Payment under a subcontract to design, supply and install hotel modular bedroom units to be made in China was triggered by milestones but, because the Construction Act applied to the subcontract, it had to have an adequate payment mechanism. The amounts of the milestone payments, which were percentages of the contract price, were not in issue but three of the milestones, which were all dependent on “sign-off”, were challenged. At first instance the court ruled that two of the milestones did not comply with the Act and that particular paragraphs of the Scheme for Construction Contracts should be incorporated, which meant that the subcontractor was entitled to be paid by reference to the value of the work carried out, even if the units were not ready for “sign-off”.
The Court of Appeal noted that this was a significant reapportioning of the commercial risk which the parties had agreed and that it would take very clear words in the Act to achieve that. It decided that “sign-off” was to be assessed objectively, i.e. by reference to the satisfactory completion of a particular stage, rather than subjectively, by reference to the date on which the sign-off actually occurred. And even if actual ”sign-off” was required, if the prototype or units were ready for “sign off” there would be an entitlement to payment and a failure to sign-off the relevant documentation would not be a defence to a claim based on that entitlement. The subcontract therefore did have an adequate payment mechanism.
The court also considered how the Scheme might apply if the contract did not have such a mechanism. It noted that the payment provisions in the Scheme are incorporated on a piecemeal basis, only “if or to the extent that” the contract does not contain the relevant provisions. Paragraph 7 of the Scheme, a ‘catch all’, was the only paragraph that could relate to the milestones, it made commercial sense, did the least violence to the parties’ agreement and resolved any concern about signoff because it provides for payment 7 days after completion of the relevant work (i.e. an objective test). The Act was not designed to delete an agreed workable payment regime and replace it with an entirely different payment regime based on a radically changed set of parameters. That could only happen where the agreed regime was so deficient that wholesale replacement was the only viable option.