Bennett (Construction) Ltd v CMC MBS Ltd

INTRODUCTION

THE CONTRACT

Given that the concept of “sign-off” was so central to Verbus’ challenge to the validity of Milestones 2, 3 and 4, it is important to see how it was addressed in the contract. There was no specific definition of the term. The references set out in the first judgment of Judge Waksman QC (as he then was) were gleaned from the detailed proposals provided by Verbus, which were referred to as ‘the contract specification’.

At page 118 of the appeal bundle, having set out in detail the particular type and specification of materials to be used in the construction of the room modules, the specification goes on:

“The module construction mechanical and electrical installation and internal fit-out will be to UK standards. This includes pipe sizing and electrical cable. Our [Verbus’] British project manager will be present in the factory to oversee the fit-out of modules and will invite the client to the factory to inspect and sign off the modules before shipping to ensure suitability. The mechanical and electrical work will be overseen and certified by British certified tradesmen in our factory.”

The other references to sign-off referred to by the judge were as follows:

Verbus’ proposals also included a section about previous hotel projects on which they had worked. About the Premier Inn in Hull, they said:

“Whenever we work for a new operator, we invite their team to our factory to meet the team, inspect our facilities and sign off a prototype module in advance of full manufacture to ensure their complete satisfaction.”

There were a number of other references to “sign off” to which the judge did not refer. They were contained in the contract documents themselves (which were put together by the parties in a somewhat ramshackle way), as opposed to the standard JCT terms (for which ‘sign-off’ is an unknown concept). There is a reference to the storage and security of on-site materials which it was said would be subject to a

“verbal sign off on site” (see the minutes of the Pre-Award Meeting). A different set of Pre-Award Meeting notes also talked about “inspection procedures and sign offs”.

THE FACTUAL BACKGROUND

ISSUE 1: DID MILESTONES 2 AND 3 COMPLY WITH THE CONTRACT?

Overview

Section 110 of the Act requires every construction contract to contain “an adequate mechanism for determining what payments become due under the contract and when”. Verbus contend (and the judge agreed) that the ‘sign-off’ requirement envisaged an actual signing off of the works, and that due payment could be circumvented by a deliberate decision not to sign off or prevent others from signing off the prototype or the units. Verbus also argued that the contract offered no clear criteria for sign-off, because it envisaged the involvement of third parties (such as ‘the client’) with no status under the contract at all. For these principal reasons, they maintained that Milestones 2 and 3 did not comply with the Act.

On behalf of Bennett, Ms Doerries contended that ‘sign-off’ meant simply the date on which completion of the identified stage of the work (the prototype for Milestone 2 and the units in China for Milestone 3) was achieved (and so was capable of being

The Statutory Framework

Sections 109 and 110 of the Act provide as follows:

The purpose of these provisions is clear: to ensure that every construction contract contained a transparent and straightforward mechanism for payment to the contractor by way of stage payments, ending with a final payment, all to be made pursuant to a clear contractual timetable. I would venture to suggest that it was not designed to invalidate a particular type of stage payment or instalment regime; it was simply intended to ensure that there was such a regime in place which met certain minimum standards.

This is not a case about s.109. In its Part 8 claim form, Verbus did not seek to challenge Milestones 1-5 on the basis of a failure to comply with s.109. That seems to me to be right: the Milestones clearly amounted to a timetable for stage payments or instalments for work carried out. S.109 was not engaged because the contract contained the necessary timetable.

Verbus’ challenge relied on s.110(1)(a), on the basis that there was no adequate mechanism for determining what payments became due and when. They accept that there was no difficulty about the amount of each instalment: that was each of Milestones 1-5, expressed as a percentage of the contract sum. Such a methodology is common in ship-building and manufacturing contracts, and, given the nature of the construction work in this case, it is perhaps unsurprising to see a similar formulation agreed here.

The Relevant Case Law

It is common in construction contracts for sums to be payable when a certain stage of the works is reached. Perhaps the best-known example is the usual agreement by an employer to pay 50% of the retention monies when practical completion is achieved.

The precise trigger for payment will depend upon the terms of the contract. If, say, an architect’s certificate confirming completion of a stage of the work is a condition precedent of payment, then the employer is entitled not to pay if there is no such certificate (see Wallace v Brandon & Byshottles UDC (1903), Hudson’s Building Contracts, 4^th edition, volume 2, paragraph 362). Even then, the contractor may have a cause of action for the sum which ought to have been certified: see Henry Boot Construction Limited v Alstom Combined Cycles Ltd [2005] 1 WLR 3850 at 3861.

