This article has been written by Ram Ayodhya Singh pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

We know that all contracts are agreements, but not all agreements are contracts. And an agreement without consideration is void ab initio. Consideration can be of any kind, payment is one of the most important kinds of consideration and plays a very important role in a contract and its execution. 

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Therefore, clarity in the contractual payment schedules is not only essential from a legal point of view but also from an administrative as well as an execution point. 

Definition of contract

In general terms, contracts are agreements, and what differentiates a contract from an agreement is its quality of enforceability through law. The Indian Contract Act of 1872, specifically in Section 2(h), defines a contract as an agreement enforceable by law. This means that not all agreements are considered contracts. Only those agreements that meet certain legal requirements and can be enforced in a court of law qualify as contracts.

One of the key elements of a contract is that it must be legally binding. This means that there must be an offer, acceptance, and consideration (something of value exchanged between the parties). Additionally, the parties to the contract must have the capacity to enter into a legally binding agreement, and the purpose of the contract must be lawful.

Furthermore, Section 10 of the Indian Contract Act provides additional criteria for determining whether an agreement is a contract. According to Section 10, all agreements are considered contracts if they are made with the free consent of the parties, are for a lawful consideration and object, and are not expressly declared void by any law.

In summary, a contract is a legally enforceable agreement that meets certain requirements, including offer, acceptance, consideration, capacity of the parties, and a lawful purpose. Only those agreements that fulfil these criteria and are not expressly declared void by law are considered contracts.

What is a contractual payment schedule

The contractual payment schedule is not defined under the India Contract Act, but there is a concept of contingent contract and performance of contract in the act and the contractual payment schedule is very similar to these concepts. Contingent contracts are those in which happenings and non-happenings depend upon the acts of the contracting parties. The contractual payment schedule is the payment timeline that will be paid during the contract’s lifetime and based on the progress of the contract. Contractual payment is a performance-based promise that creates joint liability for the parties.

Types of contractual payment schedule

While drafting a contract in which payment is involved as a mode of consideration, special emphasis should be given to drafting the terms of payment. There are many kinds of payment schedules, and some of them are as follows:

Deposit and final payment

This type of contractual payment schedule is adopted when the project is smaller, in which a portion of the project amount is given in advance to let the contractor/supplier arrange for men and materials to start the project. The final payment shall be made upon completion of the project.

Progress payment 

A progress-based contractual payment schedule is linked with the progress of the project, which means that for every percentage of work completed, an equal percentage of payment will be made. This type of contractual payment schedule is in practice for medium to large-size projects. Under this payment schedule, the payment flows are arranged so that the status of the project can be estimated through the percentage of the payment made.

Time-based payment

The time-based payment schedule means the payment schedule is designed based on periods such as monthly, quarterly, half-yearly, or annual. It is a predetermined payment plan that divides the total cost of the project between the amounts paid over the agreed time intervals.  

Milestone based

The milestone-based payment schedule is the payment schedule that is linked with certain important milestones of the project. Milestones signify the key stage/events of the project. For example, in a building construction project, the milestones can be like the foundation stone, first-floor roof, second-floor roof, etc.

Completion based

The completion-based payment schedule is generally adopted when project costs are prepared in an itemised manner. For example, in a building construction project, a specific amount is mentioned for the foundation work, the first floor, the second floor, etc., and that specific amount will be released upon completion of the foundation work, the first floor, and the second-floor work.

Retainage

In this type of payment schedule, some portion of payments are retained by the project owner or main contractor and only released after satisfactory completion of the project. Often, the retainage amount can exceed a contractor’s entire profit margin, which works as a motivator for the contractor to complete the project on time. 

How to ensure clarity in the contractual payment schedule

It should be the endeavour of all parties to a contract to make the terms and conditions of the payment schedule to the point without any ambiguities. To ensure clarity in the contractual payment schedule, the following are some points that should be kept in mind while formulating the terms and conditions of a contractual payment schedule:

  1. Specify the payment terms:
    • Clearly state the total contract price and any applicable taxes or fees.
    • Indicate if payments will be made in instalments or as a lump sum.
    • Specify the currency in which payments will be made.
  2. Establish payment milestones:
    • Identify specific milestones or deliverables that trigger payments.
    • Define the scope and acceptance criteria for each milestone.
    • Ensure that milestones are objective, measurable, and verifiable.
  3. Determine payment frequency:
    • Specify whether payments will be made weekly, monthly, quarterly, or upon completion of certain milestones.
    • Consider the cash flow needs of both parties when determining the payment frequency.
  4. Define payment methods:
    • Provide detailed instructions on the acceptable methods of payment, such as bank transfers, checks, or online payment systems.
    • Include the necessary bank account information or payment addresses.
  5. Set due dates and late payment terms:
    • Specify the exact due dates for each payment.
    • Outline the consequences of late payments, such as interest charges or additional fees.
    • Consider including a grace period before late payment terms are applied.
  6. Provide progress invoicing:
    • If payments are tied to milestones, include a process for submitting and approving progress invoices.
    • Specify the documentation required to support each invoice, such as timesheets, delivery receipts, or inspection reports.
  7. Address change orders and variations:
    • Anticipate the possibility of changes in the contract scope or deliverables.
    • Outline the process for handling change orders and how they will impact the payment schedule.
  8. Include dispute resolution mechanism:
    • Incorporate a clear and concise dispute resolution mechanism in the contract.
    • Specify the steps to be taken in case of disagreements over payments or payment terms.
  9. Review and approval:
    • Ensure that both parties thoroughly review and understand the payment schedule before signing the contract.
    • Obtain written confirmation or signatures from both parties to indicate their agreement with the payment terms.
  10. Communication and transparency:
    • Maintain open communication throughout the project or business agreement.
    • Promptly address any questions or concerns related to payments to avoid misunderstandings.

