Monday, September 30, 2019

Bennett (Construction) Ltd v CMC MBS Ltd

[2019] EWCA Civ 1515 

This case was all about the interplay between the agreed contract terms and the requirements of the HGCRA as to an adequate payment mechanism. In particular:

(i) Did a regime requiring payment of a percentage of the contract sum on “sign-off” of a particular stage of the works comply with the HGCRA? 

(ii) If it did not, can the HGCRA and Scheme be incorporated into the contract in order to “save” the bargain which the parties made? 

The project in question was a new hotel in East London. The contract, which the Judge noted had been put together in “a somewhat ramshackle way”,  was based on the JCT Form, but the arrangement dealing with interim payments had been replaced by five milestone payments, including Milestone 2, 30% on “sign-off” of prototype room by Park Inn/Key Homes/Bennett in China; Milestone 3, “30% on sign-off of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”; and Milestone 4, “10% on sign-off of units in Southampton;” There was no definition of “sign-off” in the contract. 

Disputes arose with the result that 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. There was an adjudication about the validity of the Milestone payments which led to a decision in Bennett’s favour. CMC said that the Milestones did not comply with the requirements of the HGCRA. In July 2018, Mr Justice Waxman agreed in respect of Milestones 2 and 3. After giving the parties time to agree a replacement payment schedule, which they were unable to do, in a second judgment he concluded that it was impossible to alter just Milestones 2 and 3 and that: “for reasons of workability and coherence the only approach on the facts of this case was to incorporate Paragraphs 2, 4 and 5 of Part II of the Scheme for Construction Contracts to supplant Milestones 2-5 as a whole”. 

This resulted in a liability on the part of Bennett to make interim payments calculated by reference to the value of the work which CMC had carried out. LJ Coulson noted that:

“The commercial effect of the judge’s decisions is stark. Prior to these proceedings, the principal dispute between the parties concerned whether or not the prototype and the units had been completed…But, in consequence of the judge’s two judgments, Verbus [CMC] became entitled to interim payments by reference to the value of the work which they had carried out. In this way, Verbus would become entitled to payment, regardless of whether or not the prototype or the units themselves had reached a stage of completion at which they could have been signed off.” 

This was: “a significant reapportioning of the commercial risk which the parties had agreed”.                                     

The CA considered that sign-off was to be assessed objectively. Taking the contract as a whole, the parties intended that, on completion of the relevant stage, the Milestone would be paid. There was nothing in the contract which sought to tie in sign-off to the production of a certificate or record of any sort. There was no difficulty with the use of the word “sign-off” in Milestones 2 and 3. It denoted the objective state which the prototype and then the units had to reach before the payment was due. It did not require an actual signing-off. But even if it did, that could not affect any entitlement to be paid because, if the prototype or the units were in the state in which they were capable of being signed off, CMC were entitled to be paid. A failure to sign-off the relevant documentation would not be a defence to a claim based on that entitlement. 

Further, the potential involvement of third parties (Key Homes and Park Inn) in any sign-off process did not detract from the only applicable criterion, namely completion of the prototype or the units in accordance with the contract. If compliance with the contract specification was (objectively) achieved, the works were capable of being signed off and Milestone 2 (for the prototype) and Milestone 3 (for the units themselves) became payable, whether they were actually signed off or not. The relevant completion date (of prototype and units) was therefore the date on which the payment of Milestones 2 and 3 became payable. The fact that there was no express date for payment did not matter, because the sum was payable when that completion was achieved.

Accordingly, the CA considered that the judge at first instance was wrong to find that this contract did not contain an adequate mechanism for determining what payments became due under the contract, and when. This dealt with the appeal. However, “because of its wider importance” LJ Coulson carried on. He did so on the basis that, contrary to his actual finding, the contractual mechanism did not contain an adequate payment mechanism. Here, the Judge was satisfied that it was settled law that, where payment provisions do not comply with the HGCRA, the Scheme applies, but only to the extent that such implication is necessary to achieve what is required by the HGCRA itself.  In a case where the parties did not agree a payment arrangement by reference to interim valuations of the work done, Part II of the Scheme did not impose such a regime. The question therefore was, which part of the Scheme should be incorporated to deal with milestone payments? The answer was paragraph 7 which provides that:

“Any other payment under a construction contract shall become due (a) on the expiry of 7 days following the completion of the work to which the payment relates, or(b)the making of a claim by the payee, whichever is the later.”

The payment in respect of Milestone 2 would be 7 days following the completion of the prototype in accordance with the contract. For Milestone 3, it would be 7 days following the completion of the units in accordance with the contract. In this way: “the right replacement option (paragraph 7 of Part II of the Scheme)” did “the least violence to the agreement between the parties”.

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