Construction Contracts – Are Milestone Payments Valid and Enforceable?
In an important recent decision, the courts have highlighted two important issues when it comes to payments in construction contracts:
1) Milestone payments can be a valid payment mechanism meaning that the parties are free to agree to interim payments which are in no way based on the value of the works undertaken at the relevant point.
2) It is crucial when agreeing payment terms (and any other terms) in a construction contract that the provisions are clearly drafted as any ambiguity can lead to costly and time consuming litigation.
Under the laws of England and Wales, a construction contract must contain an adequate mechanism for determining what payments become due under the contract and the final date for payment. If the payment provisions in a construction contract are non-compliant then the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended (the “Scheme”) may imply payment provisions to ensure that there is an adequate mechanism for payment that is compliant with the Construction Act.
Bennett was the main contractor building a new hotel and Verbus were contracted to design, supply and installation of prefabricated modular bedroom units for hotels. The parties contracted using a standard form JCT contract, but the parties agreed to delete the relevant interim payment provisions in the standard form JCT and replace it with five milestone payments, three of which referred to a requirement for “sign-off”. Whilst there were various references to the phrase “sign off” throughout the contract, the term itself was not defined.
The milestone payments were as follows:
Milestone 1– 20% deposit payable on execution of contract
Milestone 2– 30% on “sign off” of prototype room by Park Inn/Key Homes/Bennett in China
Milestone 3– 30% on “sign off” of all snagging items by Park Inn/Key Homes/Bennett in China
Milestone 4– 10% on “sign off” of units in Southampton
Milestone 5– 10% on completion of installation and any snagging.
Verbus supplied the modular bedroom units which Bennett subsequently rejected as they did not comply with the terms of the contract. Subsequently, a dispute arose between the parties as Bennett did not “sign-off” on the payment. Verbus then argued that the payment provisions were non-compliant with the requirements of the Construction Act. If the payment provisions were held non-compliant then the Scheme may imply certain default payment provisions.
Ultimately the question for the court was what was meant by the phrase “sign off” and then whether this was a valid mechanism for ascertaining what was due, and when.
Court of Appeal
The Court of Appeal held that the payment provisions contained an adequate payment mechanism and was therefore compliant with the Construction Act.
In this regards the Court of Appeal has stated that milestone payments such as the ones present here are a perfectly valid and legally enforceable payment structure. Meaning parties are free to agree a payment mechanism where payments have no actual bearing to the value of the works carried out at a particular date.
In terms of the question of what was meant by “sign off”, the Court held that there were two possible interpretations. Firstly, it could mean the date by which sign off was actually given –e.g. by way of the provision of a certificate or similar document. The second interpretation was that “sign-off” occurred when the stage of the works were completed to the point where it could be signed off.
The Court of Appeal preferred the latter of the two interpretations and therefore the phrase “sign off” did not, in this instance, require anyone to actually sign off the works at all.
The Court of Appeal also then went on to say that even if the first interpretation was preferred then the right to payment would arise at the point where the works had been completed to the point where they could be “signed-off”. This was to ensure that a person didn’t avoid an obligation to pay by wrongfully refusing to sign-off a particular part of the works.
The Court of Appeal also clarified that if the milestone payments did not comply with the Construction Act, then paragraph 7 of part II of the Scheme would have applied, which provides that payment would fall due seven days after completion of the relevant works.
In this case whilst the payment provisions were enforced and held to be valid, it serves as an important reminder that clarity when drafting is crucial. If the wording been clearer at the outset, the parties may have avoided the need for litigation. The case also shows that the Courts will where possible, preserve the payment mechanism agreed in the contract and will only occasionally imply terms into the contract from the Scheme.
Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd)  EWCA Civ 1515
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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