by Hardwick Legal | Feb 21, 2018 | Purpose Built (LexisNexis)
Following a consultation process on retentions in the construction industry, and on the 2011 amendments to the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996), Francis Ho, partner at Penningtons Manches, considers the possible changes that could be made to the law around retentions, payment and adjudication.
First published on LexisPSL Construction. Click here for a free trial.
What were the consultations about?
The Department for Business, Energy & Industrial Strategy (BEIS) ran two parallel consultations from 24 October 2017 to 19 January 2018. The first focused on the long-standing practice of clients and contractors holding cash retentions from their supply chains. The second was a review of the impact of the amendments to HGCRA 1996, Pt II, brought in from October 2011 through the Local Democracy, Economic Development and Construction Act 2009 (LDEDCA 2009).
Retentions
The retentions consultation followed detailed research commissioned by BEIS in England into businesses’ experiences with cash retentions, their disadvantages and possible alternatives. Cash retentions have long been a prickly issue within the construction industry. Clients and main (Tier 1) contractors typically hold back 3–5% in retention from any payments due to their own contractors, primarily to incentivise them to remedy any defects in construction works that come to light during the defects liability period. Half of this sum is usually returned to contractors at practical completion, with the remainder being paid at the end of the defects liability period (generally lasting for 12–24 months), subject to any set-offs the payer is permitted to make.
These retained funds can be abused, with those holding them either releasing them late or even not at all. Furthermore, those funds, if not ringfenced from the payer’s other monies, could be lost to the payee in the event of the payer’s insolvency. While Carillion’s long-standing financial problems would not have been a consideration for introducing the consultation, the recent collapse of the giant Tier 1 contractor into liquidation will only intensify focus in this area. Notably, the consultation did not cover construction contracts between homeowners and contractors.
The consultation was the first time the government has looked specifically at retention monies, although the subject was touched upon in separate House of Commons’ Select Committee reports in 2003 and 2008.
The government is concerned that, despite several initiatives in recent years such as the Construction Supply Chain Payment Charter, the Prompt Payment Code and project bank accounts, legislative reform may ultimately be needed to improve the situation—hence the consultation. Its research found delays in releasing retentions to be commonplace, with second-tier (Tier 2) and third-tier (Tier 3) contractors more vulnerable. Leaving aside the payer’s insolvency risk, this can lead to a weakening in relationships between payers and payees, as well as increasing payees’ overheads.
LDEDCA 2009
The consultation on LDEDCA 2009 is less unusual. The government commonly assesses changes in law after a few years to understand what has worked and what can be improved. LDEDCA 2009 was meant to refine the original legislative provisions—it has now had sufficient time to bed in that we can better understand its impact. There may also be subsisting issues arising from the original legislation, which the consultation should shed light upon.
Each consultation may lead to legislative change. This would likely be carried out through further amendments to HGCRA 1996, Pt II, in England, Wales and Scotland and to its Northern Ireland equivalent, as well as to each region’s Scheme for Construction Contracts.
What changes could be made in relation to retentions?
Cash retentions are frequently used, far outweighing alternatives in the market. While primarily designed to encourage the remedy of defects, they can be used as a buffer against other forms of non-performance. None of the substitutes is without issues and few are as effective and as simple as cash retentions in getting defects addressed. It may well take legislative change to shake things up.
BEIS appears to prefer a ‘one size fits all’ solution to cash retentions so that there is no distinction between how SMEs and PLCs or construction clients and Tier 3 contractors are treated. BEIS has also found from its delayed regulations to prohibit the assignment of receivables that restricting measures to businesses based on revenue or headcount measures can be difficult. Furthermore, retention is an issue that does affect clients and contractors of all sizes.
Project bank accounts and the voluntary Supply Chain Payment Charter would help reduce the risks. The former requires payments, including retention monies, to be ring-fenced, while the Charter demands that a Tier 1 contractor’s percentage withholding of retention monies from a sub-contractor should not exceed that being withheld from the contractor. Nonetheless, the Charter is non-binding for those who have voluntarily signed it, and neither it nor project bank accounts have found widespread usage in the industry, although perhaps the latter may receive greater uptake in the public sector following the bad press from the Carillion fallout. Two other possibilities mentioned by BEIS (performance bonds and parent company guarantees) aren’t readily available in all situations and are more often associated with protecting a payer against its payee’s insolvency than as an incentive to fix defects in the works.
