Credit Management magazine October 2017

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LEGAL MATTERS Don’t make a bad bargain! The courts will sometimes intervene to amend a poorly drafted contractual clause. But not always. AUTHOR – Peter Walker CREDIT Managers should have no difficulties in collecting interim payments in construction contracts, because such a contract will stipulate when those payments will be made. Life and building projects are, however, not that simple, as illustrated by a case considered by the judges of the Court of Appeal, i.e. Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2017] 1 WLR 1893. Some aspects of their judgement are relevant to contracts generally. The judges firstly had to find out what happened in relation to the proposed construction of a hotel and serviced apartments at Greenwich Peninsular in the south-east of London. The claimant in the case appointed the defendant to design and construct the buildings for a sum of over £121 million. The defendant did not want to wait for full payment at the completion of the project. The claimant would therefore make interim payments as is common in the construction industry. The contractual obligations were governed by a JCT (or Joint Contracts Tribunal) Design and Build Contract 2011 form. Another factor was section 109 of the Housing Grants, Construction and Regeneration Act 1996, although the principles in the judges’ decision are relevant more generally. That section of the Act stipulates that a party to a construction contract is entitled to stage payments and the like unless the duration of the work is less than 45 days, or the parties agree that the duration of the work is estimated to be less than that period. The parties are free to agree the amounts of the payments and when, or in what circumstances, they are to be made. If they cannot agree, they can fall back on the provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI1998/649). There is an equivalent scheme in Scotland, i.e. the Scheme for Construction Contracts (Scotland) Regulations 1998 (SI1998/687). They set out, among other stipulations, rules for monthly interim payments. These provisions were not immediately relevant, because there was a contract, and clause four allowed for one of two payment methods. Alternative A provided for stage payments and Alternative B applied to periodic payments. Whatever the method, the contractor had to apply to the employer for payment, and to state the basis of the application. There were rules about the ascertainment of amount payable, and so on. The parties chose Alternative A, but were unable to agree a list of stages to be incorporated into that Alternative. DELAYS Work started on the project, and the claimant made various interim payments in accordance with the defendant’s applications. There were delays, and the contract was overrunning. The defendant applied for an interim payment, but the claimant issued ‘a pay less’ notice in accordance with the contractual procedure. The amount to be deducted was £2 million, because there was a dispute about an extra-contractual payment made by the applicant. The claimant paid the net amount to the defendant. The defendant demanded the £2 million, but the parties failed to agree the applicable dates for interim payments after the expiry date for such payments stipulated in the contract. The reason for the difficulty was that the work had overrun, and the contract did not foresee this possibility. The claimant further claimed an entitlement to damages for the delay in completing the work, and that those damages extinguished any payments due. The defendant claimed that it was entitled to interim payments. Grove LJ in the Court of Appeal consequently observed, ‘Accordingly in order to resolve that dispute [the claimant] commenced the present proceedings.’ That is an expensive solution, and there was more expense to come. The court at first instance found that the defendant had no contractual right to make interim applications after the stipulated contractual expiry date, so the dissatisfied defendant appealed to the higher court. There the first question was whether under Alternative A there was indeed a contractual interim period at that date. The previous payments, for example, had been made at times other than those stipulated in the contract. The defendant asserted that it was commercial nonsense to expect it to wait until the albeit delayed end of the contract to receive the remaining payment in full, when the intention was to make interim payments throughout. COMMERCIAL SENSE OR NONSENSE? Commercial sense or commercial nonsense was a topic earlier for the judges of the Supreme Court in Arnold v Britton [2015] AC 1619. They were considering some chalets in a leisure park in the picturesque Gower peninsula in Wales. Each of those chalets were subject to 99-year leases commencing on Christmas Day 1974. Some of the service-charge clauses were certainly no gifts to the chalet leaseholders. Their service charges started at a reasonable £90 a year, but some of the chalet holders would have to pay a charge The Recognised Standard / www.cicm.com / October 2017 / PAGE 42
LEGAL MATTERS compounded by ten percent every three years. There were variations in other leases, some of which provided for an increase of ten percent compounded every year, perhaps reasonable at a time when inflation was very high. Lord Neuberger pointed out that on the assumption of a lease commencing in 1980 the service charge would be £2,500 in 2015, and over £550,000 by 2072. The leaseholders thought this to be absurd, and wanted to pay a fair cost of the services provided, i.e. a variable amount. The Lessor disagreed and wanted the Court to declare that the clause meant payment of the specified fixed sum. The judges will sometimes interpret contractual terms as they did in another the Supreme Court case. In Rainy Sky v Kookmin Bank [2011] UKSC 50 six shipowning companies each ordered to buy a ship from a Korean shipbuilding company. Each ship would cost US$ 33 million and the first instalment was conditional on a refund guarantee provided by a Korean bank. That bank would pay refund should the ships not be built. The bank provided advanced payment bonds, but the wording of those bonds did not match that in the contracts. The agreements stated that if the shipbuilder went into insolvency, the buyers could Each ship would cost US$ 33 million and the first instalment was conditional on a refund guarantee provided by a Korean bank. That bank would pay refund should the ships not be built. rescind the contracts and be entitled to refunds. The bonds merely stated that the buyers would be entitled to refunds only if they exercised their rights to terminate, cancel or rescind their contracts – i.e. no mention of insolvency. The buyers’ case was that this exception did not make any business sense. Lord Clark in the Supreme Court was influenced by the words of Longmore LJ in Barclays Bank plc v HHY Luxembourg SARL [2010] EWCA Civ 1248. He thought it was possible where a clause could have two meanings so that either of them ‘will flout common sense’. It would therefore be more appropriate ‘to adopt the more, rather than the less, commercial construction’. In that case, the commercial logic was that the insolvency of the shipbuilder would trigger the refund guarantee, the reason for the need for the security of the repayment bond. The bank therefore had to pay up, but behind the judgment there was an important factor – the contractual situation was ambiguous. That could not be said of those chalet leases with their onerous service-charge clauses. Lord Neuberger warned that commercial common sense should not undermine the language of the contract. If that wording was not clear that the court may be prepared to depart from the natural meaning. Commercial common sense was to be assessed at the date of the contract, but a court would be slow to reject the natural meaning merely because the term was imprudent. Surrounding facts would only be taken into account if reasonably known to the parties. On the occurrence of an unanticipated event the court will give effect to the clear intention of the parties if they had contemplated the event. There was furthermore no special rule of interpretation of service charge clauses. The chalet leaseholders therefore were stuck with those escalating service charges and with accommodation that they could not sell. The good news for them was that the leaseholder was reported to be willing to change the clauses to tie the increases to the retail price index – if only this solution had been offered before the litigation! THE POWER OF WORDS The judgment plus some others led Jackson LJ in the Grove case to conclude that the contract provided for an end of interim payments to end on the completion date specified in the agreement. Section 109 of the Housing Grants, Construction and Regeneration Act 1996 furthermore referred to interim payments for ‘any work done’. This did not mean all work done particularly because section 109(3) meant that the provision did not apply where there was already an agreement. Jackson LJ could not find evidence of any agreement between the parties as to interim payments other than those specified in the contract. The claimant therefore won the case. This is bad news for any business which enters into a contract discovering it has made a bad bargain. Although in some circumstances consumers have some legal protection, the courts will generally not come to the rescue of businesses unless, for example, there is some ambiguity. Read and analyse your contract before sign it! The Recognised Standard / www.cicm.com / October 2017 / PAGE 43
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