No final date for payment? No problem?

25.02.20

The Court of Appeal suggests failing to provide a Due Date and Final Date for Payment isn’t always fatal to payment provisions in a Construction Contract.

The Construction Act (the Act), requires every construction contract to have: "an adequate mechanism" for determining what payments are due under the contract, and when those payments are due. The need to be able to determine "when" payments become due, usually means ensuring the contract sets out when the sum first becomes due for payment and what the final date for payment is. If a contract fails to do this, the usual outcome is that the default payment provisions under the Act will be applied.

The recent case of Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Ltd), however, suggests that – at least when it comes to milestone payment regimes – the failure to provide when the sum becomes due for payment, and what the final date for payment is, is not fatal.  The Appeal Court instead found that such details, were not necessary in a contract of this type.

The decision

Parties had entered into a JCT form of contract for the design, supply and installation of modular bedroom units for a hotel. The parties had deleted the interim payment regime under the JCT standard form and replaced it with five "milestone" payments – where a certain percentage of the contract sum would be paid upon achievement of each of the milestones. Some of these milestones referred to payment being made on "sign-off" - the contract did not, however, expressly define what "sign-off" was; how or when it was to be assessed; when payment became due once "sign-off" had been achieved; or what the final date was for payment was.

The Court of Appeal, however, found this did not prevent these milestone payment provisions from being an adequate payment regime under the Act. The Appeal Court held that, on the proper interpretation of the contract, "sign-off" was whether the requirements of the specification had objectively been achieved. Once this point of sign-off had been reached – a payment would become due. The Court accepted that the contract did not provide a date for an invoice, a date for when the sum fell due; nor a final date for payment; but said it did not consider such details to be necessary in a contract of this type. Instead, the Court stated: "Parties are always free to agree interim payments by reference to percentages of completion. Thereafter, the courts expect the parties to adopt business common sense as to the arrangements for invoicing and payment."

The practical take away

The Bennett case serves as a reminder of the difficulties that can emerge, when payment provisions under a contract are not clearly drafted. As with anything, prevention is better than cure and the best course of action when drafting a milestone payment regime is to make sure the it clearly sets out: (1) what the milestone is; (2) how achievement of that milestone is to be assessed; and (3) when payment will then become due.

The Court of Appeal's decision does, however, suggest that where parties have not done this, the Court will (as far as possible) take a commercially sensible approach and try and make the payment provisions work, rather than deleting the parties' bespoke terms and applying the default position under the Act.   In particular - the Court has suggested that the failure to provide for the due date and final date for payment does not stop a milestone payment regime being an "adequate mechanism" for payment under the Act.