The Court of Appeal recently heard an appeal by the main contractor on a proposed new hotel in Woolwich, Bennett (Construction) Ltd, and the modular bedroom units subcontractor CIMC MBS Ltd (formerly Verbus Systems Ltd).
The appeal examined the interplay between the contract terms and the mandatory payment provisions in the Housing Grants, Construction & Regeneration Act 1996 (as amended). The issue before the court was whether a series of interim milestone payments phrased as “x% on the sign-off ….” complied with the Act. The term “sign-off” was not defined within the subcontract.
Bennett said Verbus’ prototype was non-compliant and all 78 units produced contained defects before they left the factory. Consequently, there was no actual ‘sign-off’ of either the prototype or the units themselves. Bennett argued that they never reached a stage of completion at which they could have been signed off. A payment dispute arose, with Bennett relying on the absence of ‘sign-off’ and Verbus arguing that such a requirement did not comply with the payment provisions of the Act.
Section 110 (1)(a) of the Act requires that “Every construction contract shall… provide an adequate mechanism for determining what payments become due under the contract, and when….” as well as providing a final date for payment of any sum which becomes due. When a construction contract does not contain all mandatory provisions, the Scheme for Construction Contracts, which was introduced by the Act, implies default provisions.
At the original hearing in the Technology & Construction Court, Verbus successfully argued that the ‘sign-off’ requirement envisaged an actual signing-off of the works and that payment could be circumvented by a deliberate decision not to sign off. Bennett’s counter argument was that ‘sign-off’ meant simply the date on which the completion of the identified stage of the work was achieved (and was capable of being ‘signed-off’).
The Court of Appeal disagreed with the Technology & Construction Court’s decision in that the references to ‘sign-off’ in some of the milestones did not comply with the Act. It came down to interpretation and the Court of Appeal emphasised the fact that ‘sign-off’ was not connected to the production of a certificate or record of any sort. If actual ‘sign-off’ was required, this would have been expressed within the contract. Instead the phrase ‘sign-off’” was to be interpreted objectively, meaning the milestones would be paid on completion of the relevant stage.
Although not required to decide the case, the Court of Appeal considered the Technology & Construction Court’s earlier decision to replace non-compliant milestone provisions with the interim valuation provisions in the Scheme (paragraph 2). They disagreed with this decision as it would have significantly altered the commercial position by requiring Bennett to make interim payments calculated by reference to the value of the work carried out. The Court of Appeal’s non-binding view was that the non-compliant provisions should be made to work by using paragraph 7 of the Scheme, which was intended to be a ‘catch all’ provision. It stipulates a due date seven days “following the completion of the work to which the payment relates”. This was viewed by the Court of Appeal to make the most commercial sense.
This is a reminder that the courts will strive to maintain the commercial intentions of the parties and preserve the contractual payment mechanism to the furthest extent possible, and only the deficient payment provisions should be replaced.