Moreover, if the employer prevents the issue of a certificate, which should otherwise have been issued, he cannot rely on its absence, because “no person can take advantage of the non-fulfilment of a condition the performance of which has been hindered by himself”: see Blackburn J in Roberts v Bury Commissioners [1870]

There are only a handful of cases concerned with s.110 and the Scheme for Construction Contracts. In Maxi Construction Management Limited v Morton Rolls Limited [2001] CILL 1784-1787, the contractual payment regime involved an unusual provision which required the agreement of the contractor’s valuation by the employer’s agent before it was submitted to the employer for payment. Lord Macfadyen held that that was not necessarily incompatible with s.110(1)(a), provided always that there was a timetable for the process of agreement and, just as importantly, a means of resolving any failure to reach such agreement. The problem was that the terms included no such timetable and no such mechanism. In this way, a failure on the part of the employer’s agent to agree a valuation could hold up the making of a claim for payment indefinitely. The court therefore concluded that the contract did not comply with the s.110(1)(a) of the Act.

In Alstom Signalling Limited v Jarvis Facilities Limited (No.2) [2004] EWHC 1285 (TCC), Judge Lloyd QC was dealing with a dispute as to what was meant by a final date. He said that although the payment terms in the contract referred up the contractual chain to the main contract between Alstom and Railtrack, the contract was clear that payment would be made within seven days of a Railtrack certificate. There was therefore certainty as to the final date for payment and the fact that Railtrack, possibly in breach of its own contract with Alstom, might fail to issue that certificate did not mean that, for the purposes of s.110 (1)(b) there was no date for payment to Jarvis.

At first instance in the present case, the judge referred to my judgment in Fenice Investments Inc v Jerram Falkus Construction Limited [2009] EWHC 3272 (TCC). That was a case where, by reason of a hierarchy clause, the payment provisions that the parties had agreed were adequate, and the Act was not engaged. My comments as to potential non-compatibility were therefore obiter. On the assumption that the contractual provision was silent as to the period between an application for payment and the conclusion of the evaluation process, I concluded that – in the context of that case - the mechanism was inadequate.

Analysis

Issue 1 raises primarily a question of interpretation. Does the reference to ‘sign-off’ in Milestones 2 and 3 stand as a shorthand for the prototype or units being complete, in a condition in which they could be signed-off, or does it mean the date on which they were actually signed-off, thereby allowing Bennett or a third party to refuse to sign off the prototype or the units and deprive Verbus of payment? Is it a generic reference to the satisfactory completion of a particular stage, to be assessed objectively (“the objective interpretation”), or is it a reference to the date on which the sign-off actually occurred (“the subjective interpretation”)?

I note that the judge’s starting point at [21] of the first judgment was that the use of the words “sign-off” in the schedule of Milestones, without reference to any other contract terms, was a shorthand for completion of the appropriate stage (i.e. the manufacture of the prototype for Milestone 2 and the production of all 78 units for

In addition, contrary to Verbus’ challenge, he reached that same conclusion in relation to Milestone 4. At [28] of the first judgment he said:

“As far as milestone four is concerned, this is different. There is no indication here as to anyone who would actually do the sign-off and, in this context, I consider that the expression is used very loosely. It simply means proof of delivery of the units in Southampton once discharged from the vessel carrying them. I do not consider that it involves checking to see whether they are damaged or not as a condition for a sign-off for payment. That would not affect the position as between the parties, though it might generate claims against the shippers and so on, pursuant to the contract of carriage. Indeed, that is supported by the statement I read at p.138 which made no reference to any inspection once the goods had arrived in Southampton and said that insurance to cover loss of cargo or damage would be provided in any event. Accordingly, in my judgment, milestone four remains intact.”

Accordingly, it was only those parts of the specification set out in paragraphs 6-8 above, with its various references to “sign-off”, which caused the judge to depart from the objective interpretation, and to construe that expression as having a particular meaning for the payment of Milestones 2 and 3.

It is not entirely clear what construction of the term ‘sign-off” the judge arrived at. But there appear to be three elements of his conclusion in favour of Verbus. First, at

Secondly, he suggested at [24] of the first judgment that, because of the involvement of the ‘client’s representative’, the criterion to be applied to any sign off was itself uncertain and vague (“the criterion issue”).

