CIMC v Bennett: milestone payments
A shipload of modular bedroom units from China led to a dispute over the payment mechanism, with the court ruling providing clarity over milestone payments. Robert Burns explains.
Section 110 of the Construction Act attempts to bring certainty to the payment terms of construction contracts. Section 110(1) states that every construction contract shall:
- provide an adequate mechanism for determining what payments become due under the contract, and when; and
- provide for a final date for payment in relation to any sum which becomes due.
The parties are free to agree the length of the period between the date when a sum becomes due and the final date for payment.
The courts have heard plenty of cases involving the Construction Act, largely related to the form and timing of payment applications, payment notices and pay less notices. Now we also have guidance from the court on its interpretation of Section 110(1), following last year’s ruling on CIMC MBS (formerly Verbus Systems) v Bennett Construction.
The court was asked to decide on the legislative validity of a set of milestone payments. They are a common payment mechanism, but are they adequate when measured against Section 110(1)?
Bennett was the main contractor for a design-and-build new hotel in London. CIMC was the subcontractor appointed by Bennett to design, supply and install modular bedroom units. These were to be made in China and then shipped to England. The agreement between Bennett and CIMC was a construction contract and so the Construction Act, and Section 110, applied.
CIMC was appointed by Bennett under a JCT form of contract. However, the interim payment clauses were deleted and replaced with a bespoke set of milestone payments (see box).
The five milestone payments
- 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 Bennett, the employer and the operator, again in China;
- 10% on sign-off of units in Southampton; and
- 10% on completion of installation and snagging.
CIMC’s lawyers challenged the validity of milestones 2, 3 and 4, arguing they did not comply with Section 110(1) of the Construction Act, because:
- The employer and the 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; and
- As no time was stated for sign-off, there was no due date or final date for payment.
The court found that milestones 2 and 3 did not constitute an adequate payment mechanism under Section 110(1) of the Construction Act. They were lacking specific criteria and timescales for sign-off, and these would be required in order to get over the hurdle set by Section 110(1).
Nowhere did the payment terms or the specification state by what date the sign-off must be done. The court did not feel “reasonable time” could be used as it would still generate uncertainty and cause for dispute – which Section 110(1) was designed and drafted to prevent.
Milestone 4 was held to be in adherence of Section 110(1). It was significantly differently worded from 1 and 2, and the court considered it simply meant proof of delivery in Southampton, once the bedroom units were discharged from the vessel which brought them from China.
CIMC’s argument against milestone 4 was that a check for damage would need to occur. But the court held that discharge from the vessel would suffice.
It is worth noting that the court held that the use of milestone payments in this case was not contrary to Section 110 – the issue was that the triggers for the payments were not adequately defined and ascertainable.
Robert Burns is a solicitor and senior associate at Quigg Golden