RESOURCES | Balfour Beatty payment schedule appeal refused

Tricia Morrison of Hill Dickinson writes:

In February this year, the now widely-discussed decision of the Technology and Construction Court in the matter of Grove Developments Ltd v Balfour Beatty Regional Construction Ltd was issued.

The case

Balfour Beatty had entered into a building contract with Grove with the terms broadly based on the JCT Design & Build 2011 payment mechanism but with various amendments. Whilst the parties had originally envisaged using stage payments (Alternative A), they actually agreed to use the valuation and payment dates set out in a payment schedule. That schedule included dates for submission of interim valuations by Balfour Beatty as well as the issue of payment certificates and payless notices by Grove.

Notably, the payment schedule ran out of payment dates in July 2015 immediately after the anticipated contractual Completion Date for the Works.

As is so often the case, the Works were not in fact finished by the Completion Date. Rather, Balfour Beatty continued on site and sought a number of extensions of time. Balfour Beatty continued to submit interim applications for payment after July 2015 but Grove, having taken legal advice, advised Balfour Beatty that it was not entitled to any further interim payments after July 2015, despite the extended period on site.

The original decision

The original decision of Mr Justice Stuart-Smith was that whilst the Construction Act required the parties to agree an adequate payment mechanism, which is what has been done, it was accepted by the Court that Balfour Beatty may not be happy that it had agreed a payment mechanism which ran out before it had completed the Works. However the Court would not intervene in these circumstances.

The decision came as a surprise to many in the industry. Payment schedules which did not have a mechanism to allow an extension of the stated payment interim dates have not been that unusual. In those circumstances parties have often simply extrapolated the scheduled dates forward or have proceeded to apply the payment timetable from the Scheme to the Construction Act. After the February decision in Grove v Balfour Beatty that practice came to an end and it has become common over the last eight months for contractors’ claims for payment of interim applications to be refused where the payment schedules have run out of payment dates.

The appeal

Balfour Beatty was unhappy with the decision and proceeded with an appeal. The decision of the Appeal Court was issued on 13 October. The Appeal Court was split in its decision with Lord Justice Jackson and Lord Justice Longmore refusing the appeal; however, Lord Justice Vos allowed the appeal.

The key part of Jackson LJ’s decision was that the contract and its payment schedule provided for interim payments to stop at the contractual date for completion of the works. Jackson LJ found that there was neither an express nor an implied term which enabled Balfour Beatty to receive interim payments after the contractual Completion Date. He noted that Balfour Beatty would receive a full final payment for its work in due course but until that final payment date arose no further payments were due to be made.

It seems from the decision that the problem for Balfour Beatty was that the parties simply did not consider at the relevant time (that is when agreeing the schedule) what would happen after the payment timetable came to an end. Jackson LJ found that there was no ambiguity as to the terms agreed which would allow the Court to extend those dates expressly provided.

Jackson LJ makes an interesting observation in his judgment. He notes that the Construction Act gives the parties considerable latitude as to the system of interim payments which they may agree including deciding the frequency of interim payments and the amounts to be paid. During the course of arguments before the Court, consideration was given as to whether it would be possible for parties to, in effect, frustrate the intention of Parliament by agreeing a pitifully inadequate scheme of interim payments. The leading construction law text of Keating has suggested that it may be possible for parties to simply agree one interim periodic payment and of inadequate value. Jackson LJ observed that he doubted that a cynical device to exclude the operation of the scheme by prescribing one interim payment ‘of an insignificant amount’ would suffice. However he also noted that he was not required to determine this issue as part of his judgment.

Contracting parties should note the Court’s comment, however. If an employer does seek to frustrate the intention of Parliament in the building contract payment mechanism it is possible that the Court will not find this to be an adequate payment mechanism in a future decision. In this case, the parties had agreed twenty-three interim payment dates and that was an adequate mechanism for quantifying those interim payments. Accordingly, the Court found that the terms of the parties’ contract were clear and were not contrary to the terms of the Construction Act.

That line of reasoning was not accepted by Vos LJ. He found that the contract was ambiguous and that the parties had clearly intended to reintroduce certain parts of the JCT payment provisions and dates beyond those set out in the schedule. On the basis that the contract was ambiguous Vos LJ decided that interim payments after the original contractual completion date were to be on the basis of the payment schedule as if the word etcetera had been included at the end of the payment schedule. He took the view that the parties must have intended interim payments to continue on the same basis up to actual practical completion and accordingly he allowed the appeal. As Longmore LJ followed the reasoning of Jackson LJ, Balfour Beatty’s appeal failed.

What it means…

Contractors should continue to take care to make sure that payment schedules are drafted so as to allow interim payments to continue if the contractual completion date is delayed. Employers should take note of the warning in Jackson LJ’s comments on attempts to avoid the Construction Act’s intention for there to be an adequate payment mechanism.

This article was originally published on Place Resources.