by Hardwick Legal | Dec 14, 2017 | Purpose Built (LexisNexis)
Our panel of experts from Eversheds, Fenwick Elliott, Canary Wharf Group, Beale & Company and Silver Shemmings Ash review the state of the construction industry and make predictions for 2018.
First published on LexisPSL Construction. Click here for a free trial.
The experts
- Rob McNabb (RM), partner, Eversheds
- Jeremy Glover (JG), partner, Fenwick Elliot
- Martin Potter (MP), Canary Wharf Group
- Will Buckby (WB), partner, Beale & Company
- Tim Seal (TS), partner, Silver Shemmings Ash
- Ian Masser (IM), partner, Beale & Company
What is the current state of the UK construction industry?
RM: The market remains active despite the uncertainties created by Brexit. We have seen, to an extent, the uncertainties being offset by a weaker pound, which is encouraging international investors who are willing to take a longer-term view to invest. Certain sectors continue to grow, in particular student accommodation, distribution centres and data centres, and there is some upturn in residential new builds. These are generating opportunities in the market in addition to the larger-scale public sector lead infrastructure projects.
The industry is continuing to face both challenges and opportunities in fairly equal measure and, to date, it’s benefiting more from the opportunities than it is being impacted by the challenges.
What are the greatest concerns at the moment?
JG: The biggest concern for the construction industry is the prolonged uncertainty brought about by Brexit. The issue lies in the fact that we do not have any real idea of the government’s expectations of a post-Brexit construction industry, or its key objectives for construction in the ongoing Brexit negotiations. In more tangible terms, one of the biggest concerns is labour supply. The free movement of labour has been a major success factor in the UK construction industry, with EU labour helping to cover an ageing workforce and what some have seen as a failure to invest in training and development to encourage the best home-grown talent in entering construction. This uncertainty makes it difficult to Brexit-proof a contract.
Unless a construction contract expressly addresses Brexit-related risks, it is doubtful that a party will be able to use force majeure clauses or frustration arguments to try and withdraw from what could turn out to be a bad contractual bargain. One reason for this is that it will be difficult to establish what might and might not be considered as being reasonably foreseeable. Nevertheless, we have seen Brexit-related clauses seeking to address which party takes the risk for any changes in the law as well as exposure to fluctuations in materials, taxes, import duties and the supply of labour.
With the more long-term contracts, some of which will inevitably be taking place during and beyond the Brexit period, we may find that parties, in order to deal with the challenges thrown up by Brexit, are left with a choice between being dispute-conscious or adopting a more collaborative approach to contracting. The more successful projects are likely to be those where everyone adopts the latter course.
Is Brexit having an impact on the terms of construction contracts or consultancy appointments?
MP: Brexit is having an impact to a certain extent—the lower pound and the uncertainty surrounding Brexit are increasing demands for fluctuations (not seen since the 1980s). The reaction to this is that contract sums are being increased as contractors add significant contingencies into their pricing. A further alternative is the requirement for advance payments so that contractors can hedge against significant currency movements.
Another consequence is the reluctance of European contractors to undertake work in the UK until the future becomes clearer. This is leading to searches for contractors in other parts of the world and for UK contractors to seek higher prices and, perhaps more importantly, not having the resources to undertake activities within the projected time scale.
The skilled labour shortage is becoming more acute as European workers either return home or look for work in a more stable political and economic climate. Again, this impacts the ability of UK contractors to fulfil required time scales or to seek relief in the contract should shortage of labour or materials occur.
Due to the political uncertainty, there is suggestion that changes in the law should become an employer’s risk.
WB: Understandably, Brexit is on our clients’ radar. For short term and low value projects, it is business as usual and very little has changed. However, the Brexit risk is being considered for long-term projects—and not just those projects which plan to continue after 29 March 2019, but those which have longevity before that date. This is due to the government possibly deciding that EU-derived laws should be repealed sooner to encourage and expedite a softer transition.
The areas in which we have seen a greater focus when reviewing, negotiating and concluding construction contracts or consultancy agreements are:
- change of law drafting—specifically whether the supplier is entitled to additional time and money
- fixed-priced contracts—whether the supplier is entitled to price fluctuations due to higher wages, increased tariffs on imported goods and services and further devaluation of the pound
- standards and codes which apply to the work carried out—as European standards and codes may no longer be relevant, and
- whether litigation or arbitration may apply—as it may be more difficult to enforce a UK court decision in Europe following Brexit
Are there any types of dispute that have become more prevalent?
