Hong Kong – Beware When Agreeing Special Contractual Terms.

3 March, 2017

 

In Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWCA Civ 990, England’s Court of Appeal heard an appeal by a building contractor against a decision of the Technology & Construction Court below that there was no entitlement to interim payments in the period after the contractual date for practical completion. One of the issues to be decided was how certain amendments to the standard contract (JCT standard form Design and Build Contract (2011)) should be construed.

 

Background

 

The Respondent (and Claimant), Grove, engaged the Appellant (and Defendant), BB, to design and construct a development in London. The contract was the JCT standard form Design and Build Contract (2011), subject to a number of bespoke amendments (the Contract).  

 

The Contractual terms in relation to interim payments provided that BB shall be entitled to interim payments from Grove according to either Alternative A or Alternative B, as stated in the Contract. The former was based on stage payments while the latter on periodic payments. The parties agreed that the interim payments should be in the form of stage payments, i.e. Alternative A. However they failed to agree on the list of stages to be incorporated into Alternative A.

 

Subsequently, it was agreed by email that Grove should make interim payments to BB according to a schedule of dates set out in the email (the Tumber Schedule). The Tumber Schedule provided for 23 interim payments, the last of which was scheduled for July 2015 because the contractual completion date was 22 July 2015. The Tumber Schedule further detailed the appropriate dates for applications, valuations and payments for each interim payment.

 

Dispute

 

By May 2015, it was clear that the project would over run substantially and beyond the contractual completion date of 22 July 2015, but costs continued to be incurred after the 23rd interim payment in July 2015. On 21 August 2015, BB issued the 24th interim payment application. Grove responded with a Pay Less notice, showing that Grove would deduct £2 million in respect of an extra-contractual payment of that sum previously made by Grove. Grove also asserted that liquidated and ascertained damages for delay exceeded and extinguished any payments due to BB in respect of work done and that BB was not entitled to any further interim payments.  

 

Technology and Construction Court Ruling

 

The Technology and Construction Court of the Queen’s Bench Division held that BB was not entitled to interim payments for work done after July 2015. BB appealed.

 

Grounds of Appeal 

 

BB appealed on 3 grounds:-

 

(1)   The Contract, as amended by the Tumber Schedule, expressly or impliedly provided for continuing interim payments to be made between August 2015 and the date of practical completion.

 

(2)   Alternatively, if there was no express or implied entitlement to continuing interim payments, the Contract, as amended by the Tumber Schedule, did not comply with the requirements of section 109 of the Housing Grants, Construction and Regeneration Act 1996 (HGCR Act), therefore giving BB a statutory right under the Scheme for Construction Contracts (the Scheme) to monthly interim payments until actual completion of the project.

 

(3)    If Grounds (i) and (ii) failed, the parties' correspondence and conduct in the summer and autumn of 2015 gave rise to a fresh contract for monthly interim payments.

 

Court of Appeal's Decision

 

The Court of Appeal dismissed the appeal, holding as follows.

 

No Express or Implied Terms

 

The Court held that the Contract, as amended by the Tumber Schedule, did not expressly or impliedly provide for continuing interim payments. It provided that interim payments would stop at the contractual completion date. It was impossible for the Court to ascertain the essential elements of the interim payments after July 2015, i.e. the dates for valuations, payment notices, pay less notices and payments. This was, the Court said, a classic case of one party making a bad bargain and the Court would not use canons of construction to rescue a party from the consequences of what they had agreed. There was no ambiguity, which enabled the Court to reinterpret the contract in accordance with commercial common sense.

 

The Scheme for Construction Contracts under the HGCR Act Not Applicable

 

Section 109 of the HGCR Act contains provisions relating to interim payments to contractors, such as a provision that a party to a construction contract is entitled to payment by instalments, stage payments or other periodic payments for “any work” done. In the absence of agreement in relation to such, the relevant provisions of the Scheme will apply.

 

However, the Court held that “any work” did not mean “every single piece of work” under a construction contract. Section 109(2), the Court said, gave the parties considerable latitude as to the system of interim payments they may agree and they could decide for themselves the frequency of interim payments and amounts to be paid. Here, the parties had agreed a regime of 23 interim payments stretching right up to the date specified for practical completion and the Contract, as amended by the Tumber Schedule, satisfied the requirements under section 109. Accordingly, the Scheme did not apply.

 

No Fresh Contract from the Parties' Correspondence and Conduct 

 

The Court held that there was no fresh contract for interim payments after expiry of the payment schedule. The parties never agreed on the terms upon which interim payments would be made after July 2015. They did not agree the dates for valuations, notices and payments and both parties treated those matters as essential elements of any contract The fact that Grove did respond to the 24th payment application did not mean that it waived the need to agree on the exact dates for further interim payments.

 

Comments

 

The consequence of the Court’s decision for BB was a harsh one, since it meant it having to finance a large project (the contract sum of which was £121 million) for several years until practical completion.

 

Delays in completion of construction projects are not difficult to foresee and the lesson to be learned from this case is that parties to a construction contract should be careful when agreeing special contractual terms. The case also illustrates the Court’s reluctance to interfere with contractual terms agreed upon by the parties.

 

Although the Scheme for Construction Contracts under the HGCR Act is not applicable in Hong Kong, after implementation of the Security of Payment Legislation in Hong Kong, it is likely that contractors will have a similar right to interim payments. That part of the judgment may therefore be relevant to Hong Kong contractors in future.