Construction matters

Get your Planning Consents first
8 May, 2018

The case of Clin -v- Walter Lilly has reached the Court of Appeal, just on preliminary points. It now needs to go back to the High Court to work out liabilities.

Work stated in September 2012 to convert two Victorian terraced houses in Kensington into one, under a JCT Building Contract With Quantities, 2005 Edition, with Contractor’s Designed Portion and various bespoke amendments.

In July 2013 Kensington and Chelsea council wrote to Walter Lilly, the contractor, saying that the council believed the works required Conservation Area Consent and if they proceeded without it, there was a danger of prosecution as well as enforcement proceedings. Consent was finally obtained on 19 June 2014 and work began again in August that year.  Walter Lilly claimed an extension of time of 53.2 weeks and loss and expense.  

The building contract was silent as to responsibility for getting any necessary planning or Conservation Area consents. Could the court imply an obligation and if so on whom?

The court restated the generally accepted position that terms should only be implied into a contract where necessary, so as to give the contract the meaning the parties must have intended, not merely where the court thinks an alternative meaning would be better or more logical or more commercial.

The court also said that generally, but not always, it will be the employer under a building contract who is responsible for getting necessary consents – it is the employer who knows what they want to have built and the employer is the one in the best position to get the consents in place before works start. The contractor usually appears on the scene somewhat later, when work is soon to be commenced.  The court therefore held that, in this case, Mr Clin was responsible for applying for the Conversation Area Consent. It did not say that he must get that consent, only that he must use all due diligence to try and get it within a reasonable time.  If Mr Clin had then failed to get it, despite using all due diligence, that would not be his fault but nevertheless consequences would flow under the building contract, as drafted, without the need to imply any additional terms to deal with that problem.  Precisely what those consequences would be would have to be decided by a new trial in the High Court.

The court considered whether the council’s letter warning of the need for Conservation Area Consent entitled Walter Lilly to stop work. Because the building contract required compliance with “Statutory Requirements”, the court decided that Walter Lilly might in fact have been obliged, not merely entitled, to stop work at that point. However, this would only be the case if Conservation Area Consent was, in fact, needed. That would need to be decided back at the High Court, according to whatever the full facts were.

So what should happen if the council were acting wrongly in demanding that an application for Conservation Area Consent be made or the council was unreasonably slow in granting it? The trial judge thought neither party would carry the can – the contractor could not claim loss and expense and the employer could not claim damages for delay.  The Court of Appeal disagreed.  It held that the High Court would need to consider, for example, the contractor’s obligation to proceed with the works diligently and complete them before the Completion Date and the obligations on the employer not to cause any impediment, prevention or default, as well as any unreasonable delays or demands by the council.  Barring agreement on these issues, a new trial would be necessary in the High Court to establish how the losses caused by the delays should be allocated between Mr Clin and Walter Lilly under the contract, once that court had decided who was responsible for the delays.

Every case like this depends on its facts but this case highlights a few traps. It emphasises the importance of getting consents in advance of work, where possible, and of making clear in the contract who is responsible for applying for any outstanding permissions. Finally, the contract should make clear what will happen if permissions are delayed because of default by one party or both or neither.


Project Insurance: A trap for the unwary subcontractor and their insurers
24 April, 2018

On 19 March, the High Court gave judgment in the case of Haberdashers’ Aske’s Federation Trust Limited and The London Borough of Lewisham v Lakehouse Contracts Limited, Cambridge Polymer Roofing Limited v Zurich Insurance and their joint project insurers. 

Lakehouse was the main contractor on a school extension project and took out project insurance intended to cover the school, the council, itself and its subcontractors. In the case of (at least) one subcontractor, Cambridge Polymer Roofing (CPR), however, the subcontract obliged them to take out their own works and third party/public liability insurance.  Then the worst happened.  CPR were carrying out hot work to the roof of the new extension and it caught fire. 

Lakehouse and the project insurers settled the claim with Lewisham Council and the school at £8.75m. The project insurers then claimed to have the right, under the doctrine of subrogation, to step into Lakehouse’s shoes and sue CPR for their losses. 

In fact, the insurers only sued CPR for £5m. That was the extent of the insurance cover which CPR was obliged to and did take out. 

