Welcome to the Summer 2008 edition of the Construction & Engineering Bulletin from Withy King.
This quarter we have comments on the following topical issues:
- Construction Contracts Bill: proposed changes to Part 2 HGCRA 1996
- The Future of Building Control: proposed changes
- Corporate Manslaughter and Corporate Homicide 2007
- Spotlight On: Letters of Intent - two case studies
- Adjudication Update: recent cases for the Technology and Construction Court
Use the links to access those topics of particular interest. As always, we welcome your comments on our bulletin and would be happy to answer any questions you have.
Construction Contracts Bill - proposed changes to Part 2 HGCRA 1996
Following almost four years of consultation, the Department for Business Enterprise & Regulatory Reform has now published the draft Construction Contracts Bill to amend Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”). The proposed Bill comprises a series of suggested amendments to the Construction Act. The principal amendments proposed are as follows:
Contracts in Writing
- Requirement (in section 107) for contracts to be in writing is to be repealed.
Adjudication Costs
- After appointment, the parties can agree that the Adjudicator can determine who should pay the costs of the adjudication.
- Save where the parties have contractually agreed otherwise, the parties will be jointly and severally liable for the Adjudicator’s fees
- Upon application by either party the Court will have the provision to quash, uphold or vary any determination of costs made by the Adjudicator.
Payment Notices
- Section 110(2) payment notices are to be replaced by the requirement for the payer (or a specified person) to give a payment notice and in default of such notice being given ,provides a right for the payee to give such notice at any time before the final date for payment.
- Where the payee gives a payment notice, the final date for payment set in the notice is postponed “by the same number of days as the number of days after the payment due date that the notice was given”.
- In the case of both payer and payee notices, the sum stated to be due is the “notified sum”.
Withholding Notices
- Section 111 is to be replaced by a requirement for the payer to pay the “notified sum” on or before the final date for payment (subject to the right of the payer to give “notice of intention to pay less” than the notified sum)
- The notice of intention to pay less must specify the sum which the payer considers to be due, set out how the payment is calculated and must be given not later than the prescribed period agreed. In the absence of agreement, the prescribed period is the period given by the Scheme for Construction Contracts.
Suspension for Non-Payment
- Section 112 now includes the right for a party, who exercises the right of suspension for non-payment, to recover its reasonable costs and expenses incurred as a result of exercising the right of suspension
The Future of Building Control – the proposed changes
The Future of Building Control was published in March of this year and sets out the Government’s proposed changes to building control. These changes are intended to deal with weaknesses in the current system, improve compliance and reduce burdens. The government invited responses to the proposed changes, which were to be received by June 10th 2008.
While the industry awaits the results of responses, we can remind you of the most significant of the proposed changes :
Replacing statutory notification stages with a risk-based approach to inspection
It is suggested the Government will develop (in consultation with interested bodies) specific guidance on how to assess risks. After making a risk assessment for a project, the local authority will be required to draw up a service plan detailing the likely stages of inspection. The intention is to create more flexible and individually tailored inspection regimes, and to remove inconsistencies between public and private service providers.
Three-yearly reviews of Building Regulations rather than continual changes
During this three year cycle, the government would make any necessary changes across the full body of Regulations. Once an issue had been reviewed, it would not be reviewed further during that cycle, except in exceptional circumstances. As a result (in most cases), the building regulations relating to a single issue would be changed more than once every six years.
To allow time for industry familiarisation, a six-month standstill period between the publication of the changes and implementation, has been proposed.
Improving the link between Building Control and planning consent
Merging the process and application forms of planning and building control for domestic projects is being considered. so as to ensure that local authorities work closely together to provide a seamless service.
Restricting the use of Building Notices
The Government is considering extending number and nature of projects requiring formal approval so as to restrict the use of Builidng Notices. This might include plans for the erection of new buildings, extensions of buildings and lofts and conversions of cellars and garages. Building Notices would only be permitted for emergency repairs and minor works in existing buildings.
The above is only a brief summary of the important changes now under consideration.
For further detail, you can read the consultation paper here.
Corporate Manslaughter and Corporate Homicide Act 2007
The Corporate Manslaughter and Corporate Homicide Act 2007 came into force on 6 April 2008 after the failings of the previous law were highlighted by several high profile corporate manslaughter prosecutions (Herald of Free Enterprise ferry disaster - 1987 and the Southall rail disaster – 1997). This new act enables the conviction of an organisation where failure in organisation or management results in a person’s death.
