Payment Schedules - watch out for the pitfalls

It is common place for building contracts to include an agreed schedule of dates on which applications for payments can be made throughout the duration of the contract, but what happens if the works continue beyond the dates in the agreed schedule?

This issue was considered in the recent case of Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (TCC).

Grove Developments employed Balfour Beatty to construct a hotel and serviced apartments, adjoining the O2 Complex in London _ the contract sum was £121 million. The contract was an amended JCT Design and Build Contract, 2011 Edition.

The parties agreed a 'Schedule' of 23 valuation and interim payment dates running through the anticipated duration of the contract, running from September 2013 to July 2015. However, due to the project overrunning Balfour Beatty submitted a 24^th payment application on 24 August 2015. The application was for £23 million.

Grove Developments disputed that Balfour Beatty had any contractual entitlement to further payment and in November 2015 Balfour Beatty commenced adjudication proceedings. Balfour Beatty was successful and on 11 January 2016, the adjudicator issued his decision, finding that Grove should pay Balfour Beatty a further £2 million (it had already paid some £440,000).

Concurrent to the adjudication proceedings, Grove started Part 8 proceedings, seeking the court's determination on "key questions of construction and law which arose in the adjudication and [which would] render any decision by the adjudicator that was adverse to [Grove] otiose".

The court was required to determine whether Balfour Beatty had a contractual right to submit their 24^th payment application, given the contract only allowed for 23.

The court found that due to the contract setting out only 23 staged payment dates Balfour Beatty had no contractual right to make or be paid in respect of their 24^th, or any subsequent application.

In practical terms, this meant that Balfour Beatty would need to wait until the final account stage before they would receive any further payments from Grove Developments. This has the potential to create serious cash flow problems for contractors/sub-contractors.

One would wonder if the Schemefor Construction Contracts could step in to save what would appear to be an inadequate payment mechanism.

Balfour Beatty did try to argue that the Scheme envisaged staged payments dealing with all work under a construction contract, however, the court did not agree. The judge made clear that any arrangement which satisfies the definition of staged payments will be sufficient to produce an adequate payment mechanism. The contract in this case stipulated some dates for interim applications, which was enough to satisfy the Scheme's requirements.

The parties tried to agree further interim payments, but did not come to any conclusion. The court found that although parties were open to the prospect of further interim payments, agreement on this was a pre-condition to a concluded and legally binding agreement.

The decision is being appealed to the Court of Appeal, but for now the message is:

• Ensure there is wording in your contracts to deal with payment applications received beyond those anticipated in a payment schedule.
• If a contractor/sub-contractor issues a payment application beyond those allowed by the contract consider whether this is valid. However, as ever, the safe manner of addressing this is to issue a payless/payment notice specifying that there is no contractual entitlement to payment at that stage.
• If your contract does not allow for any further payments than those stipulated and you are looking to agree this, ensure any discussions come to a conclusion. The court is likely to find that being 'open to agreement' is not enough to conclude a legally binding contract.