Bennett (Construction) Ltd v CMC MBS Ltd  EWCA Civ 1515
Chantal-Aimée Doerries QC and David Johnson acted for the successful Appellant in Bennett (Construction) Ltd v CMC MBS Ltd (formerly Verbus Systems Ltd)  EWCA Civ 1515. The case provides much-needed judicial guidance on the operation of Part II of the Scheme for Construction Contracts and in particular, on the approach to be applied to payment provisions which do not contain an adequate payment mechanism as required by the Housing Grants, Construction and Regeneration Act 1996 (as amended) (“the Act”). The Court of Appeal judgment considers how the paragraphs in Part II of the Scheme works. Also of interest is the Court’s upholding of particular milestone payment provisions as compliant with the requirements of the Act.
The dispute concerned a sub-contract for the design, supply and installation of prefabricated bedroom units to be installed in a hotel in Woolwich, East London. The parties agreed that the Respondent sub-contractor would be paid by reference to five ‘Milestones’, which provided for percentage payments of the contract sum. Several Milestones required ‘sign-off’ of various stages of the units’ completion.
There was a dispute about defects in the works and sign-off of the various stages did not occur before the contract’s termination.
Having unsuccessfully challenged the validity of the Milestone payments in adjudication, CIMC brought Part 8 proceedings in the Technology and Construction Court and obtained declarations that two of the five Milestones were contrary to the requirements of s.110(a) of the Act (which requires every construction contract to contain an adequate payment mechanism). This gave rise to the question as to what extent the provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 Sch.1 Part II (“the Scheme”) should be implied to deal with the non-compliant Milestones. The Judge at first instance concluded that it was necessary to delete all five Milestones, and incorporate paragraphs 2, 4 and 5 of the Scheme.
Bennett appealed, arguing: firstly, the Milestones complied with the Act; ‘sign-off’ did not refer to the formal act of signing-off but rather to the completion of the underlying work stage, at which payment would fall due; and secondly, the correct approach to the Scheme was not to replace the Milestones in their entirety with new stage or periodic payments, but rather to preserve the three compliant Milestones, and import the requirements of paragraph 7 of the Scheme in respect of the remaining Milestones, which provide payment would fall due on completion of the underlying work, thus preserving the intention of the parties in relation to the remaining Milestones.
On appeal, the Court of Appeal (Coulson LJ delivering the judgment of the Court) accepted Bennett’s submissions. First it concluded that sign off denoted the objective state which the work had to reach before payment was due, namely compliance with the contractual specification, and it did not require an actual signing off but even it if did that could not affect CIMC’s entitlement to payment if the work was in the state in which they were capable of being signed off.
Second, having allowed the appeal on the first ground, the Court of Appeal nevertheless addressed the second ground, noting the lack of judicial guidance in this area and the wider importance of the issue to the construction industry. Having noted that it was settled law that the Scheme provided a ‘gap-filling’ role rather than wholesale replacement, the Court addressed how Part II of the Act works. In short save in exceptional circumstances, which this was not, it was not designed to delete a workable payment regime, agreed by the parties, with an entirely different one based on a radically changed set of parameters. The Court identified paragraph 7 of the Scheme as a ‘catch-all’ provision and had the agreed mechanism been inadequate in the present case, the appropriate course would have been possible to resolve any inadequacy through the application of this paragraph.
Chantal and David were instructed by Brecher LLP for the Appellant.