The new Act will allow courts to look at management systems and practices across the organisation. This will provide a more effective means of prosecuting corporate failures to manage health and safety properly.
Under the previous law, proof was required that a "directing mind" (an individual at the very top of the company, who embodies the company in actions and decisions) was evident before he or she could be personally found guilty of manslaughter. This identification principle has made large companies with complex management structures difficult to prosecute, with only smaller companies being convicted.
The new Act enables courts to look at an organisations management systems and practices and to consider how relevant activities are managed and the adequacy of those arrangements. Applying only to organisations and not to individuals, the Act is intended to complement (rather than replace) existing health and safety legislation, under which organisations may still be prosecuted. Perhaps most significantly, for the first time, the Act will permit a catalogue of collective errors on the part of a number of people, making it possible to punish organisations for systematic failures leading to the death of an employee.
Despite the barrage of publicity which has surrounded the Act, the government estimates only five corporate manslaughter prosecutions will be likely each year.
Please click here for a link to the Ministry of Justice’s guide to the Corporate Manslaughter and Corporate Homicide Act 2007
Spotlight on: Letters of Intent – two case studies
The following two case studies highlight the perils of the carrying out of works pursuant to a letter of intent:
- RTS Flexible Systems Limited - v - Molkerei Alois Müller GmbH & Co Kg (UK Productions) [2008]
- Diamond Build Ltd - v - Clapham Park Homes Ltd [2008]
RTS Flexible Systems Limited - v - Molkerei Alois Müller GmbH & Co Kg (UK Productions) [2008]
RTS provided Müller with a quotation for the design, manufacture, assembly, works testing, delivery, installation and commissioning of automated equipment to package yoghurt pots. The quotation was based on RTS’ standard terms and conditions of sale. Müller sent a Letter of Intent to RTS.
The Letter was subject to a number of terms including the agreed price for the works, the finalisation agreement and the signature of the full contractual terms within the 4 weeks of the date of the Letter. The full contractual terms would be based on Müller’s amended form of MF/1 Contract.
It was also stated that:
- “prior to agreement on the full contractual terms, only Müller shall have the right to terminate this supply project and contract. However, should Müller terminate, Müller undertakes to reimburse RTS for the reasonable demonstrable out of pocket expenses incurred by RTS up to the date of termination”.
No final form of contract was agreed and/or executed by the parties. The Letter of Intent was accepted by RTS, subject to qualifications, including:
- The equipment would be commissioned by a certain date
- Certain specified costs incurred during the 4 week period would be recoverable
- RTS’ qualifications were accepted by Müller.
The Judge considered communications between the parties and decided the Letter of Intent was a counter offer and was accepted by RTS, subject to the above qualifications.
The language of the Letter of Intent was such that the parties were agreed that they entered into a contract of some sort pursuant to the Letter of Intent. The Judge regarded it as implicit in the agreement that, upon the expiry of the 4 weeks, the agreement would come to an end. In the Judge’s view, the parties did not contemplate that, in the absence of finalisation and signature within the specified timescale or any agreed extension, RTS would be bound to continue with a project in which the applicable terms had not been agreed. The Letter of Intent did not mention when the price would be payable. Müller’s right to cancel upon payment only of expenses and cancellation costs was entirely reasonable during a 4 week period, but inappropriate for a contract for the entire project.
After the Letter of Intent contract expired, RTS continued to build and deliver the equipment to Müller, and were partially paid for it. The Court was, therefore, inclined to conclude that the parties had entered into some contract. After the lapse of the Letter of Intent, the parties reached full agreement on the work that was to be done for the price they had already agreed. It was unrealistic to suppose that the parties did not intend to create legal relations. It was not essential for them to have agreed the terms and conditions and they did not do so. The parties continued after the expiry of the Letter of Intent just as they had before (ie, calling for and carrying out the work without agreement as to the applicable terms).
The Judge declined to infer that the parties’ contract included the final draft version of the MF/1 conditions. Müller’s obligation was to pay RTS the agreed sum stated in the Letter of Intent in return for the goods and services provided by RTS, pursuant to the contract. Müller was bound to pay the balance of the contract price upon substantial completion of the work performed. Substantial completion would be achieved once the site acceptance tests were passed.
Müller was entitled to be paid a reasonable sum for any additional work requested outside of the scope of the contract under an implied contract.
