Buildingblocks. Hot topics JCT 2006 (yes 2006 not 2005) The constructing excellence contract Insolvency and the Construction Act

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1 Buildingblocks Edition Hot topics JCT 2006 (yes 2006 not 2005) The constructing excellence contract Insolvency and the Construction Act Liquidated damages: no penalty referee! There s something about Henry

2 Welcome to the first edition of Building Blocks for There is a bit of a standard forms theme in this edition. Ron Plascow addresses JCT 2006, while Stuart Pemble gives a flavour of the new suite of RIBA forms. In the next edition, Stuart will give a more detailed analysis of the RIBA forms. Liquidated and ascertained damages is always a popular topic. In the light of two recent cases, Robert Weatherley and Amy Harris provide a timely reminder of the law in relation to this. As the slowing down of the economy becomes more apparent, the courts have been busy addressing insolvency issues. Ed Callaghan reports on the latest case addressing this and its relationship with the Housing Grants Construction and Regeneration Act On the seminar front, you should find a seminar programme with this edition of Building Blocks that sets out details of all our up and coming seminars. Contents: 3 Hot topics Some important dates for your diary as new legislation comes into force and the Government adopts the guide to best "fair payment" practices. There is also an update on concurrent delay. 4 JCT 2006 (yes 2006 not 2005). The constructing excellence contract The benefits of using JCT As a taster, adjudication and withholding notices was the topic of a successful seminar held in our Cambridge office on 31 January This will be repeated in our Birmingham office on 10 June. The extremely successful seminar on NEC3, held in Cambridge at the end of last year, will also be repeated. Ron Plascow will speak, assisted by Keating Chambers Finola O Farrell QC and Jonathan Selby. It will be held in our London office on Fenchurch Street on 23 April at 4pm. If you would like a further copy of our seminar programme, are interested in attending any of the seminars or have any other comments with regard to the content of Building Blocks and/or seminars in general, please do not hesitate to contact me. Alison Garrett Editor alison.garrett@mills-reeve.com 5 Insolvency and the Construction Act How the courts are interpreting the Construction Act when there is an insolvency. 6 Liquidated damages: no penalty referee! A reminder of some of the pitfalls of liquidated damages in the light of two recent cases. 7 There s something about Henry Is there any merit in the criticisms levelled at the new RIBA suite of forms? 8 Taking the lead on drink and drug testing 2

3 Concurrent delay Concurrent delay is when there are two separate reasons that cause the same delay on a construction project. An issue arises when a contractor is entitled to an extension of time for one of the causes of delay, but not the other. Ideally the contract should have a clause that makes express provision for this situation, but the standard forms of construction contract do not do this (with the exception of the JCT Major Project Construction Contract). In the case of Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999) the court held that, where the contract does not deal with concurrent delay, the contractor is entitled to more time. However, a recent Scottish case departed from this. In the case of City Inn Limited v Shepherd Construction Limited (2007) a sub-contractor was awarded a partial extension of time as a result of the causes of delay being divided up. It held that: where there is a true concurrency between a relevant event and a contractor default, in the sense that both existed simultaneously, regardless of which started first, it may be appropriate to apportion responsibility for the delay between the two causes; obviously the basis for such apportionment must be fair and reasonable. It will be interesting to see if the English courts depart from Malmaison and adopt the Scottish approach to concurrent delay. However, it remains the case that the best way to prevent any such potentially expensive uncertainty is to make the position clear in the contract. Hot topics Alison Garrett alison.garrett@mills-reeve.com Andrew Lovell andrew.lovell@mills-reeve.com Dates for your diary! Guide to best "fair payment" practices The Public Sector Construction Client s Forum (PSCCF) Fair Payment Working Group has agreed to implement principles of fair payment best practice. The guide includes what is known as a fair payment charter. This commits clients, lead contractors and supply chains to greater transparency, no unfair withholding of retentions, more efficient payment procedures and a payment period not exceeding 30 days. The Office of Government Commerce s website states that central government construction clients are expected to adopt the principles set out in the guide and the fair payment charter by 1 January The Corporate Manslaughter and Corporate Homicide Act 2007 The Corporate Manslaughter and Corporate Homicide Act 2007 comes into force on 6 April The Act creates a new offence for companies and other corporate bodies within the public and private sector. Under the new Act, such organisations will face an unlimited fine if they are found to have caused death due to the organisation s gross corporate health and safety failures. A gross breach is conduct that falls far below what can reasonably be expected of the organisation in the circumstances. The new offence will not create individual liability but directors and managers can continue to be held to account through existing health and safety laws and through the common law offence of manslaughter. Impact of Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007 The Government has postponed the timetable for the implementation of energy performance certificates where property is leased, sold or constructed. The dates for compliance are now: for all newly-constructed residential property and commercial property over 10,000 square metres 6 April 2008; for commercial property over 2,500 square metres 1 July 2008; and for all other commercial property 1 October

