Posts Tagged ‘solicitors’

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. 

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.

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.

Adjudication enforcement in context – traps for the unwary

April 30, 2010

Did a seminar last week on adjudication enforcement with Hill International to a group of West Midlands’ contractors. I thought it may be worth replicating some of the main points here for interest:

The general principle that has come out of the TCC for some considerable time now is that adjudication decisions will be summarily enforced save in the most narrowest of cases. We are all very familiar with the adage “pay now, argue later”. Since Carillion v Royal Naval Dockyard, the TCC been quite clear that it will only entertain defences to resist enforcement based on the adjudicator’s breach of natural justice only in the plainest of cases. Pilon Limited v Breyer Group is such a recent example where the adjudicator failed to consider properly a defence and therefore unduly restricted its jurisdiction to hear the dispute.

Nine times out of ten, however, the disgruntled party’s recourse is to seek redress by way of arbitration or litigation – not to come up with flimsy excuses at a summary judgment hearing. It leads to a substantial waste of costs otherwise.

But the reality is quite different.  More and more disgruntled parties are willing to pay up or, at least, without the other side doing some serious legwork. Why is this? From what I can see, this is due to a mixture of three things:

–         the deepest pocket theory: they’ll go away;

–         the “better-in-our-account-than-theirs-for-a-bit-longer” theory: this is a risky strategy with the threat of incurring indemnity costs; and

–         the valid defence theory: fine as long as it is a defence and not merely a sham.

Poor professional advice does, of course, compound a losing party’s position. That is why adjudication enforcement needs to be approached carefully.

Getting a proper assessment of the adjudicator’s decision, an appreciation of the chances of getting a successful judgment and ensuring that there are no credible defences to all or part of the adjudicator’s decision is key. Effectively, you want the green light to go!

But many parties want their cash quickly, quite rightly so, and this stage need not take an age. It is however recommended to avoid getting involved into protracted arguments in court at the enforcement hearing.

What does the initial meeting with your legal counsel look like at this stage?

First things first – understand your own mental state. You are going to be pleased that your efforts have been worthwhile and that an adjudicator has validated what you knew all along; that you are owed your money and/or your declarations as to the real state of affairs. You are also going to be frustrated that the other side have not paid up, despite you having shelled out your non-recoverable costs of running the adjudication. You are going to want to apply as much pressure on them as possible for as little extra legal expenditure as possible…and you will want a quick judgment at court.

Why do we not just issue a statutory demand now and threaten to wind them up?

I have seen people do this and there is no denying that sometimes it works as a threat. The problem arises if the other side, even spuriously, raise alleged defences to the statutory demand within the 21 day period in which case the debt is highly likely to be deemed to be disputed – indeed, it is often fatal to the winding up process if successful. Even if it is not, the process is inevitably stacked against you as it allows the defending party to applying for an injunction to have the advertisement of the petition restrained by the court. This means that you cannot proceed. Compound that by the defending party’s ability at the eleventh hour to appoint an administrator and the whole process is a waste of time. Oakley v Airclear Environmental is a stark warning that if there are issues surrounding the adjudicator’s jurisdiction, the threat of winding up will not necessarily succeed.

What you have to appreciate is that different rules apply in insolvency matters. You have to demonstrate that the other side cannot pay their debts as they fall due or point to some other reason why you believe that they are insolvent. It is not enough that they simply refuse to pay you. As my colleague, Adam Hiscox, (http://www.bpe.co.uk/pages/4720/Hiscox.htm) explained at the breakfast seminar in Birmingham which formed the subject of this blog, unless you can clearly demonstrate these grounds, the court will regard the petition as an abuse of process and throw it out with indemnity costs awarded against you.

The long and short of it is that you could simply be substituting one process for another, without the certainty of success, with procedural challenges along the way and the likelihood that you are no further advanced.

 What sort of risks will you face in adjudication enforcement?

 Challenges to the adjudicator’s award are invariably based on one or more of the following; namely that:

–         the adjudicator exceeded its jurisdiction in some way;

–         the adjudicator breached the rules of natural justice; or

–         there is some other good reason why the decision should not be enforced.

