Payment Terms Challenged on Modular Construction Project

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Under s110 (1) of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the Construction Act), parties are required to:

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

To some extent, parties are free to agree contractual payment terms. This has resulted in the courts hearing numerous cases about applications and payment notices. Until recently, however, little guidance has been given on s110 of the Act. The appeal case of Bennett (Construction) Ltd v CIMC MBS Ltd (formerly CIMC Systems Ltd) [2019] EWCA Civ 1515, helps to clarify the position.

Background

Bennett was the main contractor for the construction of a new hotel in London. Bennett subcontracted to CIMC the design, supply and installation of 78 prefabricated modular bedroom units for the hotel. These were to be manufactured in China and shipped to the UK. The contract price was over £2 million.

Whilst CIMC was appointed by Bennett under a standard form JCT contract, the predetermined interim payment clauses were replaced with revised payment terms called 'Milestones'.

Milestone 1: "20% deposit payable on execution of the contract;"

Milestone 2: "30% on sign-off of a prototype room in China by Bennett;"

Milestone 3: "30% on sign-off of all snagging items by Bennett;"

Milestone 4: "10% on sign-off of units in Southampton;"

Milestone 5: "10% on completion of installation and snagging."

Following numerous defects with the 78 modular units, milestones 2 and 3 were not signed off, despite CIMC transporting some of the units to the UK at its own risk.

CIMC argued that the milestones did not amount to an adequate payment mechanism as the payment terms and the specification did not state by what date the "sign-off" must be done by Bennett. Consequently, as no deadline was given, and the sign off was at Bennett's discretion, CIMC argued that there was no due date or final date for payment.

TCC  

The TCC concluded that milestones 2 and 3 did not comply with the provisions of the Construction Act. They contained a specific "sign-off" process but lacked specific criteria and timescales about what payments became due and when in accordance with s110.

Accordingly, CIMC was entitled to interim payments in respect of the value of the work it had undertaken and it was irrelevant whether the units had reached a stage of completion at which they could have been signed off.

Court of Appeal

Bennett appealed and the CA had to consider:

  1. whether a regime requiring payment of a percentage of the contract sum on "sign-off" of a particular stage of the works complied with the Construction Act; and
     
  2. if it does not, should the whole stage payment process be replaced with the Scheme of Construction Contract's monthly valuation and values based upon the amount of work completed.

Issue 1

The CA overturned the TCC's finding on the first issue. It found that there was no reference in the agreement to an actual "sign-off" being required. It concluded that, as a matter of construction, "sign-off" was a generic reference to the achievement of a stage and would inevitably be assessed objectively. In other words, the CA did not consider that the wording used meant that a certificate was needed as a condition precedent of the amount becoming due.

The CA also concluded that having no express date for payment was irrelevant as the milestones would be paid on the completion of the relevant stage.

Issue 2

The CA reiterated the existing principle that the payment provisions in Part II of the Scheme for Construction Contracts are only necessary if and to the extent that the contract is non-compliant, as provided in s110(3) of the Construction Act.

When considering the Scheme, Coulson LJ noted that:

"[the Scheme] was not designed to delete a workable payment regime which the parties had agreed and replace it with an entirely different payment regime based on a radically changed set of parameters."

As such, the CA favoured a common sense approach which caused no harm to the parties' original agreement and only applied paragraph 7 of Part II of the Scheme. This "catch all" provision made "commercial sense" - where a mechanism is inadequate due to there being no agreement as to the timetable for payment, the timetable is provided by paragraph 7 (7 days after completion).

Conclusions

This decision of the CA is interesting because it considered that the words requiring a "sign off" was, on an objective test, not a pre-condition of payment and was therefore compliant with the Act. However, there are many contracts which include arrangements where the payer issues a certificate stating that the works have been completed, before the monies become due. Whether these are a pre-condition of payment and are therefore, unlawful, is a matter of wording used in the contract. Of course, in the context of an off-site manufacturing scenario, a pre-condition of receiving a vesting certificate is an acceptable pre-condition.  

This case also makes clear the courts' commitment to seek to honour the payment regime actually agreed between those parties.