Court gives guidance on implying Scheme construction payment terms

Payment provisions should be implied in a way that "does the least violence to the agreement between the parties", bearing in mind the underlying purpose of the the Act, the Court of Appeal said.

"[T]he purpose of the Act was to provide for certain minimum, mandatory standards so as to achieve certainty and regular cash flow," said Lord Justice Coulson, giving the judgment of the court.

"Save in perhaps exceptional circumstances, it was not designed to delete a workable payment regime which the parties had agreed, and replace it with an entirely different payment regime based on a radically changed set of parameters. It seems to me that that could only happen where the regime which had been agreed was so deficient that wholesale replacement was the only viable option. That is plainly not this case," he said.

The Court of Appeal overturned a decision requiring the main contractor on a hotel project to make interim payments to a subcontractor, following a High Court judgment replacing the payment provisions in the contract with those in the Scheme. The Court of Appeal found that the High Court was wrong to find that the contract did not contain an 'adequate payment mechanism' as required by the Construction Act.

Although it was not strictly required to do so, the Court of Appeal then went on to consider the mechanism by which the provisions of the Scheme should be incorporated into a deficient contract in order to 'save' it. Construction law expert Simon Plunkett of Pinsent Masons, the law firm behind Out-Law, said that this guidance would be of interest to construction contract parties, particularly as it was handed down by one of England's most experienced construction judges.

"The case illustrates the difficulties the courts face when trying to rescue a non-compliant payment mechanism, using what the Court of Appeal described as the 'badly drafted' Part II of the Scheme for Construction Contracts," he said.

"However, the Court of Appeal's guidance is helpful in that it makes two things clear. First, it may not be necessary to incorporate all the Scheme payment provisions, lock, stock and barrel. Second, when deciding which payment provisions in the contract to replace and which to keep, courts should keep in mind the parties' original agreement and do as little damage to that agreement as they can," he said.

Under the Construction Act, qualifying construction contracts must contain certain mandatory provisions in relation to interim and final payments. Where the contract does not contain these provisions, the Act will impose its own terms as set out in the Scheme, by way of implied terms.

The dispute in this case related to the construction of a new hotel in Woolwich, East London, for which Bennett Construction Ltd ('Bennett') was the main contractor. Bennett contracted CIMC MBS Ltd, formally Verbus Systems Ltd ('Verbus'), to design, supply and install 78 prefabricated modular bedroom units for the hotel. The subcontract was based on the standard form JCT contract, although the JCT interim payment provisions were replaced with the contractor's own terms.

In 2018, the High Court upheld a claim by Verbus that some of these terms did not comply with the requirements of the Construction Act. After the parties were unable to agree replacement terms, the judge ordered that all the payment provisions be replaced with those in the Scheme, even though in his view only two of the four provisions were deficient. He did so "for reasons of workability and coherence". The effect of the change was, in the words of the Court of Appeal, "a significant reapportioning of the commercial risk which the parties had agreed".

In its judgment, the Court of Appeal found firstly that the contractor's payment terms had in fact been 'adequate' within the meaning of the Act. Verbus had argued that a reference to 'sign-off' in the disputed terms was unclear. The Court of Appeal disagreed, finding that the term "denoted the objective state which the prototype and then the units had to reach before the payment was due".

The Court of Appeal then went on to consider if, assuming the payment terms had not been adequate, the judge had been correct to replace all four provisions with those in the Scheme or whether he should have only corrected those that had been found deficient. After a review of the relevant case law, the Court of Appeal concluded that it was "settled law" that provisions from the Scheme should be applied "only to the extent that such implication is necessary to achieve what is required by the Act".

"Although Part II of the Scheme [the payment provisions] is badly drafted, I think it is possible to pilot a course through it in order to achieve a common sense result that, when applied to this case, does no significant violence to the parties' original agreement," Lord Justice Coulson said.

In this case, implying only paragraph 7 of the Scheme, which deals with 'other payments', into the contract would have delivered the intended result, he said.