UK Construction Market – let no-one put asunder?

June 12, 2012

With the news that All Mass Cladding Systems’ creditors stand to lose £2m according to administrators, Grant Thornton, and the demise of Bristol based MJN Colston owing creditors £41m, you could be forgiven in thinking that recent announcements that UK Plc is back in recession is a self-fulfilling prophesy.

 

Despite these very sad instances, BPE are seeing a number of projects ranging from a few million up to £12-15m getting underway. There is a steady cycle of healthcare, retail and leisure and heritage regeneration schemes (despite adverse changes on VAT treatment for the latter) continuing to be tendered for, won and successfully completed.

 

We are not seeing a mass collapse of the market that we did in 2009. True, it’s too early to start predicting that things may not slow down but confidence in the ability of constructors and engineers to deliver projects on time and on budget is as high as ever.

 

Pre-Tender Solutions – There is a growing tendency for contractors to offer up solutions to problems pre-tender awards to avoid issues arising later. Sharp practice in profiting from Employer Design Team led mistakes is still happening, but severely frowned up as everyone needs to pull together in a much more collaborative way. Basically, very few can play roulette as to whether they get paid or not. Those that still do play by those rules are falling by the wayside. Everyone is fed up with the glass half full mentality and realise that we have to create our own luck at times and work more strategically to get projects off the ground.

 

Colleagues and clients always laugh at my expression for this, “contracting for grown-ups”, but that is really the essence of what needs to continue to happen.

 

“Quietly Confident” – I can’t say that some further big names will not go under, nor am I saying that the picture is rosy. I do think however that the construction and engineering industries in particular have ridden a very rough road since 2008 and that have sought to adapt their practices to survive. In doing so, we are seeing some excellent integration (good old fashioned team work) which is enhanced by technological advances. The appropriate use of BIM (Building Information Modelling) is set to help bring all parts of the team together and, over a period of time, may result in more efficient practices and cost savings which has to be a laudable goal, whether we find ourselves in tough economic times or not. 

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Procurement principles – is it time for a Spring clean?

June 1, 2011

Procurement principles – is it time for a Spring clean?

Construction and engineering contracts are the formal expression of an agreement

made between the parties. Such contracts often not simple, and are rarely contained

in a single document.

The quality and precision of contract and associated documents can help (or hinder)

a successful project. It is important that they define the involvement of the various

parties, their relationships with each other and the layers and levels of obligations,

liabilities and rights between them.

All too often lack of time, lack of planning or lack of understanding leads to contracts

that do not do reflect those points. In the event of a dispute, the parties have to ask

the courts (or another third party, such as an adjudicator) to decide what the

agreement was that was actually put in place.

Do we really need paper?

Construction and engineering projects often involve a dozen or more different

commercial organisations, each with different roles needing different, skills and

expertise. It is critical that the understanding of each contribution to the whole project,

their tasks, rights and responsibilities and their interaction and co-ordination with all

of the others are fully and precisely defined. With large amounts of money and long

timescales involved, misunderstandings can be very expensive.

The only safe way is to document everything so that the various players can each

understand their part and play it properly.

Unfortunately, many projects encounter changes and problems, and these can lead

to claims and disputes. Many claims arise from poorly-prepared contracts which

inadequately define obligations or rights, but proper contract preparation can go a

long way in preventing and managing the risk of disputes.

Such risk management through the use of contractual agreements rests on ensuring

that the fundamental parts of the deal are crystallised by the drafting, and that all the

documents are:

·

 

Certain;

 

·

 

Clear; and

 

·

 

Consistent.

It is unreasonable, and asking for trouble, to expect any organisation or person to

 

carry out their role or their task if what is expected of them is not fully agreed and

 

unambiguously described. In the event of disputes arising, missing or poor

 

documentation can prevent recovery of losses: what matters is not what happened,

 

or what should have happened, but what can be shown to the courts to have

 

happened.

 

 

BPE Solicitors LLP

Construction & Engineering – Spring newsletter 2011

The best time

The most important time to use documents to get the project right is before tender

stage – before any organisation (be it a professional, a contractor, or any other) is

asked to provide a fee or quote.

Inadequate information in the issued documentation at this stage is the most

common cause of disagreements of obligations and budget overruns in the industry.

If the tender or proposal documents clearly state what is required and on what terms,

then the professional or contractor can decide whether or not they wish to tender at

all, and exactly what activities and risks they are pricing for.

The most important time for accuracy is when the agreement are actually executed.

Proposals and tenders are usually the subject of some negotiation, and it is essential

that these changes are reflected in the documents which the parties execute.

Building and engineering contracts

Usually, the building or engineering contract is the central document in the suite that

defines the responsibilities, rights and liabilities of a capital project. Such documents

set out which party is undertaking what in respect of either the construction alone, or

the design and construction, of the main works.

Building and engineering contracts are often based on published model or standard

forms. They are widely available, but few of them are suitable for every project

completely as published.

Depending on procurement route, there can be one or more building or engineering

contracts on one project: for example, in construction management there may be a

dozen independent trade contracts, whereas in design and build there will be one

main contract and a number of sub-contracts. For property development schemes,

the contract for the construction of the external structure or building is the main

agreement, with building services subsidiary to that, but in manufacturing or other

processing facilities where particular engineering expertise is fundamental to the

project, the building itself is often sub-contracted.

The published building and engineering contracts all have things about them that are

for and against their use, but there are some issues that need to be considered on all

projects when deciding what type of contract should be used.

The most important issues are first, to make sure that the contract is appropriate for

the client’s risk and procurement strategy, secondly, to make sure that it is

appropriate for the works being let, and finally to make sure that its payment

provisions accord with the purchaser’s intentions.