4 JCT 2006 (yes 2006 not 2005) The constructing excellence contract Ron Plascow While the JCT 2005 suite of contracts has received a lot of publicity, the more revolutionary 2006 contract has in comparison hardly been publicised at all. This may well be the first JCT contract to combine modern user-friendly language, partnering principles and up-to-date commercial considerations in one document. It can be used for a traditional or design and build procurement as well as for the supply of services, works or goods. More than that, the accompanying guide sets out in simple language how the contract is to be used. The guide claims this is an entirely new form of agreement where the collaborative/partnering concept is overt. It also claims that the documents were developed with local authorities and other public sector clients specifically in mind. There is also a separate, optional project team agreement. The project team agreement supplements it does not replace an employer s appointment of individual consultants. It does, however, bring the partnering approach set out in the principal contract into the consultants realm, as they take on obligations to work with each other and, implicitly, to co-operate with the contractor. This new contract is perhaps JCT s answer to NEC and PPC2000. It is not the same as them of course, but contains a lot of principles and procedures that will be familiar to those who use NEC3 and PPC2000. Furthermore and this is even more revolutionary for JCT the contract can either be used on a fixed-price basis or as a target cost contract, and the words guaranteed maximum cost, albeit in connection with the target cost principles, appear in the contract and become part of its vocabulary. There is plenty of new material for JCT users to consider and digest, even if its principles will be familiar to those who use NEC3 and PPC2000. Highlights Highlights to note are the overriding principle, which runs throughout the contract; the use of a risk register and risk allocation schedule; key performance indicators and the use of a project protocol. The overriding principle is a declaratory statement that the parties intend to collaborate with each other. It refers to the parties acting in good faith and in a spirit of mutual trust and respect, providing feedback on performance, drawing attention to difficulties and sharing information. It goes further than similar clauses in other forms by setting a tone that cannot be avoided by the courts when assessing who is at fault in any dispute. The risk register and risk allocation schedule allocate responsibility for risks and cut down on the number of relief events, that is grounds for extensions of time or more money. The project protocol is more of an add on, having no contractual significance. It should encourage good behaviour by setting out aims and objectives. The project team agreement is a short document containing the overriding principles, the collective role of the consultants and a buy-in to a project protocol and considers risk and reward sharing arrangements. The 2006 contract is a welcome breath of fresh air, relatively easy to follow and a serious rival to the traditional JCT way of working, NEC3 and PPC2000. The guide also suggests that the contract can form the basis of sub-contracts, although that does need careful thinking through to see how feasible it is. We recommend you look at this form as a genuine alternative. It may be better suited to your needs than what you are currently using. 4

