A balancing act – courts provide guidance on accounts in bankruptcy
A recent Court of Session case, Integrated Building Services Engineering Consultants Limited trading as Operon v Pihl UK Limited, provides some useful guidance on the principle of the balancing of accounts in bankruptcy, in the context of enforcing adjudication decisions. The case arose out of an Aberdeen City Council construction contract for the building of schools in Aberdeen which was originally funded by Landesbanki. When Landesbanki went into administration, refinancing was required and subsequently the contractor, Pihl UK Limited, became liable to IBS, a sub-contractor, for certain sums.
Pihl then issued withholding notices in relation to these sums citing breaches of contract by IBS. IBS commenced adjudication proceedings to enforce their claim and the adjudicator decided in IBS’s favour.
IBS raised Court proceedings in January 2010 to enforce the adjudicators award and shortly afterwards IBS was placed into administration by its bank, Natwest.
In its Court action, IBS’s administrators sought decree of the sum awarded by the adjudicator. Pihl argued that IBS were insolvent and accordingly they were entitled to retain the sums awarded by the adjudicator until their claims against IBS were determined.
The Court required to determine the relationship between the adjudicator’s decision and the right of Pihl to claim set-off on insolvency.
The Court noted that adjudication was intended to be a short, sharp procedure as it was designed to assist with resolving disputes to allow construction to continue and to keep cashflow moving. The decision is not always determinative of all the issues between the parties, but provides an interim solution.
It was this categorisation of adjudication as a “provisional dispute resolution” which influenced the Court’s ultimate decision in this case. It found that the balancing of accounts principle in insolvency could be used as a defence to an action to enforce an adjudicator’s decision.
The Court did issue a warning, however, to any contractor thinking of withholding payment to force the other party into insolvency so as to be able to use the set-off tool. The Court noted that bad faith was a ground for refusing set-off.
The message then is that, in the appropriate circumstances of insolvency, set-off can sometimes be an appropriate defence.
Clueless – industry lacks knowledge of CDM Regulations
A report published last month, entitled “Research into The Construction (Design & Management) Regulations – The Client Voice”, suggests a severe lack of knowledge and understanding surrounding the CDM Regulations 2007 within the construction industry. Most in the construction industry should be aware of the CDM Regulations (although the findings of the Report may suggest otherwise). First introduced in 1994, and updated in 2007, their aim is to make it easier for those involved in construction projects to comply with their health and safety duties, as well as improve and co-ordinate health and safety duties throughout all stages of the construction process.
The report was commissioned by the British Property Federation (BPF) and the Construction Clients' Group (CCG).
BPF and CCG represent some of the clients of the country’s biggest construction firms. The report highlights that many within the industry have little knowledge of the Regulations which, ultimately, puts lives and livelihoods at risk. The findings of a survey conducted as part of the Report suggest that:
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two thirds of one-off clients have not heard of the Regulations and a significant number would not know where to find information about them; and
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two thirds of one-off clients rely on contractors and others for full compliance with the Regulations.
The companies or individuals who fail to comply with the Regulations could face substantial fines or even jail terms. For example, managers of warehouses or hotels should become familiar with the Regulations as they themselves could be responsible for any accidents that happen in relation to construction operations which they have instructed.
There have been calls for the Government to overhaul the Regulations and engage more widely with business to ensure that anyone likely to commission construction work understands their responsibilities and knows where to get help.
Liz Peace, Chief Executive of BPF said:
“Health and Safety is something which organisations should manage as carefully as their balance sheets. It is clear from the research that this message is not permeating outside of the regular client community and at a time where the construction industry is suffering under huge cuts, it is vital we do not up the burden further”.
The summary and full report are both available from the CCG website at:
http://www.constructingexcellence.org.uk/sectorforums/constructionclientsgroup
The head of the Health & Safety Executive (Judith Hackitt) has also recently accused industry professionals of using health and safety as an excuse. See:
http://www.hse.gov.uk/press/2010/hse-lordyoung.htm?ebul=hsegen/21-jun-2010&cr=2
Whose side are you on? – courts look at application of procurement regulations in contracts which do not require to follow them
As many in the construction industry are aware, when certain criteria apply to public works then specific rules must be followed when inviting tenders for that work, including issuing and marking of tenders and notification of results.
In the case of Sidey v Clackmannanshire Council, Clackmannanshire Council issued a contract notice for the replacement of kitchen and bathrooms in council houses. The value of the contract was circa £2.5 million and therefore fell below the threshold as set out under the Regulations (and accordingly the Regulations did not automatically apply). Despite this, the Council engaged the Regulation’s terminology and stated that the restricted procedure was to apply and the contract would be awarded to the most economically advantageous tender.
The Council proceeded to act in accordance with the Regulations. Four contractors submitted tenders including Sidey Limited and Pyramid Joinery and Construction Limited. After the Council went through the tenders and calculated the scores in line with their marking scheme, the contract was awarded to Pyramid on 19 June 2009.
Examination of the Council’s evaluation of the tenderers indicated that the Council had incorrectly applied their scoring method and Sidey should actually have received the highest score and have been awarded the contract.
Sidey issued court proceedings craving the court to set aside the contract, and for the Council’s wrongful award of the contract to Pyramid to be suspended in the interim, until the final court decision was reached.
The Court held that although the contract fell below the threshold for the Regulations, as the Council had acted in compliance with the Regulations they were accordingly bound by them. The Council had effectively opted into the Regulations by advertising that the tender was to use the restricted procedure and referring to the Regulations in correspondence. The contract to Pyramid should therefore be set aside.
