Adequate contractual payment mechanisms

Part II of the Housing Grants, Construction and Regeneration Act 1996 (Act) requires Construction Contracts for Construction Operations to have a clear, transparent, and straightforward payment mechanism. If they do not, the payment terms in the statutory Scheme for Construction Contracts (Scheme) will apply.

The definitions of Construction Contracts and Construction Operations are wide and include building contracts and consultants’ appointments, although, like all good rules, there are some exceptions (for another time!)

In the case of JSM Construction Limited (JSM) v Western Power Distribution (West Midlands) Plc (WPD), the Technology and Construction Court (TCC) considered whether the absence of a final payment to the contractor on completion of the works rendered a contractual payment mechanism inadequate.

Background

WPD entered into a construction contract under which JSM agreed to install 132kV cables and associated ductwork. Following completion of the works, JSM claimed from WPD the sum of £1.5m being the alleged final balance payable, including damages and interest.

WPD sought to strike-out JSM’s claim or alternatively to obtain judgment against JSM on the basis that JSM’s entitlement under the contract was limited to a series of interim payments only and there was no final payment due at the end of the contract. The absence of such a payment did not render the payment regime under the contract inadequate such that provisions of the Scheme would be implied. As such, there was no implied term entitling JSM to raise a final invoice.

Judgment

The TCC held that the contract complied with the Act as there is nothing in the Act that necessarily requires the parties to make separate provision for a final account. The Act requires the court to take a holistic view of the overall mechanism for payments and to determine whether such mechanism is adequate for determining what payments become due under the contract, and when. Such a value judgement exercised by the court is a question of fact, and the answer will vary depending upon the circumstances and terms of the contract.

On the facts of this case, no final payment would be implied by the Scheme. The contract was essentially for a fixed price, with any variations being valued against the rates and prices in the pricing schedule.  The contract provided for monthly stage payments throughout the works that were commensurate with actual progress. Therefore, the payment mechanism was adequate.

Comment

When entering into Construction Contracts, the parties should always consider whether the payment terms are adequate. If terms are unwittingly implied into the contract, the parties run the risk of not complying with those terms, with the consequence that prejudice their rights to claim or withhold payment because they have not served the appropriate payment notices and payless notices in the required time.

For more specialist legal advice please get in touch with Lucilla Waugh on 0191 211 7984 or email [email protected]