TS: Disputes have become more prevalent and these consist of claims that can be brought as quickly and cheaply as possible. This is due to the industry still being in recession and profit margins being fine, therefore limiting both one’s own costs when bringing a claim and one’s exposure to the opponent’s costs if one fails. A quick turnaround reduces the time for an opponent to go bust in the interim and makes the claim pointless. In my experience, adjudications and statutory demands appear to be on the rise again. In the former camp, so-called smash and grab adjudications are increasing, where a party tries to show default by an opponent in serving a non-compliant pay less notice or no such notice at all, resulting in a default entitlement to the whole sum applied for by the claiming party.
IM: 2017 has seen a further increase in disputes within the UK construction industry. On the domestic front, the three main claims trends we have seen are:
- an increase in adjudication challenges and enforcement proceedings
- an increase in personal injury claims against building surveyors and managing agents, and
- an increase in litigated claims possibly a consequence of the amendments that were made in November 2016 to the Pre-action Protocol for Construction and Engineering Disputes
2018 is predicted to be another litigious year fuelled by:
- stringent reviews of ongoing projects to ensure compliance with building regulations (with a focus on cladding)
- the continuing fallout from the unravelling of Private Finance Initiative contracts, and
- claims arising out of Crossrail finally starting to trickle down to consultants
What are your predictions for the UK construction industry for the next 12 months?
RM: The implications of Brexit will begin to bite harder with potential impacts on availability of labour and the cost of imported plant and material beginning to hit home. However, there remains plenty of opportunities for those who are able to adapt. There will be increased activity coming out of new technology associated infrastructure—the move to electric vehicles and the associated infrastructure, increase in demand for connectivity and data storage as well as the general energy transition—which will mean plenty of new infrastructure projects.
Interviewed by Stephanie Boyer. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Source: LexisNexis Purpose Built
Construction—state of the industry review
by Hardwick Legal | Dec 1, 2017 | Purpose Built (LexisNexis)
In a summary judgment application, the court held that the defendant was liable as primary obligor under the terms of an agreement under which his company (the sub-contractor) had been provided with a £4m cash advance by the claimant contractor. It rejected the defendant’s argument that the guarantee only imposed secondary obligations on him.
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Multiplex Construction Europe Ltd (formerly Brookfield Multiplex Construction Europe Ltd) v Dunne [2017] EWHC 3073 (TCC)
What are the practical implications of this case?
The case provides an example of the court construing the terms of a suretyship agreement to determine whether it is an indemnity (under which the surety has primary liability), or a guarantee (under which its liability is secondary, arising only where another person is in breach).
In particular, the judgment indicates (albeit on a technically obiter basis) that the contra proferentum rule (ie that any ambiguity is to be resolved against the party who put it forward and seeks to rely on it) now has a very limited role when interpreting such documents entered into by companies of equal bargaining power. In fact, the court noted that it had ‘only skeletal, if any, remains’ in commercial cases generally. Earlier this year the Court of Appeal had confirmed the rule’s limited application in relation to exclusion clauses (see News Analysis: Court of Appeal considers limitation and exclusion clause (Persimmon Homes v Arup)).
It also suggests that, where a provision contains two triggers for the surety’s liability, there is no reason why one trigger cannot create a primary obligation and the other a secondary obligation.
What was the background?
Multiplex appointed Mr Dunne’s company, Dunne Building and Civil Engineering Limited (DBCE), as sub-contractor under a number sub-contracts relating to various projects. When DBCE encountered financial difficulties, Multiplex agreed to advance substantial sums to it so that it could continue work.
An ‘Advance Payment Deed’ (APD) was entered into by Multiplex, DBCE, Mr Dunne and DBCE’s parent company. Mr Dunne and DBCE’s parent were jointly described as the ‘Guarantor’. Under the APD, the sum of £3m was advanced to DBCE by Multiplex (this was later increased to £4m by a sale, hire-purchase and buy-back agreement).
The APD required DBCE to repay the advance payment immediately on receipt of a written demand by Multiplex. It also provided that:
‘3. GUARANTEE
3.1 The Guarantor irrevocably and unconditionally guarantees, warrants and undertakes jointly and severally to the Contractor that should the Sub-Contractor suffer an event of insolvency (including but not limited to administration…) or otherwise not be able to pay back the Advance Payment to the Contractor immediately upon receipt of a written demand from the Contractor, the Guarantor shall immediately be liable to the Contractor for the payment of the Advance Payment and shall indemnify and hold harmless the Contractor against any loss, damage, demands, charges, payments, liability, proceedings, claims, costs and expenses suffered or incurred by the Contractor arising therefrom or in connection therewith.’
