Problems with payment provisions

As you will (or should!) know, the Housing Grants, Construction and Regeneration Act 1996 as amended (the “Construction Act”), requires almost all construction contracts contain a sufficient procedure for determining when payments become due, how much is owed and a final date for payment of the same. In particular, the Construction Act provides that the parties may agree how long the period between the due date and the final date for payment will be.

The aim of the Act in this respect is to create a uniform mechanism which provides frequent and fair payments across the construction industry and within each construction project. In the event that parties are unable to agree on these terms, or they are not compliant with the Construction Act, the Scheme for Construction Contracts Regulations 1998 as amended (the “Scheme”) will be implied into the contract.

If a construction contract does not incorporate any payment terms, the entirety of the payment provisions within the Scheme will apply. If the contract complies in part with the payment terms under the Act, then those provisions that do comply with the Act will continue to take effect with any missing provisions will be implied into the contract by the Scheme. Any non-compliant provisions will be substituted by the appropriate payment provisions within the Scheme.

In some instances, there may be conflicting provisions within the same contract. Where there is a disparity as to which set of payment provisions are relevant, it can cause many issues between the contracting parties. For example, there may be a payment schedule appended to the contract, which does not marry up to the terms within the payment clause in the contract itself. The former may suggest an interim application is to be submitted on a particular day each month, whereas the latter may suggest there is an interim valuation date, and the application should be submitted 7 days prior. A common question for the parties is therefore which is the correct date to use?

The Court of Appeal in A&V Building Solutions Limited v. J&B Hopkins Limited [2023] illustrates the problems which parties may run into when their contract does not contain a clear and definitive payment mechanism. In this instance, it led to several sets of proceedings. J&B were the main contractor, while A&V were the sub-contractor. The relevant provisions within the contract were as follows:

“9.2. It is a condition precedent to payment that the Sub-Contractor shall make monthly applications.

9.3. The payments shall be in accordance with Appendix 6.”

Appendix 6 contained a payment schedule, within which the heading of the first column read “Date which Sub-Contractors to Issue Application to J&B“. The dates in this first column were uniformly 10 days before the ‘Valuation Date’ in the second column, which was always the last day of each month. Appendix 6 stated that “For the avoidance of doubt if applications are not received from the Sub-Contractor 7 days prior to the Valuation Date then the Sub-Contractor shall not be entitled to any payment….”.

A&V’s interim application 14 was dated 21 March 2022, which fell on a Sunday, so application 14 was issued the following day (being Monday 22 March). This was one day after the date specified in the column listing dates which the sub-contractor was to issue an application. J&B’s position was that the application was invalid as A&V had missed the date listed in the first column, while A&V sought to rely on the fact it was not later than 7 days before the Valuation Date.

The Court of Appeal found that Clauses 9.2 and 9.3 formed general provisions of J&B’s standard sub-contract, but Appendix 6 was a bespoke schedule agreed between the parties and specifically implemented for the sub-contract with A&V. As such, it was held that where there is irregularity between the contractual provisions, the bespoke provision was expected to overrule the general provision. It was therefore decided that interim application 14 was valid, and could have been issued up to 7 days before the last date of the month.

Another problem which commonly arises is when payment schedules ‘run out’. In the case of Grove Developments Ltd v. Balfour Beatty Regional Construction Limited [2016], the parties entered into an amended JCT Design and Build Contract, one such amendment was that there would be 23 interim valuation dates, effectively meaning 23 payment cycles. After the 23 payment cycles had passed, the works remained unfinished. Balfour Beatty (as the contractor) continued works, and submitted a 24^th application.

The Court held that Balfour Beatty was not entitled to further interim payments beyond those set out in the schedule to the contract, despite the fact that the works were not complete. It said that the right to interim payments was subject to the parties’ ability to agree the frequency of payments, and provided that there was an adequate mechanism, which there was in this case, it didn’t matter that interim payments didn’t necessarily cover the entire period of works. Although it meant that Balfour Beatty would have to wait until the final payment for further sums, effectively the court found that the fault was with Balfour Beatty in their failure to negotiate protective terms in the Contract to cover interim payment applications should the works continue (as they did) beyond the initially envisioned completion date.

The key takeaway is that parties need to have consistent, forward-thinking and uniform terms throughout the entirety of the contract. This extends to bespoke schedules, in order to avoid missing the deadlines for applications and/or payment notices, and not creating an unchangeable limit on the number of payment cycles. With a little thought upfront, payment provisions can be made clear for both parties, avoiding costly errors and disputes down the line.

This article originally featured in the March 2024 edition of our Aggregate newsletter: to read the complete edition, click here.