One possibility is for retentions monies to be held on trust. Indeed, the JCT contracts stipulate this but the relevant provisions are typically removed to enable employers to use those funds elsewhere in its business. While a trust wouldn’t necessarily resolve the issues of late or non-payment, it would at least safeguard the monies from other creditors in the event of the payer’s insolvency. The downside of mandating a trust arrangement is that it can affect the payer’s own working capital position, particularly where the construction client’s development funds originate from a bank or a forward purchaser, as is common with larger projects. Where debt finance is required for a project, this may mean drawing down loan amounts to hold in a retention account and the lender hence demanding that interest accrues on such monies. Current practice is that retention monies aren’t drawn down until they need to be paid to the contractor. This also protects the lender; monies that are not loaned out are unlikely to be at risk.
The product which is the nearest equivalent to retention monies is a retention bond. These can be seen on major infrastructure or engineering projects, as well as for utilities projects and, of course, they are often used in cross-border arrangements, typically on an ‘on demand’ basis from a bank. If clients start using these more frequently, there will need to be a discussion to be had over who meets the cost of the bond. If the payer is to bear the cost, it may feel entitled to ask for a discount on the contract price to offset this further cost. With retention bonds usually being on demand, the banks issuing them often require them to be backed by cash. In terms of cashflow during the course of a project, a contractor is drip-fed the contract price against works carried out. Consequently, the cashflow advantage sometimes associated with retention bonds may be overstated. A call on the bond could also affect the payee’s credit rating, leading to higher financing costs elsewhere.
So the issues with cash retentions are clear, but effective solutions are rather thin on the ground.
What changes could be made in relation to the LDEDCA 2009?
In relation to the review of LDEDCA 2009, there’s a general view that the provisions relating to payment still lack sufficient clarity and, in some cases, the changes have made this situation worse. This may have the effect of confusing smaller contract administration firms, clients and contractors alike. Indeed, the research carried out by BEIS for its retentions consultation found that many 2011 changes were poorly understood among Tier 2 and 3 contractors.
Another of the government’s concerns is the cost of adjudication. There’s not been much change on this front on the pre-October 2011 regime, except in relation to construction contracts whose terms are a hybrid of written and oral agreements, or where written terms have been varied orally. At least, it is now clear that a challenge as to the adjudicator’s jurisdiction would not be entertained on this basis. There is, of course, the matter that contracts which were not available in writing would not previously have been subject to statutory adjudication, so the ambit of the legislation is wider. For disputes involving contracts that are, or are alleged to be, partly oral, it has reduced costs significantly in many cases and increased certainty of outcome.
A change instituted by LDEDCA 2009 means that a payer is required to pay the ‘notified sum’ (ie the amount stated in the last correctly served notice), with heavy sanctions if it fails to serve a payment notice or pay less notice to withhold or deduct from that notified sum. This has led to instances of ‘smash and grab’ adjudications, where payees rely on a client’s ignorance, poor contract administration or paperwork to challenge payment or pay less notices (or their absence), as seen in ISG v Seevic. In particular, it may act as an incentive for payees to serve inflated applications for payment. A refinement to the provisions relating to pay less notices might assist in this.
It’s also felt that larger and better-funded parties can intimidate a counterparty through launching a string of adjudications or responding to any notice of adjudication by launching a counter-adjudication on a different point. Smaller entities are less able to cope with handling with overlapping adjudications. It’s possible for parties to agree to consolidate disputes but perhaps giving adjudicators the independent discretion to decide on whether this is appropriate in the interests of costs might be a possible way of mitigating such behaviour.
It might also be useful to add a sanction where an adjudicator has been irresponsible in deciding whether it has jurisdiction to hear a particular dispute. There are situations where adjudicators believe they have jurisdiction, meaning that both parties then incur substantial costs pushing the adjudication through to a conclusion only for it later to be established upon enforcement that this was not the case.
Another change might be to switch the timeframes in the scheme for adjudication from calendar days to business days, for example, requiring an adjudicator’s decision to be provided within 20 working days rather than 28 calendar days. This would reduce the temptation for a referring party, which has had the opportunity to carefully build a case, to take advantage of the other side’s unpreparedness or lack of resourcing to handle the matter, particularly around the Easter or Christmas periods.
