Welcome to the latest 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 provide (i) updates on legislation and forms of contract (ii) comments on recent cases and (iii) a note of other relevant news items.

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 s.lannigan@bellscott.co.uk.

Legislation Update

Local Democracy, Economic Development and Construction Act received Royal Assent 12 November 2009

In previous issues of Construction Update, we mapped the progress of the bill through its parliamentary stages. The bill has now made it to the statute book with several important amendments being made to the Housing Grants Regeneration & Construction Act 1996 (“the 1996 Act”).

The key amendments are:-

New section 106A: Exclusion orders

Under a new Section 106A, the Scottish and Welsh ministers will have power to exclude particular types of construction contract from the clutches of the 1996 Act – this was previously the exclusive domain of Westminster ministers.

Unwritten contracts

We know only too well that the 1996 Act applied to contracts for construction operations which were cast only in writing (S107 of the 1996 Act). Under the new Act, this anachronism disappears. Consequently, the right to refer a dispute to statutory adjudication or to require “statutory stage payments”, will apply to oral and/or part written contracts as well as to written contracts.

New section 108A: Costs of adjudication

Any clause in a contract which states that a party referring a dispute to adjudication is to be liable for all parties’ costs in the adjudication, regardless of the outcome, is now clearly ruled out as being contrary to the spirit of the 1996 Act. However, the parties can still include a provision conferring power on the adjudicator to allocate payment of his fees and expenses between the parties in their construction contract.

New section 110A: Payment notices

There have been wholesale changes made to the payment notices regime introduced by the 1996 Act.

Out goes the questionable Section 110(2); in comes a mechanism which allows the payee to take control of the payment notice procedure in default of the payer serving the relevant notices within timescales. The intention here is to prevent the payee suffering prejudice over payment should the paying party fail to serve the requisite notices.

In tandem with this, comes the right for a “specified person” i.e. the employer’s agent to serve the paying party’s notice.

New section 111: Requirement to pay notified sum

Out goes the “Notice of Intention to Withhold Payment”; in comes the requirement to pay the “Notified Sum”. We shall all have to get used to this new terminology!

Coming into force

As yet, there is no fixed date for the Act to go live. However, as with the 1996 Act, time now needs to be spent on the knock-on amendments needed to the Scheme for Construction Contracts. What’s more, we have the prospect of time delay that a general election will bring.

Pat Loftus, Partner, comments:

Given that the new Act introduces three separate rights of exclusion, England, Wales & Scotland, there is potential for some contracts to be excluded from the 1996 Act in one country and not in another. This may be an issue for UK wide operators.

On the positive side, the extension of the 1996 Act to “unwritten contracts” does address the concern within the industry that many high value contracts were missing out on useful rights and protections - especially the right to refer disputes to adjudication and the right to “stage payments”. However, it is a fair bet that we will see more disputes being referred to adjudication with the aim of identifying what the terms of the contract actually are.

As for the changes to payment notice provisions, the aims are laudable but probably ill-timed. The construction industry took some time to understand the procedures of the 1996 Act. Now it will have to undergo a further “bedding in” period, just at a time when operators will be more interested in economic survival than getting to grips with new contractual procedures. In addition, since the new law will mean more changes to standard form contracts, it appears that the timing of the publication of JCT Standard Form Amendment No 2, prior to the new Act, was poorly timed and we can expect to see a further JCT standard form amendment before too long.

Arbitration (Scotland) Bill

The Arbitration (Scotland) Bill was passed by the Scottish Parliament on 18 November 2009 and will be operational in the next month or so.

The new act will bring the Scots law of arbitration bang up to date, providing Scotland with a system of arbitration to rival any other jurisdiction.

Brandon Malone, Partner, comments:-

Arbitration in Scotland has gained a bad reputation for itself in recent years – it has become known as a lengthy and expensive dispute resolution process. That is so despite the fact that, with a proper set of rules and a commercial arbitrator, arbitration can be a very effective way of dealing with disputes.