Thirdly, the judge appears to suggest at [26]-[27] that the mechanism was inadequate because no date for the payment of the relevant percentages was expressed in the contract (“the date point”).

For the reasons set out below, I differ from the judge on each of those three issues.

Taking first the point as to whether sign-off was to be assessed subjectively or objectively, I consider that as a matter of construction, it was objective. The judge had

There was nothing in the contract which sought to tie in sign-off to the production of a certificate or record of any sort. There was no condition precedent by which, for example, a certificate signed by Bennett (or Key Homes or Park Inn) was required before payment of 20% of the contract sum on completion of the prototype: see the discussion in paragraph 22 above. Ms Doerries said that this aided her construction of the contract, and I agree. If actual sign-off was required, the contract would have said so. Moreover, ‘sign-off’ is used in different ways and in different contexts in the contract documents, often to denote rather loosely approval of some sort, which militates against any interpretation which imports undue formality into the phrase.

But assuming that I am wrong and that these contractual provisions did envisage the actual completion or certification of a signed off document, it makes no difference to my conclusion as to the adequacy of the payment mechanism. Let us imagine that, contrary to my view, the contract required the prototype actually to be signed off by Bennett (or Key Homes or Park Inn) before Milestone 2 was paid. That would make no difference to Verbus’ entitlement to be paid once completion of the prototype had been achieved. If it was in a state where it could be signed off, Bennett could not avoid their liability to pay Milestone 2 simply because the document had not in fact been signed off: see the discussion in paragraph 23 above.

This is therefore a case with some similarities to Alstom v Jarvis, where the potential involvement of others in the process did not invalidate the payment regime. It is not like Maxi Construction, which was an unusual regime where a third party was involved and had to agree before a claim could even be made.

Accordingly, I can see no difficulty at all with the use of the word “sign-off” in Milestones 2 and 3. 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 signingoff. But even if it did, that could not affect Verbus’ entitlement to be paid because, if the prototype or the units were in the state in which they were capable of being signed off, Verbus were 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.

Secondly, I consider that the potential involvement of third parties (Key Homes and Park Inn) 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. The points made above, to the effect that wrongful interference cannot prevent proper payment, are repeated.

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.

For completeness, I should address the issue of timing. Part of Mr Sears’ complaint was that there was no mechanism by which, once sign-off had been reached, a payment would be made: there was no date for an invoice, no date that the sum fell due; no final date for payment. I accept that such dates were not spelt out. But I do not consider that such details were necessary in a contract of this type. 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. Contrary to the suggestion at [16] at the first judgment, Fenice Investments is of no direct relevance on this issue. That was a contract with monthly payments and the problem was a clash between two different sets of conditions.

The proposition that no specified date was required to make this regime work is borne out by Judge Waksman’s conclusions in respect of Milestone 4, which did not contain a specific date for payment. It merely identified the event (sign-off on delivery in Southampton) which would trigger that payment. There was no difficulty about the certainty of that payment arrangement, and Judge Waksman rightly upheld it.

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.

Summary on Issue 1

For these reasons, I consider that the judge was wrong to find that this contract did not contain an adequate mechanism for determining what payments became due under the contract, and when. In my view, the contract contained an adequate mechanism in accordance with s.110. Accordingly, I consider that the first ground of this appeal should be allowed. However, because of its wider importance, it is appropriate to go on and consider the arguments in respect of the second ground. I do that on the basis that, contrary to the views set out above, the contractual mechanism did not contain an adequate payment mechanism.

Overview

Verbus had originally argued (and the judge agreed) that, not only did paragraphs 2-4 of Part II of The Scheme for Construction Contracts (England and Wales) Regulations 1998 (“Part II of the Scheme”) have to be implied, but that, because of the difficulties of mixing and matching the interim valuation process in paragraph 2 (on the one hand) and the original percentages of the contract sum (on the other), paragraphs 2-4

As Mr Sears submitted at the appeal hearing, this approach was based on the premise that paragraph 2 of Part II of the Scheme was the only applicable paragraph because it related to interim and stage payments. He argued that the alternative option, paragraph 7, dealing with “other payments”, was merely a kind of catch-all which did not relate to interim or stage payments. He submitted that, in consequence, the analysis never needed to engage with paragraph 7 at all.