Works requiring the contractor first and foremost to ensure some performance

specification is achieved (and this can include anything from HVAC systems in an

residential apartment block to output levels in an petroleum refinery) cannot be

contracted using a building contract: it is necessary to allow for the specification of

the performance requirements and to cover the situation if the requirements are not

met.

Similarly, a process-based performance contract is inappropriate for a small civil

engineering job such as re-surfacing a car park: the contract needs to deal with

issues such as ground conditions or adverse weather in a way inappropriate for a

multi-million pound pharmaceutical facility.

Payment provisions can very between contracts, between projects involving the

same purchaser, and between phases of the same scheme. If time is more important

than cost, the design phase of a project can be undertaken on a reimbursable or

cost-plus basis, and the execution phase on a lump sum, guaranteed maximum price

or target cost basis. Repeat projects, for example roll-out of a refurbishment

programme across retail sites, could be partnered to take account of increased

efficiencies. Anything is possible, but purchasers need to be aware that departure

from industry norms can increase risk to the contractor, which will increase costs.

There is still no such thing as a free lunch!

Professional appointments

Most building, and many engineering, projects involve professional design and/or

management consultants. It is as important to get the terms of the appointments of

the consultants right as it is the building or engineering contractor – more so in the

case of traditional procurement routes, since the professionals are the only ones

doing the design.

The two most important issues in respect of the appointment of consultants are the

integration of services across the project, and the integration of design liabilities. The

agreements with consultants, contractors, design sub-contractors and others should

fit together like a 3-D puzzle, with no overlaps and no gaps.

Lists of services must be consistent and fully meshed between consultants – it is

important that no two consultants think that they are responsible for undertaking the

same services, and equally that there are no services that no consultant expects to

do. Gaps and overlaps can cause significant cost and time overruns: the former

leads to duplication of fees, and uncertainty over design liability; and the latter leads

to design problems (particularly at the boundaries) and delays, re-design work and

other problems while the gap is dealt with.

It is because of this that the published standard forms of appointment, although

individually sound, do not work well together across a project. Each of the

professional bodies produces their own standard forms, and neither the terms nor the

services integrate either with each other or with the common building and

engineering contracts. Problems with gaps or overlaps in the services can be sorted

out “on the hoof”, although not usually without cost or time penalties, but problems

with design liability can take years to become apparent. In addition, of course, the

standard form appointments are written for the benefit of the members of the

professional bodies, and so are rarely to the overall benefit of the purchaser.

Collateral warranties

Collateral warranties, also known as duty of care deeds, are the primary vehicle that

the construction industry (and the engineering industries, but to a lesser extent) uses

to deal with the legal doctrine of privity of contract.

English law did not until recently permit a party who is not one of the contracting

parties to a contract, even if benefiting from the contract, to sue under it. For

example, if an organisation purchased a manufacturing facility and it transpired that

there were problems with the structure, the new owner could not take action against

the responsible parties. If the developer has set up a one-off company for the

development, with no assets, for example, or that was no longer trading, the owner

would have no real option for recovery as under the doctrine of privity he could not

recover from the designers that the developer had engaged.

Although the doctrine of privity has to a large extent been eroded by the Contracts

(Rights of Third Parties) Act 1999, it is still not always certain that tenants,

purchasers or the like would always be able to recover, and to what extent. The

construction industry continues to use collateral warranties to deal with the issue, and

generally contractually excludes the effect of the Act. That said, however, the 2005

suite of JCT contracts does have the option of using the provisions of the Act for

recovery instead of warranties.

Collateral warranties vary enormously in their terms. The most contentious issues are

always net contribution and limitation of liability clauses, together with copyright

licences, assignments and levels of the standard of duty of care. Each can be

negotiated depending on the relative commercial power of the parties, but there is

little point in giving or accepting warranties that are not backed by professional

indemnity or product liability insurance, to an appropriate level. In the event of

problems few organisations have sufficient assets to cover the beneficiary’s losses.

One of the most common problems with warranties is that the appointment or

contract on which any such agreement rests is missing, incomplete, or inconsistent

with the terms of the warranty. A warranty is usually only as good as the agreement

from which it springs, so it is important to ensure that these exist and are properly

executed.

Performance bonds

Performance bonds are often demanded of contractors as a form of surety for the

complete and correct execution of the works governed by the contract. They come in

two forms; on-demand bonds (which need no agreement to the default); and other

forms which need the contractor to agree to the existence of the default. Both types

will require the purchaser to demonstrate to the bondsman both that there is default

and the extent of the loss.

Performance bonds are usually for 10% of the contract sum. Since they represent

monetary recompense – cash – performance bonds are usually favoured by

purchasers over other forms of guarantee.

Parent company guarantees

Parent company guarantees are the usual alternative to performance bonds. The

main difference is that this form of guarantee is not for financial compensation, but is

a guarantee that in the event of default the parent company will complete the

obligations of the defaulting party. Favoured with contractors, as these guarantees do

not have a direct cost associated with them, this form of security is only of any use if

there is a parent company at all, and is then only of any value if the parent company

is itself financially (and technically) sound. Purchasers often prefer not to take these

instead of a performance bond, because in the event of a default they do not

necessarily want part of the same organisation to continue to be involved.

Letters of intent

Every year the construction and engineering industries waste millions of pounds and

put projects at risk through poorly-drafted letters of intent, and every year the courts

hear cases on the subject.

Whilst the letter of intent is an essential tool which allows contractors to order longlead

items, or start design work, or even get on site, it should only be used as a

temporary measure whilst some terms are finalised, or whilst the actual contract

documents are prepared for execution.

If the letter of intent does not define what the terms will be when executed, how far

the purchaser is financially liable before execution or until a specified date, what each

parties’ obligations are in the interim, and what insurances are required then in the

event that contracts are never formally executed, or if a problem arises before

execution, either party could be at significant risk of uncertainty over what has

actually been agreed.

