Construction Industry Update February 2010

Suspended sentence: courts look at contractors entitlement to suspend

On the face of it, the threat of suspending works could be a useful tool for many contractors in persuading employers to make payment.  So why is it so infrequently used?  Many suggest that the fear of a court or adjudicator subsequently finding that the sums claimed by the contractor were not due to them and accordingly the contractor is in repudiatory breach of contract.

The recent case of Mayhaven Healthcare Limited v Bothma (t/a DAB Builders) appears to lend its weight to the contractor’s right to suspend.

Bothma (“B”) agreed to carry out certain works to a nursing home however a dispute quickly arose.  The initial dispute was referred to adjudication as a result of which Mayhaven (“M”) was directed to pay B the sum in dispute. 

B subsequently claimed that M had failed to pay the sums awarded under the adjudicator’s decision and as a result suspended work.  M in turn claimed that the suspension was a repudiatory breach of contract.  The difference in this case was that unbeknown to B, M had made payment of the sum before B suspended the works.

So was B in repudiatory breach of contract?  After all B had suspended works when no sums were due to them.

The court found that there had been no repudiatory breach of contract by B as:

1. A breach of contract is repudiatory if it goes to the root of the contract.  Whether a wrongful suspension would satisfy this test depended on the facts and circumstances of the particular matter.  B made a genuine mistake in believing that payment had not been made and accordingly this did not constitute a repudiatory breach;
2. M was also the contract administrator and knew that the sums had been paid before B suspended.  Accordingly suspension could have been avoided if M had informed B of his mistake; and
3. B did not refuse to carry out the works nor had they abandoned the works but had made it clear in their notice that they would return to complete the works once payment had been received.

In light of the above it remains to be seen if contractors will use the right to suspend more frequently.  It would certainly appear that if a contractor genuinely believes that sums are due then the courts will support a suspension of work. 
 

Directive 2007/66/EC (“Remedies Directive”) became part of UK law on 20th December 2009.  It is seen as a significant, if overdue, addition to the remedies available to those who believe that they have been treated unfairly during a procurement process and seeks to clarify the position regarding remedies which, before the Remedies Directive, was seen as somewhat inefficient.

Prior to the Remedies Directive, aggrieved bidders could:

1. Apply to the court to have an award of a contract set aside, or
2. Claim damages. 

On the face of it, those options appeared to be perfectly adequate i.e. if the contract hadn’t been concluded you could stop it proceeding and if it had been concluded you could recover damages.

However, in practice this meant that in order to get an award of a contract set aside, the aggrieved bidder would be required to establish inequitable treatment and then raise an action within a 10 day period known as the mandatory (or “Alcatel” – after the leading case) standstill period.  Needless to say, success under this system was rare – the period within which to raise an action being seen as too short.  It was also unavailable for contracts in relation to which a Contracting Authority made a “direct award” (i.e. just ignored the regulations completely), as in those situations the contract was already concluded by the time contractors found out about it.

If an action could not be raised within the timescale, an aggrieved bidder would only be left with the possibility of proving loss as a direct result of the Contracting Authority’s failure to comply with the Regulations.  This is notoriously hard to do.

The Remedies Directive supplements the existing regulations by providing for a number of remedies which sit alongside the current regime, but it will only affect procurement procedures which commenced after the implementation date.

The most radical change under the Remedies Directives is the creation of the concept of the ‘ineffectiveness’ of a contract.  The result of the Court ruling a contract as ineffective is that it is prospectively terminated i.e. those obligations that are still to be performed under the contract must not be so performed.  The irony of introducing a concept with this name seems to have been lost on the European legislators.

There are time limits attached to when ineffectiveness can be invoked but it does allow for a greater window of contention for aggrieved bidders and, in addition, means that wrongly or unfairly awarded contracts can be terminated, even if they have already commenced.

In addition to the power of termination, the Court can make a number of other orders and if ineffectiveness is declared, the Court must now also fine the defaulting Contracting Authority.  This, coupled with the prospect of damages being declared and the expense of undertaking a new procurement process, shows the extent of the onerous financial penalties that can now be levied against Contracting Authorities.

The ‘real world’ impact of the Remedies Directive remains to be seen.  It will be through practice and case law that the real substance evolves. 

One thing is certain – contractors are the real beneficiaries of the changes. 

Contractors now have greatly enhanced powers to halt those processes in respect of which they feel they have been treated unfairly.  Contractors should thus ensure that they are well briefed to invoke the new remedies and benefit from the changes brought about through the Directive by ensuring that they understand the law and the processes to the fullest extent possible.

Contracting Authorities will need to be similarly armed to resist such attacks, to the extent they are able to do so. 

 

Firms attract work, for the most part, owing to their reputation to deliver.  In many cases it is the reputation of a particular member of a firm that attracts a particular client.  In addition many construction documents will list a particular “Key Person” responsible for the project, usually someone that has an ongoing relationship with the client.