What is the likelihood of changes being made?
It’s likely that the retentions consultation may lead to new law. BEIS gives the impression that it’s itching to take some action on that front. There’s a decent prospect for the other consultation, although, to an extent, parties have been able to deal with most of LDEDCA 2009’s shortcomings through careful drafting. Retentions, on the other hand, fall to market practice and the respective negotiating positions in any project. Any changes are likely to be controversial so further consultation, not least on the proposed legislative instrument, would be necessary.
Regarding retentions, BEIS has proposed that a statutory retention deposit scheme could be the solution, taking inspiration from a similar scheme recently introduced in the Australian state of New South Wales. Similar to the tenancy deposit scheme, which has operated in the UK for nearly ten years, this would likely be operated by licensed third party providers. Unless carefully designed, however, this holds the prospect of creating more headaches than it would resolve. Retention monies, for example, aren’t usually deducted all at once but from each interim payment instalment so the administration could be burdensome.
There’s also the question of what happens if a payer and payee are in dispute as to whether particular retention monies should be released, perhaps because the payer contends there are defects but the payee disagrees. The consultation suggests that such arguments would be resolved between the contract parties through the construction contract’s dispute resolution mechanisms, but that could delay the payee from getting any money it is entitled to. It’s a good possibility that taxpayer money may also be required to underwrite such a scheme.
What BEIS is proposing may go beyond what has been effected in New South Wales. That currently only applies to Tier 1 contractors and their Tier 2 contractors for projects with a value of more than AUD$20m, covering all contracts entered into after 1 May 2015. There are fines if the payer fails to comply with the requirements of up to AUD$22,000. In the New South Wales scheme, the Tier 1 contractor can only withdraw funds from the retention account pursuant to the terms it has agreed with its sub-contractor.
A less ground-breaking but broader alternative could be to adopt a scheme similar to the one used in New Zealand since 31 March last year. This covers all Tier 1 contractors and below, with no threshold limits. However, it simply imposes a requirement that the monies are held in trust and there is no obligation for these to be placed in a separate account. This could still mean there are problems in recovering such amounts from an insolvent payer, especially if the amounts have been mixed. As an alternative to the trust arrangements, the New Zealand rules permit a payment bond to be required instead, with interest is payable on any late release of retention monies.
Possibly the most substantial issue with imposing controls is that those with the stronger negotiating hand may simply press their suppliers to use and bear the costs of alternatives to retention monies altogether. This could have unintended consequences from the industry—a less-established contractor may face a higher price for a retention bond than a larger rival. At least with cash retentions, it’s theoretically an equal playing field for tenderers.
Then there’s the issue of proportionality regarding whether a retention scheme should be introduced. BEIS’s research found that the average amount lost per contractor due to non-payment arising from insolvency was £10,000 over three years and that ‘of the three-quarters of contractors with experience of retentions, contractors say retentions are not held on an average of 35% of all their current contracts’.
With regard to the Private Member’s Bill introduced by Peter Aldous MP on 9 January 2018 (see News Analysis: Construction (Retention Deposit Schemes) Bill takes first steps), its timing is regrettable. He mentioned that he’s concerned over the time that BEIS’ consultation has taken. However, the fact that BEIS has recently acknowledged that the construction clients were under-represented in its retentions research highlights how important it is that the issues and solutions are carefully considered.
The complexities over a retention deposit scheme, an idea that has never been attempted on such a scale in any construction market, do merit further assessment. What happens if BEIS decides an alternative solution is preferable while the Bill is still progressing through Parliament?
Whatever the form the legislation might take, when it could be implemented is an interesting question. Parliament’s priority has been the country’s withdrawal from the EU, so finding sufficient time to introduce new primary legislation may be a problem. There’s also the matter of whether the government wishes to take the risk of heaping further uncertainty on the industry at a time when parts of it are showing signs of slowing.
Interviewed by Nicola Laver. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
LexisPSL Construction customers are able to access the following relevant Practice Notes:
Click here for a free trial.
Source: LexisNexis Purpose Built
Exploring possible changes to construction retentions and the HGCRA 1996
by Hardwick Legal | Jan 31, 2018 | Purpose Built (LexisNexis)
25 Year Environment Plan, New Independent Environment Body and the Clean Growth Strategy
Welcome to the first edition of our monthly environmental law newscast produced in partnership with Christopher Badger, Barrister, 6 Pump Court.
