No sign off? No worries: the meaning of “sign off” and payment milestones in construction contracts
The overwhelming majority of construction disputes relate to payment, particularly what payments become due and when they become due. In Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd), the Court of Appeal considered whether the parties’ payment terms complied with section 110 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) and, if they did not, what was the correct mechanism for payment. Section 110 requires every construction contract to contain “an adequate mechanism for determining what payments become due under the contract and when”.
Bennett was the main contractor engaged on the construction of a new hotel in East London. Bennett contracted to CIMC for the design, supply and installation of modular bedroom units for the hotel. The relevant payment milestones provided that 30% payment would be made on “sign-off” of the units.
The Court had to determine whether sign-off meant the units being in a condition in which they could be signed off or whether they had actually been signed off and whether this was an adequate mechanism for payment as required by section 110 of the Act.
The TCC Judge found that sign-off required an actual signing off and that the relevant payment terms did not comply with section 110 of the Act, resulting in the agreed payment terms being replaced by those in Part II of the Scheme for Construction Contracts (“the Scheme”).
Lord Justice Coulson in the Court of Appeal held that sign-off meant whether the modular units were in a condition to be signed off. The Court said that whether or not units were able to be signed off was to be assessed objectively and that this was an adequate mechanism for payment.
"The Court had to determine whether sign-off meant the units being in a condition in which they could be signed off or whether they had actually been signed off and whether this was an adequate mechanism for payment as required by section 110 of the Act. "
The Court of Appeal then considered, if the payment terms did not comply with the Act, what the correct mechanism for payment was. It was not strictly necessary for Coulson LJ to do so given his findings on the meaning of sign-off and that it was an adequate mechanism for payment. However, Coulson LJ considered this issue because of the wider importance to construction contracts.
The Court of Appeal held that Part I of the Scheme, which relates to adjudication provisions, is clear in that if the relevant construction contract does not contain proper adjudication provisions, then Part I applies in full. However, Coulson LJ said that Part II of the Scheme (dealing with payment) is different; only if or to the extent that the parties’ construction contract does not contain the relevant provisions will the payment provisions in Part II of the Scheme be incorporated.
Accordingly, where payment provisions do not comply with section 109 or section 110 of the Act, Part II of the Scheme applies; but only to the extent such implication is necessary to achieve what is required by the Act. Coulson LJ said the purpose of the Act in relation to payment provisions was to provide certain minimum and mandatory standards to achieve certainty and regular cash flow. Except in exceptional circumstances, the Act was not designed to delete workable payment regimes which the parties had agreed and replace them with an entirely different regime. Coulson LJ said that could only happen where the regime agreed was so deficient that wholesale replacement was the only viable option.
As such, the Court of Appeal allowed the appeal and confirmed that where provisions do not comply with section 109 or section 110 of the Act, Part II of the Scheme applies only to the extent that such implication is necessary to achieve what is required by the Act.
Payment is the lifeblood of construction. In this case, the parties have been through lengthy and costly litigation to establish the meaning of sign-off and what payments become due and when. Whilst it was ultimately held that no actual sign-off was required, it may have been the case that had the payment milestones been more clearly drafted, there would have been no litigation, saving the parties time and money. The message here is that if parties intend to draft their own payment terms, they must ensure such terms are clear and comply with the Act. If they do not, then they risk those terms being supplemented via the Scheme. Drafters beware!