Building contract – Terms – Payment – Parties replacing detailed arrangements in JCT standard form dealing with interim payments – Parties agreeing milestone payments of percentage of contract sum on “sign-off” of work in stages – Appellant contractor appealing against judge’s conclusions concerning compliance of milestones with requirements of Housing Grants, Construction and Regeneration Act 1996 – Whether contract providing adequate mechanism for determining payments due and when – Whether Part II of Scheme for Construction Contracts appropriate where contractual mechanism inadequate – Appeal allowed
The parties entered into a contract relating to a proposed new hotel in Woolwich, south-east London. The claimant was the main contractor, which contracted to the respondent subcontractor the design, supply and installation of 78 prefabricated modular bedroom units for a hotel. The units were to be made in China and shipped to Southampton.
Some of the contractual terms incorporated the standard form JCT contract. However, the detailed arrangements of the JCT standard form dealing with interim payments were deleted and replaced by “revised terms” as to payment. There were five such payments (“milestones”) which included: milestone 2 – “30% on sign-off of prototype room”; milestone 3 – “30% on sign-off of all snagging items”; and milestone 4 – “10% on sign-off of units in Southampton”. There was no specific definition of the term “sign-off”.
The whole contract came to an end following the liquidation of the developer. There was an adjudication about the validity of the milestone payments which led to a decision in the appellant’s favour. The respondent complained that milestones 2, 3 and 4 did not comply with the requirements of the Housing Grants, Construction and Regeneration Act 1996. A judge agreed with that proposition in respect of milestones 2 and 3, although not milestone 4: [2018] EWHC 2440 (TCC). He allowed the parties time to work out by agreement a replacement payment schedule but they were unable to do so. Accordingly, the judge 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 was to incorporate paras 2, 4 and 5 of Part II of the Scheme for Construction Contracts (England and Wales) Regulations 1998 to supplant milestones 2-5 as a whole: [2018] EWHC 2222 (TCC). That resulted in a liability on the part of the appellant to make interim payments calculated by reference to the work which the respondent had carried out. The appellant appealed.
Held: The appeal was allowed.
(1) The reference to “sign-off” in milestones 2 and 3 was a generic reference to the satisfactory completion of a particular stage, to be assessed objectively. 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 the respondent’s entitlement to be paid because, if the prototype or the units were in the state in which they were capable of being signed off, the respondent was entitled to be paid, and a failure to sign off the relevant documentation would not be a defence to a claim based on that entitlement.
The potential involvement of third parties 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. On a proper interpretation of the contract, the only relevant criterion was compliance with the contract specification: if that 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 does not matter, because the sum was payable when that completion was achieved.
Accordingly, the judge was wrong to find that the contract did not contain an adequate mechanism for determining what payments became due under the contract, and when. The contract contained an adequate mechanism in accordance with section 110 of the 1996 Act.
(2) Because of its wider importance, it was appropriate to consider the position if the contractual mechanism did not contain an adequate payment mechanism. Although Part II of the Scheme was badly drafted, it was possible to pilot a course through it in order to achieve a common-sense result that, when applied to the present case, did no significant violence to the parties’ original agreement. When dealing with Part II of the Scheme, the adoption of the least damaging option and the importance of the parties’ original agreement, notwithstanding the provisions of the Act, should be central to the court’s considerations.
On an analysis, para 7 of Part II of the Scheme, which was intended to be a “catch all”, was the only paragraph that could relate to the milestones. It also made commercial sense. On the assumption that the agreed mechanism was inadequate because there was no agreement as to timetable for payment, such a timetable was provided by para 7 (seven days after completion). And it resolved any concern about the sign-off provision (and the possible requirement for actual sign-off or doubts about the criteria) because it provided for payment after the completion of the relevant work (an objective test as to completion). 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. On the assumption that the mechanism in respect of both date and criteria for payment was inadequate, both could be resolved in straightforward fashion by the implication of para 7 which did the least violence to the agreement between the parties. Thus, the payment in respect of milestone 2 would be seven days following the completion of the prototype in accordance with the contract. For milestone 3, it would be seven days following the completion of the units in accordance with the contract. Milestones 1, 4 and 5 would remain wholly unaffected: Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2017] 1 WLR 1893; [2016] PLSCS 271 applied. Alstom Signalling Ltd v Jarvis Facilities Ltd (No 2) [2004] EWHC 1285 (TCC) considered.
Chantal-Aimée Doerries QC and David Johnson (instructed by Brechers LLP) appeared for the claimant; David Sears QC (instructed by Fladgate LLP) appeared for the defendant.
Eileen O’Grady, barrister
