Construction matters

‘Plugging the gap’: Letters of intent
18 September, 2018

What are they and why are they necessary?

Whilst a ‘letter of intent’ can have an ambiguous and varied meaning across other legal practice areas, typically in construction, it is a letter from an employer to a contractor indicating the employer’s intention to enter into a building contract for the works detailed in the letter.

In an ideal world, employers would have everything finalised and documented in a final form contract before work commences.  Unfortunately, this is not always possible.  The construction industry is rife with commercial pressures and tight deadlines and this often means that contractors are required to enter site and start works prior to finalising the formal building contract.

The letter of intent, if drafted properly, can be a way to ‘plug the gap’ in this pre-contract stage whilst the terms of the building contract are negotiated.  It affords the parties more protection than an oral agreement, whilst allowing the parties to get a head start on the project in a number of ways – accessing the site, starting the works, hiring sub-contractors, ordering materials and regulating payment.

For the contractor, it provides comfort that they will be paid for the work done prior to entering into a final contract.  For the employer, it provides sufficient certainty of terms so that the contractor can start the design early, allowing them to adapt to commercial pressures; bring forward the completion date for the works; and potentially reduce borrowing costs.

The letter of intent therefore should be viewed as a ‘temporary fix’ (no pun intended!) prior to drafting the formal building contract.

Features of a binding letter of intent

If drafted improperly, problems of uncertainty in fundamental details of the works can arise such as timeframes, site access and control over materials.  To successfully ‘plug the gap’ in between commencing works and entering into a full building contract, all the usual features of a contract must be present.  That is:  offer, acceptance, consideration, intention to create legal relations and certainty of terms.

So what might you like to include?

Preferably, the parties should be certain on the key operative provisions, such as the standard of care expected, the quality of work and when the employer expects it to be completed.  On the flipside, the fee structure should also be addressed.  As would be the case with a building contract, insurance, copyright, dispute resolution and termination are also important provisions which should be agreed if possible.  For an employer’s protection, the letter should also be limited to only certain works and a certain value.

However, it is more than likely that if all of these key provisions had already been agreed, the parties would proceed straight to contract.  And as a result, in practice and due to the urgency of a project, it might be that the only aspects addressed are the terms concerning payment and time (whilst remaining aspects are negotiated).  With very little formally agreed, it is no wonder that uncertainty might arise if something does not go to plan …

Is it too good to be true?

Essentially, the letter of intent is a necessary evil where time is tight.  Whilst sometimes useful, they are infamous for creating uncertainty, such as in the much discussed cases of Arcadis Consulting (UK) Ltd v AMEC (BCS) Ltd and Spartafield Ltd v Penten Group Ltd.

Letters of intent are no substitute for carefully negotiated and professionally drafted building contracts.  This point was illustrated in Trustees of Ampleforth Abbey Trust v Turner and Townsend Project Management Limited.  Due to the urgent need to provide sufficient student accommodation for the approaching academic year, the contractor was required to begin the construction of a new boarding house for Ampleforth College without a formal contract (and without agreeing various terms).  The works were completed later than anticipated and the employer wanted to rely on the industry standard remedy of liquidated damages.  Whilst the letter of intent attached a draft building contract which stated that liquidated damages were payable at £50,000 a week, the letter itself explicitly stated that the terms of the draft contract were not incorporated.

The employer therefore brought a claim against their project manager for lost liquidated damages and the court found the project manager liable because the project manager had failed to exercise their reasonable care and skill by not procuring an executed building contract.  The judge stated that efforts to finalise the contractual arrangements are of central importance, and that the execution of a contract should be seen not as ‘a dispensable luxury’, but as fundamental.

Whilst not a ‘dispensable luxury’, as those in construction will know, the industry is time critical and the market calls for projects to be delivered quickly so that they can begin serving their purpose and start earning profit.

So, if the inevitable happens and urgent circumstances require a letter of intent, ensure it is tightly drafted and avoid any open ends.  But, as soon as practically possible, ensure you take out the temporary ‘plug’ and replace with a more permanent solution:  a good sturdy building contract.


