The price of modular hotel building? Court of Appeal endorses agreed milestone payments as an adequate payment mechanism and considers the meaning of “sign-off”

Upfront payment is commonplace for modular construction as is the ditching of traditional JCT interim valuation standard payment terms. So when 78 modular rooms for a new hotel in Woolwich were needed to be shipped from a factory in China, the contractor (Bennett) and subcontractor (CIMC - known at that time as Verbus) agreed for Verbus to receive up to 90% of full payment (about £1.8M) before any fully fitted out modular rooms were  within the M25. A first milestone 20% deposit was agreed as payable on contract signing.

Bennett and Verbus got into dispute over the next two agreed milestone payments, both due to be made before the modules left the factory in China. Their agreement was for 30% payment on sign-off of a prototype (second milestone) and a further 30% on sign-off of snagging of all 78 room modules (third milestone). Verbus ultimately did not get sign-off and elected to ship the modules to Southampton at their own risk. The modules were never used in the construction of the hotel and were scrapped due to the liquidation of the hotel developer.

At first instance the Court decided that what had been agreed for the second and third milestone payments was not an adequate mechanism for determining what payment became due within the meaning of the 1996 Construction Act and said that the statutory “Scheme” provisions imported a replacement payment mechanism based on interim valuation payments. Bennett appealed. The effect of the first instance decision was that Verbus was entitled to payment irrespective of whether the modules were complete and snagged at the factory. The Court at first instance took the view that achievement of the milestone required actual sign-off.

The Court of Appeal disagreed with sign-off being judged on a subjective basis and said that the test was objective. What counted was whether the modules had reached the point where they were capable of being signed-off. Accordingly, the agreed milestones were an adequate mechanism and the interim valuation provisions of the Scheme did not displace the agreed milestones. The provisions of the Scheme would only be implied to plug any gaps around the milestone arrangement.

Philip Eyre, Glovers’ head of construction comments “This Judgment of the Court of Appeal respects the milestone-based bargain struck by the parties. It has become standard practice to jettison the JCT payment terms for modular projects and disputes such as this could perhaps be avoided by obtaining specialist legal advice for drafting bespoke contractual payment terms that will be upheld with certainty as an adequate payment mechanism. The Court of Appeal has sent a shot across the bows of any payer thinking about avoiding payment by withholding (or procuring the withholding of) a physical sign-off. Unfortunately, this case is not an advert for modular building and highlights the inherent risks of making substantial upfront payments for factory-manufactured modules.”

Bennett (Construction) Limited v CIMC MBS Limited [2019] EWCA Civ 1515

For further information, please contact Philip Eyre