Milestone payments may not be an adequate payment mechanism in construction contracts - what you need to know

23 July 2018

Construction contracts as defined by the Housing Grants, Construction and Regeneration Act 1996 as amended (the Construction Act) must contain an adequate payment mechanism.   We analyse the latest decision on this requirement in CIMC MBS Ltd (formerly Verbus Systems Ltd) v Bennett (Construction) Ltd [2018].

[The full judgment is not currently available so this article considers the summary case note on Lawtel.]



Background

  • Bennett was appointed as main contractor to design and build a new hotel in London.
  • CIMC was a sub-contractor appointed by Bennett to design, supply and install pre-fabricated modular bedroom units to be made in China and then shipped to Southampton.
  • The sub-contract was based on JCT Design and Build Sub-Contract 2011 with amendments (the Sub-Contract).
  • A dispute arose following suspension of the sub-contract works over non-payment.
  • CIMC then commenced an adjudication. One of the declarations sought by CIMC was that the payment provisions in the Sub-Contract did not provide an adequate mechanism for payment, as required by the Construction Act.
  • The adjudicator decided that the payment provisions in the Sub-Contract were compliant and enforceable.
  • CIMC therefore commenced these Technology and Construction Court (TCC) proceedings contending that milestones 2, 3 and 4 were non-compliant with the Construction Act.

The Construction Act

S110(1) provides that every construction contract must:

"(a) provide an adequate mechanism for determining what payments become due under the contract, and when, and
(b) provide for a final date for payment in relation to any sum which becomes due."

Key provisions in the Sub-Contract

In the Sub-Contract, the standard JCT provisions for interim payments were deleted and replaced by provisions which included references to the employer (E) and the company that would ultimately operate and run the hotel (O).

The key provisions can be summarised as follows:

  1. 20% of the Sub-Contract price to be payable on execution of the Sub-Contract;
  2. 30% on sign-off of a prototype room by E, O and Bennett in China;
  3. 30% on sign-off of all snagging items by E, O and Bennett in China;
  4. 10% on sign-off of units in Southampton; and
  5. 10% on completion of installation and any snagging.

In these proceedings, CIMC contended that milestones 2, 3 and 4 did not comply with s.110(1) of the Construction Act because:

  • there were no criteria for determining whether sign-off had occurred;
  • E and O were not parties to the Sub-Contract; and
  • there were no due dates or final date for payment as no time was prescribed for sign-off.

Decision

Mr Justice Waksman QC applied previous case law and confirmed that Section 110(1)(a) of the Construction Act was intended to end uncertainty in payment provisions. The payment provisions had to be construed in the context of the Sub-Contract as a whole.

Based on the report available to date, the key parts of the decision can be summarised as follows:

  • It was not open to the court to re-write the payment provisions to make them compliant ie an adequate payment mechanism.
  • The term "sign-off" appeared in the payment terms, but also elsewhere in the Sub-Contract - and was intended to signify approval by E. It was not clear from the Sub-Contract however what the sign-off process involved.
  • In respect of milestones 2 and 3, it was not possible to state what the due date for sign-off would be. It could not be completion of that stage, because the word "completion" was expressly used in milestone 5, and not in milestones 2 and 3.
  • In terms of the required involvement of E and O in milestones 2 and 3, the TCC considered that the involvement of third parties was not in itself objectionable, but in order to constitute an adequate payment mechanism under the Construction Act, specific criteria and timescales for sign-off were required (otherwise a failure to sign-off could not be challenged).
  • The TCC held that milestones 2 and 3 did not comply with s.110(1)(a) because the criteria and date for sign-off were not clear.
  • Milestone 4 was compliant as that could be construed as referring simply to delivery of the units from the ship at Southampton.

Commentary

There have not been many cases on this provision of the Construction Act and it is helpful to see the TCC's approach to the specific payment provisions that had been drafted into the Sub-Contract.

The decision that milestones 2 and 3 were not compliant with s110(1)(a) is not surprising. It is of interest however that the TCC found milestone 4 sufficiently clear in terms of "when" payment of the 10% of the Sub-Contract price would become due. The reasoning may become clearer once the full judgment is available.

In the meantime, in order to avoid costly and time consuming disputes, best practice remains to ensure that bespoke (or any) payment provisions are clear and unambiguous, leaving the parties in no doubt as to how and when payments are to be calculated and made.

If you have any queries on these cases or any construction issue, please contact Ashley Pigott.


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