Welcome to the Winter issue of Bell & Scott’s Construction Law Update.

In this update we comment on the changes proposed in the draft Construction Act Bill which amends the Housing Grants, Regeneration & Construction Act 1996 and give an overview of the issues to be debated before the draft Bill makes it to the statute book.

We also update you on (1) legislative changes in 2008 and those to look forward to in 2009; (2) trends for the challenging year ahead; and (3) the current state of play for JCT/SBCC and what is on the horizon for 2009.

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News

After much debate within the construction industry, amendments to the Housing Grants, Construction and Regeneration Construction Act 1996 (“1996 Act”) were published in the Bill. In short, the 1996 Act provides that parties to a construction contract have the right to staged payments and a statutory right to adjudication for any dispute arising under the construction contract. The Bill makes the following amendments to the 1996 Act:

• The requirement for construction contracts to be "in writing" is to be removed.
  
  In future the 1996 Act will apply to all construction contracts whether wholly written, partly or completely unwritten. Save that the adjudication procedure will still need to be in writing otherwise the "relevant Scheme" will apply.

• A statutory slip rule will be introduced to England, Wales and Scotland.
  
  This requires the construction contract to provide that the adjudicator has the power to correct a clerical or typographical error in his decision. This provision must be in writing.
  
  
• The parties will not be able to agree who will pay the costs of the adjudication before notice of adjudication is given.
  
  Any agreement between the parties as to who will pay the costs of the adjudication (i.e. the costs of the parties and/or the fees and expenses of the adjudicator) will be ineffective unless the agreement is made after the giving of notice of an intention to refer a dispute to adjudication and that agreement is in writing.
  
  
• "Pay when certified" clauses are to be prohibited.
  
  The 1996 Act prohibited “pay when paid” clauses.
  
  

• New rules on payment and withholding notices.
  
  (i) a payee's notice must be given not later than five days after "the payment due date";
  (ii) a payer's notice can be given by the payer or a "specified person";
  (iii) the payee has the right to issue a payee's notice if the payer fails to issue a payer's notice; and
  (iv) a payer must pay the notified sum "to the extent not already paid" and a notice is still required even if the amount due is nil.
  
  

• New rights for a contractor who suspends performance for non-payment.
  
  (i) as well as a contractor stopping carrying out all work, it will be entitled to stop some of the work or suspend its obligations;
  (ii) the "party in default" (that is, the party who has not paid) will be liable to pay the contractor its reasonable costs and the expenses of suspending performance;
  (iii) the contractor will be entitled to an extension of time for the delay caused by its suspension, not just the period during which it suspends performance.

It is presumed that the Scheme for Construction Contracts 1998 will be updated to create a statutory fall-back position, if the parties fail to include, in their construction contracts, the new amendments to the 1996 Act.

Brandon Malone, Head of our Construction Team comments:

Just as we had with the introduction of the 1996 Act, there has been a lot of comment within the industry on the pros and cons of the proposed Bill - some positive some critical. We can expect to see further lobbying at Westminster for amendments in the months to come.

On the positive side, the Bill is trying to remedy the failings of the 1996 Act. For example, the right to suspend, under the 1996 Act, for non payment, was rarely used. This was, in part, due to the fact that the suspending party could not recover start-up costs when the period of suspension ended.

On the negative side, many commentators consider that the Bill, as drafted, is a missed opportunity to remedy the failings of the 1996 Act.

Amendments to the adjudication process are limited, though, in general, the applicability of the right to adjudication for all construction contracts and clarity on costs has been widely welcomed.

The changes to the payment rules are more complex. This complexity will lead to challenges until change beds in.

Despite the industry’s desire to see the 1996 Act amended, you can argue that the timing is poor, as many within the industry will not have the capacity or money to deal with the changes.

Legislation for 2009

It is hoped that the Arbitration (Scotland) Bill will become law in 2009. The lengthy consultation period on the draft Bill came to an end in September 2008.

The Bill will put most of the law of artbitration in Scotland into a single statute. The aim for the future is that anyone in Scotland, or anyone seeking to do business in Scotland, will be able to access and understand the law easily.

