Case analysis: JSM Construction Limited v Western Power Distribution (West Midlands) PLC [2020] EWHC 3583 (TCC)

Many construction contracts allow for interim or stage payments, and some of those also include a provision for a final account process. The final account process usually involves a gross claim by the payee subject to adjustments for items such as variations or liquidated damages less payments made to date. This calculation generates a nett balance due to either party.

In JSM Construction Limited v Western Power Distribution (West Midlands) PLC [2020] EWHC 3583 (TCC) the court had to decide whether the contract between the parties, which did not contain an express final account provision, complied with the Housing Grants, Construction and Regeneration Act 1996 (as amended) (“HGCRA”).

Facts

Western Power Distribution (West Midlands) PLB (“WPD”) engaged JSM Construction Limited (“JSM”) to install two 132kv cables between the areas of Nechells and Bordesley in Birmingham. The contract price was £3.98m.

The contract conditions provided that

“the Contractor shall be entitled to interim monthly payments and the Contractor shall within 7 days of the end of the month following the month in which the Works Commencement Date occurs and at monthly intervals thereafter”.

The contract did not however include any express final account provision.

Having completed the works in around December 2017, JSM submitted its interim application 12 for £1.53m plus VAT in July 2019. That application was rejected by WPD as not compliant with the payment provisions of the contract.

JSM subsequently commenced proceedings for the same amount as in its interim application 12. JSM’s claim also pleaded that a term should be implied into the contract to mirror paragraph 5 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended) (“Scheme”). Paragraph 5 of the Scheme states that payment for a final account claim shall become due on the later of 30 days after completion of the works or the making of a claim by the payee. In response WPD stated that the contract made no provision for a final account process and applied to strike out JSM’s claim or alternatively for summary judgment against JSM.

Decision

Pepperall J stated that the sole issue in the case was whether a final account provision should be implied into the contract. The validity of JSM’s interim application 12 hinged on that question.

JSM argued that final account provisions are crucial to construction contracts and customary in standard form contracts and therefore that one should be implied into its contract with WPD. JSM further argued that paragraph 5 of the Scheme provided a model example of what s 110 of the HGCRA required, being an “adequate mechanism for determining what payments become due…and when”.

WPD’s case was that the contract only provided for interim payments although it did acknowledge that there was no express final account provision. WPD further argued that the payment regime in the contract complied with the requirements s 110 of the HGCRA and that therefore there was no need to imply the provisions of the Scheme or any other term.

Pepperall J referred to Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWCA Civ 990, in which the payment schedule provided for twenty-three interim payments. The contractor sued on its twenty-fourth application. In the Court of Appeal, Jackson LJ upheld the first instance decision that the contractor had no contractual right to make its twenty-fourth application. Jackson LJ made the following comment regarding the contractor’s submission that is was entitled to make its twenty-fourth application:

“First, the express words used make it clear that the parties were only agreeing a regime of interim payments up to the contractual date for practical completion…Secondly, it is impossible to deduce from the hybrid arrangement what would be the dates for valuations, payment notices, pay less notices and payments after [after the last interim payment]. These were essential matters for the reasons previously stated. Thirdly, this is a classic case of a party making a bad bargain. The court will not, and indeed cannot, use the canons of construction to rescue one party from the consequences of what that party has clearly agreed.”

Pepperall J noted that Grove was good authority to defend a claim for an additional interim payment but not against an assertion that a final account provision should be implied.

The judge agreed with WPD that there was nothing in s 110 of the HGCRA that requires the parties to include a final account provision in their contract. He also rejected JSM’s claim that paragraph 5 of the Scheme provided a model final account clause, stating that

“[t]he threshold question is to consider whether the contract provides an adequate mechanism for determining what payments become due under the contract, and when. If it does then it passes muster under s.110(1)(a) and there is no question of implying the default terms in the [S]cheme upon that ground.”

Pepperall J held that whilst construction contracts that only provided for interim payments “might put the parties under considerable pressure” in formulating and submitting applications, they would have the “considerable advantage of ensuring early payment” rather than waiting for convoluted final account negotiations after completion of the works. Underlining his prior comments, the judge stated that “the purpose of the [HGCRA] is not to save a party from an imprudent deal.” The judge declined to either award JSM its claim or make an order on WPD’s application as there remained outstanding factual and legal disputes relating to insufficient design and the inadequacy of the contract pricing schedule.

Commentary

JSM Construction v Western Power Distribution demonstrates that the court will not go beyond ensuring that the payment provisions within a construction contract comply with the minimum payment provisions of the HGCRA and that a final account provision is not necessary in order for a contract to comply.

Standard form construction contracts address final account provisions in varying ways. The JCT Standard Building Contract 2016 and FIDIC Red Book 2017 both allow the contractor to submit final account applications within six months and fifty-six days of practical completion respectively. This approach allows the contractor to properly prepare its final account although there is a delay in payment for the same. The NEC4 Engineering and Construction Contract distinguishes from this approach in that it provides for interim payments only up to the issue of the defects certificate. The contractor must also submit its applications before the assessment date. The NEC approach encourages proactive commercial management, which places a burden on the contractor, but rewards this with speedier payment of the final application.

On a practical note, in contracts which do not have a final account provision, contractors should be proactive in their commercial management, ensuring timely submittals of applications and including all measured work, variations and claims or loss and expense. The final interim instalment becomes crucial in this instance. Likewise, employers should be aware of the payment regime and reject any payment application that is not a valid interim application.

Expert
Liam Hendry
Solicitor