Money Pit? What happens if your payment schedule ends months before the build does?

Grove Developments Limited employed Balfour Beatty to design and construct a hotel and serviced apartments next to the 02 complex at Greenwich Peninsular London. The valuation schedule attached to the JCT Design and Build contract 2011 contained 23 valuation and payment dates covering the period from September 2013 to July 2015.

In August 2015 the works were still ongoing. Balfour Beatty issued its application number 24 on the 21st August 2015 (outside the payment dates provided for by the valuation schedule) for a further interim payment under the contract. Grove didn’t pay, didn’t issue any notice and sat firmly on its hands. Seemingly its position was that Balfour Beatty had no further entitlement to any interim payments and should wait for the final account. Balfour Beatty had to do its best to get payment as it faced a large cash flow hole; they tried to argue that if there was no instalments in the contract, the Scheme should apply to fill in the gaps and that being the case, as no timely payment or pay less notice had been submitted by Grove Developments, they were entitled to the full sum that they had applied for.

The Court didn’t agree: Most of the contract mechanism was compliant and just because there were no instalments for a period of work did not mean that the payment mechanism under the Scheme would apply in the alternative to plug the gap in the payment schedule. In the circumstances therefore the Court determined that there was no effective contractual term which dealt with the entitlement to further interim payments beyond July 2015 and that Balfour Beatty had no contractual entitlement to make and/or be paid under their application number 24.

And so to the lesson learnt. Where it is agreed that payments under a construction contract are to be governed by the valuation schedule, adequate allowance should be given for circumstances where the works overrun beyond the original completion date under the contract. This was a costly lesson for Balfour Beatty given the loss of their entitlement to payment and serves as a useful warning to contractors and subcontractors when agreeing payment terms under their contracts. There is always a good chance that the works will overrun and having a simple provision to say (for example) “and on the 28th of the month thereafter until the issue of the Notice of Making Good Defects” can save a profitable project from folding your business.

But watch this space, given the amount, the judgement and the facts, our money is on an appeal…

Author
Lucinda Baker
Partner
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