The Scottish Government, in consultation with various interested parties, such as the Scottish Branch of the Chartered Institute of Arbitrators, the Law Society of Scotland and the Faculty of Advocates, has pushed the reform of arbitration, promoting its economic growth potential for Scotland.

The new system of arbitration will not apply to arbitrations started before the act goes live, but will apply to new agreements and to arbitration clauses in existing agreements, unless the parties agree otherwise.

The old problems associated with arbitration: the lack of power to award damages and interest and the difficult interface with the court, have all been addressed. The drafters have drawn upon the best of international practice and the experience of the courts in England and Wales in dealing with the UK Arbitration Act 1996. Arbitration looks set to make a comeback in construction disputes and, here’s hoping, to make an impact on the wider economy.

Contracts Update

Contracts update: SBCC Amendment No 2?

JCT has published Standard Form Amendment No 2 to the 2005 suite of contracts. The construction industry is just getting to grips with this now. In Scotland, the SBCC is considering the JCT amendments and has not decided whether it will produce an amendment sheet or simply reprint the relevant SBCC contracts to incorporate the amendments. As is always the case, there is a temporary mismatch between standard form JCT contracts north and south of the border. Again, UK wide operators should be aware of this.

Pat Loftus, Partner, comments:-

Given that all construction contracts will need to be amended for Local Democracy, Economic Development and Construction Act 2009, we are faced with the inevitable time lag for standard form contracts to catch up. We await with bated breath to see if the SBCC decide to issue a Standard Form Amendment No 2 to the SBCC contracts in the interim. It is no surprise that an already battered and bloody industry is not taking too kindly to yet more regulation and standard form contract changes, particularly in the current economic climate.

Case Law Update

There’s a hole in my bucket

Albert Bartlett & Sons (Airdrie) Limited v Gilchrist & Lynn Ltd

A recent Scottish case highlights the issue of how the courts view an employer’s contractual right to recover damages from a contractor for defects.

The parties entered into a contract for the design and build of a process and packaging plant. As the works were ongoing, the employer (Albert Bartlett & Sons) raised concerns about water ingress through the roof. The contractor (Gilchrist & Lynn) confirmed that any defects would be rectified when the works were completed.

The works were completed, but the water ingress through the roof continued. The parties arrived at Court, not to establish liability, since the Contractor admitted it was in breach of contract over the roof leak, but to work out the level of damages to be awarded to the employer.

The general principle is that the level of damages for defective work is the cost of reinstatement or making good the defect. In this case, the court accepted the general principle but was asked to rule on which of two proposed rectification procedures for the water ingress should be the guide to the level of damages payable.

The employer argued that it was entitled to damages based on a proposed over-cladding solution. The contractor disputed the over-cladding route as being unreasonably expensive and potentially inadequate to solve the problem. The contractor proposed much cheaper liquid waterproofing measures, believing that this would be better in preventing the leak than the over-cladding system.

The Court heard expert witnesses from both sides but decided that damages should be assessed on the cheaper of the rectification procedures which the court also considered was the best technical solution.

Sara Lannigan, Solicitor, comments: -

The court’s decision in this case suggests that, when faced with defects in a premises, the party seeking damages cannot assume that it will recover the full costs of making good the defects under its preferred means of rectification if there is a viable, cheaper and more sound technical alternative. If there is, it is likely that the courts will favour the adoption of the alternative method. This approach is, of course, in line with the general principle that a party who suffers a loss has to mitigate that loss. The decision shows that a party cannot hope to recover damages for making good defects which are both unreasonable, in the circumstances, and, of questionable benefit.

Case referred to Albert Bartlett & Sons (Airdrie) Limited v Gilchrist & Lynn Ltd 2009

A full text of the decision is available on the Scottish Court Service website accessible here

The devil is in the detail

Education 4 Ayrshire Limited v South Ayrshire Council  

In 2006, Education 4 won the contract to design and construct six schools in Ayrshire for South Ayrshire Council. It sub-contracted the construction work under the project agreement to Carillion, exactly mirroring the terms of the project agreement in the sub-contract.

