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Bell & Scott Construction Update, Summer 2009
Welcome to the Summer issue of Bell & Scott’s Construction Update.
This e-update will also be available to download from our website.
Construction Update seeks to cover a wide range of topics of relevance to those involved in the construction industry. In this issue, we comment on:
- proposed changes to the tax status of self-employed construction workers;
- recent and prospective legislation;
- changes to JCT contracts;
- (1) recent cases highlighting the need for a construction contract to be in writing for the purposes of statutory dispute resolution; and (2) the importance of having 'key personnel' clauses in professional appointments.
In addition, we include a number of updates on issues affecting the industry.
If you wish to discuss any of the items in this edition or require advice on construction issues please contact either Brandon Malone: DD: 0131 718 2384 e: b.malone@bellscott.co.uk; or Pat Loftus: DD: 0131 718 2388 e: p.loftus@bellscott.co.uk; or Sara Lannigan: DD: 0131 718 2390 e: s.lannigan@bellscott.co.uk;
If you would rather not receive Construction Update in future, please email us and ask to be removed from the Construction Update mailing list.
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Tax Update |
The end of self-employed status for construction workers?
In the 2009 Budget, the government indicated that it intended to introduce new legislation dealing with the tax and employment status of construction workers. The government thinks that the widespread use of sub-contracting within the construction industry leads to abuse in the claiming of self-employed status for tax purposes.
Westminster has issued a consultation document setting out its proposals to determine whether or not workers in the construction industry are self-employed for income tax and national insurance contribution purposes.
The proposals are that a construction worker will be taken to be employed, and any payment made to him or her will be subject to PAYE income tax and national insurance contributions, unless at least one of the following conditions is met by the worker:-
- he or she provides the plant and equipment required for the job which he or she has been engaged to carry out, excluding “tools of the trade” which, traditionally, in the construction industry, individuals do provide for themselves;
- the worker provides all the materials required to complete the job; or
- the worker engaged to carry out the job provides other workers to carry out that job.
If none of these requirements are met, then the construction worker should be treated as an employee for tax purposes.
The consultation paper is available on H M Treasury’s website accessible here and seeks responses on whether:-
- the proposed tests genuinely indicate self-employed status for a construction worker;
- VAT registration should be considered;
- the proposals will increase the administrative burden on contractors,
- there will be a change in the labour market.
Responses to the consultation are due by 12 October 2009.
Our Employment Team is considering the wider ranging implications and will comment more fully in its forthcoming Employment Update.
Pat Loftus, Partner, comments:
If the proposals become law, in their current form it is likely that more workers in the industry will be treated as employees. One of the inevitable consequences being increased the costs for employers in terms of employer national insurance contributions and the additional administrative burden on them at a time when they can ill-afford additional overheads.
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Legislation Update |
Local Democracy, Economic Development and Construction Bill
This much discussed bill has now received its second reading in the House of Lords and is due to be reviewed again on 13 October 2009.
As we outlined in our Spring edition of Construction Update, when the Bill reaches the statute book, there will be wholesale changes required to the payment provisions in construction contracts. Also, the right to refer a dispute to adjudication where the construction contract is not in writing will be introduced.
Arbitration (Scotland) Bill
This bill, which is currently before the Scottish Parliament, aims to update and consolidate the law of arbitration in Scotland. It is set to make the statute book in late 2009. From then, we will see if the construction industry benefits with an uptake in arbitration as a method of dispute resolution.
The Climate Change (Scotland) Act 2009
This ground breaking Act became law on 4 August 2009. It introduces targets for the reduction of greenhouse gas emissions – down by 50 per cent by 2030 and 80 per cent by 2050. The impact on the construction industry and its processes will be marked in the years ahead!
The Environmental Liability (Scotland) Regulations 2009
New environmental liability regulations came into force on 24 June 2009. The new regulations place a duty on certain operators who may risk causing significant damage to land, water or biodiversity to avert damage occurring or, where damage has occurred, a duty to reinstate the environment to the condition it was in prior to the incident or to pay compensation. Under the regulations, an operator is the person who operates or controls an activity which poses a threat of damage or causes actual damage to the environment. Activity has a wide meaning in the regulations, extending to any activity carried out in the course of a business or an undertaking, irrespective of its private or public, profit or non-profit nature – developers and contractors are clearly covered. The regulations will not impose requirements to make good damage which has occurred prior to the regulations becoming law.
