In any construction project, payment will be one of the most important aspects (for some the most important) whether you are the one paying or being paid. The consequences getting the amount or the timing wrong, or not providing for delays to completion of the project in terms of agreed payment schedules, can have a very serious and expensive effect. This article will be dealing with payment schedules and the potential consequences if the project is delayed.
There have been a plethora of previous legal articles on the question of a potential problem with payment schedules, resulting from a decision of the High Court which was subsequently upheld by the Court of Appeal. Many contractors and those who employ them still seem unaware of this potential problem, so revisiting this topic seems worthwhile.
It’s quite common in construction projects for the parties to agree a comprehensive schedule of dates for monthly payments. The schedule sets out the relevant dates for the payment application, the provision of payment and pay less notices (which determine what the contractor will be paid that month) and the final date by which payment must be made. The schedule goes up to the agreed date for completion of the project. As often occurs, the project overruns – what then happens to the contractor’s right to continued monthly payments? Without express provisions setting out how further dates are to be calculated beyond the schedule, that right could be lost. The contractor would then have to wait until the final account, which will be usually be several months away, before receiving any further payment. It makes no difference who caused the delay. The result? Potential cashflow problems for the contractor who is still going to have to pay his workers, as well as all the sub-contractors and suppliers.
Balfour Beatty was caught by this in fairly spectacular fashion, suffering the temporary loss of a seven figure sum until the final account payment was due (Balfour Beatty Regional Construction Ltd. –v- Grove Developments Ltd.). All because the payment schedule went up to a certain date and then stopped, without providing for what would happen if the works went beyond that date. Balfour Beatty argued among other things that there was an implied term that interim payments would continue as they had previously, but it was held there was no need to imply such a term to make commercial sense. There were various other complicated technical arguments put forward as to why Balfour Beatty should be entitled to receive continued payments - the Court of Appeal rejected them all. It upheld a well worn principle that the courts will not rescue a party from a bad bargain.
It might be thought that this would be good news from the employer’s (payer’s) perspective at least, in that it gets to hold on to money that it would otherwise be paying for longer, but in reality this will almost certainly not be the case. It will massively upset the contractor at a critical time when the project is already in delay and needing to be completed as soon as possible. The contractor will probably try to pursue the employer by legal means, and whether the contractor succeeds or not (and the Balfour Beatty case would suggest almost certainly not), the employer will suffer a greater or lesser cost in terms of irrecoverable legal fees, not to mention the time it will have to spend dealing with the problem.
So, if the contract provides for payment by means of a schedule, how best to avoid this potential minefield? The solution should be relatively simple – just make sure there is a suitable extension mechanism for interim payments. There are two suggested ways : either ensure that the schedule goes way beyond the contractual completion date to cater for any delays; or (probably simpler) include express terms in the schedule stating that if the project overruns, interim payments will continue and on what basis they will be made.