Posts Tagged ‘engineer’

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.

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.