Schedule 1 of the Bill sets out the “Scottish Arbitration Rules”. These give the parties to an arbitration a set of rules which will govern the arbitration. Schedule 1 also contains a number of mandatory and default rules. The mandatory rules cannot be varied even with the agreement of the parties to the arbitration. In the absence of agreement between the parties, the default rules will be read into the parties’ arbitration agreements.

If the Bill becomes law in 2009, it is hoped that the whole arbitration process will become more streamlined and, consequently, more cost effective in the resolution of disputes within the construction industry.

Health and Safety (Offences) Act 2008

Section 33 of the Health and Safety at Work etc Act 1974 is to be amended to raise the maximum penalties available to the lower courts for certain health and safety offences.

The intention is to allow offences to be dealt with more effectively and appropriately within the lower court system without the need to refer to higher courts. The Act is applicable to the whole of the United Kingdom and widens the range of offences for which an individual can be fined or imprisoned. It also increases the maximum fine available from £5,000 to £20,000 and allows prison sentences of up to 12 months to be passed down by the lower courts.

There are no changes to the existing legal duties of businesses.

Sara Lannigan, Solicitor in our Construction Team comments:

The Act sends out an important message to those who choose to ignore their legal responsibilities. However, as always, good employers and good managers have nothing to fear. In fact, they have much to gain by the new proposals.

The introduction of the Act in January 2009 also coincides with a restructuring of the court system in Scotland. From January 2009 onwards, all cases investigated by the Health and Safety Executive and reported to the Procurator Fiscal will be dealt with by a newly created, dedicated, specialist Division.

Under the charge of a senior prosecutor, the new Division will consist of experienced lawyers working in three teams: Scotland North, working closely with HSE staff in Aberdeen; Scotland East, working with HSE staff in Edinburgh; and Scotland West, working with HSE staff in Glasgow.

It is anticipated that this new approach will result in a greater concentration of expertise, increased specialist input at the start of an investigation and enhanced knowledge in this area of investigation and prosecution.

Given the introduction of this new Division and the Act, it is clear that the Scottish Government is determined to ensure that serious health and safety breaches do not slip through the net.

As with all new legislation and court procedures, you will have to “watch this space” from January 2009 onwards to see how matters unfold.

European Directive: Public sector procurement remedy

The European Commission has issued Directive 2007/66/EC to improve the effectiveness of national review procedures for the award of public contracts. The aim of the measure is to provide clear and effective procedures for seeking redress in cases where bidders consider contracts have been unfairly awarded. This is crucial to making sure contracts go to the company which has made the best offer, and, therefore, to building confidence among businesses and the public that public procurement procedures are fair.

Member States have until 20 December 2009 to implement the Directive in national law. The requirements are that:

• public authorities must wait a certain number of days - known as a 'standstill period' - before concluding a public contract;
  
• the rejected bidders should have the opportunity to start an effective review procedure in the appropriate time i.e. when unfair decisions can still be corrected;
  
• if the “standstill period” has not been respected, the courts, under certain conditions, can set aside a signed contract, by declaring the contract to be "ineffective";
  
• courts should be able to combat illegal direct awards of public contracts by making these contracts ineffective if they have been awarded illegally without any transparency and prior competitive tendering.

The Text of the Directive can be accessed here.

Trends for 2009

Bonds all round?

The construction industry has always suffered a disproportionate amount of insolvencies compared to other sectors of the economy. Given the current constrained climate, the level of insolvencies in the industry is likely to increase in 2009. However, unlike in previous downturns, in which the majority of insolvencies were at the contractor end, the current recession is showing no mercy to the employer end as well.

Employers

Increasingly, employers will require a performance bond from the contractor to give some measure of protection from the risk of the contractor becoming insolvent during the course of the works.

Contractors

Contractors will be keen to ensure that their employer has adequate funds to complete the works. This is a key consideration for contractors entering into building contracts with one-off joint venture companies or special purpose vehicle companies which have no assets of their own and are funded by third parties for the project. The contractor, in these circumstances, may be looking for an advance payment bond to have an element of the contract sum ring-fenced, should the employer become insolvent whilst the contractor has unpaid outstanding invoices.