CPR argued that it was co-insured under the project insurance and therefore the project insurers had waived their rights of subrogation and could not recover any of their loss from CPR. The insurers claimed that the fact that the subcontract required CPR to take out its own insurance meant that CPR were not covered by the project insurance at all.  The court agreed with the insurers and CPR must therefore pay the full £5m and look to recover it from their insurers. 

The most obvious point to come out of this is, of course, that subcontractors should think carefully before signing up to a standard form of subcontract which obliges them to take out their own insurance where the employer or, perhaps, someone even higher up the chain, has obtained project insurance intended to cover everyone including the subcontractor. In those circumstances, the subcontractor should always take professional advice from its insurance brokers and/or lawyers. 

Interestingly, the judge suggested that if the project insurers had sued CPR for more than £5m, they would only have got judgment for the £5m. In his opinion, the fact that CPR were only obliged to take out £5m worth of cover meant that this sum should cap any claim against them.  However, that opinion was not part of his formal judgment and is not therefore a statement that can be relied on.  It will be much safer to provide specifically in a subcontract, if it is agreed, that the liability of the subcontractor is to be capped at the level of the insurance it takes out. 

The court also spent considerable time discussing how project insurance works. Three theories were discussed.  The first was that the subcontractor gives authority to the main contractor to procure insurance on the subcontractor’s behalf and then the subcontractor ratifies that insurance.  The court was not impressed by this approach, on the basis that the “undisclosed principal” has to be capable of being ascertained at the time the insurance is effective, which would not be the case where the subcontractor is appointed sometime afterwards.

The second theory was that the insurer makes a standing unilateral offer to anyone who will in due course become a subcontractor and that this offer is accepted when the subcontractor signs its contract. The court felt this was the correct approach. Because CPR’s contract required them to obtain their own insurance, this meant, the court said, that CPR never joined the “defined group” of subcontractors to whom the unilateral offer was made by the project insurers. 

The third theory is that the insurer accepts by conduct that the subcontractor is included in the project insurance. The court did not say this was positively wrong but based its judgment on the standing offer theory.

This case emphasises how vital it is to ensure that all the right insurances are in place, that there is no doubt about who can rely on which insurance policies, that there is no double insurance and that any caps on liability are specifically stated. 


Adjudication: Conduct of the parties and extensions of time
26 March, 2018

As most readers of this blog will aware, construction adjudications are intended to provide a swift resolution to disputes under construction contracts that the regime applies to. By statute the decision of an adjudicator must be issued no later than 28 days after receipt of the referral notice. This can be extended to 42 days with the consent of the referring party or to a longer period with agreement of both the referring and responding parties. In Baldwin & Another v JR Pickstock Limited (2018) the High Court had to consider two issues: First, what was the extent of extensions of time granted to the adjudicator? Second, if no decision had been issued by the expiry of the last extension granted, what was the status of the adjudicator (as a matter of contract)?

The Facts

Mr Baldwin was appointed as the adjudicator to a construction dispute around the beginning of March 2016. JR Pickstock Limited was the referring party. It was a term of Mr Baldwin’s appointment that if there was a challenge to his jurisdiction which was successful then he was contractually entitled to resign prior to issuing his decision and in those circumstances JR Pickstock Limited would be liable to meet his fees.

During the currency of the adjudication Mr Baldwin requested a number of extensions of time. Extensions of time to 20 May 2016 appear to have been expressly agreed by the parties but Mr Baldwin sought further extensions to 7 June 2016, in part as a result of submissions made by Pickstock. Pickstock’s representatives at no stage expressly declined to consent to extensions beyond 20 May 2016.

On 31 May 2016, following the passing of the last expressly agreed extension of time, Pickstock’s representatives asserted that Mr Baldwin was out of time for reaching his decision. After several protracted rounds of correspondence between the parties Mr Baldwin, on 3 June 2016, issued an ultimatum: Agree an extension as he sought, otherwise he would resign. No agreement was forthcoming and on 9 June 2016 Mr Baldwin advised the parties that the failure to agree represented a valid challenge to his jurisdiction so he was resigning. He then issued Pickstock with an invoice for his fees, in accordance with the terms and conditions referred to above. Pickstock refused to pay.