In the case of Fitzroy Robinson Limited v Mentmore Towers Limited, a firm of architects sought payment of unpaid fees.  A key member of the claimant’s team was a director who had been sought-out by the defendant and who was instrumental in securing the project for the firm.  The contract between the parties stated that the “Team Leader” was to be a particular director “or such other individual of comparable standing ability and experience as [the claimant] may at its discretion approve." 

Unknown to the developer, just prior to the contract being signed, the director had resigned and he had started his one-year notice period.  The claimant therefore knew that the director would not act as Team Leader though to the project’s completion.  The claimant chose not to disclose the director’s expected departure until several months after the contracts had been signed and work on the project was well underway.  The director was also instructed by the claimant to maintain silence regarding his resignation.  Due to various problems with planning applications the project was soon suspended; the claimant then sued to recover fees which remained due.  The defendant counter-claimed, alleging, amongst other matters, that it had been induced to enter into the contracts on the basis that the specific director would manage the project and that the claimant’s failure to inform them of his resignation amounted to a misrepresentation and a breach of contract which led to financial loss.

The Judgment

The court found for the defendant and allowed the counterclaim.  The following points are worthy of note:

• The claimant’s failure to inform the defendant was motivated by a belief that the defendant would have looked elsewhere if it had known that the director would not be involved throughout the project;
• The defendant signed the contracts because it had indeed believed that the director would lead the project to its conclusion;
• The claimant had made the misrepresentation knowingly and deliberately, without an honest belief in its truth in order to induce the defendant to enter into the contracts - it was therefore a fraudulent misrepresentation; and
• By neglecting to inform the developer of the resignation after the contracts were signed, the claimant had breached an implied term of co-operation.  The contract had specified the project leader and so the claimant was therefore duty-bound to inform the developer timeously of any change to the project leadership, notwithstanding the caveat to the Team Leader definition.

Implications

• Pre-contractual negotiations should be explicit and honest – communicate who will be in charge of the project and establish the importance of that person to your client; and
• Your Terms of Engagement or other pre-contractual documentation must detail your staff and team composition policies and if possible you should seek to retain control and flexibility over the client team.

In light of this judgement, you should bear in mind the implied term of co-operation and contact your client as soon as you reasonably believe that a significant person is leaving.

It should be noted that this is an English case and would only be persuasive in Scotland. 

In recent months many construction firms have been focused on simply surviving the current recession and environmental issues have been put on the back burner.  For the regulators however green issues remain a hot topic.

With that in mind the Environmental Civil Sanctions Order 2010 (Order) comes into force in England & Wales on 10 April this year.  The Order sets out a system whereby significant civil penalties can be imposed by the courts on construction firms that cause damage to the environment (such as unsuitable waste disposal or insufficient storage techniques).  The Order will be enforced by an environmental regulator who will be appointed under the order. 

According to the Environmental Agency (EA), the Construction Industry accounts for 25% of pollution incidents which occur in England and in Wales.  This figure, together with the number of waste and nature conservation related offences committed by those in the construction industry, means that the Order could have a significant impact on the industry, and in severe cases construction companies could be fined up to 10% of their turnover.

In October 2009, the EA fined soft drinks firm Red Bull £261,279 for packaging waste offences.  If it had subjected the firm to the new civil penalties it could have fined Red Bull 10% of its turnover.  Given the size of the soft drinks manufacturer this could have been a substantial sum.

Under the Order, the Environmental Regulators will be given a wide range of powers to ensure compliance.  These powers will be greater than those available to the Environmental Agency.  These powers will include the ability to issue a wide range of enforcement notices and fix monetary penalties for specific minor offences.  The usual site inspections will be where anything untoward is flagged up by the regulators.

As a result of these powers, offences which occur (other than the most severe) will now fall into the civil arena and be dealt with by the civil courts.  The Government has even established a tribunal solely for the purpose of hearing appeals against the imposition of sanctions and enforcement notices.

It is important for those in the Construction Industry to take heed of these proposals before its inception in order to understand where civil sanctions will be appropriate as opposed to criminal.

So far no plans are in place in Scotland, however it is likely to be only a matter of time before some variation on the Order moves across the border.

The Order can be viewed at:
http://www.defra.gov.uk/corporate/consult/env-enforcement/civil-sanctions.pdf

 

In November 2008 the then Master of the Rolls, Sir Anthony Clarke, appointed Lord Justice Jackson to lead a fundamental review of the rules and principles governing the costs of civil litigation in England & Wales and to make recommendations in order to promote access to justice at proportionate cost.  Lord Justice Jackson has been openly critical in relation to costs of court actions, and particularly scathing in relation to the Wembley court action over which he presided and where costs were in excess of £20 million (for a £25 million claim).