There are standard forms of both types of bond on the market - ABI or JCT/SBCC forms. However, 2009 will see time spent on the negotiation of these bonds, in particular:-

• the value of the bond;
  
• the triggers for calling on them - be it on demand, on an adjudicator’s award or on insolvency;
  
• whether the consent of an administrator should be dispensed with before commencing proceedings;
  
• whether the bond can be assigned to funders;
  
• the step down of value of the bond on multi-building projects; and
  
• the expiry of the bond.

With debate on these issues likely to prove costly on time, 2009 may well be a boom year for the bondsman!

The return of the Late Payment of Commercial Debts (Interest) Act 2008

It would not be a great surprise to find that, in the current economic climate, this little used statute is dusted off and brought back onto centre stage given plunging interest rates. As contractors, sub contractors and suppliers seek to protect their payments and cash flow, they may resort to claiming interest on late payments at the statutory rate provided by the Act - 8% above base rate.

The Act provides that qualifying creditors have a right to claim interest on late payments at the statutory rate unless the contract provides for a different rate of interest which would give a creditor "a substantial remedy” in the event of default. Where a contract is silent on interest for late payment, then the statutory rate can be applied in any event.

SBCC contracts provide for an interest rate of 5% above base. Does that rate now provide "a substantial remedy" for the creditor? It will be interesting to see if a challenge is made in the courts on the basis that standard form contracts no longer provide for "a substantial remedy”.

The risks of incorrect termination of contract

The recent case of Hayes (T/A Orchard Construction) v Peter Gallant, shows the pitfalls an employer can fall into when terminating a contract.

The employer terminated the contract for ongoing delays in the carrying out of works, alleged poor workmanship and excessive cost. The contractor was, consequently, excluded from the site. The contractor countered by alleging that the employer was in breach and it was entitled to claim loss of profit on the work it was prevented from completing.

The court found in favour of the contractor.

Pat Loftus, Partner in our Construction Team comments:

Although decisions such as this are very much fact specific, the lesson to be learnt is to ensure that your contract allows for a right to terminate effectively. For example, if the employer is looking to terminate because the contractor has failed to proceed “regularly and diligently” with the works, then the employer has to have good evidence of this. Given that the view of the employer as to what amounts to progress of the works will clearly be at odds with how the contractor sees the position, there is scope for considerable disagreement.

Looking forward to 2009, it is inevitable that employers and contractors will seek to terminate contracts when either becomes insolvent or is heading that way. It will be very easy for the party seeking to terminate, in these circumstances, to rush in and attempt to terminate the contract. However, for the process to be managed efficiently, the party seeking to terminate should always consider the following before taking any action:

The grounds for termination:

Do you have the right to terminate in the contract? Does insolvency automatically terminate the contract? Have you any ground for termination allowing for the contractor’s anticipatory breach or breach of financial covenants?

Most standard forms make detailed provision for determination of the contractor's employment in the event of default. These provisions must be followed to the letter if the determination is to be valid. Determination of the contractor's employment is to be contrasted with termination of the contract itself.

In the year ahead, parties will seek the right to terminate where they see early warning signs that the employer/contractor is financially struggling before any actual insolvency takes place.

The procedural Steps:

What is the mechanism for termination? It is key that any termination procedure contained in the contract is followed - time periods must be complied with when serving notices and addresses for service of notices must be correct.

The consequential impact of termination:

Does the funder need to be notified? In a design & build contract, have intellectual property rights been obtained in the design? Have all “deliverables”, at or prior to any termination, been delivered?

The Final Account:

Always bear in mind that even where the contract is terminated, money may still be due to the contractor for works carried out prior to termination.

The lesson to be learnt is to take a step back and not to rush into action before knowing where you stand and what you need to do!

JCT publications expected in spring 2009

The Consultancy Agreement (Public Sector (CA))

The Joint Contracts Tribunal (JCT) is to publish a new consultancy agreement specifically for the public sector. JCT consider that the Consultancy Agreement (Public Sector (CA)) is for use by public sector employers who wish to engage a consultant, regardless of discipline, in relation to construction works.

The agreement will suit all members of the construction team regardless of whether their respective appointments are for a limited period or for the duration of the project.

The central element of the agreement is a professional duty of care owed by the consultant to the employer in a form which should be acceptable to all parties on public sector projects.