Richard Hart, our Environmental Law specialist, will be commenting in detail on the impact of the new regulations in our Autumn construction law seminar to be held in our Edinburgh office on 22 October 2009. Richard will also be commenting on the new regulations in the September issue of Property Update.
Pat Loftus, Partner, comments:
Many of the new regulations coming out of Westminster and Holyrood, affecting the construction sector, aim to drive forward the sustainable construction agenda. The drive for more sustainable construction methods and the requirements to use sustainable construction materials are not slowing or softening in the downturn. There will be benefits for those contractors and developers who can take the lead in sustainable construction in the new era of industry activity which will surely come.
On the environmental side, contractors and developers will need to ensure that their working methods on site are geared and proofed to avoid creating any environmental damage. There will be an even greater need for contractors and developers to undertake extensive site condition, wildlife and habitat surveys when working on or near particularly environmentally sensitive areas – a failure to do so may be costly. It will also be important for contractors and developers to know the exact condition of the site, because if they have to remediate any damage caused by their operations they will need to know precisely the standard or benchmark for making good.
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Contracts Update |
JCT Amendment No 2.
Following an industry-wide consultation, the Joint Contracts Tribunal (JCT) published its guidance note, “Building a Sustainable Future Together” on how sustainability in design and construction is to be provided for in JCT contract documents. The key findings of the consultation were:-
- the industry would welcome the introduction of contract provisions, albeit on a limited scale, and contract specific guidance on sustainability issues;
- sustainability provisions should not only be included in contractual conditions, but also in other contract documents such as schedules or specifications;
- any contract clauses addressing sustainable development must be legally enforceable or they risk being ignored. However, given the nature of construction contracts, both obligatory and aspirational provisions should evolve over time; and
- Client lead on sustainability issues is essential, but early involvement by all parts of the supply chain is preferable.
Following on from the guidance note and the consultation process, the JCT has published standard form amendment No 2 to the Standard Building Contract, the Design and Build Contract and the Minor Works Contract 2005 suites of contracts to deal with sustainable construction.
Amendment 2 introduces contractual sustainability clauses. However, the clauses and guidance do not seek to impose rigid criteria upon parties or strict targets.
The guiding principles are:-
- the contractor is encouraged to suggest economically viable amendments to the employer's requirements which, if instructed as a variation, may result in improvement in environmental performance in the carrying out of the works or of the completed works.
- the contractor is to give the employer all the information that he reasonably requests regarding the environmental impact of the supply and use of materials and goods which the contractor selects.
These principles are supported by provisions dealing with performance indicators and value engineering. Though both these provisions are not mandatory requirements, they can be beneficial in providing a benchmark for a sustainable construction project.
Pat Loftus, Partner, comments:-
Amendment No 2 provides a constant reminder of the need to address sustainability issues in construction projects. The JCT amendments recognise that contract conditions have a part to play in driving sustainability forward. However, the issue needs to be driven also by the other contract documents such as the specification and drawings which will deal with sustainability in other ways – this approach acknowledges that each project is unique and each client may wish to adopt different requirements.
The Amendment No 2 clauses have been well received by other industry bodies and SBCC is to adopt them for the relevant SBCC contracts. The incorporation of sustainable construction obligations within contracts really shows that the industry is taking sustainability seriously. Despite industry standard contract provisions being in their infancy, they are catching on and will continue to do so. The impetus of more sustainability building regulations, the requirements to have energy performance certificates for buildings and the “greening” of provisions in commercial lease agreements will make its mark on building contracts as we go forward.
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Case Law Update |
Anyone for adjudication?
