Interim payments: to schedule or not?

25 July 2016


Managing the payment process under a construction contract can be a headache as you try to work out deadlines for notices and for payment. In Gowling WLG's latest alert, we consider whether scheduling specific dates in the contract itself will simplify matters or leave you exposed.

Surely it would be a whole lot easier to include a detailed schedule of specific dates in the contract itself, reflecting all the relevant deadlines in the payment process, leaving no room for misunderstandings and miscalculations at ground level?

In principle, such a schedule is a great idea, but you need to get those specified dates right or you will leave yourself exposed, as the claimant found in the recent case of Bouygues (UK) Ltd (Bouygues) v Febrey Structures Ltd (Febrey) [2016].

This dispute came before the Technology and Construction Court (TCC) on 10 June 2016. It forms part of a complex web of proceedings flowing out of a payment dispute between Bouygues and its sub-contractor Febrey, appointed in relation to the construction of a building at the University of Bath.

The issue in this application arose out of such an agreed schedule of specified dates for interim payments (the Schedule). In the sub-contract between Bouygues and Febrey, the Schedule appeared at Appendix 10 and was described as "new construction act compliant" meaning compliant with the Housing Grants, Construction and Regeneration Act 1996 as amended (the HGA).

It is reasonable to imagine that the Schedule would make life much more straightforward each month - no more pouring over the calendar and counting on your fingers, right? Not in this case unfortunately, as we go on to explain below.

There was an initial argument put forward by Bouygues that the Schedule conflicted with another provision in the sub-contract which would result in the Schedule being inapplicable. In summary on this point, having considered the arguments, the TCC decided that "something [had gone] wrong" with some of the relevant wording in the sub-contract but that the Schedule did apply.

Turning to the Schedule itself: based on the judgment in this case, it seems that the Schedule looked like this, setting out specific dates, starting from March 2015:

Application Date Assessment Date Due date for payment Payment notice date Pay less notice date Final date for payment
           

The particular problem that arose concerned the dates set out in the Schedule relating to the interim payment application of October 2015:

Application Date Assessment Date Due date for payment Payment notice date Pay less notice date Final date for payment
23 Oct 2015 2 Nov 2015 16 Nov 2015 23 Nov 2015 20 Nov 2015 23 Nov 2015
      40% balance of payment 4 Dec 2015 7 Dec 2015

There were two significant problems with these dates where the Schedule was not compliant with the HGA:

  1. the payment notice date of 23 November 2015 was more than 5 days after the due date for payment - 16 November 2015; and
  2. the deadline for the pay less notice was 20 November 2015, before the deadline for the Payment Notice which was 23 November 2015.

So what actually happened in October and November 2015?

  • Febrey submitted a payment application on 23 October 2015 claiming £144,582.06
  • Bouygues served a payment notice on 23 November 2015 which valued Febrey's entitlement as -£2,041.27.
  • Relying on its notice of 23 November 2015, Bouygues did not make any payment further to the application of 23 October 2015.

Unsurprisingly, a dispute arose and in due course, these proceedings were issued and this application came before the TCC.

Without rehearsing the particular arguments put forward, it suffices for these purposes to summarise the outcome: the TCC found that there was a "clear and obvious" error in the Schedule in that the date of 23 November 2015 for the payment notice should have been 20 November 2015.

As a result, Bouygues' payment notice submitted on 23 November 2015 was late and therefore invalid as either a payment or pay less notice (as had been argued it might be), leaving Bouygues liable for monies due to Febrey pursuant to the payment application of 23 October 2015.

Practical tips on scheduling (or not)

A schedule of payment dates is a great idea but, if it's not exactly right, there is a serious risk that you could end up with this type of nightmare scenario, resulting in adjudication and court proceedings with both parties incurring significant costs and wasted internal time.

So, here are some practical tips that will hopefully help to protect your business from this type of exposure:

  1. Scope out your resources early and consider the various options from a commercial perspective:
    1. At the pre-contract stage: do you have the time and resource (in terms of the team and any budget for external advisers) to commit to the production of a wholly accurate and compliant payment schedule?
    2. If you don't have that resource available at the pre-contract stage, then give serious consideration to the use of one of the standard form wordings without specified dates. This will mean more input is needed during the management of the contract in terms of interim payment applications and notices to ensure deadlines are met, but this may suit your commercial strategy ie ramping up resource once the project is up and running.
  2. Reflecting the point above, if you do decide to include a payment schedule in the contract, allow for adequate preparation time. This is not a document to be waved through - it has to be right. The likelihood is that you will need specialist advisers to ensure that the contract wording and associated dates in the payment schedule are HGA compliant. You may well have that expertise in-house or be able to budget for external input, but don't underestimate the importance of accuracy at this stage.
  3. Consider having a bespoke payment schedule with associated contractual clauses prepared that can be used as precedents going forward.  A front loaded drafting exercise may save your business time and money on numerous contracts.
  4. In any contract incorporating a payment schedule, ensure you make provision for overruns ie potential dates beyond those specified. In another recent case, the court held that once the agreed schedule of dates for interim applications had expired, there was no contractual right to make further interim applications.
  5. If you've got an existing contract you're dealing with that looks non HGA-compliant or possibly ambiguous, consider how you can pragmatically minimise your exposure. For example, seeking an agreement with the other party to the contract as to what are the applicable (HGA compliant) dates may significantly reduce the risk of a later dispute.
  6. Whatever route you select, ensure at an early stage that the task of managing the payment and notice process is allocated to a particular person or team for that contract.
  7. Ensure that relevant team members are trained on the importance of the HGA from a practical perspective - mistakes or oversights can be costly.
  8. Look ahead and get key dates diarised with lead in time as needed.

If you're dealing with construction contracts, the payment process can easily trip you up. Early planning on each project can reduce your risks - and keep headaches to a minimum.


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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