Advance payment provisions are used in construction contracts to assist the contractor, i.e. so that the contractor does not have to fund the works out of its own money. A question which arose in a recent case is: can a contractor terminate the contract, and sue for an advance payment which ought to have been paid, even if the contractor has not done any work?

Failure to make an advance payment required under a construction contract can give rise to unusual risks and opportunities. In Mirimskaya v Evans the TCC clarified that a failure to pay an advance instalment (where a contract requires advance payment) can give a contractor the right to terminate, stop work, and sue for the advance payment that should have been made. The contractor in that case sued for payment of an agreed advance payment. This followed the owner having repudiated the contract, and the contractor electing to terminate without having performed any of the relevant work.

Obtaining advance payment after work has stopped would in most cases over-compensate a contractor. If the contractor has not begun any of the work relating to the advance payment, then a legal rule known as "total failure of consideration" will prevent a contractor from recovering the advance payment. However, Mirimskaya v Evans suggests that if a contractor has performed some work relating to an advance payment (even if only a small portion), it may recover all of the advance payment. For example, a contractor involved in a dispute over advanced payments might perform 10% of work relating to an unpaid advance payment and then attempt to terminate and recover 100% of the advance payment.

There may be some scope for Mirmskaya v Evans to be challenged at law. Until the law is clarified however there are a number of practical points be taken from the decision:

  • Parties involved in negotiations for advanced payments would be well advised to spell out an agreed position in the event of termination. One reasonable negotiating position might be for advance payments due post-termination to be reduced to reflect the actual amount of work done.

  • Advance payment bonds are sometimes provided by contractors to protect an owner against the risk of work not being performed after an advance payment has been made. It would be wise to state clearly how such a bond is to operate if the contract is terminated in circumstances where there is an existing claim to an advance payment.

  • Where a contract with advance payments does not spell out an agreed payment position on termination, owners and contractors alike should approach disputes over payment with particular care. Such disputes may give rise to rights of termination, which in turn may threaten to produce the unbalanced situation mentioned above requiring payment for work not done.

Reference: Mirimskaya v Evans [2007] EWHC B11 (TCC). For the full judgment, please click here

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 25/09/2007.