Legally, letters of intent fall into one of three categories: the courts will find that the

letter constitutes an ordinary contract, with the terms being defined in the letter – and

not necessarily being what one or both parties has expected; an “if contract” where it

is clear what the terms would have been had they actually been executed; or a

quantum meruit agreement, where the client pays the contractor “as much as he

deserves”, with the amount being determined by the courts. None of these options is

ideal, lacking as they do contractual – and budgetary – certainty, but the “if contract”

is what should be aimed for.

The overriding message is to keep on top of your agreements and, if in doubt, get

them checked. Investment now could save thousands in legal costs during a later

dispute.

Suspending performance v repudiatory breach

October 21, 2010

When there is no other choice – wrongful suspension: the consequences of repudiatory breach

Contractors need to be careful that they suspend performance of their works on proper grounds and ensure that they do so in the correct procedural way. A timely reminder as to the consequences of getting it wrong can be found in the recent case of Mayhaven v DAB [2010].

The question facing the court was whether the effect of the contractor wrongfully suspending its works amounted to a repudiatory breach of contract. This would entitle the employer to terminate the contract and sue the contractor for damages or, alternatively, force the contractor to perform its services. In this case, the court decided that wrongful suspension did not automatically constitute a repudiatory breach. Why is that the case? Because it is only fair that a party be penalised when the breach is sufficiently serious so that he “so acts or so expresses himself as to show that he does not mean to accept the obligations of a contract any further”.

The court did not accept Mayhaven’s submission that a wrongful suspension, which gave rise to a failure to proceed regularly and diligently under an express term of the contract, would necessarily amount to a breach of a condition or fundamental term so that every such breach would amount to a repudiatory breach of contract. It would be a matter of considering the seriousness of the breach and the facts and circumstances of the case. DAB’s mistake as to its legal entitlement to suspend the contract was merely one of several factors to consider when determining whether the suspension amounted to repudiation.

Unless there is an express refusal to operate the terms of the contract, the court will ask itself whether the defaulting party’s actions were such as to lead a reasonable person to conclude that it no longer intended to be bound by the contract in the circumstances. A breach of contract will be considered repudiatory where:

1. the parties have agreed that any breach of a particular contractual provision will entitle the other party to end the contract; or

2. where there has been a fundamental breach of contract so that the innocent party is denied a substantial amount of the benefit of the contract. The right to suspend at common law is limited to very narrow circumstances, such as when the employer pays consistently late or not does not pay at all without good reason.

There may be some other unacceptable past conduct by an employer which may indicate that it has no intention of honouring contractual terms in the future. In most scenarios, and in the current economic climate, the contractor will delay treating the employer’s conduct as repudiatory in the interests of keeping the work flowing and in the hope that they get paid at some point in the future. It really is seen as a weapon of last resort by many and rightly so.

Generally speaking, suspending performance is fraught with risk unless done pursuant to a s112 notice or by operating prescribed, contractual provisions which provide the contractor with more security as to the outcome.

Understanding Practical Completion

October 21, 2010

Understanding the meaning of “Practical Completion”

The term is of key importance to all those in the supply chain as well as subsequent purchasers and tenants. Developers will want practical completion to be certified quickly so that rental payments begin, or so that their profit can be paid in terms of a forward funding agreement. Tenants may not otherwise be able to start fit-out works or open for trading. Contractors will want to avoid or minimise liability for liquidated ascertained damages (LADs) and have the insurance risk transferred back to the developer.

Practical completion may lead to a release of retention monies (normally 50%) to the contractor if that has been agreed beforehand and, depending on its wording, any performance bond may also fall away (although increasingly bonds are extended to the time when all snagging has been completed).

The consequence of achieving practical completion is that this triggers the commencement of the defects liability period (3, 6 or 12 months typically). This narrows the matters which the contractor needs to address to incomplete and defective works that arise during that period. Issuing variations is no longer an option post practical completion and normally amount to the instruction of additional works pursuant to a separate contract.

In practice, practical completion certificates are often issued conditional upon certain snagging items being completed and so this needs to be an amendment to the standard form.  It is often also necessary to include a timeframe for the contractor rectifying such snags as there is no other duty otherwise to do so before the expiry of the defects liability period.

There can be disparity between the definition of practical completion in the Agreement for Lease and the building contract. For example, a developer may agree that the date of entry for a purchaser or tenant can only occur when the local authority has accepted the completion certificate, but this same requirement may not be included in the building contract. The issue of drawings, operation & maintenance manuals and other certificates should, if required, be drafted in as conditions precedent to achieving practical completion so that the developer ensures a smooth transition.

The risk of dispute can be mitigated by ensuring that:

  • All relevant obligations in property documents are mirrored in the building contract;
  • The professional team remains in constant communication in the lead up to practical completion and all are clear about the role they are to undertake;
  • The contract administrator operates the terms of the building contract to the letter and remains impartial (which can be difficult when faced with client pressure);
  • Practical completion is certified subject to certain outstanding snags being completed to motivate the contractor to return;
  • Any further defects are dealt with promptly, both contractually and on site. This avoids disputes festering and not being dealt with until the expiry of the defects liability period, by which time often documents have been archived and memories have faded.

Public procurement – the not-so-new rules

October 21, 2010

Complaining about unsuccessful public bids – the new rules

Over the last few years, more and more contractors are disputing decisions by public bodies when unsuccessful in public tenders. This has long been the hallmark of construction disputes in Scandanavian countries but represents a shift in the mindset, in view of harsh economic times, of UK contractors. Morrison Facilities Services Limited v Norwich City Council [2010] is a recent example.

In this case, Norwich City Council awarded a contract for £17.5m bid to Connaught Partnerships Limited. All other bids were in the £23m-£26m range, including the one from Morrison.

Morrison complained that Connaught’s tender was accepted despite it being “abnormally low” and that the Council had applied undisclosed criteria when assessing the ‘quality’ of bids. As a result, Morrison applied for an injunction to prevent the award of the contract to Connaught, pending the outcome of a trial on its various claims.