It seeks to set reasonable limits to the 'pro-activity' obligation that can be implied in a consultant's appointment. This is counterbalanced by an obligation on all parties involved to work cooperatively.

There is no net contribution provision but there are provisions for caps on liability.
 
The Consultancy Agreement can, with only two exceptions, Constructing Excellence (CE) and Homeowners (HO) contracts, be used in projects based on any JCT main contract.

Pre-Construction Services Agreement (General Contractor) (PCSA)

JCT is to publish a new contract for pre-construction services, it will have separate versions for the appointment of a general contractor and a specialist version for pre-construction services.

JCT has designed the PCSA for the interim appointment of a general contractor by the employer to carry out pre-construction services, under a two-stage tendering procedure. The appointment follows first stage tenders and covers the period leading up to the contractor's submission of a definitive second stage tender and entry into the main contract for the construction phase.

The appointment will enable the contractor to assist the consultant team with the development of detailed designs and the main contract works and specialist tender documents. The contractor's involvement at pre-construction stage is widely viewed as being valuable and often essential in the final design process and preparations for the construction phase, including the programme, cost plans, buildability and specialist procurement.

The Pre-Construction Services Agreement (Specialist) (PCSA/SP) is designed for the interim appointment of a specialist to carry out pre-construction services for either the employer or the actual or prospective main contractor. This version of the agreement is likely to be used on substantial or complex projects prior to entry into sub-contracts for construction or installation work. The appointment will enable the specialist to be involved and give advice during the pre-construction period. It is, at this time and not during the construction phase, that the purchaser, assisted by the contractor and relevant specialists, is able to derive the greatest benefits from value engineering exercises.

Either version of the agreement can be used whether or not the specialist or contractor is to be responsible for design work but, unless otherwise agreed in the provision of services, any liability will only arise once a contract for the construction works is in place or, additionally, in the case of a specialist, a collateral warranty with the employer has been signed. It can also be used by both private and local authority employers.

Both versions of the agreement are designed for use on projects where it is intended to use, as the main contract:

• the JCT Standard Building Contract;
• the Design and Build Contract;
• the Major Project Construction Contract;
• the Management Building Contract;or
• both versions of the Intermediate Building Contract 2005 (and their related subcontracts).

In addition JCT has also announced:

• the imminent revision of JCT's construction management documents;
  
• publication of Amendment 2 to JCT's building contracts, including the Standard Building Contract and Design and Build Contract, in Spring 2009; and
  
• withdrawal of hard copies of JCT98, in Spring 2009.

The publication of sustainability drafting for the Standard Building Contract and Design and Build Contract, is to be in Spring 2009.

Users of JCT98 contracts should be aware of the decision by JCT to withdraw hard copies of JCT98 contracts and publish a new amendment to the 2005 editions of its building contracts in Spring 2009. It will now become increasingly difficult to source JCT98 contracts, so the turn of the year may be a good a time to get comfortable with the ongoing JCT 2005 contract.

SBCC publications expected in Spring 2009

As is usual, SBCC will follow JCT’s lead on the publication of contracts in 2009. In addition SBCC said, in October 2008, that their intention is to publish the following:

• Design and Build Sub-Contract Agreement Revision No 1;
  
• Design and Build Sub-Contract Conditions Revison 1; and
  
• Design and Build Sub-Contract Guide.

It will be a question of watch this space for further announcements from both bodies as and when the new contracts become available.

If you wish to discuss any issues arising form matters we have covered in this Construction Update, please get in touch with Brandon Malone , Pat Loftus and Sara Lannigan.

Bell & Scott Construction Team News

On 27 February 2009, Brandon will chair CLT Scotland's Conference "Construction in the Credit Crunch". The conference will consider construction projects from both sides of the fence, what to do to ensure that the contracts in place are rock solid as well as investigating where clients may be able to find “wriggle room”. Additionally, there will be an assessment of the current and future economic climate.

This conference will be of interest to all principals who work in the construction industry and their advisors. For further information and to register click here.

Pat Loftus will be speaking to RICS as part its CPD programme on 17 June 2009. He will speak on legislative changes affecting the construction industry in 2009.

Our Construction Team will be speaking on issues affecting the sector at the Bell & Scott Spring 2009 Seminar on 3 March 2009 at our Glasgow office. Details to follow.