HM Insights

What is an "adequate mechanism" for payment under the Construction Act?

Summary

In considering what is an "adequate mechanism" for determining what payments become due and when in accordance with section 110(1)(a) of the Housing Grants, Construction and Regeneration Act 1996, the court found in Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd) [2019] EWCA Civ 1515 that milestone payments can be a valid payment mechanism. The Court of Appeal confirmed that parties are free to agree a mechanism for interim payments based on progress of the works, as opposed to the value of the works. The courts will only interfere with an agreed payment mechanism where it is so unclear as to be unviable.

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The Housing Grants, Construction and Regeneration Act 1996 ("the 1996 Act")

Section 110(1)(a) of the 1996 Act states that every construction contract requires to provide an "adequate mechanism" for what payment become due under the contract and when, and provide for a final date for payment in relation to any sum which becomes due.

The 1996 Act expressly states that whilst it is a requirement for such an "adequate mechanism" to exist it is open to the parties to agree how long the period is between the date a sum becomes due and the final date for payment of that sum.

Bennett (Construction) Ltd v CIMC MBS Ltd (formerly Verbus Systems Ltd)

The question of what an "adequate mechanism" is for assessing what payments become due and when recently came under scrutiny by the Court of Appeal in Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd) [2019] EWCA Civ 1515 particularly with regard to the question of whether milestone payments relating to the date of "sign-off" constituted an "adequate mechanism".

Bennett concerned a contract for the construction of a hotel in Woolwich, East London on behalf of the developer, Key Homes. Bennett Construction (the main contractor) sub-contracted the design, supply and installation of 78 prefabricated modular bedroom units to Verbus (the sub-contractor). The units were to be made in China and then shipped to Southampton.

The contract between Bennett and Verbus Systems was governed by the standard form JCT contract (the English equivalent of SBCC). However, the standard form clauses relating to interim payments were deleted and replaced with Bennett's bespoke terms which provided for five staged payments:

  • Milestone 1 – 20% deposit payable on execution of the contract
  • Milestone 2 - 30% on sign-off of prototype room
  • Milestone 3 – 30% on sign-off of all snagging items
  • Milestone 4 – 10% on sign-off of units in Southampton
  • Milestone 5 – 10% on completion of installation and any snagging

Verbus supplied the prefabricated modular bedroom units but Bennett subsequently rejected these on the grounds that they did not comply with the contract. A dispute subsequently arose as Bennett refused to "sign-off" the payment.

Verbus argued that the condition of payment following "sign-off" was not an adequate mechanism and therefore did not comply with the 1996 Act. On this basis, the default mechanism for interim payments provided in the Scheme for Construction Contracts (England) Regulations 2018 ("the Scheme") ought to apply. The consequence of this would mean that interim payments would be based on the value of works done to date, as opposed to Verbus reaching particular milestones.

The First Instance Decision

The judge at first instance agreed with Verbus. The judge held that milestones 2 and 3 (although not milestone 4) did not comply with the 1996 Act.

The judge found that as parties were unable to agree a replacement schedule, it was not possible to alter just milestone 2 and 3 and therefore milestone 2 – 5 were supplanted by the Scheme and payments were calculated with reference to the value of the work done by Verbus to date.

The Court of Appeal Decision

Bennett (Construction) Ltd was successful on appeal. The Court of Appeal held that the purpose of the 1996 Act was not to invalidate a particular type of stage payment or instalment regime but simply to ensure that any such regime met certain minimum conditions. The court found that the absence of payment dates did not matter because payments were due on the dates when the milestones were achieved. Accordingly, it was an "adequate mechanism" in accordance with the 1996 Act.

In coming to its decision, the Court of Appeal confirmed that there were two possible interpretations of "sign-off". The first being the date where sign-off was actually given (through some form of certification), and the second being the time when the works were completed to the point they could be signed off. The court favoured the second interpretation. The court held that "sign-off" did not require anyone to physically sign-off the works, and therefore meant that Bennett could not wrongfully refuse to sign-off works to avoid payment.

The Court of Appeal stressed that only in exceptional circumstances should it ever delete a workable payment regime and replace it with a different payment regime based on a radically changed set out parameters. It was only possible for the court to interfere with a payment regime where the agreed regime was so deficient that replacement was the only viable option.

Insight

Whilst the finding in Bennett may not come as a huge surprise, it will nevertheless come as a relief to Employers and Contractors who rely on milestones for interim payments. Bennett again repeats the mantra coming from the courts that they will interpret an agreement between the parties so as to comply with the 1996 Act, and the Scheme, where possible.

It is only in exceptional cases, where the terms of the contract are so unworkable, that the courts shall take steps to read the Scheme into the contract.

Bennett is also an important warning to both Employers and Contractors to ensure that when relying on a milestone payment mechanism, that this mechanism is clear and unambiguous. It is beneficial to ensure that milestones can be associated with a clear and identifiable date. Whilst it is unlikely that a court would delete a payment mechanism, and would most likely interpret the milestone payments to tie into a clear and identifiable date instead, parties can avoid a lengthy and expensive litigation if these milestones are unambiguous.

Get in touch

Please contact a member of our construction team for advice or assistance in relation to the adjudication process or any other issues arising under construction contracts.

Miranda Cannibal - [email protected] - 0141 227 9436

Laura McCorquodale - [email protected] - 0131 247 2535

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