Pyramid appealed the court’s decision. The appeal court held that because the value of the contract fell below the threshold noted in the Regulations, the contract did not require to be subject to the Regulations (despite the Council opting to use the restricted procedure under the Regulations and having acted in accordance with them), and therefore the fact that the tenders had not been scored correctly did not mean that the contract with Pyramid should be set aside.
This case should not be taken as judicial authority for the presumption that any contract falling under the threshold will not be subject to the principles of European Community law. The principles may apply where there is a legitimate cross border interest in the contract, but remedies for breach would be those available under Scottish law as opposed to specific remedies provided for in the Regulations.
Coalition wields the axe – Government announces spending cuts to green agencies
We are all aware that the current coalition Government has made clear its intentions to cut public spending. The UK Environment Secretary, Caroline Spelman, announced in July the Government’s intention to cut funding to the Sustainable Development Commission (SDC), and stop funding altogether to the Royal Commission on Environmental Pollution (RCEP), as part of a larger drive to reform 30 of the 90 bodies associated with the Department for Environment and Rural Affairs (Defra).
The SDC was set up nearly a decade ago, as the then government’s independent adviser on sustainable development and a watchdog for its departments and agencies. Its predominant role has been exerting pressure on the government to ensure their construction of schools and housing was more sustainable. RCEP’s role had been to advise on general environmental issues.
A Government statement announced that these cuts would make Defra a “leaner, stronger department” with a “renewed and clearer focus on its key priorities and a simplified structure”.
The announcement came from the Government in tandem with the publishing of an SDC report, which shows that moves towards greater sustainability (as promoted by the SDC) made by the previous administration have already saved the Government in the region of £60-70 million every year. The report also called for the coalition Government to step up its green ambitions in order to benefit from further efficiency savings.
As expected the decision to make the cuts has received some robust opposition.
Joan Walley MP and chair of the Environmental Audit Committee has written to Miss Spelman criticising the Government’s plans. Walley has emphasised that both the SDC and RCEP play essential roles in furthering sustainable development and environmental protection across the Government.
It will be difficult to assess the full implications of these Government cuts, and the potential damage caused by them in relation to environmental issues. It will also be of interest to find out how cross-Government independent scrutiny is to be achieved, and what additional resources will be afforded to DEFRA to allow them to achieve sustainable development given the push for greener development.
Safety blip – number of construction related accidents on the increase
Historically, recessions normally produce a decline in construction accidents (owing for the main part to less construction work being undertaken and less urgency in construction projects etc) as discussed further in our October e-bulletin entitled 'Credit Crunched Health and Safety'.
The latest Key Performance Indicators (KPI’s) published in July 2010 by information provider Glenigan would appear to suggest otherwise, but why?
Whilst Glenigan call for further research into the issue, there are suggestions that numerous factors could be contributing to the increase in accidents. One reason cited is that the mix of construction work changes and as such the balance of relative health and safety risks will too. Added to that is the pressure to cut costs is taking precedence over the drive to improve value.
Cultural changes to health and safety were prompted to a degree by the Latham report (of 1994) and Egan report (of 1998). Those reports looked at ways to improve inefficiencies within the industry. Through their recommendations, better supervision on construction sites was ultimately achieved, however it would now appear to be in jeopardy owing to the economic crisis (with many contractors having to put those who would have been charged with supervision back to a more traditional role to cut costs).
In the lead up to 2010, the industry saw regular improvements in its health and safety record, most notably in the number of deaths on construction sites, although the figures for 2010/11 have yet to be released. The latest KPI’s are representative of performance in 2009 and represent an increase in accidents, despite the number of deaths in the industry continuing to decline.
Third Parties triumph under new Act
The introduction of the new Third Party (Rights Against Insurers) Act 2010 has many benefits for third parties. At common law, where an insured party incurs a liability to a third party, that insured party can make a claim under an insurance policy. If the insured party becomes insolvent before the third party receives payment, then the sums to be paid to the third party become an asset of the insolvent party’s estate and the third party will have to make a claim (along with other creditors) for those sums.
The Third Party (Rights Against Insurers) Act 1930 tried to deal with this issue by way of transferring the insured party rights under the insurance policy to the third party. There were issues with this however, such as the third party being unable to issue proceedings without first establishing the insured’s liability, the 1930 Act failing to keep abreast of company and insolvency law, if the insured was a dissolved company which had been struck of the register of companies the third party may first have to take proceedings to have it restored to the register before suing, and problems with identifying what insurance cover was in place etc.
Enter the Third Party (Rights Against Insurers) Act 2010. Whilst updating the terminology from recent developments in company and insolvency law, the 2010 Act introduces much needed change.
The 2010 Act removes the need for multiple sets of proceedings, and allows third parties to bring proceedings direct against the insurer itself. The third party no longer has to prove liability before commencing proceedings. This improves drastically upon the procedure under the 1930 Act whereby proceedings had to be first brought against the insured party and liability had to be proven.
The removal of the requirement to sue the insured party itself has a benefit, in that dissolved insured parties no longer need to be restored to the register of companies.
The 2010 Act has also introduced enhanced disclosure of information to third parties and sets out the defences available to insurers in response to any proceedings commenced by a third party.
It should be noted that the 2010 Act will not have retrospective effect. Knowledge of both the 1930 and 2010 Act will be required during the period of transition (i.e. if the insured incurs liability to the third party before the 25 March 2010 then the terms of the 1930 Act will apply).
Given that the 2010 Act has only been in force for a few months it may be some time before we are able to gauge if it is as effective a tool as it was intended to be.
The matters covered in this ebulletin are intended as a general overview and discussion of the subjects dealt with. They are not intended, and should not be used, as a substitute for taking legal advice in any specific situation. Semple Fraser LLP will accept no responsibility for any actions taken or not taken on the basis of this publication.
For further information please contact: Kirsteen Milne