Michael Hiscock, a Partner at Leamington Spa-based law firm Wright Hassall, is a specialist in construction and engineering procurement, advising on a wide variety of works contracts, professional terms of appointment, bonds, guarantees and ancillary documentation.

n an industry where being paid late or receiving a lower amount than expected may mean the difference between surviving or not, it is sensible commercial practice to agree in advance when you are going to be paid. If you undertake major commercial work for a non-residential client, and your job lasts 45 days or more, then the law gives you a right to claim interim payments. You may be given rolling monthly valuations, milestones or a payment plan – a schedule of dates defining when you are permitted to apply for payment. All sounds good so far. You have transparency of payment structures which allows you to implement a financial management plan.

However the Court of Appeal has confirmed that there is a trap for the unwary. The legal requirements for the payment clauses in a construction contract are that it contains an “adequate mechanism for payment” – namely a contractual system for assessing when payments become due, how much is due and when that sum is finally payable. Without this adequate mechanism for payment, the law inserts a compulsory set of terms, creating a 24-day payment cycle. The problem comes when clients want more certainty by using a schedule of specific payment dates. Mansell (now Balfour Beatty Regional) signed a fully negotiated JCT Design and Build 2011 contract with Grove Developments for a £120m job to design and construct a hotel near the O2 in London, under which the parties agreed 23 interim payment application dates running up to the date of anticipated practical completion.

The job ran late, the contractor issued interim application 24, but the court said that there was no contractual right to claim that money. The payment clause was adequate and so complied with the law. There was no justification to imply a term to give extra monthly interims, the contract was clear and understandable as written. The contractor had to cashflow the rest of the job themselves, up to actual practical completion, and then claim the rest of their money in the final account process. The court commented that the contractor was unwise and could have negotiated a protective position, so had to wait for its money until the end of the build.

So what are the practical implications? Avoid payment schedules, but if you must do so, either add extra interim application dates just in case, or add a sentence that confirms both parties’ agreement that in the absence of any available dates, the structure continues onto a rolling monthly arrangement.

Then look at the final date for payment – when the money actually moves. JCT says 14 days but parties often amend that period by agreement. Don’t forget, it is illegal to link payment under one contract with third-party performance under another – so if the contractor is not paid until the funder is happy, or the subcontractor isn’t paid until the employer receives practical completion, then the law will delete that from the contract.