13 February 2020 | Comment | Article by Jade Zelko

Guidance from the Court of Appeal on milestone payments in construction contracts

In Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd) [2019] EWCA Civ 1515 the Court considered whether milestone payments in a construction contract were compliant with the Housing Grants, Construction and Regeneration Act 1996 as amended (“the Construction Act”).   

Background

Bennett (Construction) Limited (“Bennett”), as main contractor, engaged CIMC MBS Limited (formerly Verbus Systems Limited) (“Verbus”) to design, supply and install 78 prefabricated modular bedroom units for a hotel in East London (“the Sub-contract”). The units were to be made in China and then shipped to Southampton. The contract price was just over £2 million.

The sub-contract incorporated the JCT standard form terms but the interim payments provisions were replaced by revised terms based on various "Milestones".

Three of the milestone payments were linked to “sign-off” of certain elements of the works For example, “30% on sign-off of prototype room by Park Inn/key Homes/Bennett in China”. Despite this, the Sub-contract was silent on the definition of “sign-off”.

The Dispute

A dispute arose between the parties when Bennett alleged that the prototype of the bedroom units and the bedroom units themselves, which had been produced by Verbus, were not compliant with the sub-contract. As a consequence, there was no actual sign-off of either the prototype or the units themselves, nor any agreement that the prototype or the units had ever reached a stage of completion in which they could have been signed off.

First Instance Decision

The court held that the milestones linked to the sign-off requirement were not an adequate payment mechanism as required by section 109 and 110 of the Construction Act. Whilst the payment would become due on the date which sign-off physically happened there was no certainty on when this would take place. Bennett and/or the underlying clients (Park Inn/Key Homes) could potentially refuse to sign off the units even if they had reached the necessary stage of completion.

The court replaced the milestone payments wholesale by paragraphs 2, 4 and 5 of Part II of the Scheme for Construction Contracts. This resulted in a liability on the part of Bennett to make interim payments calculated by reference to the value of the works which Verbus had carried out. This fundamentally changed the basis of payments as agreed between the parties from milestone payments to interim valuations.

The Court of Appeal Decision

On appeal, the court disagreed. It held that the milestone payment provisions in the Sub-contract were adequate for the purposes of sections 109 and 110 of the Construction Act.  The sign-off requirement 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. The court rejected the need for the works to be physically signed off.

Comment

This case has confirmed that milestone payments can be an adequate mechanism for the purposes of section 109 and 110 of the Construction Act. It does, however, highlight the importance of ensuring that payment provisions are expressed clearly and in specific terms that will satisfy the requirements of the Construction Act.      

If you would like any further information or advice on how this decision may affect you, please contact our construction team on 02922 67 5400.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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