Construction matters

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.

So you think you know all about sub-contractor insolvency and guarantees?
23 February, 2018

With the demise of Carillion and a number of other large construction companies, issues around contractor insolvency are once again in the press.  However, sub-contractor insolvency can also cause severe headaches on construction projects.

In Multiplex Construction Europe Ltd v Dunne, the main contractor recovered a £4 million advance payment made to its sub-contractor under a personal guarantee provided by the managing director of the sub-contractor’s parent company.


Multiplex employed DBCE (a concrete frame sub-contractor) on major construction projects.  When DBCE encountered financial difficulties, Multiplex advanced £3 million to DBCE.  The terms were set out in an advance payment deed which also stipulated that DBCE’s parent company and the director, Mr Dunne, were jointly and severally liable as the guarantor.

The key provisions were that:

  • the guarantor guaranteed that, should the sub-contractor suffer an event of insolvency, the guarantor shall immediately be liable to the contractor for repayment of the advance payment and shall indemnify the contractor against any loss suffered.
  • the guarantor’s obligations were independent of any other security which the contractor might hold and the guarantor’s liability shall in no way be discharged, lessened or affected by any act or event that might otherwise do so.

The original agreement was subsequently amended so the advance payment increased to £4 million and became a payment on account of sums that would become due to DBCE in the future for its work on different sub-contracts.  Five months later, DBCE and its parent company went into administration.

The key finding of the court was that Mr Dunn’s obligation was “primary”, similar to an indemnity and could be enforceable on satisfaction of some event or requirement which here was an event or, or akin to, insolvency (the term “Insolvency” had been defined broadly).

The commercial context, and the words used, were critical to this finding – Mr Dunne had guaranteed that he would “immediately” be liable to the contractor to repay the advance payment if DBCE became insolvent.  That would not be possible if any accounting had to be done with DBCE first, so the word “immediately” was very important.

Further, it would be contrary to the provision’s commercial purpose if this was not the case.  The parties had agreed that Multiplex, providing substantial cash-flow, needed assurance that the sum would be repaid immediately by the director and the parent company (on a joint and several basis) if DBCE, to whom that sum was advanced, were to become insolvent, which it had.

Finally, consideration of the contra preferentem rule, requiring any ambiguity in the interpretation of a contract or clause to be resolved against the party who put it forward and sought to rely on it, did not arise as there was no ambiguity.  Interestingly, the court went on to say that, in any event, that rule had a very limited role in relation to the interpretation of commercial contracts, including contracts of suretyship, negotiated between parties of equal bargaining power.


The case surely serves as a useful reminder for individuals to ensure that they review with care any surety or guarantee contracts they decide to enter into, particularly without legal advice, as was the case with Mr Dunne.

More broadly, given that contractors carry the risk of sub-contractor insolvency, contractors should carry out appropriate financial checks on their proposed sub-contractors, ensure the sub-contract defines “Insolvency” broadly and also allows alternative sub-contractors to complete the works (and set off costs) and, for major packages, ensure it has performance bonds or parent company guarantees in place.


Settling claims: beware the pitfalls
14 February, 2018

Whether we like it or not, construction contracts routinely give rise to disputes.  Some get as far as adjudication or court or arbitration proceedings.  More often than not, parties manage to resolve their differences prior to reaching that stage, a way is found to compromise claims and get on with the job.

Where a settlement is reached, it has to be documented.  The parties are, after all, changing what they have already agreed.  The settlement terms constitute, or should constitute, a legally binding arrangement so that those terms themselves can be enforced if required.

Formalities need to be observed.  There should be ‘consideration’ for the settlement, it should contain all the terms agreed and it should be capable of interpretation in accordance with its ordinary meaning without reference to extrinsic evidence.

So far so good.  However, settlement agreements can be extremely difficult to get right.  Crucially, the parties have to be clear as to precisely what it is they have agreed.  For example, a contractor and an employer may agree that the contractor will waive all claims for extensions of time in return for a payment of £X.  Is that agreement only in respect of delays that have occurred prior to the settlement date?  If there is a subsequent relevant event that would normally entitle the contractor to an extension of time, is that claim precluded by the waiver?  Or is it only precluded to the extent that it is attributable, in whole or in part, to an earlier event to which the waiver did apply?  Does the waiver only prevent claims for extensions of time leaving the contractor free to pursue claims for loss and expense?

The courts were recently faced with a dispute over a settlement agreement in Fluor v Shanghai Zhenhua Heavy Industry [2018] EWHC 1 (TCC).  The facts were extremely complicated and the judgment runs to some 600 plus paragraphs.  In essence, however, certain steel monopiles and transition pieces supplied by a steel fabricator for an offshore wind farm contained cracks in their welding, rendering them unfit for purpose.  The parties in a settlement agreement had agreed that the additional costs of retesting and repairs arising from a non-conformance report would be waived.  The claimant sought to recover losses and it was disputed as to whether they were losses the  claimant had already settled.  The court found that where the settlement letter waived losses resulting from the particular report, it did not automatically mean that other losses could not be recovered.  In fact the defendant’s position was prejudiced because the settlement agreement had named the report and focused on it as the heart of the settlement.  By implication, therefore, the parties had not intended to exclude other losses. 