The Decision

As to the first question the Court confirmed that an extension to 20 May 2016 was expressly agreed. However that was not the limit of the extensions it was prepared to find. First, as a matter of construction, the Court held that an email written by Pickstock’s representative constituted agreement to an extension to 27 May 2016. Second and importantly the Court determined that it was implicit in the conduct of Pickstock that by its actions it in fact consented to an extension to 7 June 2016. As to this point the court considered noted that Mr Baldwin requested an extension to 7 June 2016 to reach his decision in light of Pickstock’s own last round of submissions. The Court determined that the absence of an express rejection to that request amounted to tacit agreement to it and that silence by a party could nevertheless amount to agreement where the extension sought is reasonably required as a result of the conduct of the silent party.

Therefore the court concluded that, on the first question, extensions to 7 June 2016 had been agreed to. However no decision was issued by that date, so what is the status of the adjudicator and his entitlement to be paid? The court concluded that the effect of not issuing a decision by 7 June 2016 had the effect of Mr Baldwin’s appointment lapsing. From this point there was no appointment from him to resign from. The effect of this is that the provisions in his terms and conditions regarding payment simply fell away. Had the resignation occurred before expiry of the extension then it would have been valid and the entitlement to be paid would have followed but crucially his failure to act before the expiry of the last extension was fatal to his claim.

It is an unfortunate decision and in a number of respects unusual. The key messages to take from the decision are:

• Do not assume that silence will amount to a rejection of an adjudicator’s request for an extension. The court bent over backwards to find ways to conclude that extensions had been agreed to by Pickstock. It was also highly critical of their conduct in responding to Mr Baldwin’s requests and the manner by which they challenged his status.
• As a party to an adjudication you will not be allowed to act unreasonably when it comes to extensions of time. The Court’s finding that time was extended to 7 June 2016 was on the basis that Pickstock’s own conduct warranted such an extension.
• As an adjudicator do not lose sight of the statutory deadlines. The risks in a failure to comply can be disastrous.


What happens when your pre-construction services agreement fails?
19 March, 2018

Pre-Construction Services Agreements (“PCSAs”) are increasingly being used in large and/or complex construction contracts, combined with two-stage tendering.  The contractor partner may be selected on the basis of overheads and preliminaries and non-financial factors such as track record, capacity for the works etc.  The aim is that risks can be exposed at any early stage to produce more robust pricing but the “downside” is the possible loss of competitive pressures at the final pricing stage.  However, the recent decision in Almacantar (Centre Point) Limited v Sir Robert McAlpine Ltd highlights other risks.

In the case, developer Sir Robert McAlpine Ltd (“SRM”) was ordered to pay Almacantar, owners of the landmark Centre Point tower in central London, just over £1m in fees under an agreement relating to the £100m redevelopment of the landmark Centre Point tower.

The parties had entered into a Pre-Construction Services Agreement (“PCSA”) in 2012 which, two years later, was terminated by consent.  The dispute centered on SRM’s right to further payment following that termination and, in particular, to the balance of 50% of the fee.

SRM originally succeeded in adjudication back in June 2017 and so Almacantar sought a declaration that SRM was only entitled to the balance if they entered the construction contract and, due to SRM not having done so prior to the termination of the agreement, there was no such entitlement.

Here, Almacantar intended to procure the project using a two stage procedure: the first being the selection of a contractor to enter into the PCSA and the second being the development of the Contractor’s Proposals and a Contract Sum, leading to a design and build contract.

SRM raised three arguments.  Firstly, the second 50% of the fee was payable after the first valuation subsequent to commencement on site under the main contract as “Main Contract” was defined as a contract with any contractor, not just SRM.  Secondly, as the Fee was described as a “lump sum” payable in instalments, it was not the commercial intention that the second 50% would not be paid at all.  Finally, the parties could have agreed that the second 50% was only payable if the main contract was entered into with SRM but they did not do so.

The judge, Jefford J, acknowledged the strength of these arguments.  However, she instead felt that the correct view was that the provision for one further application for payment at termination to cover any instalments of the fee that had accrued due applied and ordered the repayment of the sum awarded under the adjudication to Almacantar.