(our emphasis)
DBCE (and its parent) went into administration, and Multiplex sought to recover the advance payment of £4m from Mr Dunne under clause 3.1 (relying on DBCE’s insolvency). Multiplex brought a claim for summary judgment for this amount, under CPR 24. The court had to consider whether the APD was a contract of indemnity under which Mr Dunne had primary obligations, or whether it was a contract of guarantee under which he only had secondary obligations.
The relevance of this was that, if the document amounted to a guarantee, it would have been necessary for Multiplex to establish the losses it suffered as a result of DBCE’s insolvency (which would take into account, for example, any claims DBCE had against Multiplex). Such an exercise would not have been appropriate at a summary judgment hearing.
What did the court decide?
Primary liability
Looking at the objective meaning of the language used, the court held that Mr Dunne was liable as primary obligor (jointly and severally with DBCE’s parent) to make the payment of £4m to Multiplex. The use of the word ‘immediately’ (as emphasised in bold above) played an important role in the court’s decision—it would not be possible to pay the advance payment immediately if some kind of accounting process was required with DBCE. Further, it would be contrary to the commercial purpose to say that if DBCE became insolvent the primary obligation to repay was on DBCE. The use of ‘indemnify and hold harmless’ reinforced the conclusion that there was a primary liability.
Neither the heading ‘GUARANTEE’, nor the use of the verb ‘to guarantee’, was determinative as to the nature of the obligation (per Bitumen Invest v Richmond Mercantile [2016] EWHC 2957 (Comm), and also the contract provided that headings were for convenience only).
In relation to the second trigger (‘or otherwise not be able to pay back the Advance Payment to the Contractor immediately upon receipt of a written demand’) the court noted that the position was not so straightforward. However, this trigger was not relied upon by Multiplex, and the court considered there was no reason why both triggers had to be construed in the same way (it was possible that the first trigger could create a primary obligation, and the second trigger could create a secondary obligation).
As there was no ambiguity in the words used, the court did not consider that the contra proferentum rule arose, but it thought that the rule would not have much, if any, application in the circumstances of this case. In its opinion, the statement in Persimmon Homes v Arup [2017] EWCA Civ 373 (which concerned a exemption clause) that ‘the rule now has a very limited role’ was equally applicable to contracts of suretyship entered into in a commercial context between parties of equal bargaining power. The fact that Mr Dunne did not take legal advice was not relevant as that was his own choosing, nor was it relevant that DBCE was in financial difficulties.
Amount secured
Multiplex was entitled to recover the full £4m. The court rejected Mr Dunne’s argument that the amount of the ‘Advance Payment’ under the APD was reduced as and when DBCE became entitled to payments under the various sub-contracts. While Multiplex could elect not to pay sums otherwise due to DBCE, the APD did not provide for this to happen automatically (and such an automatic process would largely defeat the purpose of the APD by turning off DBCE’s cash flow).
Insolvency Rules
Finally, the court rejected Mr Dunne’s argument that it was not appropriate to give summary judgment in light of the Insolvency Rules and the principle that, in the event of insolvency, claims and cross-claims marge into a single debt. It was DBCE that was insolvent, not Mr Dunne, and his liability was not dependent on the state of the account between DBCE and Multiplex.
Case details
- Court: High Court of Justice, Queen’s Bench Division, Technology and Construction Court
- Judge: Fraser J
- Date of judgment: 1 December 2017
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Source: LexisNexis Purpose Built
Owner of insolvent sub-contractor liable as primary obligor (Multiplex v Dunne)
by Hardwick Legal | Dec 1, 2017 | Purpose Built (LexisNexis)
Sebastien Korwin, an international environmental lawyer and senior legal and policy advisor for Climate Law and Policy (CLP), reports on the outcomes of the 23rd meeting of the Conference of the Parties (COP) of the United Nations Framework Convention on Climate Change UNFCCC, including how the UK contributed to developments.
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How has the political landscape changed since the previous Conference of the Parties (COP 22) and what were the main challenges faced by the delegates?
COP 23 of the UNFCCC was held from 6 to 17 November 2017 in Bonn, Germany, under the presidency of the government of Fiji. So far, 170 parties have ratified the Paris Agreement, which was agreed at COP 21 in Paris in December 2015. Syria, embroiled in a civil war since 2011, became a signatory on 7 November 2017.
In June 2017, US President Donald Trump announced that he would pass legislation to take the US out of the Paris Agreement. Legally, the US must wait until 2020 to officially withdraw, meaning that for the duration of Trump’s term in office the US will continue to be present during the UNFCCC negotiations. Secretary of State and ex-CEO of ExxonMobil, Rex Tillerson, has indicated that the US will continue engaging in the talks in order to protect its interests.
