Bennett (Construction) Limited v CIMC MBS Limited
The Court of Appeal recently considered milestone payments in to the context of the Housing Grants Construction and Regeneration Act 1996 Section 110(1)(a) of the Construction Act states that "every construction contract shall provide an adequate mechanism for determining what payments become due under the contract, and when". The question for the court was whether milestone payments were an “adequate mechanism” under the Construction Act.
The Facts
Bennett was the main contractor engaged to construct a new hotel in London. Bennett employed CIMC under a subcontract to provide the designs for , supply and install pre-fabricated bedroom units for the hotel. The contract provided for payment to fall due on upon 5 key milestones:
Milestone 1 - “20% deposit payable on execution of the 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 Bennett, the employer and the operator, again in China”
Milestone 4 - “10% on sign-off of units in Southampton”
Milestone 5 - “10% on completion of installation and snagging”
A dispute arose as to the meaning of “sign-off” with it being argued that it should be interpreted objectively rather than literally - (i.e. not to be physically signed off).
The Decision
The Court of Appeal favoured the objective approach stating that “if actual sign-off was required, the contract would have said so”, overturning the decision of the TCC who construed the “sign off” subjectively.
The objective interpretation meant that “sign off” was achieved on the actual completion of each of the milestones and did not require actual sign off by Bennett. This prevented Bennet from avoiding liability for payment simply because the documents had not been formally signed off. To interpret the contract otherwise would give too much power to the contractor who could in theory avoid liability to pay for completed work which has been done.
Lessons Learned
Although the court showed flexibility in its interpretation of the contract so that the milestone payment provision was compliant with the Construction Act, contract drafting should be as clear as possible, particularly as to when payment is to fall due. Payment clauses are among those most likely to give rise to disputes. The aim of a contract is to avoid disputes. Clear drafting is essential.