Ms Doerries disputed that approach. She said that the judge had been wrong to treat Milestones 2 and 3 as interim or stage payments “of a kind mentioned” in paragraph 2. That was, in particular, because there was no agreement here as to interim valuations, which was the focus of paragraph 2. Accordingly, she said that the most apposite provision was paragraph 7, which would mean that an entitlement to payment arose seven days after the completion of the work to which the payment related. Importantly, she said that this avoided any payment arrangement by reference to value. In addition, she said that this fitted in not only with the agreed concept behind Milestones 2 and 3, but also with the Milestones whose validity was either not in issue (Milestones 1 and 5) or had been upheld by the judge (Milestone 4).

The Statutory Framework

As noted above, pursuant to s.110(3), “if or to the extent that a contract does not contain” adequate mechanisms for payment, “the relevant provisions of the Scheme for Construction Contracts apply”. Section 114 provides that the provisions operate by way of implied terms. Accordingly, on the assumption that the answer to Issue 1 was that the contract did not contain an adequate mechanism, it is necessary to turn to the Scheme to find the necessary replacement terms. They are in Part II. The relevant paragraphs are as follows:

The Relevant Case Law

The Scheme is divided into two parts: Part I (which is otherwise immaterial for the purposes of this appeal) deals with the adjudication provisions to be incorporated if the contract did not contain a proper adjudication clause. Part II sets out the more complex provisions which apply if the parties failed to agree compliant payment conditions. Although there has been a certain amount of confusion in the authorities as to whether, in cases of non-compliance, these Parts are to be incorporated wholesale or only where necessary, I consider that the position is now clear.

Part I of the Scheme, dealing with adjudication provisions, is a series of “all or nothing” provisions. If the contract does not contain proper adjudication provisions, then Part I of the scheme applies “lock, stock and barrel”: see Edwards-Stuart J in Yuanda (UK) Co Limited vWW Gear Construction Limited [2010] BLR 435 at [61]. That is because of s.108 of the Act and the straightforward provision in s.108(5) that, if the contract did not comply with the Act, “the adjudication provisions of the Scheme for Construction Contracts apply”. There is nothing to say that such incorporation would only be to the extent necessary.

But Part II of the Scheme is different. The payment provisions there are incorporated where the contractual provisions are non-compliant, but s.110(3) makes plain that that is only “if or to the extent that” the contract does not contain the relevant provisions. As I pointed out in Banner Holdings Limited v Colchester Borough Council [2010] EWHC 139 (TCC); [2010] 131 Con LR 77, the words “to the extent that” are missing from s.108. That indicates that piecemeal incorporation is permitted in respect of the payment provisions in Part II of the Scheme in a way that is not permitted in respect of Part I.

That was always the approach in Scotland: see Hills Electrical & Mechanical plc v Dawn Construction Limited [2004] SLT 477. In that case Lord Clarke found that some of the payment provisions did not comply with the Act and that therefore Part II of the Scheme had to apply, but only to the extent that the express terms of the contract omitted particular requirements of the Act. That approach has been followed in England in a number of more recent cases. I note in particular that in Grove Developments v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (TCC); 165 Con LR 153, Stuart-Smith J said:

Accordingly, I regard it as settled law that, where payment provisions do not comply with s.109 or s.110 of the Act, Part II of the Scheme applies, but only to the extent that such implication is necessary to achieve what is required by the Act.

There is very little authority as to how the court should go about the task required by Part II. In Alstom v Jarvis, Judge Lloyd made a number of references to the tortuous nature of the drafting, and the “maze-like” exercise required to arrive at the answer. In Banner I complained that it should not really be the court’s job to have to piece together one set of compliant provisions from two different sources. Judge Waksman made a similar complaint in the current case.

The few authorities dealing with the approach to be applied to payment provisions which do not contain an adequate mechanism required by s.110 are concerned with the particular provisions relating to final payments. So, other than those cases previously noted, leading counsel were unable to find any authority dealing with the interplay between an inadequate mechanism for periodic or interim payments, and paragraphs 1-7 of Part II of the Scheme.

Analysis

For the reasons explained below, I have concluded that Ms Doerries’ approach to Part II of the Scheme is to be preferred. Although Part II of the Scheme is badly drafted, I think it is possible to pilot a course through it in order to achieve a common sense result that, when applied to this case, does no significant violence to the parties’ original agreement.