5 Insolvency and the Construction Act Ed Callaghan Moorside Investments Ltd v DAG Construction Ltd is a High Court decision involving the Construction Act, which was handed down just before Christmas. It was an application to restrain by injunction the presentation of a winding up petition and was therefore heard in the Companies Court by a judge of the Chancery Division, Warren J. The contractor, DAG, had made interim payment applications. The employer, Moorside, asserted counter-claims for the cost of rectifying defective work and for damages for delay. The counter-claims exceeded DAG's claims. Moorside gave no withholding notices and DAG served a statutory demand. The contract was a construction contract but there was an issue as to whether it was sufficiently evidenced in writing for the Construction Act to apply. The judge decided that Moorside's counter-claims raised genuine and substantial issues. So far so good. After this, the judgment becomes rather curious. One would have expected the judge to consider firstly whether he could decide, on the evidence, if there had been a contract in writing sufficient for the application of the Act. Instead, he said this: For the purposes of the present application the 1996 Act seems to me to be a red herring. Even if we do have a contract in writing the position is that the underlying dispute can still be litigated. The Act simply requires payment of sums claimed in respect of which no counter-notice is served. Thus, although the sums claimed may be due, the company [Moorside] can still assert a breach of contract which, if established, would entitle it to recover some of the amounts which it had paid. [My emphasis.] The judge then proceeded to grant the injunction on the basis that Moorside had a genuine and substantial cross-claim. One might have expected instead the following train of thought: 1. Is there a contract in writing such that the Act applies? If Moorside says no, do they have genuine and substantial reasons for saying no that have a reasonable prospect of success? If they do, then as there is a genuine and substantial cross-claim I should grant the application for an injunction on those grounds. 2. If DAG get over that hurdle and the Act does apply, then it requires Moorside to pay DAG and litigate later because Moorside gave no withholding notices and section 111(1) applies. 3. However, if DAG instead of coming straight here had first applied for and obtained summary judgment (with or without a prior adjudication) then Moorside would have been entitled to a discretionary stay of execution because DAG is insolvent and would not be able to repay the money if a court or arbitrator subsequently found in favour of Moorside on its counter-claims. See Herschel Engineering v Breen Properties. 4. For that reason, I would grant the injunction. DAG would then have had to seek summary judgment (with or without an adjudication award first) and resist Moorside's application for a stay of execution. If they succeeded in resisting it, then the way would be clear for a winding up petition if Moorside did not pay. That is of course the effect of the judgment, but perhaps more by accident than design because it fundamentally ignores the Construction Act and the cases decided under it. 5

6 Liquidated damages: no penalty referee! Robert Weatherley Amy Harris These two cases bring home just how important the wording of any liquidated damages clause is Over the years the courts have developed guidance on distinguishing between what is a penalty clause and what is a valid liquidated damages clause Liquidated damages are, of course, a pre-estimate of loss that becomes payable by a contractor under a building contract if certain specified breaches occur. A typical clause in a building contract requires that, if the contractor should fail to complete by a specified date in a contract or any extended date, he should pay or allow the employer to deduct liquidated damages at the rate agreed in the contract until the works are complete. It depends on the wording of each liquidated damages clause whether the right to claim liquidated damages is additional to, or replaces, the normal right to claim damages measured by the amount of any loss suffered by the employer. This was highlighted in two recent cases. Firstly, in Chattan Developments Limited v Riegill Civil Engineering Contractors Limited (2007) the parties did not enter into a formal contract but there was reference to liquidated damages in the minutes of a meeting which said: liquidated and Ascertained Damages n/a All Relevant Events and List of Matters to remain unaltered. In this case, the court had to determine whether the arbitrator had erred in law in finding that it was the intention of the parties that there would be no right to damages at all for late completion, either liquidated or unliquidated. The court decided that the arbitrator had not erred. Secondly, Biffa Waste Services Ltd and another v Maschinenfabrik Ernst Hese GMBH and another (2008), where the Technology and Construction Court held that the contractual clause, which stated that: liquidated damages in the event of, inter alia, failure to comply with the specified time for completion, such a sum being the only monies due from the contractor for such default provided a complete remedy in damages for delayed completion. These two cases bring home just how important the wording of any liquidated damages clause is. It is also worth a reminder that, in order to claim liquidated damages at all, there must be an express clause in the contract (most standard form building contracts contain such a clause). Such clauses must fulfil the following criteria to be enforceable: They must not be a penalty. They must be a genuine pre-estimate of loss at the time that the contract was entered into. It can be difficult to determine whether an agreed sum is a penalty. Over the years, the courts have developed guidance on distinguishing between what is a penalty clause and what is a valid liquidated damages clause. The question to ask in trying to determine if the agreed sum for liquidated damages is a penalty or bona fide liquidated damages is: - is the function of the clause to deter the party from breaking the contract (a penalty) or to compensate the innocent party for the breach (liquidated damages)? There must be a definite date fixed in the contract from which damages can run. All specified contractual procedures for claiming damages must have been followed. The employer must not have waived its right to claim liquidated damages. 6