The lesson is the need for the wording of a settlement agreement to be precise.  In this case, the settlement agreement had settled some, but not all, of the consequences of the breaches of contract.  The defendant may have thought that it had settled the matter but it remained exposed to further claims for damages.

When might your liquidated damages provisions not apply?
25 January, 2018

Including a provision for liquidated damages in a building contract in order to allow an employer to claim damages at a certain rate for the contractor failing to complete project on time is a good starting point. There are, however, issues that can arise in enforcing such liquidated damages provisions. A few such issues are highlighted below:

Is the payment too high?

One issue is whether the amount/rate that the employer can withhold or deduct for liquidated damages is too high. The position used to be that the liquidated damages rate must be a genuine pre-estimate of loss. Following a Supreme Court decision in 20151, which we have discussed previously, the law has become more nuanced and considering whether a liquidated damages payment is a genuine pre-estimate of loss is no longer the key point to consider.

Contractors now face a tougher task in persuading a court that an agreed liquidated damages clause is unenforceable. What we must now look at is whether the payment is “exorbitant or unconscionable” and in considering that, in a liquidated damages context, you can look at the employer’s legitimate interest in ensuring that the target completion date is met.

Has time become at large?

A building contract should generally also include a provision confirming the process for extending the completion date due to delays caused by the employer. That is because of the risk of time becoming at large if you restrict the ability for any extensions of time if a delay event occurs that is the employer’s fault but the contract did not make provision for that delay.

If time becomes at large any agreed completion date would fall away and the liquidated damages provisions would not kick in as there is no completion date to start from.

Have you agreed something that ends your right to liquidated damages?

A recent case2 looked at the recovery of liquidated damages after the parties amended their contract by a “memorandum of understanding”. The memorandum of understanding did not expressly deal with liquidated damages nor set a new completion date. It instead included a duty on the performing party to use its “fullest endeavours” to complete its works by a specified date. That meant the performing party could possibly comply with its duty and still not complete by the specified date. This meant that liability for liquidated damages fell away as the obligation in the original contract had been replaced with something else. In the opinion of the judge, delay damages would now only arise, in these particular circumstances, should the performing party fail to use its “fullest endeavours”.

Accordingly employers and their representatives should take care when drafting their contract to ensure that the liquidated damages provisions are enforceable and should also be mindful when making any supplemental agreement with the contractor to not replace those obligations with anything else that means that liability for liquidated damages falls away.

1 Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67
2 HSM Offshore BV v Aker Offshore Partner Ltd [2017] EWHC 2979 (TCC)

Contractor insolvency: a checklist
15 January, 2018

Today’s announcement that Carillion are being moved to liquidation brings into focus the effect of liquidation in a construction context. While not intended to serve as a complete guide in each and every case, the pointers below should be considered if you are an employer in the unfortunate position of facing contractor liquidation.

Before entering into contracts

• Do consider whether performance bonds or guarantees should be procured. The availability of these will depend on a number of circumstances including the negotiating power of the parties, the value of the contract and its length.
• Consider the importance of third party warranties (e.g. from sub contractors) and ensure that where possible the form and content of any warranty package is agreed as well as the timing for procuring third party warranties.

During the currency of a contract

• Understand the type of insolvency the contractor is facing. The effect of administration (for example) is different to liquidation.
• Check the contract. Contracts will usually contain provisions regarding the effect of contractor insolvency. Ensure that you are familiar with them and understand their effect. In particular understand the effect of insolvency on your obligation to make payments.
• Secure the site. The contractor will have possession of the site but if they have been moved to liquidation security of the site may not be maintained. If the contract permits you to secure the site then you should do so. Upon securing the site, immediately review the insurance and security arrangements for the site and any materials.
• Speak with the liquidator. It may be there are plans as part of an orderly winding up for a replacement to put in place arrangements to fulfil a contract. If there are then consider the logistics of this under the contract (e.g. if the contract is to be passed to a third party who will complete the works what, contractually, needs to be put into place to give effect to that, and what would the effect be of such arrangements on past contractual obligations).
• Do not reach agreement with the directors or other representatives directly. The movement of a company to insolvency shifts the decision making powers away from the officers of a company.
• Do not strike deals directly with sub contractors without first taking legal advice. You may inadvertently be assuming responsibility for sub contracts which you may not have full particulars of.
• Notify funders. If you have a funder in place they may well dictate what you can and cannot do.
• Make contact with any guarantor / bondsman to notify them of the insolvency and your rights under the guarantee or bond.
• If necessary, take steps to terminate the building contract. For example, issuing a termination notice.

After completion of the works

• Check your warranty package. The value of your direct contractual relationship with the contractor may be uncertain and that brings into sharp focus the importance of warranties that you have in place and the scope of valuable protection against defects.
• Check any guarantee or bond. It may be that the protection of any performance bond will have ended after practical completion but check the terms.
• Re-inspect the works. The insolvency of a contractor should serve as a trigger to ensure that the works are not defective. While contractor insolvency may result in the loss of a viable remedy against the contractor it may not be so in each and every case (it depends on the financial position of the contractor and the type of insolvency situation at play). Of course third parties may also retain liability in respect of works (whether under a warranty, bond or guarantee).

The above is not intended to be a complete list of do’s and don’t’s but should hopefully provide employers with some tips on how to address actual or potential contractor insolvency.

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