Court of Appeal considers application of Construction Act to milestone payments

Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd) [2019] EWCA Civ 1515

In Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd) the Court of Appeal considered whether milestone payments in a construction contract were compliant with the Housing Grants, Construction and Regeneration Act 1996 as amended (“Construction Act”) as to whether the contract contained an adequate payment mechanism.

Milestone payments are payments to a contractor in a series of lump sums paid upon achieving a ‘milestone’. A milestone is a defined stage of progress during the works, such as upon sign-off of snagging items, completion of specified tasks or a phase or upon submission of proposals.

As many will know, where the payment terms in a construction contract do not comply with the Construction Act, the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended (the “Scheme”) implies terms to ensure that there is an adequate mechanism for payment that is compliant with the Construction Act. However the Scheme only implies what is absolutely necessary and does not replace the original contractual terms if it could be avoided.

The case concerned a main contractor in relation to a proposed new hotel in Woolwich (Bennet (Construction) Limited). Bennett employed CIMC MBS (formerly Verbus Systems Limited) to design, supply and install 78 prefabricated modular bedroom units for the hotel pursuant to a standard form JCT Design and Build Sub-Contract 2011 edition. These units were to be made in China and shipped over to Southampton. The Contract Sum was circa £2 million.

Rather than rely on the JCT standard interim payment terms (which are fully compliant with the Construction Act) the parties amended the contract to allow for milestone payments instead. Three of the milestone payments were linked to “sign-off” of certain elements of the works. There was a disagreement between the parties as to exactly what sign-off meant and therefore when a payment became due.

At the first instance it was held that milestones 2 and 3 (being tied to sign-off) were non-compliant with the Construction Act as they lacked specific criteria and timescales for sign-off and thus were not an adequate mechanism for determining when a payment became due. The Court therefore implied the Scheme wholesale, such that the due date arose on either the expiry of 7 days following the relevant period or by the making of a claim by the payee (with the last payment due 30 days following the completion of the work or by the making of a claim by the payee) and the amount due being ascertained by reference to the amount of works completed rather than any form of milestones (in accordance with paragraphs 2, 4 and 5 of the Scheme).  This fundamentally changed the basis of payments as agreed between the parties from milestone payments to interim valuations.

On appeal however Coulson LJ disagreed with the first instance decision stating that the contract was compliant with the Construction Act. ‘Sign-off’ was to be interpreted objectively meaning that payment was due when the units were complete and in a condition where they could be signed off. He rejected that the payment was not due until the works were actually signed off.

The Court of Appeal held that the milestone payments were compliant with the Construction Act and were an adequate payment mechanism.  Although it was not necessary, having made the finding in respect of the milestone mechanism, the Court went on to state that had the mechanism not been compliant with the Construction Act,  paragraph 7 of Part II of the Scheme would apply rather than paragraphs 2, 4 and 5. This would have meant that payment under the contract would become due on the expiry of 7 days following completion of the work to which the payment relates or the making of a claim by the payee, whichever is later. This would have maintained the milestone structure as agreed between the parties.

For any more information please contact Lianne Edwards from our Construction & Infrastructure Team on Li.edwards@ashfords.co.uk.