The case of GPS Marine v Ringway Infrastructure has clarified that a party that does not reserve its position to challenge an adjudicator’s award is likely to face an uphill struggle if it then wishes to challenge that award. This can be worded in correspondence or the pleadings themselves as a general reservation.  

What are you actually asking the court to do?

As will be recalled, adjudication awards are binding only until a court decides otherwise. You are therefore asking the court to order that adjudicator is right and that the award should be enforced if the losing party still refuses to pay. As the resisting party, you are asking the court to order that there is some reason why judgment should be stayed (suspended) or that it is more appropriate that matter be settled at trial. Basically, that the enforcing party is not due its money now.

There are many examples of arguments based on excesses of jurisdiction. Here are but a selection.

You may argue that the adjudicator has been biased in some way during the adjudication itself. A&S Enterprises v Kema is an example whereby the adjudicator made adverse comment about the non-availability of a representative at a hearing. It was held by the court that this could be construed as evidence of bias.  A mere observation of non-availability of evidence would have sufficed.

There is also the well-known cases where the adjudicator has held telephone conversations with a party without disclosure of contents to the other side. This was held to be sufficient to  invalidate the adjudicator’s decision in Discain Project Services v Opecprime Developments Ltd

There is nothing wrong with an adjudicator seeking legal advice, provided it discloses that fact to both parties and invites comments on its validity. In BAL (1996) v Taylor Woodrow Construction Ltd the adjudicator asked the parties for permission to take legal advice. Whilst the claimant agreed, the defendant did not reply. It was held by the court that the adjudicator had not shared the advice with the parties or provided them with  an opportunity to comment. The result was that the decision not enforced, which seems fairly harsh in the circumstances.

There is one caveat to all of this – the bias or breach of natural justice must be material and central to the dispute. So, in Kier Regional (t/a Wallis) v City & General (Holborn) the adjudicator disregarded expert evidence not available at the time the dispute crystallised. It was held that, even if it made the decision to disregard evidence in error,  the adjudicator had still decided on an analysis of facts or law that it was irrelevant and was entitled to do so. This is an inherent risk within adjudication but one consistent with decisions dating back to Bouygues v Dahl Jensen.

At the seminar, I discussed when set off would be allowed in some detail. It warranties a topic by itself but the main point is that set off must be real and ascertainable at the time of the enforcement proceedings. Such a defence will not work where the sums remain unquantified or hashed together at the last minute. Also, the set off must relate to the dispute and not to some unrelated contract as happened in Solland v Daraydan Holdings. It is not the  function of the court to stay decisions pending the outcome of other disputes.

 The bottom line is that, if an adjudicator has decided upon the issue of sums to be set off, then a resisting party may do so subject to the issue of proper notices as required. If the issue of set off has not be referred and decided upon. the entitlement depends on the precise contractual terms.

Nor will an award be held as a “hostage of fortune” to be subject to set off of unquantified subsequent payment certificates. That was tried in William Verry Ltd v Camden London Borough Council in the context of LADs to be applied. Whilst not successful, the defendant still retained the right to pursue the claimant at a later date, which is what the Construction Act is all about. A TCC judge will not allow a system of rolling balances however where one adjudicator’s decision is subject to a subsequent one. The Act requires immediate payment: Interserve Industrial Services v Cleveland Bridge UK.

 What may consist of other valid grounds to resist enforcement?

 The answer lies in the claimant’s financial standing. Bearing in mind the maxim “pay now, argue later” could the claimant pay back those sums awarded at a later stage if required to do so? If the answer is no, then the court is unlikely to order the defendant to pay. The rationale is that the sums are not being order to further the claimant’s cashflow, but rather to pay its creditors which is not the purpose of the Act. Also, if the claimant’s position is pretty much the same as it was before contracting with the defendant, then the same rationale applies. This has been the position ever since Wimbledon Construction Company 2000 v Vago. The case of Hart Investments Ltd v Fidler confirmed this that, where there are clear insolvency, the court will not enforce but will defer to the operation of insolvency rules.

This all comes down to one principle, as we all know – ensuring cashflow. ven if a decision is wrong it is still enforceable in the absence of wrong doing by adjudicator. The court is loathed to depart from that basic position.

Good bank holiday weekend, everyone.