Background
One of the key terms of the Housing Grants Construction and Regeneration Act 1996 (as amended) is section 110(1)(a): "Every construction contract shall provide an adequate mechanism for determining what payments become due under the contract, and when". Whilst the parties to a contract are able to determine what their payment provisions will be it is important to keep in mind this provision of the Construction Act.
Declaration
In this case the claimant sub-contractor sought a declaration from the Court that the payment terms in their sub-contract were not an adequate mechanism for determining what payments were due and so were unenforceable. They had agreed to design, supply and install pre-fabricated bedroom units for a hotel in London which were to be made in China, shipped to Southampton and then transported and installed in London. The payment terms were not monthly under the JCT contract but instead due at specified milestones:
- 20% on execution of contract;
- 30% on sign off of prototype in China;
- 30% on sign off of snagging items in China;
- 10% on sign off in Southampton;
- 10% on completion of installation/snagging.
The subcontract works were suspended due to non-payment by the employer and the claimant referred a dispute over its entitlement to payment to adjudication. The adjudicator decided the milestone payment provisions complied with the Construction Act and were therefore valid and enforceable.
Court action
The claimant brought enforcement action in Court contending s110(1)(a) was not complied with in relation to milestones 2, 3 and 4 because there was no criteria for determining whether sign-off had occurred and no time was prescribed for the process.
The court held in favour of the claimant. The provisions of the sub-contract for payment by reference to certain milestones did not comply with the Construction Act requirements as it was not clear what the criteria or relevant date were for "sign-off" under the milestones. They noted that "sign-off" appeared elsewhere in the contract, not just within the payment provisions. It was used to signify approval by the underlying client and therefore the court could not fashion a particular meaning to it for the payment provisions. It was not clear what sign-off involved and it was impossible to say what the due date for sign-off was for milestones 2 and 3. It could not be completion of that stage, as completion was expressly used for milestone 5.
However, the court did hold that milestone 4 was compliant as it could be construed as delivery of the units from the ship at Southampton.
Conclusion
The key message is that it is important to make sure any payment provisions that displace the monthly JCT payment provisions are still complaint with s110(1)(a) of the Construction Act by clearly providing an adequate mechanism for identifying when payments become due. The payment provisions need to be read in conjunction with the rest of the contract to ensure there can be no confusion as to their meaning.
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