Adonis Construction Limited v O’Keefe Soil Remediation
In this case, the Technology and Construction Division of the High Court in England had to look at what amounted to a contract in writing for the purposes of adjudication under the Housing Grants Construction and Regeneration Act 1996 (“the Act”)
Background
Adonis appointed O’Keefe to carry out testing and soil stabilisation works on short notice at Westcott Venture Park in Aylesbury. A meeting was held on site at which O’Keefe was asked to begin the work in three days. O’Keefe confirmed it could meet this timescale and asked Adonis to issue a letter of intent (LOI). Adonis issued the LOI which said “We confirm our intention to enter into a sub-contract with you”. Adonis also issued a draft sub-contract order. The works started on time and were completed in one week. Around one month after completion, Adonis issued a sub-contract order for the works. O’Keefe amended the order and returned this to Adonis who rejected the amended contract. Later it became clear that the works were not acceptable. Adonis sought payment from O’Keefe for remedial works. O’Keefe denied that it had accepted responsibility for defects in the contract and sought payment for the work carried out. Adonis served a notice of adjudication which was contested by O’Keefe on the basis that there was no written contract for the purposes of the Act.
The Issues
Adonis raised an action for summary judgement to enforce the decision of the adjudicator. The issues before the High Court were:-
- was there a contract in writing?
- was the contract capable of acceptance by conduct?
- did O’Keefe act in a way to indicate its acceptance of the sub-contract order?
- did the LOI amount to a contract?
The court’s view
The High Court decided that because Adonis had issued the sub-contract order as a draft that meant that it was no more than the terms upon which an offer would be made in due course – despite the pressing need for the work to be started.
Additionally, because the order provided for a specific form of acceptance (signing and returning the signature page within 7 days) the contract was not capable of acceptance by conduct. The court took the view that the specific form of acceptance was a contractually ’required mode’ of acceptance which had not happened rather than an obligation to be performed after acceptance by some other method.
The court decided that O’Keefe had not acted in a way that indicated acceptance of the sub-contract order. O’Keefe argued that it had not received the sub-contract offer until after the work had started on site. It was not clear whether the work had begun based upon the LOI or the draft sub-contract order. There were two bespoke amendments to the draft sub-contract order issued by Adonis, both of these placed risk and expense for certain elements of the work squarely on the shoulders of O’Keefe. The court accepted O’Keefe’s argument that Adonis would have, or should have, known that these amendments would not have been accepted by O’Keefe.
Adonis argued that O’Keefe’s position was based on too legalistic approach to the steps involved in the documents and not a practical view of the situation. If the draft sub-contract order did not constitute a contract in writing then the parties had continued upon the basis of the LOI and O’Keefe’s acceptance of the LOI indicated by its starting the work. The court found that because the LOI referred to Adonis’s intention to enter into a sub-contract, the LOI itself could not be viewed as a contract. The existence of a contract would be inconsistent with the words used in the LOI.
The court decided that there was a sound case that the adjudicator had lacked jurisdiction to decide the issue.
Sara Lannigan, Solicitor,comments:-
This case underlines the need to have a written contractual framework in place even where parties are in a rush to begin work. Although there were various terms put down in writing here, there was no final agreement between the parties. Adonis’s mention, in the LOI, of the sub-contract order to follow meant, in the court’s view, that the LOI could not be the contract. Qualification of the sub-contract order as a draft indicated that it too could not be the contract. The crux of this case was that there was no contract in writing for the purposes of the Act. The Local Democracy, Economic Development and Construction Bill, currently making its way through parliament, proposes to allow adjudication on construction contracts which are wholly oral contracts or partly oral and partly in writing in addition to contracts in writing. However, for contracts that are not wholly in writing, adjudication under the Act will only apply if there is some written indication between the parties that referral to adjudication is agreed.
Case referred to Adonis Construction and O’Keefe Soil Remediation [2009] EWHC 2047 (TCC)
A full text of the decision can be accessed on the British and Irish Legal Institute website accessible here
Enabling works not "excluded" from the Construction Act 1996
North Midland Construction Plc v A E & E Lentjes UK Ltd
In North Midland Construction, a sub-contractor asked the court to decide whether its enabling and civil engineering works at a power station fell within the definition of works excluded from "construction operations" under section 105(2)(c) of the Housing Grants, Construction and Regeneration Act 1996 (the Act). The enabling works were made up of preparatory works, such as securing the site, building temporary roads and laying temporary services. The civil works entailed heavier construction works, such as piling and excavation. Following a dispute over the final account, North Midland wanted to exercise its statutory right to adjudicate under the Act, which it could only do if these contracts were held to be "construction contracts" as defined in the Act.
