The case of Bennett (Construction) Limited (“Bennett”) v CIMC MBS (formally Verbus Systems Limited) (“Verbus) considered whether “sign off” was required prior to payment.
The main contract was for a new design and build hotel in London. Bennett were employed as the main contractor who in turn employed Verbus under a JCT contract (with the standard payment terms replaced with milestone payments) to supply and install modular bedroom units. The modular building units were to be designed and built in China and then shipped to the UK and installed.
The milestone payments were as follows:
- 20% of the subcontract price to be paid on execution of the subcontract
- 30% on sign off of a prototype room in China by Bennett, the employer and the ultimate operator of the hotel
- 30% on sign off of all snagging items by Bennet, the employer and the operator, in China
- 10% on sign off of delivery of units in Southampton
- 10% on completion of installation and snagging.
Verbus produced a prototype which Bennett rejected claiming it did not meet the contract specification. Verbus then went on to produce the remaining bedroom units, which again Bennett rejected.
The Technology and Construction Court (“TCC”) held that the milestone payment protocol as noted in this contract contravened s110(1) of the Construction Act.
Section 110(1) of the Construction Act relates to payment and it says that every construction contract shall:
- Provide an adequate mechanism for determining what payments become due under the contract and when, and
- Provide a final date for payment in relation to any sum which becomes due
Verbus contended that milestones 2, 3 and 4 did not comply with s110(1) of the Act because
- The employer and operator were not parties to the subcontract and the details around sign off were vague
- There were no determinable criteria for establishing when, or indeed whether, sign off had occurred
- As no time was stated for sign off there was no due date or final date for payment.
The TCC held that milestones 2 & 3 did not comply with s110(1) of the Act because:
- They did not specify specific requirements needed for sign off to occur
- They did not specify a timescale for sign off
The TCC dismissed Verbus’s argument in relation to milestone 4 as it said that the terms stating the delivery of the units in Southampton was a clear and specific milestone.
The TCC stated that it was impossible to alter only milestones 2 & 3 and therefore the standard payment terms of the Act should apply and replace milestones 2-5 in their entirety.
This meant that the standard payment terms as set out by the Act applied and Bennett had to make payments in accordance with value of work done rather than by milestone.
Bennett appealed on the following grounds:
- Whether a payment regime where a percentage of the contract sum was paid on sign off at a particular milestone complies with the Construction Act
- If it does not how does the Construction Act be incorporated into the contract to save the agreement the parties had made
The Court of Appeal overturned the TCC’s decision on the following grounds.
In relation to point 1:
- The TCC had interpreted sign off subjectively i.e. it required an actual sign off. The court of Appeal ruled that this should be judged objectively is were the works capable of being signed off.
- The TCC said the criteria for sign off was vague and unclear. The Court of Appeal ruled that the criteria was the contract specification.
- The TCC said that there was no date for payment detailed in the subcontract. The Court of Appeal ruled that this was irrelevant as the sub contract stated that payment was due once completion of the relevant milestone had occurred.
Point 2 of Bennetts appeal disappeared after the rulings regarding point 1.
This is another example of a case which had brought to Court at great expense because terms drafted within the contract were not clear.
Ensure that any bespoke or amended clauses within your contract clearly and unambiguously reflect the agreement that you have made.
This article contains information of general interest about current legal issues and does not provide legal advice. It is prepared for the general information purposes only. This article should not be relied upon in any specific situation without appropriate legal advice.