Interim Payments: The perils of fixed payment schedules

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

The Court of Appeal has affirmed a Technology and Construction Court (TCC) decision from earlier this year. The main points are summarised below:

• Held that the parties had agreed to interim payment to the planned date of practical completion but not further
• It was confirmed again that the Courts will give effect to the words used by the parties if their meaning is clear even if circumstances have worked out badly for one party
• Also confirmed that s109 of the Construction Act confers a wide measure of freedom for the parties to agree payment terms but those terms cannot seek to circumvent the intentions of the Construction Act.

Construction cases do not reach the Court of Appeal very often and so guidance from the Court can be useful to the construction industry and construction lawyers alike. The recent case of Balfour Beatty Regional Construction Limited v Grove Developments Limited is no different, particularly as the decision of the Technology and Construction Court (TCC) being appealed was met with some surprise given the potentially draconian consequences for contractors of getting interim payment schedules wrong.

We considered the implications of that judgement earlier this year but to summarise what happened:

• The parties entered into a JCT Design and Build Contract 2011, with bespoke amendments including that there would be stage payments (Alternative A), but did not at the time the contract was signed agree how those stage payments would be calculated.
• They subsequently agreed a schedule of 23 interim payments in place of stage payments through to the planned date for practical completion.
• The works were however delayed and a dispute arose about the contractor's entitlement to interim payments after the 23rd payment in the agreed schedule.

The TCC concluded that the payment schedule covered the contractor's complete entitlement to interim payments. The result was that after the 23rd payment the contractor was not entitled to be paid again until the works were complete and the final payment date under the contract reached.

The Appeal

The Appeal was heard by three Court of Appeal judges including Lord Justice Jackson, former head of the TCC, who gave the main judgement. The contractor had three grounds of appeal:

1. That the contract either expressly or impliedly provided for continuing interim payments.
2. Alternatively, that if the contract didn’t provide for continuing interim payments then it did not comply with section 109 of the Construction Act and therefore the Scheme applied and conferred a right to interim payments.
3. Further alternatively, that the parties had agreed a fresh contract for interim payments after the original payment schedule expired (this ground was dismissed fairly quickly).

Ground 1

In relation to the first ground, Jackson LJ was clear that he could find no ambiguity in the words used by the parties to allow the Court to reinterpret the agreement reached in accordance with "commercial common sense". He concluded that it was absolutely clear that the parties had agreed a regime of interim payments up to the planned date of practical completion and no further.

This followed the guidance of the Supreme Court from a number of recent cases that when interpreting contracts the Courts should give meaning to the words used by the parties if that meaning is clear and, "The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language".

One of the other Court of Appeal judges (in the minority), Lord Justice Vos, disagreed and did find that the language was ambiguous and that a continuing provision for interim payments could be found. This is a powerful reminder that senior judges may not agree on issues of interpretation.

Ground 2

The second ground of appeal, produced some interesting observations from Jackson LJ. It was argued (although not relevant to this appeal) that parties could try and frustrate the intention of the Construction Act by agreeing on insignificant periodic payment in order to comply with the letter of the Act and avoid the application of the Scheme. Jackson LJ concluded that if the parties did want to exclude the operation of the Scheme, they would need to agree a system of interim payments in good faith. He doubted that a "cynical device" to exclude the Scheme would suffice but noted that the parties have "… a wide measure of freedom as to the nature of the regime which they may agree."

Conclusions

The Court of Appeal decision is a stark reminder that the Courts will enforce the terms of a contract agreed between parties if the words used are clear. It may continue to be a surprise to many, that the parties intended to agree a limited number of interim payments and that if the works were delayed the contractor would have to fund the project until a final payment was due. Both the TCC and Court of Appeal have concluded however that the words used were clear and no matter how bad a deal that was for the contractor, the terms of the contract must be enforced. The use of payment schedules can be very helpful to define exactly what needs to be done, and when, but parties need to consider if their payment schedule is sufficiently flexible to project delays or unexpected events.

The Court of Appeal guidance on the interpretation of section 109 of the Construction Act is welcome. Whilst care needs to be taken to ensure that the requirements of the Act are satisfied, confirmation that section 109(2) which provides, "The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due.", confers a wide measure of freedom to the parties is helpful, particularly where parties may need to agree unusual, bespoke payment terms due to the nature of the project. The Courts will not however let parties try and get round the intentions of the Construction Act by agreeing payment provisions that are not concluded in good faith.