The court ruled that Morrison had a seriously arguable case that Connaught had submitted an abnormally low tender and that the Council had failed fully to investigate whether the bid was sustainable. Furthermore, the Court found that Morrison had a seriously arguable case that the Council had relied on undisclosed award criteria in its assessment of the bids. The Court also concluded that, in the absence of an injunction, damages were an inadequate remedy for Morrison. Thus the injunction was awarded.

Morrison had to endure the costly and lengthy process involved in getting their injunction. Under the new Public Contracts (Amendments) Regulations 2009 (“the 2009 Regulations”) there is an automatic suspension of the tender process as soon as proceedings, such as those commenced by Morrison, are started. The issuing of the claim form (without even a letter before action) is sufficient now  to suspend the contract award process.

As Morrison sought an injunctions before 20 December 2009 (the date that the 2009 Regulations came into force) in order to obtain an injunction Morrison was forced to meet the high threshold for being awarded an injunction, set out in the well known American Cyanamid case.

Under those rules, a claimant needs to show that there is not only a serious issue to be tried, but also that damages would not be an adequate alternative to an injunction. Furthermore, a claimant has to show that the balance of convenience does not favour the contracting authority entering into the contract. A claimant also risks being held liable for the contracting authority’s costs, should they successfully resist the claim. This combination represented a significant hurdle for potential claimants to overcome for contractors, some of whom have limited resources, when constantly unsuccessful in public tenders for no good apparent reason.

Since 20 December 2009, when proceedings alleging a breach of public procurement procedure are brought at the contract award stage and before the contract is entered into, the contracting authority must automatically suspend the procurement process. There is no need to apply for an injunction to prevent the contract in question being awarded.

This suspension remains in force until proceedings are determined or discontinued, or until the court passes an interim order lifting the suspension. This shifts the balance much more in favour of aggrieved bidders. The onus is now on the contracting authority to have the suspension lifted.

It is important to respect the timeframes within the 2009 Regulations and to note especially that:

  • proceedings must be started promptly and, in any event, within three months beginning with the date when grounds for starting the proceedings first arose. Proceedings need not be started before the end of the standstill period.
  • proceedings which seek a declaration of ineffectiveness must be brought within six months from the date of the contract, if there has been no publication, or 30 days beginning on the day after the date on which a contract award notice is published in the Official Journal or when the contacting authority has informed the bidder. However, in the 2009 Regulations, the 30 day time period only begins in case of notification to the bidder on the day after the date on which the bidder receives a summary of the relevant reasons, as well as being informed of the conclusion of the contract.
  •  a claim form can be issued even though the contracting authority has not been informed of the breach or anticipated breach of duty. The requirement for a letter before action is therefore removed.

 

The scope for the application of the 2009 Regulations is clear to see in overcoming the initial hurdle and to mitigate the risk of the contract being awarded quickly without others being able to air their grievances. Success will depend on advancing legitimate grounds and not simply using these enhanced remedies as a strategic tool to prevent competitors benefiting from a legitimate award.

Endeavours – merely semantics?

October 21, 2010

Constantly endeavouring…but to what end, exactly?

Lawyers can spend a lot of time arguing about such terms as “reasonable endeavours”, “best endeavours” and “all reasonable endeavours”. Why? Because the law is often uncertain about the effect of certain wording which may have a direct impact upon your entitlement to, for example, get paid.  

Getting it wrong can have serious effects for anyone entering into a construction or engineering contract, whereby payment of sums due can be conditional upon a party endeavouring to carry out certain actions. This is a fertile area of dispute if not handled carefully. The issue can and should be closed off when reviewing contracts at tender stage.

The recent decision in CPC Group Limited v Qatari Diar Real Estate Investment Company [2010] is a timely warning to dedicate some time to ensuring the scope of what you say you can achieve, is actually achievable!

In this case, joint venture parties entered into a sale and purchase agreement for the development of Chelsea Barracks which included an obligation to “use all reasonable but commercially prudent endeavours to enable the achievement of the various threshold events and Payment Dates“.

One of the parties retracted its application for planning following much publicised objections. This effectively delayed one of the payment dates under the sale and purchase agreement. The judge was asked to consider whether the withdrawal of the planning application was a breach of Qatari Diar’s obligation to “use all reasonable but commercially prudent endeavours“.

The judge rejected the submission that Qatari Diar’s behaviour was in breach of this obligation. Having considered the Court of Appeal’s decision in Yewbelle Limited v London Green Developments [2007] he found that:

  • the wording “all reasonable but commercially prudent endeavours” did not equate to a “best endeavours” obligation;
  • the obligation to use “all reasonable endeavours” does not always require the obligor to sacrifice his commercial interests; and
  • the wording “but commercially prudent endeavours” was effectively superfluous in these circumstances.

What is the impact of this judgment in real terms? The following table summarises the current distinction between the various terms:

“Reasonable Endeavours”

 

“Best Endeavours”

 

“All Reasonable Endeavours”

 

  • A “reasonable endeavours” obligation does not require a party to disadvantage itself unless the contract specifies that certain steps have to be taken in performance of the obligation. There may also be an obligation to litigate, subject to the costs and the likelihood of success.

 

  • More onerous than a “reasonable endeavours” obligation and subject to the test of reasonableness.

 

  • An “all reasonable endeavours” obligation does not necessarily equate to a “best endeavours” obligation. It does however require a party to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted.

 

  • This does not require the party to exhaust all possible actions; one particular course should discharge the obligation.

 

  • Satisfying a “best endeavours” obligation does not require a party to take steps that would bring about its bankruptcy, certain liquidation or disregard the interests of shareholders.