Following the consultation, Lord Justice Jackson’s much anticipated final report on civil litigation costs was published on 14th January 2010.  His report puts forward proposals for substantial reforms to costs in civil litigation matters.  His proposals potentially affect almost every area of civil litigation ranging from small personal injury matters to high value complex commercial litigation.

Many of the proposals are of specific relevance to the construction industry, such as:

• Pre-action protocols: The pre-action protocols for the Construction and Engineering sector need to be simpler in nature in an attempt to reduce costs in the overall process;
• Fast Track: For construction cases with a value lower that £25,000, a fast track procedure should be introduced in an attempt to fix costs where the recoverable costs of each stage of the process are predetermined and strictly limited;
• Costs: In cases, judges could be asked to take on a more ‘hands on approach’ and keep costs under control.  This could be ascertained by way of a cost budget.  Prior to the outset of cases, the courts can set down a budget for the duration which cannot be exceeded without request;
• Contingency fees: Clients will pay solicitors a percentage of the sum awarded.  Where the client is successful and awarded costs, the losing party will only be required to pay costs to the extent that they are a reasonable amount with the winning party covering the difference;
• Disclosure and document management: In construction litigation there is often vast amounts of paperwork.  As such the introduction of a more flexible system can reduce the expense in relation to document management pre-trial; 
• Alternative Dispute Resolution: Lord Justice Jackson was of the opinion that ADR is seriously underused. As such he has put in a proposal for all practitioners, the judiciary and the public to be educated as to the potential benefits of ADR, and that an authoritative handbook should be published on this topic;
• Mediation: It should be promoted with particular vigour for those low value construction cases in which conventional negotiation is unsuccessful;
• Case Management: Greater case management and costs sanctions for excessively and unduly lengthy witness and expert evidence; and
• Settlement Incentives: Greater incentives for settling disputes, including enhancement of the current settlement offer regime under Part 36 of the Civil Procedure Rules (whereby a party can be liable for expenses if they do not beat the other party’s offer).  Lord Justice Jackson proposes that a successful claimant's costs recovery, where a defendant has failed to beat a claimant's offer, should be enhanced by 10%.

The Lord Chief Justice, Lord Judge, welcomed the report stating:

“The judiciary has been concerned for some time that the costs of civil litigation are disproportionate and excessive."

It will be a matter of time until we see whether these proposals are taken on board and implemented to any extent.  

The senior judiciary have thrown their weight behind Lord Justice Jackson's report, and if his proposals are taken on board we can expect to see major changes to the disputes landscape.  The cost of civil litigating in Scotland was also considered in Lord Gill’s Scottish Civil Courts Review. 

 

Competent person schemes were introduced in 2002 in England & Wales as a way of ensuring building work is carried out to the high safety and environmental standards required in the Building Regulations 2000, without the need to involve the local council or approved inspectors in signing it off.

The UK Government recently published the Building Regulations Competent Persons Self-certification Scheme consultation paper (Paper).  The Paper sets out and seeks responses on proposed changes to the administrative provisions for approval, monitoring and quality assurance of Building Regulations competent person self-certification schemes in England and Wales.

The changes proposed in the Paper are designed to address perceived weaknesses in the current system, as identified by both the Government and Competent Person Scheme Operators.

Under the proposals set out in the Paper:

• People would be able to look online to find the right local tradesman like a builder, plumber or heating engineer qualified to carry out specific jobs.  Currently, there is no ‘central register’ for all tradesmen and therefore consumers take a risk by employing them through an advert in the paper, phone book or word of mouth;
• Consumers would also have upfront information on the competent person schemes’ website about how their complaints procedures work and how long a complaint will take to process.  The Department currently allows schemes to develop their own complaints procedures so long as the goal is a satisfactory resolution of justified complaints that do not comply with building regulations.; and
• A body seeking to become a competent person scheme operator must agree to conform to a set of conditions of authorisation.  These conditions are designed to ensure that the body is a fit and proper body for such an activity, has the necessary competences to do so and will act fairly towards its own members and the customers of those members.  At present, the applications process has been operated on an ad hoc basis with an open advert on the Department’s website inviting expressions of interest to run a scheme.

There are currently 12 competent person scheme operators in England and Wales including glazing, heating, hot water, plumbing systems and electrical installations in homes.  There is no obligation on a firm to join a competent person scheme (except for those in the approved gas safety scheme).

The changes proposed in the Paper aim to improve the level of compliance with the Building Regulations and increase consistency across the schemes.

This consultation is only open to those in England and Wales and closes on 19 March 2010.

Scotland has its own certification schemes, however the Scottish Building Standards website (which includes certifiers of electrical installation and design of domestic and non domestic buildings) has a general list (which accordingly makes it harder to identify which parties are capable of carrying out specific kinds of work).

The consultation can be viewed at:
http://www.communities.gov.uk/publications/planningandbuilding/competentschemechangesconsult

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

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