In this bulletin, we consider some of the key legal developments that are likely to have a significant impact on the environmental law field for 2018, including:
- the Department for Environment and Rural Affairs (Defra) 25 Year Environment Plan;
- Defra’s plans for a new independent environment body; and
- the Committee on Climate Change’s response to the UK’s Clean Growth Strategy.
25 Year Environment Plan—tune in from 0:28 secs
Defra finally published its 25 Year Environment Plan on 11 January 2018. The plan is split into six chapters:
- Using and managing land sustainably;
- Recovering nature and enhancing the beauty of landscapes;
- Connecting people with the environment to improve health and wellbeing;
- Increasing resource efficiency and reducing pollution and waste;
- Securing clean, productive and biologically diverse seas and oceans; and
- Protecting and improving the global environment.
In this newscast, Christopher explains how each chapter is underpinned by the concept of ‘natural capital’ and highlights some of the most interesting commitments in the Plan.
New Independent Environment Body—tune in from 3:40 mins
To ensure strong governance, the Government plans to consult in early 2018 on establishing a world-leading independent statutory body to hold Government to account for upholding environmental standards.
In this newscast, Christopher considers some of the interesting, and as yet unanswered, questions about the proposed environment body which will need to be addressed. He also discusses the Government’s plans to develop a set of new innovative environmental principles that will underpin the action contained in the 25 Year Plan.
Committee on Climate Change’s response to the Clean Growth Strategy—tune in from 6:42 mins
On 17 January 2018, the Committee on Climate Change published its independent assessment of the Government’s Clean Growth Strategy. It concluded that the Government has made a strong commitment to achieving the UK’s climate targets, placing the low carbon economy at the heart of the UK’s industrial strategy and framing the Clean Growth Strategy as a positive contribution to the economy. However, policies and proposals need to be firmed up.
In this newscast, Christopher discusses some of the policies and proposals which require further work in accordance with the recommendations made by the Committee.
For related documents, see:
Subscribers to Lexis®PSL Environment can also access the following News Analysis:
For a free trial, register at Lexis®PSL free trial.
Source: LexisNexis Purpose Built
Lexis®PSL Environment Newscast—January 2018
by Hardwick Legal | Jan 25, 2018 | Purpose Built (LexisNexis)
What happens now to the many infrastructure projects Carillion was involved with? Simon Lewis, partner in the construction and engineering team at Womble Bond Dickinson, assesses the implications of Carillion’s insolvency and outlines what steps those working with Carillion should take next.
First published on LexisPSL Construction. Click here for a free trial.
What steps should sub-contractors/suppliers to Carillion be taking in light of its insolvency?
The Official Receiver (OR) has indicated that his priority is:
to ensure the continuity of public services while securing the best outcome for creditors. Unless told otherwise, all employees, agents and subcontractors are being asked to continue to work as normal and they will be paid for the work they do during the liquidations.
So, on the face of this advice, it remains ‘business as usual’ for those working with Carillion in the public sector.
However, approximately 60% of Carillion’s business is made up of contracts with the private sector, and on Monday, 15 January 2018 the government indicated that either the private sector counter-party must within 48 hours agree to fund future works itself, or those private sector contracts of Carillion would be terminated.
Against all this uncertainty, there are some immediate legal and practical issues that should be considered by all supply chain members:
- consider whether you need to terminate your contract—some contracts may already be deemed to have terminated due to the OR being appointed as liquidator while others are likely to contain strict notification requirements
- continue to comply with your own payment obligations to others—make sure you understand how this may impact your own obligations to make payments to others and ensure that all notices continue to be issued correctly and on time
- take reasonable lawful steps to secure your site resource or any plant or materials, whether fixed or unfixed, for which you have not been paid, and consider whether you could make use of any retention of title terms in your contract
- ensure that you keep good physical records showing the status of the works you have completed to date on behalf of Carillion, and
- if the loss of any existing contracts with Carillion is likely to cause financial difficulties for your own business in the future, seek early advice
What steps should Carillion’s clients be taking?