First, I think she is right to note that paragraphs 1 and 2 of Part II of the Scheme are intended to deal with the problem identified by s.109 of the Act, namely contracts that do not contain provisions for the payment of instalments or stage or periodic payments. The wording of paragraph 1 is precisely the same as s.109. By the same token, paragraph 3, which is under a separate sub-heading within Part II, reflects precisely the words of s.110.

As previously noted, this case is not concerned with s.109. Accordingly, save for the reference in paragraph 4, paragraph 2 of Part II of the Scheme is irrelevant to this appeal. Instead, this is a case concerned with s.110. On the assumption that the parties failed to provide an adequate mechanism for determining either what payments become due under the contract or when they become due for payment, the replacement mechanism is said to be expressly addressed by paragraph 3 and following.

How do those paragraphs work? It seems to me that they identify four different kinds of payment. Paragraph 4 identifies “payments of a kind mentioned in paragraph 2”. Paragraph 5 is concerned with final payments. Paragraph 6 is concerned with excepted contracts, and paragraph 7 with “other payments”.

Working through those options, this is not a final payment or a payment under an excepted contract, so neither paragraph 5 nor paragraph 6 can be relevant. Equally, it seems to me that paragraph 4 cannot be relevant either. That is because the Milestones in this case are not the “kind of payment mentioned in paragraph 2”. I accept that, superficially, Milestones 2 and 3 could be said to be instalments or stage payments, and that therefore paragraph 2 might apply. But I do not consider that, on analysis, it is correct to say that Milestones 2 and 3 are “payments of a kind mentioned” in paragraph 2.

Why not? Because “payments of a kind mentioned” appears to be a clear reference to the particular type or kind of payment with which paragraph 2 is expressly concerned. That is a payment based on “the value of any work performed”: see paragraph 2(2)(a) and following. But Milestones 2 and 3 were not payments based on the value of any work performed. They were based solely on completion of a particular stage of the works. They were not therefore payments “of a kind” referred to in paragraph 2.

By a process of elimination, therefore, paragraph 7, which I consider was indeed intended to be a ‘catch all’, is the only paragraph that could relate to these Milestones. Moreover, that proposition makes commercial sense. It means that, on the assumption that the agreed mechanism is inadequate because there was no agreement as to timetable for payment, such a timetable is provided by paragraph 7 (7 days after completion). And it resolves any concern about the sign-off provision (and the possible requirement for actual sign-off or doubts about the criteria) because it provides for payment after the completion of the relevant work (i.e. an objective test as to completion).

But if (contrary to my primary view) Mr Sears was right and the analysis must start with paragraphs 1 and 2, I consider that precisely the same conclusion would result. If the problems here were the criteria which triggered a payment, and the timing of that payment, they would be covered in paragraph 1 by the phrase “circumstances in which such payments become due”. What are the provisions to be implied where there is an inadequate mechanism dealing with the circumstances in which payments are due? The answer is said to be provided by paragraph 3, which in turn takes the reader to paragraphs 4-7, and therefore the analysis already set out above.

Accordingly, it seems to me that, 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 in some way, both can be resolved in straightforward fashion by the implication of paragraph 7. In that way, the payment in respect of Milestone 2 would be 7 days following the completion of the prototype in accordance with the contract. For Milestone 3, it would be 7 days following the completion of the units in accordance with the contract. Milestones 1, 4 and 5 would remain wholly unaffected.

It follows from the above that the right replacement option (paragraph 7 of Part II of the Scheme) does the least violence to the agreement between the parties. The adoption of the least damaging option also happened in Alstom v Jarvis. Furthermore, the importance of the parties’ original agreement, notwithstanding the provisions of the Act, was stressed by the Court of Appeal in Grove Developments v Balfour Beatty. It seems to me that, when dealing with Part II of the Scheme, these are matters which should be central to the court’s considerations.

That links to a wider point about the underlying purpose of the Act. As previously noted, in relation to payment provisions, the purpose of the Act was to provide for certain minimum, mandatory standards so as to achieve certainty and regular cash flow. Save in perhaps exceptional circumstances, it was not designed to delete a workable payment regime which the parties had agreed, and replace it with an entirely different payment regime based on a radically changed set of parameters. It seems to me that that could only happen where the regime which had been agreed was so deficient that wholesale replacement was the only viable option. That is plainly not this case.

Accordingly, for the reasons which I have given, if my Lords agree, this appeal will be allowed. Verbus’ claims for the declarations in the claim form will be dismissed.