Modular Construction: Addressing Deposit Payments In Building Contracts

• Published date: 22 October 2020
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Contracts and Commercial Law, Construction & Planning
• Law Firm: Charles Russell Speechlys LLP
• Author: Mr Christopher Busaileh

Introduction

Modular construction has become increasingly popular in recent years. Once synonymous with 'pre-fab' houses and concrete tower blocks, the potential cost, programme and quality benefits mean it is now seen as a potential solution to the existing housing crisis, something my colleague Alexander Gold has written about - read more.

Modular construction does, however, give rise to a number of potential legal issues. In this article we will consider one such issue concerning payment protection for the employer. In the coming weeks we will be writing about other issues such as design liability and collateral warranties.

The problem

Often the modular manufacturer is a sub-contractor/ supplier to the main contractor. This is particularly the case where only specific elements of the building (for example, bathroom pods in a hotel) are constructed off-site as opposed to the entire development. The nature of off-site manufacture means that factory slots need to be reserved, often months in advance and typically a modular manufacturer will require a deposit payment before a slot is reserved. The modular manufacturer will then usually require further payments to be made during the manufacturing process and before the items are ready for delivery to site.

The problem is that such payments are not adequately covered in the payment provisions in standard form building contracts. These tend to assume that 'traditional' construction methods are used and therefore the contractor's right to payment for materials usually arises when those materials are delivered to site.

There may be exceptions to this where payment can be made prior to delivery if certain conditions are met. These conditions often include the relevant items being identified in the building contract, proof that ownership in the item has vested in the contractor being provided, that it is insured and that it is set aside and labelled at the off-site premises.

The problem here is that these conditions cannot be satisfied where an item is yet to be manufactured or is in the process of being manufactured. Therefore, the contractor has no right to recover these payment from the employer unless it has a specific entitlement to an advance payment under the building contract.

Possible Solutions

The contractor could use its own cash reserves to fund the payments to the modular manufacturer. However, if the project requires a substantial amount of modular manufacturing this is unlikely to be acceptable to a...