7 Any criticism of the RIBA suite of forms has been angrily rebuffed by RIBA s editor When the 1999 suite was issued, a well-known barrister (now a High Court judge) said that he would not advise any of his clients to appoint an architect using the form the allegation was that the form was too biased in favour of the profession There s something about Henry Henry Wadsworth Longfellow's view of the world may have some modern-day lessons for the Royal Institute of British Architects. Stuart Pemble stuart.pemble@mills-reeve.com The Royal Institute of British Architects (RIBA) has issued a new suite of forms. Any criticism has been angrily rebuffed by RIBA s editor. Perhaps Henry Wadsworth Longfellow, the 19th century American poet, can provide the most sensible explanation of the argument. Before I wrote this article, I didn t know that much about Henry. In case you re interested, he wrote the Song of Hiawatha and was the most important American poet of the century. And there s more he is also credited with having thought up the line the strength of criticism lies only in the weakness of the thing criticised. So far, so much a testament to the powers of Google as a search engine. But Longfellow s aphorism on criticism strikes a chord when you consider the brouhaha surrounding the latest RIBA suite of contracts for the appointment of an architect. The RIBA forms have always been controversial. When the 1999 suite was issued, a well-known barrister (now a High Court judge) said that he would not advise any of his clients to appoint an architect using the form the allegation was that the form was too biased in favour of the profession. The great and the good of the architectural world disagreed, and the barrister was attacked as being an employer s man. Fast-forward a few years and ignoring the 2005 High Court decision in Munkenbeck and Marshall v Harold, which criticised two clauses in the 1999 form as unusual and onerous and history has repeated itself. Some well-known commentators have suggested that the new form helps neither clients nor architects, only to incur the wrath of the RIBA for daring to criticise the form. And the RIBA doesn t mince its words the criticism is inaccurate and self serving, biased and ignores the form s obvious benefits. But it does seem to be a bit of a storm in a teacup. The criticisms some of the terms won t be acceptable to clients; others don t help architects are hardly different to those regularly levelled at any standard form. All standard forms face the same problem. They try to assert that the particular balance of risk and reward set out in the form is going to be suitable, without amendment, for all projects whatever their shape, size and complexity. That s a tough magic trick to pull off. So, why the fuss? Does Longfellow s suggestion that there is only force to the criticism because it is valid provide the answer? Perhaps it is time for the RIBA to stop being so defensive. In the next edition of Building Blocks, I will provide a more detailed analysis of the RIBA forms. 7

8 Taking the lead on drink and drug testing Andrew Lovell Recently the press has reported that, to try and improve health and safety, Laing O Rourke has introduced compulsory drug testing for all workers and sub-contractors before they are allowed on construction sites. Employers should be aware that they have no right to test for alcohol and drugs without an employee s consent. It is therefore important that the right to test is: included in the employee s employment contract; confined to workers whose activities are safety critical and have an impact on the health and safety of others; and compliant with the Data Protection Act Provided these requirements are satisfied, Laing O Rourke s approach should be commended as, with notorious early starts, the construction industry presents numerous dangers that may be amplified the morning after the night before. In addition to putting employees own welfare at risk, working under the influence of alcohol or drugs could also jeopardise the health, safety and welfare of others on site. There is also the possibility of criminal liability on the part of the employer, as there is the potential for breach of the statutory duty of care under the Health and Safety at Work Act 1974 and the Occupiers Liability Acts. Moreover, the Corporate Manslaughter and Corporate Homicide Act 2007 comes into force in April It provides that the jury deciding the case may consider the extent to which the evidence shows that there were attitudes, policies, systems or accepted practices within the organisation that were likely to have encouraged any such failure. Turning a blind eye to employees feeling the effects of excessive drinking or drug taking could in the future result in senior managers facing criminal prosecution. Telephone: BIRMINGHAM CAMBRIDGE LEEDS LONDON MANCHESTER NORWICH Mills & Reeve LLP is a limited liability partnership regulated by the Solicitors Regulation Authority and registered in England and Wales with registered number OC Its registered office is at Fountain House, 130 Fenchurch Street, London, EC3M 5DJ, which is the London office of Mills & Reeve LLP. A list of members may be inspected at any of the LLP s offices. The term partner is used to refer to a member of Mills & Reeve LLP. Mills & Reeve LLP will process your personal data for its business and marketing activities fairly and lawfully in accordance with professional standards and the Data Protection Act If you do not wish to receive any marketing literature from Mills & Reeve LLP please contact Claire Ringer on or claire.ringer@mills-reeve.com The articles featured in this publication have been selected and prepared with a view to disseminating key information. Space dictates that any article may not deal with individual concerns but the author would be pleased to respond to specific queries. No liability can be accepted in relation to particular cases. Before taking action, you should seek specific legal advice. Copyright in this publication belongs to Mills & Reeve LLP. Extracts may be copied with our prior permission and provided that their source is acknowledged. March 2008