Many of the matters listed above will also apply. In addition, employers and developers should consider:
- how will any long-term services and facilities management obligations be fulfilled in future
- how you might directly engage any of Carillion’s sub-contractors to ensure continuity of works or services (or ensure that sub-contractors are novated to any new contractor)
- if there is a public or private finance initiative element to your project, consider the impact of public procurement rules when seeking to re-procure works
- how this impacts on your funding arrangements
and ensure insurance is in place for the project and existing obligations under the contract have been complied with.
If any project security documentation is outstanding:
- check any advance payment bonds, performance bonds, vesting certificates and any other security documentation and understand the consequences of this insolvency
- conduct an audit recording the status of the works and all on-site plant, equipment and materials and ensure security measures are in place
- ascertain copyright and design rights and obtain drawing and design information as far as possible from Carillion, its consultants and subcontractors, and
- verify the amounts paid and the status of the account in terms of any overpayments, right to set-off and retentions
What are the implications for infrastructure projects on which Carillion is working?
Many of the large infrastructure projects (including High Speed 2 (HS2)) do not hold direct contracts with Carillion and were awarded to joint ventures (JVs) consisting of a number of large contractors. Any adverse impact should therefore be containable. The remaining CEK JV partners on HS2 (Eiffage and Kier) will now take over and complete Carillion’s works.
Carillion was also involved in a number of other JV infrastructure projects. These will also continue, although the cost to the other partners or contractors is likely to be significant. For instance, Balfour Beatty, which was in a JV with Carillion on three highways projects in England and Scotland, now expects to take a £45m hit in 2018.
There may be other infrastructure projects such as elements of the Crossrail project where (solely) Carillion was engaged, and there the considerations highlighted above will apply.
How does the government safeguard against events such as this?
A greater degree of financial due diligence and transparency in terms of the financial stability of companies would help to safeguard against collapses such as this in the future, but that would require significant reform of reporting obligations and company structures. Whether that will be forthcoming remains to be seen.
Are there any other important aspects worth mentioning?
HMRC has indicated that it will provide practical advice and guidance to those affected through its Business Payment Support Service (BPSS) and that ‘time to pay’ tax arrangements may be available to those affected by this collapse.
In addition, a number of banks are currently working with the government and trade body, UK Finance to provide financial assistance to small and medium-sized enterprises (by way of overdraft extensions, payment holidays and fee waivers) through what will inevitably be a difficult period.
We anticipate that further important announcements will be made by the OR and his special managers over the coming days and weeks.
Interviewed by Jenny Rayner. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Source: LexisNexis Purpose Built
Carillion’s insolvency—infrastructure and construction
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 5, 2017 | Purpose Built (LexisNexis)
2017 editions of the following contracts were launched today at the FIDIC International Contract Users’ conference in London:
- FIDIC Red Book (Conditions of Contract for Construction)
- FIDIC Yellow Book (Conditions of Contract for Plant & Design Build)
- FIDIC Silver Book (Conditions of Contract for EPC/Turnkey Projects),
which replace the corresponding 1999 editions.
We have been informed by FIDIC that copies of the new contracts will be available to purchase from 22/23 December 2017. However, reference PDF copies will shortly be available to LexisPSL Construction customers here: FIDIC contracts—reference copies (as well as in our FIDIC subtopic under the ‘Forms’ tab).
We are attending the conference today and tomorrow. Some of the themes emerging so far are that:
- the changes aim to provide greater clarity and certainty—what’s expected of the parties and when
- the contracts are more prescriptive
- there is more administration for the Employer, Contractor and Engineer
- there is an emphasis on dispute avoidance
Watch out for our full report on the conference, along with further information on the new contracts.
For a free trial of LexisPSL Construction, click here.
Source: LexisNexis Purpose Built
FIDIC Red, Yellow and Silver Books 2017 launched
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.
This same-day case analysis is from LexisPSL Construction. Click here for a free trial.
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
LexisPSL Construction customers are able to access the following relevant Practice Notes:
Click here for a free trial.
Source: LexisNexis Purpose Built
Owner of insolvent sub-contractor liable as primary obligor (Multiplex v Dunne)
Following a consultation process on retentions in the construction industry, and on the 2011 amendments to the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996), Francis Ho, partner at Penningtons Manches, considers the possible changes that could be made to the law around retentions, payment and adjudication.
