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Payment schedules – when being organised leads to chaos

It is been more than 4 ½ years since the Local Democracy Economic Development and Construction Act 2009 come into force.  “Time flies when you’re having fun” I hear you cry!  Well, 55 months have clearly not been enough for many parties trying to get their heads around the complexity of sections 109 – 111 of that Act, dealing with the timing of payment notices.  This month, Neil Mason has looked at parties’ attempts to use Statutory Demands when the provisions of the contract/act have not been met.  What remains absolutely clear is that the provisions are complicated and continue to confuse many perfectly intelligent people. 

So some clever people have turned to using payment schedules, appending to their contracts a clear table of dates for all the anticipated interim payments.  Such a schedule might look something like this:

App. No.

Application date

Due date for   payment

Employer’s Payment   Notice

Last date for Pay   Less Notice

Final Date for   Payment

1

09-05-16

11-05-16

16-05-16

20-05-16

25-05-16

2

06-06-16

08-06-16

13-06-16

17-06-16

22-05-16

..

etc

 

 

 

 

Ostensibly, this is a fantastic way of providing clarity on timings and also dealing with Bank Holidays and the traditional Christmas shut down.  This was probably the logic behind the use of a payment schedule in the contract between Grove Developments Limited and Balfour Beatty Regional Construction Limited when they entered into a contract for c.£121m for the construction of a hotel near London’s O2.  That schedule helpfully set out the key dates for all 23 of the anticipated interim payments in accordance with the agreed programme.

Their schedule looked like this:

Val. No

Val month

App Submission Date

Val Date

Cert. Issued

Payment

1

Sept

19-09-13

20-09-13

25-09-13

20-10-13

2

Oct

17-10-13

18-10-13

23-10-13

22-11-13

 

 

 

 

 

23

July

16-07-14

17-07-13

22-07-15

21-08-15

Balfour Beatty ended up in delay.  23 months came and went.  Month 24 arrived and so Balfour made application 24.  Grove failed to make payment so Balfour went off to an adjudicator who took their side and said that they could enforce application 24.  Grove issued proceedings in the TCC seeking a declaration from the Court that Balfour was not permitted to make any further interim applications than those stated in the agreed payment schedule.  The TCC agreed with Grove ([2016] EWHC 168).

It is worth remembering that the Courts will generally not protect parties from a bad bargain.  Further and in the same vein, the Scheme for Construction Contracts is only used where the contract does not contain payment terms that satisfy the requirements of the Housing Grants Construction and Regeneration Act 1996 Part II as amended by the Local Democracy Economic Development and Construction Act 2009 ("the Construction Act").   In Grove, the TCC found that the payment mechanism was legally sufficient – the fact that it did not include a mechanism for interim payments in the event of delay was not enough to help Balfour Beatty.   The Court said:

“where section 109 or section 110 is engaged, the provisions of the Scheme as to payment will only be imported and apply so as to govern the legal relations of the parties to the extent that they have not already concluded binding contractual arrangements that can remain operative.”

The Court took the opportunity to review the law on the frequency of interim payments, and indeed the regularity of such interim payments.  The Judge referred to, and indeed agreed with, the respected book “Keating on Construction Contracts” which states:

“Further, there is no requirement as to when such payments are to be made; any arrangement which satisfies the definition will be sufficient. Thus a contract prescribing one periodic payment, even of an insignificant amount, would it seems, meet the requirements.”

The TCC rejected Balfour’s submission that the 23 rows of the schedule were merely examples – they were deemed a conclusive list. 

So does this spell the end for Payment Schedules?  No!  Payment Schedules are still an excellent way of providing clarity for all parties.  Drafted properly by your lawyer/contract administrator these should make payment disputes easy to unpick.  However, it is vital that in addition to a Payment Schedule, your contract contains further wording to allow for the timing of further interim payments in the event of delay (or, indeed, expressly prohibits further interim payments beyond the schedule).   In short, clarity is key.  So long as there are clear rules for all circumstances, or a clear way of determining new rules, you should be fine.  Gaps in drafting cause disputes and cost money – careful and complete drafting is crucial. 

Before I end this article, I think it is worth looking further at the cause of the delay in the Grove case.  The official transcript of the TCC judgment runs to 18 pages but only mentions the possibility of an extension of time twice.  It appears that the parties did not rely heavily (or perhaps at all) on the cause of the delay in their submissions.  This is curious to an outsider: had Balfour Beatty been in delay due to their own errors, then this would compound the argument that they should not be entitled to further payment; in the alternative, had the delays been attributable to Grove (and therefore Balfour Beatty were entitled to an extension of time), one can see that it could be considered unfair for Grove to benefit from their own breach.  I am surprised this was not discussed, even obiter, by the TCC. 

Please note that Balfour Beatty has appealed the TCC decision but the Court of Appeal decision is not yet available.  We will provide an update when it is – perhaps the entitlement to an extension of time will have been determined by the Contract Administrator at that point and thus submissions may be made on that point.  In the meantime, if you are currently negotiating a contract using a payment schedule, please take this opportunity to check the drafting!

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.