The Construction Act and milestone payments

The Court of Appeal recently decided whether payment terms requiring “sign off” of stages of work before payment was triggered were in accordance with the requirements of the Construction Act.

Background

Under section 109 of the Construction Act, a party to a construction contract is entitled to instalments, stage payments or other periodic payments subject to certain exceptions. Under section 110(1)(a), every construction contract must contain “an adequate mechanism  for determining what payments become due under the contract, and when”. In the absence of such provisions the Construction Act will impose terms.

In the case of Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd) [2019] EWCA Civ 1515, a dispute arose in relation to the design, supply and construction of 78 prefabricated modular bedroom units for a hotel. The payment terms between the parties were based on five milestone payments. Three of these payments were subject to sign-off of the pre-fabricated units. The term “sign-off” was not defined. In the event “sign-off” was not given and the parties were then in dispute over whether the works in question had ever reached a stage where they could have been signed off.

Did the provisions for milestone payments comply with the Construction Act?

Verbus argued that there was no adequate mechanism for determining what payment became due when because no clear criteria for sign-off had been agreed. Bennett argued that the trigger for payment was clear, namely: when the relevant work was completed in accordance with the contractual requirements.

So who was right?

Coulson LJ disagreed with the judge at first instance and held that the contract did contain an adequate payment mechanism for determining what payments are due when. He held that the reference to “sign-off” was objective, it referred to the “satisfactory completion of a particular stage”. Actual physical sign-off was not required. If the works had objectively achieved compliance with the contract specification then the milestones became payable. Coulson LJ went on to comment that even if physical sign-off had been required, Verbus’ entitlement to payment arose when the units were in a state when they were capable of being signed off.

Dates for payment

The judgment also considers the interpretation of section 110 of the Construction Act in relation to dates for payment. Section 110 states that construction contracts should provide an adequate mechanism for determining when payments become due and provide a final date for payment. In this case, once sign-off had been reached, the contract did not specify a date for invoicing, a date when the sum fell due or a final payment date. However, Coulson LJ did not consider that these details were necessary to comply with the Construction Act, saying “Parties are always free to agree interim payments by reference to percentages of completion. Thereafter, the courts expect the parties to adopt business common sense as to the arrangements for invoicing and payment”.

Mechanism for replacing inadequate payment terms

Despite the above finding, Coulson LJ went on to consider how the provisions of Part II of the scheme would have applied if he had held that the payment terms had not complied with the Construction Act. He considered this issue to be of “wider importance” and the judgment provides some useful guidance.

First Coulson LJ noted that, where payment terms in a construction contract do not comply with section 109 or section 110 of the Construction Act, Part II of the Scheme applies but only to the extent “necessary to achieve what is required by the Act”. Coulson LJ considered that position to now be “settled law”.

Coulson LJ then considered what payment terms would have been implied in this case if the terms agreed between the parties had not complied with the Act. He did not consider the milestone payments to be “payments by way of instalments or stage or periodic payments” as described at Paragraph 2 of Part II of the Scheme. That was because those types of payments are based on the value of the work performed whereas the milestone payments in Bennett were based on achieving completion of a particular stage. Therefore, he held that the payments fell into the “catch all” provisions of paragraph 7 of Part II of the Scheme - which meant that they fell to be paid within seven days of completion of the work related to the payment (or the making of a claim by the payee, whichever was the later).

The court will strive to uphold existing payment terms

This case illustrates that the court will strive to give effect to the payment terms agreed between the parties. The court will only impose terms to the extent required to achieve compliance with the requirements of the Construction Act. In his judgment, it is made clear by Coulson LJ that wholesale replacement of payment terms will only occur when the terms are “so deficient that wholesale replacement was the only viable option”.

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