 

  • This obligation does not always require the sacrifice of commercial interests and very much depends on the commercial context in which it is applied. It is therefore the least certain of all such endeavours obligations.

 

  • “Reasonable endeavours” applies an objective standard of what an ordinary competent person might do in the same circumstances. It also allows commercial considerations to be taken into account.

 

  • A party should probably exhaust all of a number of reasonable courses which could be taken in a given situation to achieve a particular aim.

 

 
 
  • A “best endeavours” obligation can require the party under the obligation to invest and take the risk of success or failure  but only where there is a reasonable prospect of commercial success.

 

 
 
  • A “best endeavours” obligation can be qualified by other duties such as the duty of directors to act in the best interests of the company.

 

 

 

Unless there is a reason not to do so, the best advice is to make any pre-condition an absolute obligation by the use of the words “shall” or “must”. Trying to compromise an agreement too far can lead to unintended, negative consequences. It is best to invest time upfront getting your contracts reviewed and such uncertainty stripped out, rather than fall foul of the court guidance and pay a lot more later on without a cast-iron certainty of recovery.

Construction & Engineering Briefing Notes – Collateral Warranties

October 11, 2010

What is a Collateral Warranty?       
It is a contract under which a consultant such as an architect or a contractor / sub-contractor warrants to a third party (e.g. a funder, landlord or purchaser) that it has complied with its professional appointment or duties under a building contract.        

Why have Collateral Warranties?  
The appointment of a consultant or the award of a building contract will be between two parties i.e. the developer and the consultant or between the employer and the contractor. Often a third party will need the benefit of the contract even though it is not a party to the contract.           

The collateral warranty will contain statements to the effect that the consultant or contractor:       
a) takes proper skill, care and diligence in design;    
b) uses materials of appropriate quality;       
c) carries out the work in a proper workmanlike manner;     
d) maintains an adequate level of insurance.

The collateral warranty may also provide the third party with a contractual right of redress enabling it to sue for losses which would not otherwise be recoverable.   

Are Collateral Warranties really enforceable?    
No-one ever sues on a collateral warranty right? Wrong, as the case below demonstrates.          
           
In Scottish Widows Services Limited v Harmon & others [2010], Scottish Widows claimed several million pounds against a contractor who had installed defective cladding under a collateral warranty that had been assigned to it. The case is important because the contractor had been careful to include a ‘net contribution’ clause, which it believed would limit its liability. This was held to be effective in overriding the principle of ‘joint and
several’ liability i.e. that a single party can be held singularly responsible for the liability caused by a collection of wrongdoers. As a result of the ‘net contribution’ clause, the contractor was only responsible for the proportion of those losses which it had caused and not the total losses incurred by Scottish Widows.

Pitfalls
Parties will often attempt to include its rights of ‘set-off’ or counterclaim in the collateral warranty. A third party beneficiary should ensure that such rights are excluded. If a consultant or contractor has not been paid for its works under the building or engineering contract, then this could be used to ‘set-off’ any claim against it and could reduce the liability of the contractor under the collateral warranty to nil. In effect, the collateral warranty would become worthless.      

Many insurance policies exclude liabilities that are assumed by way of a guarantee. This can cause problems in collateral warranties where the consultant or contractor ‘warrants’, ‘covenants’ or ‘ensures’ that no prohibited materials have been used. The reason is that such terms are akin to giving an express guarantee. Therefore the consultant or contractor should only ‘see’ that prohibited materials are not used. Precise drafting is very important.            

It is also crucial to include a ‘no greater’ liability clause. Professional indemnity insurance policies commonly exclude cover for claims where the collateral warranty has imposed obligations which are more onerous or longer lasting than the equivalent liability under the building or engineering contract.

 The Future? 
Collateral warranties may create certainty and is favoured by the construction and engineering industries as well as funders. The resulting paper-chase can however be time-consuming. As a result, some major projects and consultancy appointments make use of a schedule of third party rights. This makes use of the Contracts (Rights of Third Parties) Act 1999 and is intended to provide the same benefit as a collateral warranty without the need for a separate document.   

The downside is that the drafting and negotiation of the master document becomes more complex. For instance, a schedule of third party rights requires the contracting parties to consider carefully the relevant contract terms so that they benefit not only the contracting parties, but also consider the third party requirements and whether that third party can enforce those terms. The master contract will also need to deal with the risk of double recovery by those third parties.   

The JCT 2005 suite provides the option of a third party rights schedule on all standard form contracts. Many funders however still insist upon being granted a collateral warranty as a separate document. They regard the ‘step-in’ rights (allowing the funder to take over the development if the developer or contractor becomes insolvent) as being better worded and therefore more certain as security.  This remains a culture hard to shift.

 A Word of Caution   
Even if a collateral warranty has been provided, a consultant or contractor may become insolvent. Professional indemnity insurance must be renewed annually so it is often a warning sign of foreseeable cashflow problems if parties delay or refuse to forward policies or other evidence of insurance cover.    

A solution can be found in ‘latent defects insurance’, which is a non-cancellable policy to cover the cost of repairing hidden defects and insulate against consequential losses. Policies vary however and this is merely an extra level of protection. This kind of insurance is not a substitute for a robust collateral warranty providing a wider contractual right of redress whilst the parties remain trading.

NEC3 – the finished product for effective procurement?

October 5, 2010

Is NEC3 the finished product for effective procurement?

I recall having a similar discussion about 5 years ago when NEC3 was first published. At that time, we were seeking to make sense of the changes from the second to third edition for clients.

Five years on, where are we? Our experience is that certain perennial debates are still ongoing such as:

–          Contract formation: how do clients achieve the desired result by choosing the various options;

–          Partnering: what exactly does it mean?

–          Life: how do I cope with industry expectations/evils which threaten the  precise workings of the contract?