The Act applies to contracts for "construction operations". These are defined in section 105(1) and qualified by the exceptions under section 105(2). Important in this case was the exception for "assembly, installation or demolition of plant or machinery…on a site where the primary purpose is…nuclear processing, power generation, or water effluent treatments…"
However, even though works were performed at a site where the primary activity was power generation, the judge decided that the enabling and civil works were not excluded works under section 105(2)(c) of the Act.
Sara Lannigan , Solicitor, comments
Interpreting "excluded works" on this narrow basis opens up adjudication to parties who may not have thought they had a statutory right to refer their dispute to adjudication. The decision will be particularly relevant to parties, such as sub-contractors, who are only concerned with a small part of the overall project. It may also mean that statutory payment terms will also apply to their contracts in place of contractual terms that do not comply with the Act, preventing the parties using a "pay-when-paid" clause and requiring a paying party to issue a withholding notice, if necessary.
To avoid the difficulties that arose in this case, some employers and contractors may choose to adopt payment and adjudication clauses in their contracts and sub-contracts that mirror the requirements of the Act, even if some or all of the works are "excluded works".
Where's my architect gone?
Fitzroy Robinson Ltd v Mentmore Towers Ltd 2009
Background
Mentmore Towers Ltd (Mentmore) engaged Fitzroy Robinson Ltd (FRL) as architects to carry out design work on projects at Piccadilly in London and at Mentmore Towers in Buckinghamshire. Mentmore decided to use FRL because the director at Mentmore liked the architect who was to lead the architect’s team - a Mr Blake. However, before the architect's appointment had been finalised, Mr Blake resigned from FRL. He was to leave FRL before completion of the works covered by the appointments. FRL did not tell Mentmore about Mr Blake’s resignation. The actual appointments were signed up by Mentmore and FRL after Mr Blake’s resignation and Mentmore was only told about the resignation at a later date.
The Court’s view
The Court decided that FRL had made a "fraudulent misrepresentation" by not telling Mentmore about Mr Blake's resignation. However, Mentmore was not able to show that it had incurred significant losses as a result of this misrepresentation. The damages that Mentmore could recover were limited to disruption and duplication of work caused by Mr Blake’s resignation.
Brandon Malone comments:-
Although the decision in this case was based on peculiarities of English law, it has quite far-reaching consequences and there are lessons to be learnt:
- Consultancy practices should promptly inform their clients of changes in key personnel.
- When negotiating and agreeing a professional appointment, care should be taken over the terms of any “key personnel” clause. There is little point in nominating a person who is likely to leave the organisation, and it is helpful to include the ability to substitute the named “key personnel” with the consent of the client (such consent not to be unreasonably withheld), this would give the client some leeway should the “key personnel” resign.
- If someone designated as “key personnel” resigns before the formal contract documents are signed, it is important that the client is told immediately. Otherwise, the professional may be held to have induced the contract by fraudulent misrepresentation.
- Whilst it will often be difficult to demonstrate a specific loss arising out of a change in personnel, this type of misrepresentation will generally give the client the option to withdraw from the contract and take its business elsewhere, which will be costly and disruptive to the professional involved.
Another interesting point in this case is that the judge, Mr Justice Coulson, criticised the parties’ failure to attempt any form of alternative dispute resolution. His view was that even if ADR had been unsuccessful, it would have narrowed and focused the dispute between the parties, saving time and costs in the subsequent litigation.
Case referred to Fitzroy Robinson Ltd v Mentmore Towers Ltd [2009] EWHC 1552 (TCC)
A full text of the decision can be accessed on the British and Irish Legal Institute website accessible here
If you wish to discuss any issues arising from matters we have covered in this Construction Update, please get in touch with Brandon, Pat and Sara
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Bell & Scott Construction Team News |
We are hosting an Autumn construction law seminar in Edinburgh on 22 October 2009. Registration details are available on our website accessible here
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