Getting contracts right for modular build projects

Modular projects are becoming much more popular in the construction industry, particularly in projects where entire rooms are constructed off site.

Milestone payments will often be agreed between parties, where payment is triggered upon “sign-off” of a certain event, such as completion of a certain number of rooms on a hotel project.

The recent case of Bennett (Construction) Limited v CIMC MBS Limited (2018) highlights the issues that can arise in the event that triggers for payment are not properly defined.  This contract concerned the design, supply and installation of 78 modular bedroom units for a hotel. Payments were triggered by “sign-off” of certain milestones, such as completion of a prototype room.

The parties disagreed about what “sign-off” actually meant and when payment became due. The court considered whether “sign-off” meant being in a condition in which units could be signed off or whether express sign off had to have taken place, and whether this was an adequate payment mechanism as required by the Construction Act.

The court held that milestone payments were compliant with the act and an adequate payment mechanism. It did not go as far as to define “sign-off”, leaving an air of uncertainty around the lengths parties must go to in order to avoid disputes.

Payment milestones must be clearly drafted

This illustrates that payment milestones must be clearly drafted and in terms which cannot be construed as contrary to the Construction Act.

If this mechanism is to be utilised efficiently, parties should agree and document exactly what constitutes “sign-off” and what express criteria will have to be met in order to make “sign-off” obligatory by a party. This should minimise the chances of future disputes arising.

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