A milestone payment may be defined as the payment to a contractor in a number of lump sums, each stage of payment is made upon achievement of a milestone or a stage defined in the contract. The payment in full or in percentages is based upon progress in completing certain works listed in an activity schedule prepared and priced by the contractor in his tender.
The proposed statutory payment regime in Hong Kong specifies that the contracting parties shall be free to agree 1) how many progress payments to be made; 2) when they may be claimed or the circumstances under which they may be claimed; 3) the basis on which they shall be calculated; 4) the period within or date on which any amount due must be paid provided that such period or date shall not exceed 60 calendar days after a claim being made in the case of a progress payment. To the extent that the parties fail to agree any of the above matters the parties undertaking construction activities or providing related services or supplying related materials or plant shall be entitled to claim a progress payment based on the value of their work, services or supply every calendar month. The value of work, services or supply shall be based on any contract price or rates or other prices agreed by the parties to the extent it can be reasonably applied or otherwise having regard to market rates or prices prevailing in the industry at the time the contract was entered into. The maximum payment cycle is within 60 calendar days of an interim progress payment claim or within 120 calendar days for a final progress payment claim.
The above statutory payment mechanism has been regulated in other jurisdictions for protection of cash flow in the construction industry. This statutory payment mechanism will automatically apply if a construction contract fails to provide an adequate payment mechanism. For example, s.110 and s.111 of the UK Housing Grants, Construction and Regeneration Act 1996, s.36 of the Malaysian Construction Industry Payment and Adjudication Act 2012 and s.15 of the New Zealand Construction Contracts Act 2002.
Before certifying a milestone payment, a construction contract may impose a condition precedent to require a certificate of achievement (CoA) issued by the contract administrator. A challenge arises as to whether the requirement of CoA and the nature of milestone payment no longer an adequate payment regime compliant with the proposed statutory payment regime.
In Bennett (Construction) Limited v CIMC MBS Limited (formerly Verbus Systems Limited)  EWCA Civ. 1515, the Court of Appeal considered whether milestone payments in a construction contract constituted an adequate mechanism for payment in terms of the UK Construction Act. The main contractor (Bennett) engaged subcontractor (CIMC) to design, supply and install pre-fabricated bedroom units for a hotel. The sub-contract incorporated the JCT standard form of contract and replaced the standard provisions for interim payments with five milestone payments. Milestones 2, 3 and 4 provided for payments upon “sign-off” of the bedroom units at various stages. The parties disputed over what “sign-off” meant and whether an adequate payment mechanism existed in the contract. The court rejected the subjective interpretation averred by CIMC that “sign-off” only took place when the bedrooms units were actually signed off for the reason that there was no condition precedent by which, for example, a certificate signed by Bennett was required before certifying the milestone payment. Even if the CoA was a condition precedent, it made no difference to the conclusion as to the adequacy of the payment mechanism because the state of completion was an objective assessment no matter the bedroom units were actually signed off or not.
The underlying purpose of the security of payment legislation is to provide for certain minimum, mandatory standards to regulate construction cash flow. It is not designed to expunge a workable payment regime agreed by the parties and replace it with a wholly different one. Another important remark is that if the Hong Kong proposed statutory payment regime applies “to the extent” that the parties fail to agree the payment terms adequately, the statutory provisions will only be imported and apply so as to govern the legal relations of the parties to the extent that they have not already concluded in the contract. The statutory regime payment will not automatically or necessarily be imported in their entirety as a result the milestone payment method may remain intact even though the contract does not adequately provide all the statutory requirements of a payment regime.