Parties to construction contracts are free to agree their own payment terms, subject to the contract containing an adequate mechanism form payment in accordance with the Housing Grants, Construction and Regeneration Act 1996 (‘the Construction Act’). Whilst most construction contracts tend to use monthly payments based on the value of the work that has been completed, some parties prefer to rely on milestone payments.
Milestone payments are payments that are linked to the contractor achieving a particular stage of work under the contract.
The recent Court of Appeal case of Bennett (Construction) Limited (‘Bennett’) v CIMC MBS Limited (formerly Verbus Systems Ltd (‘Verbus’)) considered whether milestone payments were compliant with the Construction Act. The case concerned the design, supply and installation of 78 prefabricated modular units for a hotel in Woolwich under a JCT Design and Build Sub-Contract, 2011 edition (‘the Contract’). The parties amended the Contract such that the standard interim payment provisions were deleted in their entirety and replaced with the following bespoke milestone payments:
- Milestone 1 – 20% deposit payable on execution of contract;
- Milestone 2 – 30% on sign-off of prototype room in China;
- Milestone 3 – 30% on sign-off of all snagging items in China;
- Milestone 4 – 10% on sign-off of units in Southampton; and
- Milestone 5 – 10% on completion of installation and any snagging.
Unfortunately, the parties failed to define the term ‘sign-off’ and a dispute subsequently arose as to when the relevant payments became due. Bennett refused to pay for the units because they had not been ‘signed-off’ due to alleged defects, whereas Verbus argued that the milestone payment provisions did not comply with the requirements of the Construction Act.
The case ended up before the Court of Appeal, who were required to consider two specific issues: (1) whether the milestone payments complied with the Construction Act; and (2) if not, the extent to which the Scheme should be incorporated into the Contract.
The court held that the term ‘sign-off’ should be assessed objectively, such that the payments would become due on the completion of the relevant stage (i.e. it was not necessary for there to be an actual sign-off). He therefore concluded that the Contract did contain an adequate mechanism for determining what payments became due.
Despite this, the judge went on to consider the extent to which the Scheme would have been incorporated into the Contract if the payment milestones had not been an adequate mechanism. He held that the payment provisions in Part II of the Scheme should only be incorporated to the extent necessary and that they should do the ‘least violence’ to the parties’ original bargain. He considered that paragraph 7 of Part II of the Scheme would have been implied into the Contract so that the payments would have become due on the expiry of 7 days following completion of the milestone.
This case demonstrates the importance of ensuring that the requirements of each milestone payment are clearly defined to reduce the possibility of having to resort to the Scheme to imply terms to provide an adequate payment mechanism. Proper drafting should also help to avoid disputes arising in the first place. It also confirms that the Courts will only imply the terms of the Scheme where necessary to make the contract compliant with the Construction Act, rather than a wholesale replacement of the payment provisions.