Professional negligence update
11 September, 2018

The pre-action rules governing professional negligence disputes have changed

On 1 May 2018, the law relating to negligence claims against non-medical and non-construction professionals underwent a sea change.  This change has resulted in parties to professional negligence actions having access to a different dispute resolution method – adjudication – in addition to conventional litigation and arbitration.

What is adjudication, and what are the advantages?

Adjudication is a streamlined form of dispute resolution often associated with construction disputes (eg between owners of property and contractors engaged to perform building works).  Adjudication in the context of professional negligence is a similar process which shares many key characteristics and advantages with construction adjudications.  For example, relative to conventional litigation, adjudication has the following advantages:

  • Rather than the matter being decided by a judge in court, adjudication awards are often made by an industry or technical expert who decides the matter.  This streamlines the matter and reduces the often significant costs associated with instructing experts to advise the court;
  • The parties’ lawyers and the adjudicator are all under very tight and strictly defined time deadlines which are much shorter than analogous court procedures.  This results in a swifter procedure for resolution of disputes by comparison to traditional court based litigation; and
  • Adjudication proceedings and awards can be kept confidential, and made final and binding on the parties if so agreed.  Indeed, claims can be kept entirely out of court in this way.

These advantages could make adjudication of professional negligence matters a very favourable option for claimants and defendants alike.

How can a professional negligence dispute be referred to adjudication instead of court?

Following the change on 1 May this year, the pre-action protocol now requires claimants to indicate at the outset whether or not they wish to refer the dispute to adjudication.  If they do, claimants are required to propose three prospective adjudicators to decide the claim, or seek nomination of an adjudicator from the Professional Negligence Bar Association (PNBA).  In this way, by agreement of the parties, professional negligence matters can be referred for adjudication.

This pre-action procedure favours agreement of the parties to adjudicate rather than take the matter to court because, where adjudication is opposed (eg by the claimant at the outset), the claimant must given reasons.  Should the matter end up in court, the judge then has discretion to make an adverse costs award against the party refusing to adjudicate.

The outlook for adjudication of professional negligence matters

Clearly the future of adjudication in the professional negligence context remains to be seen.  However, by comparison, since its inception in 1996 adjudication in the construction context has emerged as key amongst the fora available for resolution of construction disputes.  Since the advantages of adjudication apply equally to professional negligence as they do in the construction context, it appears likely that adjudication of professional negligence claims will see a similar rise to prominence as adjudication has for construction disputes.


Potential Issues with NHBC and Collateral Warranties/Third Party Rights
21 August, 2018

In my last blog, I began a ‘compare and contrast’ of the NHBC (and other insurance backed structural warranties) and collateral warranties/third party rights. We previously looked at what (i) each type of protection did; (ii) the parties/stakeholder that would benefit from each type of protection; and (iii) who they were aimed at. In this blog, we will look at the drawbacks of each type of protection.

Potential issues with NHBC

The NHBC offers a certain level of long term, easily transferable protection to homeowners. However, there are issues that arise in the robustness of the protection being offered. From 0-2 years after practical completion, the builder is required to come on site and remedy defects notified by the homeowner itself (the ‘builder warranty period’). The problem with this is what happens if the builder won’t play ball (i.e. refuses to come on site). If this happens, the homeowner potentially has a significant amount of administration to do using either: (i) the NHBC resolution service; or (ii) to obtain a court judgment/arbitration award in order to resolve its issues. Whilst the beneficiary of a collateral warranty/third party rights notice might also have the same trouble getting the contractor/consultant to come back to site, this protection will at least be provided to third parties for (most likely) no fee.

During the ‘NHBC warranty period’ (i.e. years 3-10 post practical completion), the insurance backed cover only protects against damage to certain parts of the premises; there an excess to pay for each claim and there are limits on the amounts that can be paid out under the policy. There is a common assumption that NHBC cover will provide the homeowner with protection in the event of any kind of defect to the building. This isn’t the case as it provides structural protection only. Damp which doesn’t impact the structure wouldn’t be covered for example. So, any damage which is non-structural or only impairs decorations wouldn’t be covered. Repairs to heating systems and any M&E works are also not covered, neither are consequential losses such as financial losses.