She also looked at the commercial context and said the fundamental purpose of the PCSA needed to be considered.  In most cases, termination would mean that Almacantar would lose the benefits under the PCSA and would have to go back to the beginning with another contractor.  She found the argument that (if a contract was entered into with another contractor) SRM could claim the second half of the fee made little sense.

So what lessons can be learnt here?  From a reading of the case, it is clear that much turned on the particular drafting.  That is nothing new and we, as lawyers, are always advising clients to ensure documents are properly drafted to reflect their intentions.  Of particular relevance may be the need to pay more attention to termination provisions generally – the parties may hope these will not be used but in circumstances such as PCSAs, where parties are trying out a relationship with each other (and the nature of the project may be more speculative), they surely justify detailed attention!!


Option C insurance under JCT 2016 – not such a C change?
12 March, 2018

By way of a reminder, the JCT contracts have three ways of taking out appropriate insurances in relation to a development.  Option A insurance is used in instances where a new building is to be constructed and where the contractor is required to take out all risks insurance for the works.  Option B insurance is used in instances where the employer takes out such insurance.  The post-2008 era has seen a big increase in large scale refurbishments rather than commencing entirely new developments and this brought into sharp focus the inadequacy of how the JCT dealt with Option C insurance arrangements (the insurance option to be used where works are being undertaken to an existing building).

Pre-2016 JCT Option C insurance required the employer to:

  • take out and maintain a joint names policy (usually in the names of the employer and the contractor) in respect of the existing structures, under which the insurers have no right of recourse against either party.  This policy should cover the costs of reinstatement, repair or replacement for any loss or damage caused by any ‘Specified Perils’; and
  • take out and maintain a joint names policy for the Works (ie an ‘all risks’ insurance policy).

 

This is still the case in the 2016 JCT, unless a ‘C1 Replacement Schedule’ is provided.  This schedule gives parties the ability to adjust the default requirements and replace them with bespoke provisions to better reflect the position on the ground.  This finally adds some flexibility to deal with the issue of taking out existing structures insurance if the party carrying out the works is not the building owner and therefore doesn’t have existing structures insurance (for example, it is a tenant of a multi-storied building and it is the landlord’s responsibility to take out buildings insurance).

However, make no mistake – this issue is still complicated.  Even if the JCT has brought in some much needed flexibility on this point, there are a number of practical issues that can arise from the development of existing structures.  In circumstances where the tenant is carrying out works and the landlord has existing buildings insurance, the landlord may be willing to let the employer/tenant and contractor be named on its insurance policy.  Quite often it won’t, however, particularly in larger buildings where the landlord will be concerned about the risk of a claim being made under the insurance policy and its insurance premium being increased in the future as a result.  In much larger, multi-storied, multi-tenanted buildings, the landlord may (justifiably) not want the administrative burden of arranging each of the tenants’ insurance arrangements.

One answer might be for the tenant to insure the entire structure itself.  Whether or not this is a cost effective option is another matter.  Where this isn’t cost effective, discussions will need to be held between the contractor and the employer as to which party would be most appropriate to carry the risk for existing structures under the contract and whether a mixture of risk allocation can be reached.  For example, sometimes contractors will have sufficient public liability insurance to cover the reinstatement of an entire building.  Note, however, that public liability insurance policies usually exclude loss caused by specific perils and so it may be that the employer can take out a specific insurance policy to cover its gap in protection on this matter.  Whether the contractor’s public liability policy also contains any additional exclusions that leave the employer exposed should also be reviewed.  If the contractor does not have sufficient public liability insurance to cover the reinstatement of the entire building, the parties could also discuss whether the liability of the contractor could extend to a level which is acceptable to both parties.  The JCT (rightly) advises that insurance specialists are used when advising on whether or not the C1 Replacement Schedule is correct and adequately covers both parties in the event of damage giving rise to a claim under an insurance policy being incurred.  It would also be appropriate in some circumstances to try to obtain written confirmation from the insurers that whatever hybrid structure is put in place the insurance policy covers the risks referred to in the Option C insurance requirements.


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