As a result, Balfour issued interim application number 24 on 21st August, claiming some £23m. Grove served a pay less notice on 15th September. By 21st August, the parties had already been trying to agree new payment dates beyond interim application 23. However, there appeared to be no consensus about what, if anything, had been agreed.

In November 2015, Balfour started adjudication proceedings against Grove. Grove, while reserving its position regarding the adjudicator’s jurisdiction, served a response in the adjudication in December, and issued Part 8 proceedings for declaratory relief shortly afterwards.

The questions for the court to determine were:

  1. Was there a contractual right for Balfour to make interim application 24 and further interim applications beyond the original agreed Schedule?
  2. What was the final date for payment and was Grove’s pay less notice valid?

The judge decided that Balfour had no contractual right to make or be paid its application 24 or any further applications. Notwithstanding that the judge found in Grove’s favour regarding the first issue, the judge commented that he would have found in favour of Grove’s position that its pay less notice was valid.

When reaching its decision on the first question, the Court commented that:-

·         While it might be useful to consider interpreting a contract’s terms in light of commercial common sense where the terms are ambiguous, the Court should not “strain to find ambiguity where none exists".

·         The parties amended the stage payments to provide for 23 payments in the agreed Schedule and that Schedule worked with the other payment terms of the contract. Therefore the parties had an operable and agreed payment mechanism. The need to rely on the Scheme for Construction Contracts 1998 (as amended), even in part, therefore fell away. The Court also reiterated its accord with previous case law which ruled that the Scheme will not be imported wholescale where parts of the Scheme could be used to supplement existing and perfectly workable payment terms of a contract.

·         Section 109(1) of the Construction Act, which calls for interim payments to be provided for construction contracts of more than 45 days’ duration, does not require a construction contract to provide for interim payments covering all work under the contract and that this would be the position even if it were not for section 109(2) which gives the parties freedom to choose the amounts of the payments and the intervals when they become due.

The court rejected the arguments from Balfour that:

·         It was an implied term of the contract that the right to make interim applications would extend beyond application 23 – this would be inconsistent with what had expressly been agreed; the Agreed Schedule’s dates were mere examples of the dates for its valuations.

·         The parties had varied the Agreed Schedule beyond application 23. While some attempts were made to negotiate an extension to the Agreed Schedule, the Court noted that at no time during the negotiations was there agreement as to the terms.

·         Payments should continue to be made monthly and that the dates in the Agreed Schedule were mere examples of those payments. The court said that the Agreed Schedule was not an example of monthly payment, neither was it akin to stage payments which were based on the contractor’s progress of the works. The parties were bound by what they had agreed in the Agreed Schedule.

·         Grove was barred from contending that it had no right to make payment applications after application 23 on the basis that Grove had issued payment certificates in respect of the applications (albeit it had not paid them). The Court considered that this was a classic example of an attempt to use the principle of estoppel as a sword, rather than a shield.

Conclusion

Although Balfour was in a bad commercial position as a result of the court’s strict contractual interpretation of the Contract, the contract was unambiguous. The court rightly saw that the parties were two commercial entities who were free to negotiate the terms of the contract between them as they liked.

The failure by Balfour to cater for the right to make interim applications beyond those specified in the Agreed Schedule in the event of delay was unfortunate, but not a matter that the Court could or should correct given that the Contract’s terms where clear and compliant with the Construction Act. The Contract was perfectly operable notwithstanding that Balfour found itself in an unfortunate position.

While it remains to be seen whether this case will be successfully appealed or not, it will undoubtedly by cited by parties seeking to operate the provisions of existing building contracts containing similar terms.

 

About the author: Adam Hiscox is a construction solicitor with Wright Hassall LLP

 

 

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This article was published on 6 Apr 2016 (last updated on 6 Apr 2016).

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