If it is required to repair a defect, the NHBC is only required to repair it to NHBC standard. On many developments where robust appointments and building contracts are put in place by lawyers, the threshold of what a ‘defect’ is under the NHBC policy will most likely be lower than those included in the suite of construction documents.

Anecdotally, we also understand that the NHBC can have a reputation for being inflexible with the construction methods that it expects to be used on the developments it insures.

Potential issues with collateral warranties/third party rights

You can expect collateral warranties/third party rights to offer a wider form of protection than the NHBC structural warranty. This is because these documents warrant everything that is included in the underlying contract to which it relates (i.e. the building contract/consultant appointment). Provided you have a good suite of construction documents in place, you will have more certainty as to what is covered under your warranty/third party rights notice. Also, warranties and third party rights will generally have limitation periods of 12 years from the date of practical completion and will be provided for free by the professional team.

However, if the builder becomes insolvent the chances of recovery under its collateral warranty is almost nil. The NHBC in contrast does provide some form of cover in these situations (limited to £100,000 or 10% of the purchase price (whichever is lower)).

Also, it is very important to remember that your warranty/third party rights notice is only as good as the underlying contract so it is crucial that you ensure that this document is robust. There may also be limitations on liability included in the appointment, warranty or third party rights notice so beware of these as they may impede on your ability to claim the full amount necessary to remedy any defect/breach of contract.

In contrast to third party rights (where costs in producing these are much lower), the costs of the administration of agreeing forms of warranty and getting them executed properly can build up. Spending money up front incorporating third party rights into contracts can therefore pay off in the long run (especially in cases where providing long lists of warranties are pre-conditions to completion).

Conclusion

The NHBC (or other structural warranty provider – anecdotally we’ve just had a good experience with Buildzone) are almost essential these days for new residential homes. However, they do not provide the breadth of protection that is afforded under a decent set of construction contracts and related collateral warranties/third party rights. In cases where there are other stakeholders involved in developments (such as funders, the council, private landlords etc) these parties will most likely require a comprehensive set of collateral warranties/third party rights notices as their own protection.

Get both!


NHBC versus collateral warranties/third party rights
13 August, 2018

To the uninitiated, there seems to be a lot of confusion in the marketplace as to whether or not an employer should be procuring NHBC cover or collateral warranties on a development that includes residential buildings (this may well come from whether or not the employer is talking to an insurer or a lawyer on this point). This blog attempts to unlock this confusion by providing a ‘compare and contrast’ of the two.

Firstly, we need to distinguish between the two types of protection. They are different and they do different things and are there for different reasons. The NHBC warranty is an insurance backed structural warranty. According to its website, the NHBC provides warranty schemes covering around 80% of new homes. The NHBC refers to its warranty as a ‘comprehensive risk management package’ (and whether or not this is the case will be looked at in due course). It provides certain levels of cover for 10 years (although you can pay extra for an additional 2 years protection if you wish). Often the 12 years protection is insisted upon by funders but whether it is in fact worth it is debatable.

The purpose behind NHBC warranties and collateral warranties/third party rights:

NHBC cover is for homeowners. The aim was to raise standards of housebuilding in the industry. NHBC (or equivalent) protection is almost always a necessity now for mortgage providers to consent to lending.

Collateral warranties and third party rights exist in order to provide protection to any other interested third party (that isn’t a mortgagee). Provided the documents are ‘properly’ drafted and the underlying appointments/building contract is robust, the level of protection afforded via collateral warranties and third party rights is much more comprehensive than the NHBC.

What does a NHBC warranty do?

The NHBC sets minimum standards for builders. In order for a house to be registered with NHBC, the builder needs to be registered and needs to pay a membership fee (in fact, NHBC membership has been the subject of controversy and has lead to an investigation as to whether the Monopolies and Mergers Commission considered there to be a monopoly situation). The NHBC provides tiered warranty protection: for the first 2 years of completion of the premises, the builder is responsible for coming on site to remedy defects (the ‘builder warranty period’). Years 3-10 of the warranty protection provides more limited cover and this protection is provided by NHBC directly (the ‘NHBC warranty period’).

