Delays leave contractor paying for the job

Theresa Mohammed

No right to further interim payment left one contractor funding the job. Theresa Mohammed describes how amendments agreed at the outset of a job can have a far-reaching effect.

Parties to construction contracts often start works before all the contractual terms are finalised. This is a common occurrence in construction and sometimes parties just go on to complete the works without a further thought, with the contract safely put away in a drawer.

We have seen frequent attempts by parties to adjust payment terms during the course of the works to suit their own payment processes or to assist a contractor or subcontractor’s cash flow. What this can mean is that parties are caught out by knock-on effects as there is confusion as to when payment notices are due to be served and when final dates for payment are.

As most of us will know, if commercial relationships become strained, this can lead to smash-and-grab adjudications or other, more complicated payment disputes.

While relationships can deteriorate, some parties just work through it as the joint objective of delivering the project will not be served if the contractor or subcontractor is starved of cash. We have seen countless examples of parties making payments on account or relaxing contractual requirements to make sure works can progress on time.

Occasionally, however, the terms agreed by parties have unintended consequences, leaving one party at serious disadvantage. This happened in the case of Balfour Beatty and Grove Developments.

Unusually here, the parties did not shorten the payment terms to inject cash into the job, the terms agreed actually ended up having the opposite effect.

At first instance, the Technology and Construction Court held that while the parties had entered into a JCT Design and Build Contract 2011 edition, it had amended the payment terms and selected that stage payments were to apply. The parties did not list the stages and instead recorded that this would be agreed within two weeks. Some weeks passed and then the parties agreed a series of 23 dates, the last date being close to the completion date stated in the contract.   

What the parties perhaps did not anticipate was the substantial delay to the works, which meant that the 23 dates soon passed by – the assumption of Balfour Beatty being that it could just continue to apply for further interim payments.

Grove disagreed and unfortunately for Balfour Beatty the Technology and Construction Court confirmed that there was no right to apply or be paid for interim payments after application 23. By agreeing the payment schedule the parties had agreed the contractor would have 23 dates to submit valuations but no more. It was irrelevant that those dates had run out due to delay.   

Balfour Beatty took this matter to the Court of Appeal where it was argued that the effect of the parties’ contract was that interim payments were to continue at monthly intervals beyond the planned completion date. Alternatively, if that was incorrect the contract did not comply with s109 of the Construction Act which provides that a party to a construction contract is entitled to be paid by instalments, stage payments or other periodic payments.

As a further argument it was also suggested that after the payment dates had run out there was a new contract between the parties entitling Balfour Beatty to monthly interim payments.

The majority in the Court of Appeal held that the proper construction of the payment schedule meant that the contractor was only entitled to 23 interim valuations and that was it. The Court could not invoke commercial common sense unless the natural meaning of the words used was unclear.

This may have been an unintended consequence, given the delay to the works, but meant that the contractor could have to wait for months or even years until the date of the final payment. On any assessment of the facts, surely the last thing a contractor would want.  

Nearly everyone that has heard of this case has expressed surprise and sympathy with the contractor. The stark reality of what had been agreed was surely not what Balfour Beatty envisaged as it is difficult to see why it would agree to effectively fund the job for an indeterminate period of time.

However, what this case does show us is that amendments agreed at the outset of a job can have a far-reaching effect that could financially break contractor or subcontractor, affecting performance, timing and, ultimately, the intended purpose of the contract.

Theresa Mohammed is a partner in dispute resolution and litigation at Trowers & Hamlins