Royal Courts of Justice (Dreamstime)
Appeal judge reverses original decision in row over main contractor’s payment plan to its modular subcontractor. By Anastasia Barich-Chivikova.
Milestone payments are the life blood of the construction industry. They have legislative entrenchment through the Housing Grants, Construction and Regeneration Act 1996 which stipulates that all construction contracts lasting over 45 days must have adequate mechanisms for interim payments.
In a case earlier this year, where main contractor Bennett was constructing a design-and-build hotel in London, its modular bedroom subcontractor CIMC challenged the validity of milestone payments, saying they did not comply with the act.
The court accepted CIMC’s interpretation, replacing the contractual provisions for payments with the schedule to the Scheme for Construction Contracts. But now the court of appeal has overturned this decision.
Background of Bennett case
Main contractor Bennett subcontracted the manufacturing and installation of 78 modular bedroom units to Verbus (later renamed CIMC). The milestone schedule paid 20% of the price on execution of the subcontract and then further percentages on sign-off as follows:
- 30% – a prototype room in China by Bennett and client;
- 30% – all snagging items by Bennett, the employer and the operator, again in China;
- 10% – all units on arrival in Southampton; and
- 10% – completion of installation and snagging.
Bennett claimed that the prototype room was not up to the contractual specifications. Nonetheless, CIMC produced all 78 bedroom units and shipped some of them to Bennett despite the latter’s allegations that the goods were non-compliant. No milestones were ever signed off as complete.
CIMC sought to receive the payments, relying on the act. Although the amounts and circumstances of interim payments complied with the act, the supplier alleged that the mechanism for determining them was not clear. CIMC argued that sign-off meant a formal act of signing off the works and that this process could be deliberately subverted by the main contractor or the project developer.
So, there were no clear conditions which would have obligated Bennett to make the payments. The sign-off was interpreted as a subjective notion dependent on the capricious will of Bennett and a third party.
Initially, CIMC’s interpretation was accepted by Judge Waksman. Consequently, he replaced the contractual provisions with the schedule to the Scheme for Construction Contracts. The payment to CIMC and its due date was calculated on the basis of the value of the work performed.
Decision on appeal
The decision of Judge Waksman was reversed by Judge Coulson at the Court of Appeal.
It was emphasised that the legislature intended to ensure every construction contract had a minimum workable mechanism for interim payments. It was not to redistribute the commercial risks or invalidate any types of stage payments.
The concept of sign off was construed objectively. It meant the contractually compliant completion of a particular stage of the works so that they could be signed-off.
The fact that the contract did not state the precise timeline for payments – such as the dates for issuing invoices or deadlines for making payments – did not make the mechanism inadequate. Once the objective milestone completion occurred, the parties were to rely on their good business sense in those issues.
So the contractual interim payment mechanism was sufficiently adequate on its own. There was no need to supplement or replace it by the legislative scheme.
Judge Coulson took the interpretative course that did “the least violence to the agreement between the parties”.
This stance achieved a rational result. It would have been unreasonable to make Bennett liable for the substantial value of the delivered goods which did not correspond to the contract.
The decision of the Court of Appeal in Bennett fortifies the robustness of English law on several fronts: sound commercial outcome, predictability and freedom of contract. Those are the tenets making English law attractive to the business parties and esteemed internationally.
Anastasia Barich-Chivikova is a specialist legal writer with a PhD in Law from the University of Birmingham.