An appraisal of NEC3, as with all industry form contracts, must come with a caveat attached. It is all-too-easy to criticise a particular contract for its failings. Contracts are not meant to be and cannot be one size fits all, which must be borne in mind here.

There are real benefits to using the NEC suite, as we all know. The three main advantages are often hailed as flexibility, simplicity and clarity.

But is that due to the terms of the contract itself, such as the early warning mechanism, or are other factors in play? How much of its apparent success is also due to market forces or strong on site project management.

It is, of course, slightly disingenuous to criticise a contract that may substantially avoid disputes by its very operation. But from a legal perspective there are aspects which, if tested, could result in the consequences of certain ambiguities in drafting being magnified.

There are, in reality, both pluses and negatives as with any contract.

Flexibility vs clarity

One of the core features of the NEC3 is, of course, its flexibility.

The forms can be used for any procurement method in an international, multi-discipline environment (be it building, civil, process engineering etc) and whether it includes contractual design or not:.

The contract is made up of various sections, as we all know:

– 9 core clause selecting the appropriate main option clause;

– 15 secondary option clauses;

– bespoke terms or amendments from the Z clauses; and

– a choice of two different schedules of cost components.

The negatives with NEC3 are exacerbated by inexperience and lack of care which may inadvertently result in no contract at all being agreed, or at least not in the way parties intended.

In terms of adjudication, there may not be a contract sufficiently evidenced in writing to enable an adjudication to take place but that may become less important with the proposed changes to the Construction Act due next year subject to the points below.

From experience, problems in the contract could arise from one or several of the following:

–          A lack of attestation clause affecting insurance cover and the duration of parties’ intended obligations;

–          The scope of services being vaguely drafted;

–          The Employer’s risks ignored in the Contract Data. This is a problem for the Contractor since it bears the risk of any not so stated.

–          In relation to the risk register, there is only an obligation to record; not to do – decision making is not mandatory (condition 16.3)

–          There may be a lack of proper programme or a failure to set out adequately sectional completion information. (X5) must be included within the contract;

–          Confusion as to the meaning and consequences of key dates as opposed to section completion dates. For clarity, a key date is an obligation to meet the condition stated in the contract by that time, whereas a section completion date acts as a trigger for the Employer to take over the works not later than two weeks after completion.

 

May be a lack of contract at all…does it really matter?

The well-known case of RJT Consulting Engineers Ltd v DM Engineering (NI) Ltd  may well be overturned by the amendments to the Construction Act but at the risk of uncertainty as to payment terms. Additionally, the right to adjudicate will still need to be in writing.

A fundamental lack of agreement over rates will remain a fertile ground for dispute, irrespective of the procedural requirements. Experience suggests that this seems to arise when the draft contract goes out to tender, the contractors then price on the information given but the contract data is sometimes never firmed up.

As a practical point, you should always get the contract data firmed up as soon as accepted, whichever side of the fence you are on. Why leave it to chance when you are undoubtedly dedicating so much administrative resource to the operation of the contract anyway?

Partnering – meaning and enforceability

Core clause 10.1, of course, states: “The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in the spirit of mutual trust and co-operation.”

The simple problem is determining precisely what this clause means.

Core clause 10.1 comes close to a requirement to act in good faith and reflects the good faith requirements of those countries that operate under a civil code. This doesn’t work so well in England & Wales, which has a common law system. A few cases have tried to make sense of it though.

See, for example, Bedfordshire County Council v Fitzpatrick Contractors Limited [1998] where Dyson J would not imply such a term into a road maintenance contract that neither party should conduct itself in such a way that would “damage the relationship or confidence in trust” between them.

One reason for this was the care taken by the parties to detail out the terms which were to govern their contract. There was no scope to imply this further relationship.

One thing is clear from this case – being too prescriptive in terms can result in the parties losing the whole ethos of partnering. The problem is that not prescriptive enough risk the terms being too uncertain to be enforceable.

On the other hand, in Petromec Inc and Others v Petrobras and Others the Court of Appeal had to consider the whether an agreement to negotiate in good faith was enforceable. It was said the Court of Appeal because:

  • The requirement was expressly agreed by the parties as part of a contract drawn up by lawyers.
  • The Court recognised that it would be able to calculate the cost referred to and so would be able to establish whether there was a lack of good faith on the part of a party.

The questions then arise – (1) what is the standard of care in partnering and (2) how do you measure it to know if the standard has been breached?

As a reminder, it does appear that the English courts will pay attention to the intentions of the parties. Birse Construction v St David Limited is such an illustration  in which the  terms of a partnering charter was deemed not to be, and never intended to be, a binding contract even though it had been signed by the parties. As the judge said, the terms, whilst:

“clearly not legally binding, are important for they were clearly intended to provide the standard by which the parties were to conduct themselves and against which their conduct and attitude were to be measured.

This is the approach that any judge or adjudicator should follow if asked to consider the effect of core clause 10.1 in NEC3.

How do you establish the standard of care in partnering? The answer is to  list out any activities which demonstrate that the parties are acting in good faith.

How do you measure the standard? By the use of KPIs as an option to ensure that objectives surrounding cost, completion and accuracy are achievable.

Please mind the gap…z clauses

Notwithstanding the above, some would suggest that the lack of detail contained in NEC3 can lead to ambiguity and that clarity in respect of certain matters should be set out at the outset, rather than as particular events occur. Accordingly, Z clauses may typically address the following:

  • The provision of collateral warranties. Notwithstanding the Contracts (Rights of Third Parties) Act 1999, the construction industry still relies heavily on collateral warranties. It is often the case that funders, tenants and the like will insist on an employer procuring collateral warranties from its contractor. An employer will therefore be forced to include such provision within the contract;

 

  • Copyright. Where a contractor has design responsibility, it is important to include a provision addressing matters relating to copyright. Without such clarity the employer’s rights, if any, to use the design would be uncertain.

