Construction Scheme would not fill shortfall in Scheduled Payments

Sections 109(1) and 110 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) require instalment payments to be made for all work under a construction contract lasting 45 days or more.

The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due. In the absence of such agreement, the relevant provisions of the Scheme for Construction Contracts (“the Scheme”) apply.

In Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] the defendant contractor said:
– it was entitled to serve an application for a further interim payment and
– that the claimant had failed to serve either a Payment Notice or a Pay Less Notice within the applicable time limits and that in consequence,
– the claimant was liable to pay the defendant £23,166,425.92.

The claimant countered that:

– the defendant had no contractual right to issue or be paid in respect of the application for a further interim payment and, so, the notice regime was irrelevant OR
– that on a true interpetation of the Contract the final date for payment was 18 September 2015 which would mean that the Pay Less Notice which it issued on 15 September 2015 was issued in time and effective.

The defendant contended that Section 109(1) of the Act requires instalment payments to be made for all work under a construction contract lasting 45 days or more. Here the Schedule of Payments only covered interim payments up to and including 22 July 2015. Since the construction contract failed to cover a further interim payment invoiced on 21 August 2015, the relevant timing provisions of the Scheme would apply to it.

The High Court said where sections 109 or 110 of the Act were engaged, the payment provisions of the Scheme would only be imported and apply to the parties to the extent that they have not already concluded binding contractual arrangements that can remain operative.

Those payment provisions would not automatically or necessarily be imported in their entirety.

The arrangements under a contract may be incapable of forming part of a payment scheme when read against the Scheme. Here it may be necessary to import the whole of the Scheme’s Payment provisions.

“But that is not a necessary or correct outcome if the existing contractual arrangements are capable of co-existing with some of the Payment provisions of the Scheme to form a coherent whole.”

There was no requirement as to when such payments are to be made: any arrangement which involved one or more instalment payments would be sufficient. Thus a contract prescribing one periodic payment, even of an insignificant amount, would seem to meet the requirements.

It followed that if the parties enter into an agreement about the amounts of the payments and the intervals at which, or circumstances in which, they become due, the mere fact that the agreement does not provide for interim payments covering all of the work under the contract is no reason to import the provisions of the Scheme to supplement their agreement so as to generate interim payments covering the work not covered by their agreement.

Under Section 109(2), the parties could agree stage payments by reference to stages at highly irregular intervals and for the payment of highly variable amounts. So, it would have been open to the parties to agree the front loading of payments in advance of the value of the work done or to agree that payments would be withheld until very late on. Indeed nothing in section 109(2) prevented the parties from agreeing that the amount of a payment shall be nil.

The parties’ agreement was clear and provided for 23 interim payments on the dates set out in the agreed Schedule and no more.

In Balfour Beatty Regional Construction Ltd v Grove Developments Ltd [2016] the Court of Appeal upheld this decision by a majority of 2:1.

The lead judge said:

” ….the express words used make it clear that the parties were only agreeing a regime of interim payments up to the contractual date for practical completion…….this is a classic case of one party making a bad bargain. The court will not, indeed cannot, use the canons of construction to rescue one party from the consequences of what that party has clearly agreed.”

To exclude the Scheme, the parties must draw up a system of interim payments in good faith. A “cynical device” to exclude the operation of the Scheme by prescribing one interim payment “of an insignificant amount” would be unlikely to be enough. Section 109(2) gives contracting parties a wide scope as to the nature of the regime they may agree.

Here the parties agreed a regime of twenty three interim payments right up to the date specified for practical completion. What had been agreed satisfied the requirements of section 109 of the Act.

Clause 4.14 of the contract provided an adequate mechanism for quantifying interim payments. So, however unusual the contract, it satisfied the requirements of section 110 of the Act.

Accordingly the Scheme did not apply and the appellant could not rely upon the Act and the Scheme to recover interim payments after July 2015.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.