Building contract – Construction – Interim payments – Defendant contractor applying for interim payment outside agreed payment schedule – Claimant developer seeking declaration that defendant not entitlement to further payment – Whether defendant having contractual right to payment – Declaration granted
By a contract made between the claimant developer and the defendant building contractor, the claimant employed the defendant to design and construct a hotel and serviced apartments adjoining the O2 Complex at Greenwich Peninsular, London. The contract sum was £121,059,632. The contract was based on the JCT Design and Build Contract 2011 as amended by a series of bespoke amendments. Pursuant to the contract, works began in July 2013 but were not completed by the defined completion date of 22 July 2015.
The parties agreed a schedule of 23 valuation and payment dates covering the period from September 2013 to July 2015, which governed the making of interim applications and payments during that period. After the period covered by the agreed schedule (valuation 23), the defendant issued an application for a further interim payment (“IA24”) in the sum of £23,166,425.92 plus VAT. The claimant served documents described as a payment notice and a pay less notice.
The defendant argued that it was entitled to serve IA24 and that the claimant had failed to serve either a payment notice or a pay less notice within the applicable time limits. The claimant contended that the defendant had no contractual right to issue or be paid in respect of IA24 so that the notice regime was irrelevant. Alternatively, on a proper construction of the contract the final date for payment was 18 September 2015 and the pay less notice issued on 15 September 2015 was issued in time and effective.
The defendant commenced adjudication proceedings claiming payment of £22,726,922.61 plus VAT and interest. The claimant participated in the adjudication without prejudice to its reservation that the adjudicator had not been properly appointed. The adjudicator issued his decision requiring the claimant, having already paid £439,503.31 of the sum claimed, to pay a further £2million.
The claimant sought a declaration, amongst other things, that the defendant had no contractual right to make IA24 (or any subsequent application) or to be paid in respect thereof.
Held: The declaration was granted.
(1) While commercial common sense was often deployed at some stage in the iterative process of interpretation of commercial contracts, the court should treat “business common sense” with caution, because what appeared to be business common sense might depend upon the standpoint from which the question was asked. Where words were capable of more than one meaning, the court had to consider the implications of the rival constructions as part of the interpretive process and was entitled to prefer a construction which was consistent with business common sense and to reject one that was not. But the court should not strain to find ambiguity where none existed.
(2) Sections 109 and 110 of the Housing Grants, Construction and Regeneration Act 1996 provided for the Scheme for Construction Contracts to apply in the absence of provision for staged payments and dates for payment. Where section 109 or section 110 was engaged, the provisions of the Scheme as to payment would only be imported and apply so as to govern the legal relations of the parties to the extent that they had not already concluded binding contractual arrangements that could remain operative. They would not automatically or necessarily be imported in their entirety. It was possible that the existing arrangements under a given contract were not capable of forming part of a payment scheme when read with the relevant provisions of the Scheme. If that were the case, it might be necessary to import the Scheme’s payment provisions as a whole. But that was not a necessary or correct outcome if the existing contractual arrangements were capable of co-existing with some of the payment provisions of the scheme to form a coherent whole: Hills Electrical & Mechanical v Dawn Construction Ltd [2004] SLT 477 and Yuanda (UK) Co Ltd v WW Gear Construction [2010] EWHC 720 (TCC); [2010] PLSCS 152 considered.
(3) While many if not most construction contracts of a significant duration probably made provision for interim payments at predetermined intervals, pursuant to section 109(2), it would be open to the parties to agree stage payments by reference to stages that would be concluded at highly irregular intervals and require highly variable amounts to be paid. Equally, it would be open to the parties generally to adopt any amount and any interval. On the face of section 109(2) it would have been open to the claimant and the defendant to agree front loading of payments in advance of the value of the work done or to agree that payments would be withheld until very late on. There was also nothing in the terms of section 109(2) (or elsewhere in the 1996 Act) to prevent the parties from agreeing that the amount of a payment should be nil. It followed that if the parties entered into an agreement about the amounts of the payments and the intervals at which, or circumstances in which, they became due, the mere fact that the agreement did not provide for interim payments covering all of the work under the contract was no reason to import the provisions of the Scheme to supplement their agreement so as to generate interim payments covering the work that their agreement did not cover.
(4) Although in principle parties might enter into contractual arrangements in stages, in this case, agreement on the terms on which further interim payments were to be made was a pre-condition to a concluded and legally binding agreement. The defendant had no contractual right to make or be paid in respect of IA24.
Alexander Nissen QC and William Webb (instructed by Macfarlanes LLP) appeared for the claimant; Steven Walker QC (instructed by Pinsent Masons LLP) appeared for the defendant.
Eileen O’Grady, barrister
Click here to read a transcript of Grove Developments Ltd v Balfour Beatty Regional Construction Ltd