By incorporating these elements into contractual payment schedules, businesses can ensure clarity, minimise disputes, and foster a mutually beneficial relationship between the parties involved. And additionally:

  • The use of vague terms/words should be avoided.
  • The payment terms should be specific:- when, how much, and to whom the payment will be made.
  • The payment terms must include balancing terms to protect the interests of both parties, payer and payee for delayed payment as well as delays in delivery of works.
  • All the milestones should be such that they can be easily measured.
  • The procedures for invoicing and the procedures for examining the milestones should be mentioned in the terms and conditions of the contractual payment schedule. 
  • The procedure for change request and its impact on the payment schedule must be defined.
  • To make the contractual payment schedule with more clarified, the following are some points that can be added to terms and conditions of a contractual payment schedule-
  • Clarity in verification of work done.
    • Clarity in mode of payment.
    • If a cross-border contract, then the currency in which payment will be accepted.
    • Clarity regarding all applicable taxes.
    • Clarity regarding whether the payments include taxes or not will be calculated separately. 
    • The curative time- it is mentioned with clarity that after any breach of the contractual payment schedule, what is the curative time during which remedial action must be taken by the parties?
    • The incentive/penalty clause should be mentioned with clarity.

What are the advantages /disadvantages of a contractual payment schedule

While drafting a contractual payment schedule, a carrot and stick policy should be adopted, which means incentives for efficient and early completion of tasks and penalties for late completion. There are many advantages and disadvantages to a contractual payment schedule, and some of them are as follows:

Advantages of a contractual payment system

  • It removes ambiguity and confusion about payment. A payment schedule makes the process smoother and it also provides clarity to all parties about their obligations. 
  • A contractual payment system helps to avoid confusion, disputes, and unnecessary expenses.
  • Both parties know about the penalties related to their failure to fulfil obligations related to the contractual payment schedule.
  • It makes it easy to monitor the progress of the project and the availability of the funds.

Disadvantages of a contractual payment system:

  • It is a double-edged sword; it penalises either party for their failure to fulfil their obligations in the agreed-upon manner.
  • Sometimes, it works as a hurdle because if any party fails to fulfil their agreed obligation, it leads to disputes and delays in project completion.
  • Any change request leads to a change in the main contract and delays the project’s completion.

Content of payment schedule

The contents of a payment schedule vary by nature and type of project, but some common points are typically included while preparing most of the payment schedule.

  • Project information: The project name, location, and descriptions, including commencement and completion date.
  • Name of the parties, including subcontractors, only those who are bound by the contract.
  • Work’s scope: Include works, materials, and services that are part of the contract.
  • Payment: Parties wise payment details and payment due dates.
  • Payment schedule: Payment timing, such as the due date or date/interval of the next payment or based on the milestones, should be clearly indicated.
  • Payment method: Whether the payment will be made through cheque, RTGS, electronic, etc. transfer
  • Payment terms: The terms and conditions regarding penalties or other invoicing requirements should be given. 
  • Dispute resolution mechanism: If any dispute arises, how will it be resolved, whether through arbitration, mediation, or other mechanisms?  
  • Signatures of the parties: Signatures of all the stakeholders

Case law

In the case of Grove Developments Limited vs. Balfour Beatty Regional Construction Limited (2016), the central legal dispute revolved around the interpretation of a construction contract and the entitlement to interim payments. Grove Developments Limited (GDL), the claimant, sought legal relief regarding two specific issues related to the construction of a contract with Balfour Beatty Regional Construction Ltd. (BBRCL), the defendant.

The crux of the matter was that the construction work was not completed within the agreed-upon timeframe, resulting in a disagreement between the parties. GDL contended that they were entitled to interim payments, even if those payments were not explicitly specified in the agreed-upon payment schedule. However, the UK court ruled against GDL, holding that a contractor is not entitled to any interim payments that fall outside the scope of the mutually agreed-upon payment schedule.

This landmark decision clarified the legal principles governing interim payments in construction contracts. The court emphasised that the payment schedule forms an integral part of a construction contract and serves as a crucial tool for managing cash flow and ensuring the timely completion of projects. By limiting interim payments to those specified in the payment schedule, the court sought to uphold the sanctity of contractual agreements and prevent contractors from seeking additional payments beyond what was originally agreed upon.

The Grove Developments case has far-reaching implications for the construction industry in the United Kingdom. It reinforces the importance of carefully drafting construction contracts, particularly regarding payment terms and schedules. Contractors must ensure that they negotiate and agree upon a payment schedule that accurately reflects the project’s scope, timeline, and financial requirements. Failure to do so could result in disputes and potential financial losses, as GDL experienced in this case.

The legal principles established in the Grove Developments case serve as a valuable precedent for future construction contracts. They provide guidance to contractors, subcontractors, and project owners alike, helping them navigate the complexities of construction payments and avoid costly disputes. By adhering to the agreed-upon payment schedule and seeking legal advice when necessary, parties involved in construction projects can protect their rights and ensure the smooth completion of their endeavours.

Conclusion

The clarity in the contractual payment schedule not only ensures hindrance-free project works but also makes it easy to monitor compliance and take timely remedial action for any failure in the implementation of the project. Therefore, while drafting a contractual payment schedule, a summary of some of the best practices that can be adopted, like avoiding ambiguous language and payment dates, should be specifically mentioned, including late fees, offering of any incentives for early project completion, etc. 

References

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