This Technology and Construction Court (TCC) case relates to the adequacy of the payment provisions within a construction contract, and whether the contractor was entitled to a “final account”, or whether its entitlement was limited to a series of interim payments. The case includes arguments as to whether the lack of a final account mechanism in a construction contract will lead to the Housing Grant, Construction and Regeneration Act 1996 (HGCRA) and associated Scheme for Construction Contracts (the Scheme) implying in such payment terms to the relevant contract. Ultimately, the TCC held that such arguments could not be decided conclusively in the context of a strike out or summary judgment application, but the judgement provides some helpful guidance nonetheless. 

Background 

The parties, JSM Construction Limited (JSM) and Western Power Distribution (West Midlands) plc (Western) entered into a contract whereby JSM was to install two 132kV cables and associated ductwork for Western. 

Parties were in dispute as to the payment provisions in the contract. JSM had offered to carry out the work based on the information within Western’s Invitation to Tender, together with some caveats and assumptions. Western accepted the offer, and so the parties contracted based on an ad hoc agreement for underground works, alongside Western’s detailed terms. The agreement set out that interim payments would apply, and included a pricing schedule. Although the parties agreed that retention would be 5% of the contract price, key information relating to the contract price, commencement date and the contract period was left blank. There was no express final account mechanism included in the contract.

During the works, JSM raised 10 payment applications. When the works were completed, JSM claimed the sum of £1,521,087.09 in payment application 11, which included the final balance, together with variations and adjustments. Western disputed the value of this application. The dispute was referred to adjudication.

Following this adjudication, JSM issued payment application 12 in the sum of £1,832,649.91. This included a final account, damages and interest. JSM argued that as there was no express provision for a final account, one should be implied into the contract, in terms of HGCRA and the Scheme. Western disputed that the payment applied for was due, on the basis that JSM was contractually entitled to interim payments only, and no final account mechanism was to be implied. Western therefore sought a strike out of the claim, or failing that, summary judgement against JSM. 

Decision 

Justice Pepperall rejected Western’s strike out application, in particular based on the following: 

  • Whether a contract provides an “adequate mechanism for determining what payments become due under the contract, and when” under HGCRA section 110(1)(a), is “essentially a question of fact”. The court should exercise a value judgement with the answer varying based on the circumstances and other terms of the contract. 
  • The purpose of section 110 of HGCRA was to “ensure that every construction contract contained a transparent and straightforward mechanism for payment to the contractor by way of stage payments, ending with the final payment”. This should not mean that a payment mechanism must have provision for a final account to be deemed adequate and such provision is not universal within construction contracts. 
  • He rejected Western’s submission that the Scheme provides a model of what is required by HGCRA section 110(1)(a), such that the absence of a final account provision akin to that provided in the Scheme indicates that the contract in question is unlikely to comply with HGCRA. The test is to consider overall “whether the contract provides an adequate mechanism for determining what payments become due under the contract, and when”. 
  • The Judge concluded by dismissing Western’s strike out application on the basis that there were outstanding facts and legal issues that prevented a conclusion that JSM’s claim for its final account application was hopeless.

Implications 

This judgment provides interesting commentary on the payment provisions within HGRCA and the scheme, as well as the NEC3 and NEC4 payment mechanisms, highlighting that an important difference between the latter is that NEC4 has an express final account mechanism. The judge commented that even a “simple payment mechanism” allowing for monthly stage payments paid in line with progress could be adequate in determining when payments are due, even where there is no express final account mechanism. Regardless of whether the mechanism is “inconvenient” to a party, the judge commented that it is not for HGCRA to “save a party from an imprudent deal”. 

Therefore, parties should take care at contract award stage, to ensure the payment provisions in the contract cover what they require for their project, both during the works and at completion. 

For more information on this or another related matter, please contact Iain Drummond, at iain.drummond@shepwedd.com, Leigh Herd, at leigh.herd@shepwedd.comNatasha Wyllie, at natasha.wyllie@shepwedd.com, or your usual Shepherd and Wedderburn contact.

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