In reaction to the US federal government’s stance, American governors, mayors and business leaders have recently formed a sub-national coalition, referred to as the ‘We Are Still In’ coalition. Informally led by Governor Jerry Brown of California, Michael Bloomberg, the former mayor of New York, and Governor Jay Inslee of Washington, the group has vowed to uphold the Paris Agreement and move ahead with policies to fight climate change.
Since President Trump’s declaration, others have taken up the climate leadership role. In Europe, Chancellor Angela Merkel of Germany and President Emmanuel Macron of France have vowed that the Paris Agreement will flourish without the US. President Xi Jinping of China and the Canadian Prime Minister, Justin Trudeau, are promoting their countries as climate change champions.
The Paris Agreement established the principles and framework of the new international climate regime, and over the coming years the details that will make this framework a reality need to be fleshed out. The Paris Agreement is based on a bottom-up approach to emission reduction commitments, with individual countries making pledges to cut their respective carbon emissions, known as nationally determined contributions (NDCs).
However, current pledges, even if fully implemented, would still result in at least 3°C of global warming. Although COP 23 was largely technical in nature, many of the discussion were highly sensitive politically. Key challenges for delegates include making further progress on pre-2020 climate actions, increasing the ambition of NDCs and developing the Paris ‘rulebook’. Additional challenges included how to make progress on the issue of ‘loss and damage’ and most controversial of all, on climate finance.
What were the key outcomes of this year’s conference?
Pre-2020 action
One of the most significant conflicts emerging in the early days of the meeting is linked to pre-2020 action. This centres on concerns from developing countries that rich countries are not doing enough to meet the emission reduction commitments made for the period prior to the implementation of the NDCs, which apply post-2020. Even if these commitments were to be fully implemented, they would still lead to a pre-2020 am-bition gap (the difference between current commitments and the amount of emission reductions needed to meet the 1.5°C target).
Initially not on the COP 23 agenda, following complaints from developing countries including India and China, pre-2020 ambition and implementation was included in the COP 23 decision text. The decision established a process of review and enhancement of pre-2020 actions, including a ‘stock-taking’ session at COP 24 and again at COP 25 to track and report on the progress of developed countries’ pre-2020 commitments to reduce emissions and to provide finance and technology to support developing countries.
Increasing ambition
Parties in Paris agreed that there should be a global ‘stock take’ in 2018 to review the progress made on climate action to date, with the intention that this information should be used to inform the following round of NDCs, due in 2020. This global stocktake will lead to the establishment of a mechanism to regularly review and increase ambition every five years. This is known as the Paris Agreement’s ‘ratchet mechanism’.
Under the Fijian COP presidency, the 2018 global stock take (previously referred to as the facilitative dialogue) was re-named ‘Talanoa dialogue’, reflecting a traditional approach to discussions used in Fiji. The COP 23 decision states that ‘the dialogue should not lead to discussions of a confrontational nature in which individual parties or groups of parties are singled out.’ The dialogue will be structured around three general topics:
• where are we?
• where do we want to go?
• how do we get there? Importantly, the dialogue will be informed by the IPCC Special Report on global warming of 1.5°C, which is due to be published in October 2018.
Development of the Paris ‘rulebook’
Negotiations in Bonn heavily focused on trying to make progress on developing the Paris ‘rulebook’, that is, the technical rules and processes needed to meet the Paris Agreement’s goals. These discussions are overseen by the ad-hoc working group on the Paris Agreement (APA). Its work covers several areas, including NDCs, how to report on adaptation efforts, defining the information to be reported in the ‘global stocktake’ in 2023, and how to monitor compliance with the Paris Agreement.
The COP 23 outcome text recognises that additional negotiating time may be needed to ensure the completion of the Paris rulebook by COP 24 and makes provision for an additional session to be organised between May and December 2018. The decision will be made during May’s scheduled intersessional meeting depending on the progress made there (or lack thereof), with August/September 2018 being the likely time for this to take place.
Loss and damage
The Paris Agreement includes a section recognising the importance of averting—and addressing—the loss and damage caused by climate change. The absence of loss and damage from the workstream to develop the Paris rulebook, despite demands from developing countries that new additional finance will be needed for loss and damage (that is, in addition to the finance needed for NDC implementation, adaptation and reporting) was also a sticking point at the COP.
Discussions on loss and damage took place under a technical workstream called the Warsaw International Mechanism (WIM). Originally agreed in 2013 at COP 19 in Warsaw, the WIM is separate workstream to the APA discussions, with its own executive committee. At the COP, the WIM agreed on a five-year rolling work-plan but has yet to bring forward any concrete plans on finance, the main difficulty in the loss and damage discussions. A one-off ‘expert dialogue’ was also agreed for the May intersessional in 2018, which will inform the next review of the WIM in 2019.
