Contractual payments

Q: My main contractor's payments are tied to specific milestones rather than pre-agreed payment dates. The contractor has just written to me claiming that the payment milestones are so uncertain that it does not know when it is due to be paid, and as a consequence the contract is not compliant with the Housing Grants, Construction and Regeneration Act 1996 (as amended). How do I check whether the contractual payment regime is valid? What will happen to the payment mechanism if it is not valid?

A: A construction contract must provide an adequate mechanism for determining what payments become due and when. The contract must also provide final dates for payment of any sums that become due. These requirements are set out in section 110 of the 1996 Act.

A contract that makes payments to the contractor subject to the completion of certain milestones can be perfectly valid and compliant with the minimum requirements of the 1996 Act. However, the contract will only comply if the terms are sufficiently clear as to when payments fall due and if entitlement to payment is triggered by an objective event. You should check your mechanism against the minimum requirements in the 1996 Act and the guidance in the case law.

The Scottish case of Maxi Construction Management Limited v Morton Rolls Limited [2001] CILL 1784 is a good example of the parties getting milestone payments wrong. In that case the contract required that the contractor's valuation be agreed by the employer's agent before it would be paid by the employer.

The contract did not give a timeframe by which the employer's agent had to agree valuations, neither did it give any means of resolving a situation where the employer's agent did not agree the contractor's valuation. This was found an inadequate mechanism for determining when payments become due to the contractor.

If a construction contract does not contain an adequate mechanism, the 1996 Act will effectively step in and incorporate terms to make the payment provisions compliant with the minimum mandatory standards in the act. These terms can be found in the Scheme for Construction Contracts (England and Wales) Regulations 1998.

Until the recent Court of Appeal decision in Bennett (Construction) Ltd v CMC MBS Ltd [2019] EWCA Civ 1515, it was unclear how and to what extent the terms from the scheme should be incorporated. In Bennett, the court held that the 1996 Act was not designed to delete a workable payment regime that the parties had agreed, and replace it with an entirely different payment regime. Rather than wholesale replacement, the court should do 'the least violence to the agreement between the parties' and, in that case, found that the 'least damaging option' would be to keep the majority of the milestone payments unaffected and to replace only those offending milestones with the relevant alternative provisions from the scheme.

In conclusion, if your mechanism is invalid, you cannot agree how it is meant to work and you end up arguing the point in court, then the courts will try to respect the agreement reached between the parties wherever possible, only incorporating the provisions of the scheme in a piecemeal way to correct any inadequacies.

Unfortunately, this invariably creates some uncertainty and it is difficult to predict the extent to which a defective mechanism will need to be rescued. The lesson to take away is to vet payment provisions in your contracts carefully to make sure that any corrective measures and court interventions will not be needed – otherwise your payee may seek to benefit from uncertainty to re-apportion the commercial risk by negotiating additional payments in circumstances where the agreed milestones have not been met.

Charles Blamire-Brown is a partner and David Greenwood a senior associate at Pinsent Masons
charles.blamire-brown@pinsentmasons.com
david.greenwood@pinsentmasons.com

Related competencies include: Contract practice