The project agreement covered work to be done at Prestwick Academy. This phase of the works had to be completed by the “Target Service Availability Date” set out in the project agreement. Extensions of time could be claimed by the contractor if it gave formal notice to the Council under specified circumstances. One such circumstance was the occurrence of a “Works Compensation Event”. Such an event covered the situation where asbestos problems arose which went beyond those identified in the surveys obtained at the start of the project. In this event, a contractor could give formal notice under the project agreement for time to remedy the problem and complete the phase and, it could seek relief or compensation from the Council. Significant additional asbestos problems were discovered by the contractor at the site at Prestwick Academy. The contractor wrote to the Council saying that the date for handover would be delayed by 16 weeks and that it would be making a subsequent claim for compensation – this amounted to £815,792 in the court action. The Council contested the claim for an extension of time and compensation on the basis that the notice by Education 4 was not given correctly in line with the project agreement. The project agreement set out strict procedures which had to be followed if time extensions and compensation were requested in specific circumstances.

Education 4 argued that it had given the requisite notice within the time allowed in the project agreement. The Council argued that the letter by Education 4 could not be a notice given in line with the project agreement.

The court took the view that parties who sign up to formal agreements containing precise and specific procedures and remedies, to cover events that may occur in the course of a project, must be taken to understand the importance of adhering to those steps. The project agreement contained a lengthy clause which clearly set out the formal steps to be taken and information to be provided by each party when important issues arose in the ongoing works. Although, in practice, Education 4 had made the Council aware of the nature of the problem which had occurred at Prestwick Academy within the timescales provided in the project agreement, the only formal notification to the Council indicated that the contractor would be coming back to the Council with a detailed assessment of the compensation sought at a future point. The notice provisions in the project agreement required the contractor to provide the council with that assessment when giving notice that an extension of time and compensation were being claimed as a Works Compensation Event – Education 4’s notice should have set out the compensation that it sought for the period of delay.

Sara Lannigan, Solicitor, comments:-

This is one of these cases in which people might say, “the law is an ass”. However, when time and money is spent in engaging skilled professionals to deal with the risks, liabilities and responsibilities in construction agreements, you can hardly fault a judge for sticking strictly to what the agreement said verbatim. In reality, the Council was told by Education 4, in good time, that the project works had run into difficulties with asbestos and that there would be delays. The mistake was that the detail of the formal notice fell short of what the project agreement required – the time delay sought and compensation claimed should have been communicated in the one notice. The case serves as a timely reminder to all those engaged in construction contracts to make sure that all the ducks are in a row for key matters in the contract. Needless to say, your lawyers are there to keep you right on the detail, so use us.

Case referred to Education 4 Ayrshire Limited v South Ayrshire Council [2009] CSOH 146

A full text of the decision is available on the Scottish Court Service website accessible here

News

Project bank accounts

The Office of Government Commerce (OGC) is pushing for fairer payment practices and the use of project bank accounts. The aim of the drive is to protect the supply chain (especially sub-contractors and suppliers) in contractor insolvency.

The proposal is that the bank (as funder of the works), the employer and the main contractor enter into an agreement that money will be paid into a separate account and ring-fenced for the purposes of the construction works. The money would be released to the contractor only after the employer and the bank have received the requisite valuation certificates confirming that the works have been carried out in accordance with the contract.

Although there has been little use of project bank accounts to date, the JCT has made its project bank account documentation available both for use and for comment as part of a wider consultation.

There are three elements to the JCT documentation package:

• the project bank account agreement
• the additional party deed
• and the enabling provisions

It will be interesting to see how the documentation is amended and whether the JCT has achieved the groundswell of support it desired for these accounts. If there is little support for them, it is likely that project bank accounts will be more aspired to, than used!

Update on consultation on false self-employment in the construction industry

HMRC has announced that a summary of responses to the consultation on false self-employment in the construction industry will be published in the New Year.