Agriculture
One notable outcome from the conference this year was the end of a deadlock on agriculture which had lasted for years. Parties agreed to work over the next few years on a series of issues linking climate change and agriculture. They agreed to streamline two separate technical discussions on this topic into one process. Countries have now been asked to submit their views on what should be included in the work by 31 March 2018, with options including how to improve soil carbon and fertility, how to assess adaptation and resilience and the creation of better livestock management systems.
Finance
Like at most previous COPs, the issue of climate finance was the source of major disagreements in Bonn, both in relation to pre-2020 ambition and to the implementation of the Paris Agreement itself. Many developing country NDCs include conditional pledges (based on the availability of financial support from developed countries), which means that discussions on the scale and predictability of climate finance cannot easily be separated from discussions on increasing climate ambition (discussed under the Talanoa Dialogue as high-lighted above). This contrasts with the views of developed countries, who prefer to keep the discussions separate.
Unsurprisingly, discussions on how much finance developed countries intend to provide biennially (as required under Article 9.5 of the Paris Agreement) extended into the early hours of Saturday 18 November 2017 (well past the official end time of COP 23). In the end, the COP 23 decision text kicks the can down the road, leaving COP 24 to decide how ex-ante finance will be addressed, with extra time allowed for discussion during the intersessional meetings between now and COP 24.
How did the UK contribute to the discussions and outcomes?
Prior to COP 23, the UK government published its Clean Growth Strategy (October 2017), which maps out how the UK plans to meet its emission reduction goals set out under the Climate Change Act 2008 (a reduction of at least 80% below its 1990 baseline by 2050). The strategy includes a commitment to phase out the use of ‘unabated’ coal in energy production by 2025 and a continued emphasis on increasing offshore wind production.
Building on this key development, the UK, along with Canada and the Marshall Islands launched the ‘Powering Past Coal’ alliance at COP 23, inviting governmental entities from around the world to phase out dirty coal power plants. The new alliance was launched with a letter signed by Claire Perry, UK Climate Change and Industry Minister, Catherine McKenna, Canadian Minister of Environment and Climate Change and John Silk, Marshall Islands’ Minister for Foreign Affairs and Trade. Members of the alliance commit to phase out existing traditional coal power plants in their jurisdictions and to restrict legally and financially the construction of new coal plants that will not come with carbon capture and storage (CCS) technologies. So far, 27 countries and states have joined the alliance, including Austria, Belgium, Denmark, Finland, France, Italy, Luxembourg, Mexico, New Zealand, Portugal, and Switzerland. The coalition aspires to expand its signatories to 50 by the beginning of COP 24.
The UK government also committed to double its 2017 funding to the Intergovernmental Panel on Climate Change at the COP.
What are the next steps following the close of COP 23?
With the conclusion of COP 23, a busy 2018 is anticipated, with the Talanoa dialogue, the completion of the Paris rulebook (including a possible additional intersessional), the submission of views on agriculture, the expert dialogue on the WIM and the continuation of discussions on finance.
Are there any other points of interest worth mentioning here?
In parallel to the governmental negotiations, another conference was held in a temporary structure on the UN campus, bringing together civil society representatives, academia, think tanks, indigenous peoples’ groups and representatives of the private sector.
Of particular note (and of interest to legal practitioners) was a panel organised by the Heinrich Böll Foundation, where climate activists and legal professionals discussed how, in light of the perceived failures of international climate policy, litigation is becoming an increasingly important part of the strategy to hold climate polluters financially accountable for the damage they’ve caused (and therefore accelerating climate action).
Several hundred climate-related lawsuits have been filed in the past 20 years, with plaintiffs having already won significant battles, including in the Netherlands, where a court ordered the government to cut green-house gas emissions to protect a liveable climate in a ruling known as the Urgenda decision. The proliferation of such cases around the world have the potential to fundamentally change the political and economic landscape, driving investment away from fossil fuels and increasing climate ambition.
CLP is a research and advisory organisation that aims to contribute towards national and global environmental sustainability through advances in environmental governance. Sebastien leads CLP’s work in international policy fora, including the UNFCCC and CITES (the Convention on International Trade in Endangered Species of Wild Fauna and Flora). He also provides strategic and technical advice to governments, civil society organisations as well as multilateral institutions such as the UN and the World Bank, particularly in the field of forest and natural resource governance.
Source: LexisNexis Purpose Built
What are the outcomes of the COP 23 climate conference?