 

  • Prohibited materials and Codes of Practice. Again, where a contractor has design responsibility a provision requiring the contractor to refrain from using prohibited materials in design and construction may be necessary so as to prevent the use of unsuitable materials;

 

  • Assignment. A provision prohibiting the contractor from assigning the contract may be necessary so that the employer has certainty in respect of who is actually carrying out the works.

 

  • Confidentiality clauses – of particular importance in the public sector.

 

  • Project specific definitions – one size does not fit all, as mentioned earlier.  

 

  • Notice to Contractor of any third party interests, e.g. a landlord or funder, so that it does not act inconsistently and inadvertently put Employer in breach of its obligations. If the Contractor cannot comply, then it is best to say upfront at which point relief from any indemnity that may be put in.

 

  • Details of the insurance provisions actually in place for the project.

 What should be remembered is that Z clauses are not intended to substantially rewrite the standard clauses of contract. Indeed, improper use of Z clauses can be problematic.

No doubt it is quite easy for parties to simply “cut and paste” provisions contained in some “special conditions” or a “schedule of amendments” into Z clauses. The problem is that in doing this the parties can quite easily fall back into old habits, thereby defeating the benefits of using the NEC. Put simply, wholesale amendments to the standard form through the use of Z clauses should normally be resisted.

Saying that…certain conditions are (by the parties’ desire for clarity as to their consequences) still amended and redress the contractual balance. For example, dealing with the consequences of ambiguities/inconsistencies being discovered in condition 17.1.

Unamended, the Contractor is duty bound to notify the Employer of any ambiguity or inconsistency between “documents which are part of this contract.” Normally, an instruction follows. If it amends the Works Information, then this normally amounts to a Compensation Event.

A proportionate amendment would be to avoid the Contractor benefiting from its own breach where it fails to submit design information to the Employer and this leads to direct loss or delay.

What’s the feeling – does it tick all the boxes?

Success in using NEC3 requires a lot of pragmatism. Get the contract formation right and get the legal obligations drafted carefully so that they are effective. Partnering works when it can be measured.

There remain other barriers to effective procurement in addition to the legal uncertainties mentioned above including:

• The change in mindset required in complying with NEC3 weighed against the appearance of being “contractual”.

Experience of managing a project on NEC3 terms.

Resource having to deal with an administratively burdensome contract.

Knowledge The increased use of NEC3 by both the public and private sector.

Get this right and the benefits can be considerable leading to cost savings and success in terms of delivery.

Construction insurance explained

September 25, 2010

Construction & Engineering Briefing Notes — INSURANCE MATTERS BPE Solicitors LLP St James’ House Tel: 01242 224433 St James’ Square Email: construction@bpe.co.uk Cheltenham http://www.bpe.co.uk GL50 3PR

What do I need to look out for?

A contractor will undoubtedly warrant that is has certain types of insurance in place. Unless the insurance policy mirrors these those contractual obligations, a contractor can inadvertently find itself in breach of contract. Some common traps for unwary include the following: 1. The different scope of Joint Name Policies Insurance for the works is often taken out in the joint names of the contractor and the employer. Joint Names insurance is used to ensure that the risk is on the insurance company regardless of which party is at fault. The intention is that each party can claim on the insurance and that the insurance company cannot claim against the jointly named insured, even if one of them is at fault. One note of caution: an interest noted on a policy is no substitute for a Joint Names Policy. A person noted on a policy can still be pursued by an insurance company whilst it has no contractual redress itself against any such claim. For this reason, standard form contracts are often amended to name any party providing funding for the project so that they have equal rights to the other named parties. Joint Names insurance does not automatically exclude liability for the parties for negligence. This does however depend on the wording of the specific policy. If specific or nominated subcontractors are to be included within the Joint Names insurance, they should be expressly referred to in the contact and policy. The scope of cover in standard form contracts can vary dramatically, so you need your advisers to explain the differences to you for your particular circumstances. The contractual obligation upon an employer may extend only to insuring existing structures which may not cover any subsequently installed equipment for a tenant fit-out. If the contractor’s cover is inadequate, then the new installation may not be insured. 2. Conflicts between the policy and standard form contract wording The general principle is that one Joint Name Insured cannot claim against the other in respect of the joint insured risk. Certain express terms in the contract can conflict with this principle, such as the existence of an indemnity clause. This means that Joint Names insurance may not provide a remedy if the contract says something else. 

 It is imperative that the insurance clauses and indemnity provisions do not conflict. Most contracts contain an indemnity clause that remains unaffected by the Joint Names insurance. So, even if the insurance policy includes the negligence of one of the parties, it may still be possible for the employer to claim against the culpable contractor. Your advisers should carefully consider the precise wording of the proposed construction contract for you, so that this conflict with these consequences does not arise. 3. Getting the correct policies for the correct period Care is needed to ensure that the insurance policies do not overlap. One solution is to take out ‘project’ insurance to supplant all the other types of insurance. It is worth nothing that latent defect insurance still needs to be considered if you agree project insurance to cover hidden defects which may become apparent at a later date. Project insurance is usually taken out by the employer with the contractor (and possibly subcontractors and consultants) as joint insured. It will be designed to cover a particular project in addition to the coverage provided by contractor’s All Risks Insurance. Advantages for employers include control over the policy terms and the extent of insured risk but the premiums can be high in the UK and the ongoing costs prohibitive for all but the largest of projects. No matter which insurance cover is contemplated, it is all too easy to warrant that suitable insurance is in place but then fail to understand properly the detail of the underlying policy documents.

This typically happens in two scenarios: Scenario A When considering ‘each and every claim’ cover which is subject to aggregation clauses within the policy documents: – Those putting together construction contracts should raise questions as the existence of aggregation clauses in the underlying policy documentation – especially when dealing with contaminated land. – In a typical JCT contract, the default position is on the basis of an annual aggregate level of cover rather than on an each and every claim basis. Thus, the level of insurance provided by the contractor is reduced. Scenario B Parties taking out certain commercially available insurance policies in lieu of other security in the mistaken belief that it will pay out for latent defects. Often the reality is that it only provides cover for catastrophic events resulting in total destruction of the building.

