Interim payments: many happy returns?

The common aim of the parties to a construction contract is to complete the works. To achieve this, the employer will commonly make interim payments to the contractor during the project to ensure the contractor has sufficient cash flow. This hopefully means that the project is not delayed due to disputes. But what happens after completion? The parties will undertake a final account but might the interim payments have compromised the final account? Can amounts that have already been paid be clawed back by the employer? Can the contractor seek to introduce new claims? 

These issues were considered in HSM Offshore BV vs Aker Offshore Partner Ltd, which concerned a contract for the fabrication of modules for an offshore platform. The contract incorporated subcontract conditions of a LOGIC form of contract for the oil and gas industry, but the case highlights issues relevant to any construction contract.  

During the project, the contractor submitted monthly draft invoices which were reviewed, then commented on or approved by the employer. Amended invoices were then submitted by the contractor and paid by the employer. 

It became apparent that the completion date would not be met, so the parties entered into a binding memorandum of understanding which addressed this and altered the remuneration structure for the project. 

Payments without prejudice

Thereafter, proceedings were commenced by the contractor to determine the final account. The employer said it was entitled to revisit the interim invoices because they had been paid on a “without prejudice” basis. The contractor claimed that the employer was “estopped” (prevented) from contending that any of the sums approved and paid were not due and/or could be clawed back as part of the final account process; even though it contended that it was free to include further sums in the final account. 

The court found that there was a complete answer to the contractor’s estoppel argument in the LOGIC conditions, which provide that the payment of an invoice does not constitute the settlement of a dispute or otherwise waive or affect the employer’s rights to say that such a sum was incorrect or not properly payable. The court noted that even if there was no express term, such a term could be implied, as anything else would be contrary to industry norms, which would extend to the construction industry in general.

The following reasons were also considered by the court in rejecting the contractor’s estoppel argument and indicate how it is possible to avoid compromising the final account:

• Making payments expressly “without prejudice”. This means that the existing rights of the parties are preserved and can be relied on at the final account. Payments made expressly “without prejudice”, or alternatively “on account”, can be reviewed later. Ideally, any disputed amount should be expressly identified.
• Factors such as a short timeframe for the review process, a large number of claims being submitted at once, poorly supported claims and a junior onsite QS giving approval support the position that invoices paid during the project can be reconsidered at the final account. While construction contracts commonly contain a comprehensive procedure for interim applications, payment notices and pay less notices, this structured approach does not prevent interim payments.    
• What does the contract permit the parties to do? For example, the LOGIC conditions provide that any waiver must be “given in writing by one party to the other”, that both parties otherwise retain all rights and remedies against each other under the contract and at law, or that the contractor cannot be relieved of its liabilities or obligations under the contract by any review, approval or authorisation by the employer. 
• Not creating “a one-way street”. If the contractor is able to submit new or amended invoices, the employer should also be able to challenge invoices which have been paid, as is the case under the LOGIC conditions. 

Common sense

In addition, the court considered thatthe process contended for by the employer was ordinary business practice across the construction industry. It was “only a more high-pressured version of the process for interim payments adopted on construction and engineering contracts all over the world”. It was also common sense; QSs agree what they can be paid on a monthly basis, knowing that at the end of the project the claims can be reviewed as part of the final account process. 

It would, the court suggested, “be an astonishing development for the construction engineering industry worldwide if it were thought that an agreement to pay an individual invoice by the on-site QS was somehow an agreement to be bound to accept the validity for all time of the claims that it contained merely because […] the opposite was somehow not made plain”. 

Where parties wish to put in place a scheme that is not the ordinary business practice in the industry, this should be expressly provided for in the contract or recorded in a joint document. Otherwise the final account will typically allow both parties to revisit all invoices and submit new claims, provided that the contractual procedure has been followed throughout.