Diamond Build Ltd - v - Clapham Park Homes Ltd [2008]
Diamond Build Ltd (DB) was sent an invitation to tender letter dated 2 March 2007 by Clapham Park Homes (CPH) in respect of refurbishment and regeneration works. The invitation to tender enclosed a specification, tender drawings and a form of tender. The specification stated the Conditions of Contract will be the JCT Intermediate Building Contract (2005 edition) with Contractor’s Design. It also stated that the agreement would be executed as a deed. The invitation to tender was amended by a further letter dated 28 March 2007. DB submitted its tender to CPH on 2 April 2007. CHP sent a letter of intent to DB on 5 June 2007, which was reissued on 7 June 2007.
The letter of intent stated:
- Should it not be possible for CPH and DB to execute a formal contract in place of the letter of intent, then CPH would undertake to reimburse DB’s reasonable costs up to and including the date on which DB are notified that the contract will not proceed provided that the Supervising Officer is satisfied that those costs are appropriate and that, in any event, total costs will not exceed the sum of £250,000.
- The undertakings given in the letter of intent will be wholly extinguished upon the execution of the formal contract.
The Letter was signed by DB shortly thereafter and DB proceeded to place orders with suppliers and contractors to enter into a JCT form of subcontract. Interim certificates were issued on the standard JCT form of certificates. On 12 October 2007, CPH wrote to DB enclosing the contract and asking for it to be signed and sealed and returned to CPH. The contract was not signed by DB.
On 15 November 2007, CPH wrote to DB giving notice that no further work was to be carried out under the letter of intent. DB responded by stating that the contract with CPH was based upon the terms and conditions of the JCT Intermediate Form of Contract 2005 edition with further amendments as specified in the specification.
In the Judge’s view there was no doubt that the Letter of Intent gave rise to a (relatively) simple form of contract that had sufficient certainty. There was a commencement date, a requirement to proceed regularly and diligently, a completion date, an overall contract sum and an undertaking to pay reasonable costs in the interim. By accepting the Letter of Intent, the parties were accepting that the terms of the Letter should dictate the rights and obligations of the parties, until the formal contract was signed.
The Judge rejected arguments made by DB that the financial limit included in the Letter produced an unfair position for DB because it was foreseeable that the cap could be reached within a relatively short time. The Judge also rejected DB’s arguments of estoppel.
The Judge was not satisfied on the balance of probabilities that any representations were made by CPH and that in some way there was no need for the contract to be executed or that CPH altered its position with regard to that need. Similarly, he was not satisfied there was any convention as between the parties to similar effect.
Adjudication Update: a round up of recent cases for the Technology and Construction Court
Harris Calnan Construction Co Ltd v Ridgewood (Kensington) Ltd
HHJ Coulson QC found that a party who failed to reserve the right to argue that, whatever the Adjudicator decides, the Adjudicator did not have jurisdiction to reach that conclusion. Accordingly the decision that the Adjudicator reached as to the existence of the contract could not be challenged.
Claymore Services Limited v Nautilus Properties Limited
HHJ Jackson decided, in connection with a dispute settled prior to trial that the claimant was guilty of one year’s unreasonable delay in rendering the claim and accordingly, the interest payable during this period should be reduced by 50%. Mr Justice Jackson also held that the Judgements Act rate of interest (8%) did not reflect the loss to the claimant of being kept out of its money and instead chose to award interest at 2% over base rate.
Cantillon Limited v Urvasco Limited
Mr Justice Akenhead decided that part of an Adjudicator’s decision which was said to be contrary to the rules of natural justice could, in appropriate circumstances, be severed from the remainder of the decision.
Edenbooth Limited v Cre8 Developments Limited
HHJ Coulson QC held, in an application for summary judgment to enforce an Adjudicator’s decision, that an Adjudicator who had required a party to make submissions within a short period of time had not breached the rules of natural justice. He commented that it is an often heard complaint in enforcement applications but it is an inherent feature of adjudication that the Adjudicator is obliged to produce his decision quickly.
T&T Fabrications Limited and T&T Fabrications (a firm) v Hubbard Architectural Metalwork Ltd
HHJ Wilcox refused to enforce an Adjudicator’s decision because, on the evidence before him, it was at least arguable that terms relating to the provision of drawings and timing of the works had not been recorded in writing. That issue could only be determined after hearing evidence from witnesses who had provided statements in relation to the enforcement application and accordingly a full hearing would be required.
Peter Mair v Mohammed Arshad (Scottish Case)
Sheriff Derek O’Carroll found that the question of whether a contractual payment mechanism was “adequate” as required by section 110 of the HGCRA was a question of fact, not law. Accordingly that question could only be determined following consideration of the factual operation of the payment mechanism and is according to witnesses of fact.
