Case Digest: Court of Appeal finds contractual provisions requiring payment on sign-off were compliant with Construction Act and provides guidance on how non-compliant payment provisions will be replaced by Part II of the Scheme

In Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd) [2019] EWCA Civ 1515, the Court of Appeal held that contractual payment terms, which included provisions requiring payment "on sign-off", were in accordance with the Housing Grants, Construction and Regeneration Act 1996 (the "Construction Act"). This case also provides notable guidance on how the courts will apply Part II of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the "Scheme") to a contractual payment mechanism that is not fully compliant with the Construction Act.

Background

This case concerned a proposed new hotel in Woolwich, East London, for which the appellant, Bennett (Construction) Limited ("Bennett"), was the main contractor. Bennett engaged the respondent, CIMC MBS Limited ("CIMC"), to design, supply and install prefabricated modular bedroom units for the hotel, which were to be made in China and shipped to Southampton.

The contract between Bennett and CIMC incorporated the standard form JCT contract, although the interim payment provisions were replaced by bespoke provisions requiring milestone payments. Two of these milestone payments were stated as payable "on sign-off" of a prototype room and bedroom units by Bennett, the developer and eventual operator of the hotel.

A number of disputes arose as to whether the bedroom units complied with the contract, with Bennett alleging numerous defects. As a result, the units were never actually signed off, nor formally acknowledged as complete, but were shipped to the UK at CIMC's own risk following some 'without prejudice' payments by Bennett. Ultimately, the contract came to an end following the developer's liquidation and the units were subsequently scrapped.

Following an adjudication in Bennett's favour, CIMC brought proceedings to determine the validity of the milestone payments involving "sign-off", which it claimed were non-compliant with the Construction Act.

TCC decision

Waksman J found that the milestones requiring "sign-off" by Bennett and others were non-compliant with the Construction Act. However, since it was impossible to alter just two of the milestones, he held that the relevant paragraphs of Part II of the Scheme should replace the entire contractual milestone mechanism. Bennett appealed.

Court of Appeal decision

Coulson LJ, who gave the lead judgment, overturned the first instance decision and held that the contract contained an adequate mechanism in accordance with the Construction Act.

Commentary

The commercial effect of the first instance decision was to render Bennett liable to pay CIMC for a percentage of the contract sum notwithstanding that the units were not complete. Coulson LJ noted that this represented a significant re-apportioning of the commercial risk agreed between the parties, and very clear words in the Construction Act would be required to bring this about.

On a proper construction, Coulson LJ concluded that the word "sign-off" in the two milestones in contention denoted the objective state which the prototype room and bedroom units had to reach before payment was due. It did not require an actual signing-off, but even if it did, that could not affect CIMC's entitlement to be paid. This was because, if the prototype room and/or bedroom units were in the state in which they were capable of being signed off, CIMC was entitled to be paid, and a failure to sign off the relevant documents would not be a defence to a claim based on that entitlement.

Coulson LJ also found that, since the only relevant criterion for sign-off was compliance with the contract specification, the potential involvement of third parties (i.e. the developer and eventual operator) in the sign-off process could not prevent proper payment. He also held that, although no dates for payment were spelt out in the contract, such details were unnecessary for a contract of this type, and the parties were free to agree interim payments by reference to percentages of completion.

A secondary issue considered by the Court of Appeal was, if the milestones requiring "sign-off" by Bennett and others were non-compliant with the Construction Act, what was the correct mechanism of replacement. Whilst it was not strictly necessary for the court to determine this issue (as it had already concluded that the contractual payment mechanism was compliant), it went on to do so due to its wider importance.

In this regard, Coulson LJ noted that the right replacement option was one that "does the least violence to the agreement between the parties", and highlighted the importance of the parties' original agreement. Coulson LJ also emphasised the underlying purpose of the Construction Act, which was to provide for certain minimum, mandatory standards so as to achieve certainty and regular cash flow. Therefore, save in exceptional circumstances, "it 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". This could only happen where "the regime which had been agreed was so deficient that wholesale replacement was the only viable option".

Given that there is little authority on this matter, this case provides useful guidance on how the courts are likely to go about replacing any non-compliant payment provisions with the statutory requirements of Part II of the Scheme.  Whilst obiter, the above commentary suggests that the courts will try to uphold any existing payment mechanisms to the extent possible and are likely to be selective in replacing any provisions with those of Part II of the Scheme.