What does a collateral warranty/third party rights notice do:

A collateral warranty is a contract that is ‘collateral’ to the underlying building contract/appointment (the primary contract) which has been entered into. It confirms that the services/works referred to in the primary contract have been carried in accordance with the requirements of that contract. This means that the beneficiary of the collateral warranty can also make a claim (subject to drafting in the warranty) for any breach of the primary contract.
Third party rights offer the same level of protection as collateral warranties but the benefit is usually conferred by way of a noticed from the employer, rather than a separately negotiated collateral warranty (thus saving on lawyers’ fees in dealing with the administration of getting these documents agreed and signed!).
It also means that provided you have a well drafted primary contract, warranty and/or third party rights schedule, the protection offered under a warranty/third party rights notice is generally more extensive than a NHBC warranty.

My next blog will look at the problems associated with both insurance backed warranties and collateral warranties/third party rights.

Spoiler alert: in order to maximise your construction protection on your developments, you should not be using one or other forms of protection. The NHBC warranty has its considerable uses and so do collateral warranties/third party rights.


Adjudication: What happens if a party is unhappy with the adjudicator’s decision?
8 August, 2018

As many readers will be aware the parties to a construction contract  have a statutory right to refer a dispute to adjudication. By its nature adjudication is a swift process. What happens following the decision if a party is unhappy with the adjudicator’s decision?

Let us use an example of a contractor seeking payment of £100,000. The employer doesn’t pay, a dispute over the entitlement to be paid has crystallised and the contractor refers the dispute to adjudication. The adjudicator finds for the contractor. The employer, understandably aggrieved, feels the decision is wrong and does not want to pay. The contractor issues court proceedings for the enforcement of the adjudicator’s decision. Is the employer in these circumstances doing the right thing?

The short answer in almost every case would be no.

The purpose of adjudication is to find a swift solution. It is not necessarily the right solution. For that reason decisions of adjudicators are temporarily binding. However that does not mean that parties should just ignore a decision if they do not agree with it. Such a party should, in the normal course of events, issue proceedings in court for a final determination of the question referred to the adjudicator.

There are in reality only three circumstances where a court will refuse to make an order for judgment in the same terms of an adjudicator’s decision on an enforcement application:

• The decision itself is a breach of the rules of natural justice. In practice this means a decision where there were no reasons given for reaching a decision, alternatively the reasons given make no sense, and as a result a party had suffered substantial prejudice. This is an incredibly high test to satisfy.
• Substantive proceedings to secure a final determination are underway and the court can sensibly deal with those proceedings at the same time as the hearing of the enforcement application. This will only really apply in circumstances where the adjudicator has plainly got the decision wrong and the court can deal with the matter summarily and within the time allowed for the enforcement hearing.
• There is a financial reason why it would be improper to allow the decision to be enforced. An example of this may be that, using our example, the contractor is in financial difficulty and there is a real risk that that if the adjudicator’s decision was found to be wrong, that the contractor would not be able to repay the sums to the employer. A court would almost certainly want to see that substantive proceedings to challenge the decision were underway before entertaining such an order. If made, the court still gives judgment in favour of the party who issued the enforcement application but simply directs that payment need not be made to that party. Most likely the court would instead require the payment to be made into an escrow account pending determination of the substantive action.

A party dissatisfied with an adjudicator’s decision should not ignore it. If the effect of the decision is to require the aggrieved party to do something, whether that be to pay money or to take some action, it is important that steps are taken if the decision is to be challenged. Whether those steps involve issuing proceedings for a final determination of the subject matter of the adjudication is a question for individual cases. By communicating dissatisfaction in a substantive and reasoned manner it increases the chances of securing an agreed way forward, notwithstanding the decision of the adjudicator. A party that sits on its hands and allows an enforcement application to be made, only to argue at the enforcement hearing that the adjudicator got it wrong, can expect little sympathy from the other party or from the court. The courts have consistently affirmed the principle that whether an adjudicator’s decision is right or wrong is a not a matter for consideration within any enforcement application and it should not be assumed that enforcement can be staved off or delayed by deploying this argument at the enforcement stage.


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