Contracts Matter

Mark Clinton at Thomas Eggar LLP gives us a lesson on getting contracts right.

The construction industry has a long history of failing to get its contractual paperwork in order before work is started. Often, letters of intent will be used as an unsatisfactory stopgap on substantial projects. Sometimes the contract is largely agreed, but certain items are left to be agreed later. That was what happened in a contract between Grove Developments Limited and Balfour Beatty Regional Construction Ltd which ended up before the courts in February. The case is a salutary lesson about getting the paperwork sorted out at the outset, if a further lesson is needed.

The project was a substantial one. The contract price was in excess of £121M. The payment arrangements would, I expect, have been quite an important element of the contract. The parties agreed to use the JCT stage payment option but had not agreed the details. They therefore completed the contract saying those details would be agreed within two weeks. That should set alarm bells ringing. Agreements to agree are generally unenforceable. The very nature is that they only work if both parties agree but each has the right not to do so. If agreement had not been reached, the parties would have been stuck with the provisions of the Scheme for Construction Contracts.

In the event, the parties did reach agreement. What they agreed was not a schedule of stage payments but a schedule of valuation and payment dates. It provided for 23 valuations, applications and payments. They had therefore changed from the JCT stage payment regime to the interim valuation and payment regime.

The project fell into delay and, anticipating that further interim payments would need to be added to the schedule, the parties entered into discussions and correspondence to that end. The last valuation date in the original schedule was in mid-July 2015, so the parties started their dialogue in late May. They disagreed about some details, the most important being what the due date for each payment was. The due date dictated the final date for payment and the date for any pay less notice. The parties were effectively seven days apart. The exchanges continued until early June but then ran out of steam.

The 23 applications provided for in the schedule came and went and in August, application 24 was submitted. Remember, the schedule did not provide for applications after number 23 and the parties had failed to agree additions to the schedule. Nonetheless, a payment certificate was issued. An invoice was duly raised for the amount in the certificate. Then, came a pay less notice.

At this point, Balfour Beatty claimed that both the certificate and pay less notice were out of time. It seems that in calculating the dates for the certificate and notice Grove thought it would play safe by using the dates that Balfour Beatty had been arguing for when trying to agree extensions to the payment schedule. Balfour Beatty now said that because no agreement had been reached, the dates were to be derived from the Construction Act and Scheme for Construction Contracts and those dates had not been met.

Balfour Beatty’s arguments backfired rather badly. The Construction Act requires provision to be made for interim payments in contracts that will last more than 45 days. The Act does not stipulate how many payments must be provided for nor how much they must be for. The schedule of 23 payments met the requirement. The Act did not require that there must be further interim payments if the works extended beyond the 23^rd valuation date. Accordingly, and contrary to Balfour Beatty’s arguments, the Act and Scheme did not provide dates for valuations after number 23. The parties having failed to agree further dates, the court held that there was no entitlement at all to interim payments after the 23^rd one. Regarding the date of the court hearing, the project is still ongoing, some 6 months after the original completion date. That is a long time to go without an entitlement to payment, particularly on a project of this size.

The first point to draw from this unhappy tale is that it really is important to get a proper contract agreed and in place before work starts. Agreements to agree are of little value. Although the parties did agree the original schedule, the subsequent attempts to agree an extension to it show how easily these things can break down and be left unresolved. That happens not infrequently where letters of intent are issued and attempts to agree the contract subsequently run out of steam.

The second is that if you are going to include a schedule of payment dates in the contract, you must make sure that it enables dates to be derived for however long the project may take. The means for doing so, of course, should not be an agreement to agree.

The third point is that great care is needed when amending a contract. Here there was a change from stage payments to progress payments. I suspect that had the contract particulars been revised and had the schedule cross-referred to the relevant provisions in the conditions, the difficulties that arose might have been avoided. It is also important these days to keep in mind the provisions of the Construction Act.

Finally, as always, when debating points of detail one must keep an eye on the big picture.

 

Mark Clinton, partner at Thomas Eggar, recently merged with Irwin Mitchell LLP

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