Various exclusions to the insurance cover Different forms of contracts may have different insurance provisions. In ICE contracts, for example, (published by the Institute of Civil Engineers and are normally used for operations involving groundwork) the exclusions to insured risk are known as the ‘expected risk’. These include ‘any fault, defect, error or omission in the design of the works (other than a design provided by the contractor pursuant to his obligations under the contract)’. The exclusions will need to be matched in the contractor’s insurance policy to cover its liability. The wording of the policy then needs to match carefully the limitation of the contractor’s liability. The nature of the insured event (the time, place and loss) should be carefully checked. Where a party warrants to another party that no deleterious materials have been used, this can fall outside the insurance cover. Many policies exclude liabilities that are created by the provision of a guarantee. The use of words ‘warrant or covenant ensure that no deleterious materials have been used’ is the same as giving a guarantee and can have unintended and unwelcomed consequences. 5. The continuing duty of disclosure A common problem area is the failure to disclose properly all material facts when taking out insurance. The non-disclosure of a material fact can render the insurance policy voidable. Just because the insurance policy has been signed, does not mean that the duty of disclosure has ended. The duty of disclosure equally applies to the renewal of an insurance policy. If your contractual relationship with a third party has deteriorated, it may qualify as a material fact requiring disclosure. Construction or engineering projects can be complex and careful wording is needed to meet your duty to disclosure. This may include an assessment and possible disclosure of all potential disputes to your insurer and you should speak to your broker about doing so. The duty of disclosure also applies equally to Joint Names contracts. So, if one party fails to disclose something material, then it is possible that both parties may be without insurance cover and subject to a claim by the insurance company.

Collateral warranties – doing a good deed

August 19, 2010

Collateral warranties – deed, what deed?

Collateral warranties are often signed as part of the commercial reality of getting the deal done. How many of us actually consider the possibility of not being able to enforce them at a later date? Not getting the basics right can prove very costly indeed.

By way of reminder, the whole point is that a collateral warranty should ensure that the grantor:

·        takes proper skill, care and diligence in design;

·        uses materials of merchandisable quality;

·        carries out and complete the works in a proper workmanlike manner; and

·        complies with an express fitness for purpose obligation.

Whilst the contents are drafted with care, construction litigators still see many warranties that are not executed properly, which has dire consequences. Lack of proper execution means that you cannot rely upon the document as a deed and benefit from the extended limitation period of 12 years to bring an action. To put it bluntly, your rights under the warranty will have been extinguished after 6 years (the normal time under simple contract) and to argue otherwise would be a futile exercise.

In some cases, you will not be able to make out a contract at all leaving you with no redress whatsoever. Of course it depends how the job has been procured but privity of contract will prevent you from enforcing the building contract against a third party and the rights of third parties clause will undoubtedly have been struck out. You are going to face an uphill struggle with defective warranties whichever side you find yourself on. It is therefore worthwhile getting the basics right in order to minimise costly and unnecessary disputes from arising in the first place.

The deed and its pitfalls

The fact is that problems can occur. In such circumstances, tt is important to know how deeds work so that you can assist your lawyers with collating corroborative evidence if you do have some irregularity in the document.

In brief, the terms of the warranty must be reduced in writing. Any representations during negotiation not in writing are only persuasive as contemporaneous evidence of the intentions of the parties.

Moreover, the document must make it clear on its face that it is intended to be a deed. The intention must be expressed by the person making it or, as the case may be, by the parties to it. It is often argued that the beneficiary must also execute the document. Do not be fooled – this  is completely unfounded in English and Welsh law.

The deed needs to be signed by either two directors or one director and the company secretary or one director with a witness.

A warranty will be defective as a deed if signed by only one director and not attested as such by a witness. Adopting the old engineering adage, “if it ain’t broke, don’t fix it”, you should continue to execute documents as you have always done unless there is good reason not to, in which case, seek advice.

Your problems are confounded if there is more than one formal defect to the deed. In such circumstances, you cannot argue estoppel to prevent the other party from relying upon the defect to deny that a deed was ever entered into. Expect a stern rebuke from the Technology and Construction Court and a costs order against you if you attempt to do so.

The issue of legal delivery of the document, which should not be confused with physical delivery, is another fertile area for argument. Let’s clear this one up now – legal delivery is an act done which evidences an intention to be bound. Dating the document is often the most common way of doing this but clear evidence to the contrary will rebut any supposed intention.

The lack of contract

If you cannot evidence the making of a valid deed, a warranty may still exist as a simple contract or be evidence that a contract was formed between the parties. This brings with it another headache as there is no automatic presumption that a defective deed exists as a contract. The evidential problem is this – if the document was drafted as a deed, it may not require consideration in its terms, which is a crucial element of making out a contract.  The worse case scenario is that you may not even be able to evidence the formation of an agreement.

If that happens, you need to rely on tort in which case you will need solid contemporaneous evidence of a breach of professional duty of skill and care. Your records 6-12 years on may not be in good order and you may have already disposed of the files. Even if you do have records, the exercise of going through them will be expensive either in lawyers’ fees or management time or both. In any case, tortuous damages are only given on an indemnity basis which limits the losses you may be able to recover.

Safeguarding your interests

You can take some basic steps to safeguard your interests. Make sure you execute the document in the right places. Expect repeat calls from your lawyers until you do. Keep copies of the executed warranty and do not assume that other parties will produce them if you are faced with a problem.

If you want the benefit of the warranties, then ensure you can evidence of your entitlement. In short, the collateral warranty is a humble but highly significant document which deserves due care and attention.