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Once you’ve made your contractual bed, you’ve got to lie in it… Barrister Professor Rudi Klein discusses a standout legal case from 2016 regarding contracts and the law.

Once made, contracts are meant to be adhered to. That has always been the attitude of the law. The role of the courts, therefore, is to uphold the agreement entered into by the parties, even if that agreement turned out to be a poor bargain for one of the parties. In 2016, this principle was illustrated in a very graphic way in the case of Balfour Beatty Regional Construction Ltd v Grove Developments Ltd.

The facts

Balfour Beatty (BB) had been engaged by Grove Developments (Grove) to design and construct a hotel and serviced apartments for a sum in excess of £121 million. The contract was the standard JCT Design and Build Contract 2011, designed for construction projects where the contractor carries out both the design and the construction work.

When they entered the contract, the parties’ intention was that stage payments would be made (in accordance with one of the two options in the standard contract). The contract contained rules for calculating the stage payments. Unfortunately, the parties were not able to agree a list of stages.

Instead they agreed to a schedule of monthly interim payments that was to take them up to 22 July 2015 – the date specified in the contract for practical completion. This schedule included dates for applications (which were to be the third Thursday of each month), valuations, and issue of payment certificates and for payment.

Twenty-three interim payments were envisaged under the schedule. Up to July 2015, both sides managed the payment process in accordance with the agreed schedule. But trouble was brewing.

 

 

 

Valuation

No.

 

Valuation

Month

Application

Submission

Date to Grove

 

Valuation

Date

Grove

Certificate

Issued

(three working days)

Grove Payment Made by (30 working days)
 

1

 

SEPT

 

19/09/2013

 

20/09/2013

 

25/09/2013

 

20/10/2013

 

 

23

 

JULY

 

16/07/2015

 

17/07/2015

 

22/07/2015

 

21/08/2015

 

Excerpt from schedule showing dates for the first and last interim payments.

By May 2015, it had become apparent that the project was in serious delay. In fact, practical completion of the whole project was not achieved until a year later, in July 2016.

BB sought to extend the schedule beyond July 2015 but the parties couldn’t agree on the dates for applications, valuations and payments. Nonetheless, BB issued a payment application (number 24) on 21 August 2015.

On 28 August 2015, Grove issued a payment notice followed by a pay less notice on 15 September. This indicated a deduction of £2 million, leaving £439,503 as due to BB; Grove paid this on 18 September 2015. BB immediately challenged the correctness of these dates and the validity of the pay less notice. Further efforts were made to resolve future dates for interim payments.

Eventually, relying on independent advice, Grove asserted that BB had no entitlement to receive further interim payments after July 2015 and sought a declaration from the court to that effect.

BB’s position

The trial judge granted Grove’s declaration. The schedule was an agreed amendment to the contract. It envisaged 23 interim payments in accordance with the specified dates. There was no further provision for interim payments.

BB appealed to the Court of Appeal:

  • The schedule did – expressly or impliedly – provide for interim payments to be made between August 2015 and the actual date of practical completion.
  • In any event, the schedule did not comply with section 109, Housing Grants Act 1996 (which provides for a statutory right to interim payments).
  • If the above arguments were to fail, there was a fresh agreement for monthly interim payments arising during discussions/correspondence after July 2015.

 

The Court of Appeal’s judgement

Did BB have a right to interim payments after valuation 23?

Identification of the dates for valuations, payment notices and pay less notices was essential to the operation of the contract. If Grove served notices out of time, the consequences could be draconian.

The express words used by the parties clearly indicated that they were only agreeing a regime of interim payments up to the contractual date for practical completion (July 2015). Furthermore, there was no implied term providing for interim payments after valuation 23. There would only be a need to imply such term to make the contract workable; but here it was perfectly workable without such term.

Did the 1996 Act enable BB to recover interim payments after valuation 23?

Section 109 of the Act states “A party to a construction contract is entitled to payment by instalments, stage payments or other periodic payments for any work under the contract…” (emphasis added in bold)

BB’s case had been that interim payments had to be applied to all the work envisaged by the contract. Therefore, after the contractual date for practical completion, the fall-back provisions in the Scheme for Construction Contracts would apply (meaning that a regime of interim payments would be incorporated into the contract).

The Court of Appeal disagreed. “Any work” in section 109 did not mean “every single piece of work”. This section simply provides a general entitlement to interim payments; the frequency of interim payments and their timing is left up to the parties. (However, the court felt that a contract providing for one interim payment “of an insignificant amount” would not comply with the section and the Scheme would apply.)

Did the parties reach a separate agreement for interim payments after valuation 23?

The court concluded that there was no evidence of a separate agreement having been concluded.

Commentary

For BB this was a costly error; they had to do without interim payments for the best part of a year. In fact, the court’s judgement may also have been rather harsh. Some of the delays had been caused by Grove. BB had obtained a two-month extension of time but there was still a dispute over responsibility for the delays. To some extent, therefore, Grove had profited from delays it had brought about; Grove didn’t have to make interim payments for the period of the delay it had caused.

Lord Justice Jackson said: “This [was] a classic case of one party making a bad bargain.” He was echoing another statement made by Lord Neuberger in a recent Supreme Court case on the approach to be adopted when interpreting commercial contracts. He had said: “When interpreting a contract, a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.”

What should BB have done? The easiest solution would have been to state in the schedule that interim payments would continue after July 2015 (to cover any period by which the works might be delayed). A timeline could have been agreed enabling applications to be submitted on the third Thursday of each month and specifying the number of days (rather than actual dates) thereafter for valuations, payment notices and final dates for payment.

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