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Buildingblocks
www.mills-reeve.com
Edition 4 2009
2
Editorial
Welcome to the last edition of Building Blocksfor 2009.
In keeping with previous “end of year” editions,this edition contains shorter articles than usual.If you prefer this format please let me know.
In this edition there are articles as diverse as taxproposals for construction works, commentary on both the NEC3 and JCT standard forms, theinvasive Japanese knotweed and finally in areflection of the present economic climate, what a pre-pack is.
Also with this edition you will find a flyer whichsets out our programme of seminars for spring2010. If you would like to attend any of theseplease contact Rachel Snow; email:[email protected].
Best wishes for Christmas and the New Year.
Stop Press!
Changes to the Construction ActThe Local Democracy, Economic Development andConstruction Act 2009 received Royal Assent on 12 November, making it far more likely that it willactually become law.
When the Act does come into force, there will bewholesale changes to the way that payment mustbe made (and withheld), which will apply toconstruction contracts, whether they are in writingor not. The rules regarding payment of adjudicator’sfees will also change.
A date has not yet been set for the Act to come into force. It is understood that the Governmentintends to consult with the industry about the bestway to implement the changes before announcingthe date.
In due course we will be running a series ofseminars at a number of our offices addressing the practical effect of the changes.
Contents:
3 Playing fair: the constructionindustry’s new competitioncode The UK Contractor’s Group and the National Federation ofBuilders’ New Code of Conduct
Construction workers:new tax proposalsProposals to deal withemployees who presentthemselves as being self-employed for tax andnational insurance purposes
4 NEC tipster – time, testingand defects Ron Plascow continues his seriesof articles on NEC3 clauses
5 Japanese knotweed: a threat to development …and bio-diversity The Government consultationon inhibiting the growth of Japanese knotweed
JCT Revision 2 – insurance and mediationRecent amendments to the JCT 2005
6 The buck stops here The recent case of CostainLimited v Charles Haswell and Partners Limited
Who’s the man?Fitzroy Robinson Ltd v Mentmore TowersWhat happens when the team changes?
7 Corporate manslaughter –new sentencing guidelinesThe second consultation by the Sentencing Guidelines Counsel
8 Distressed developmentsThe risks in the current economic climate
Pre-packsWhat are they?
Alison Garrett Editor01223 222207 [email protected]
The Treasury estimates that “false self-employment” in the construction industrycosts the exchequer £350 million a year. The Treasury has announced proposals todeal with the problem of workers who areactually in an employment relationshippresenting this relationship as one of self-employment for tax and nationalinsurance purposes.
The proposalsUnder the proposals, workers in theconstruction industry will be deemed to be in receipt of employment incomeunless they meet one or more of the three following criteria:
1. provision of plant and equipment –that a person provides the plant andequipment required for the job theyhave been engaged to carry out. Thiswill exclude the tools of the trade which it is normal and traditional in the industry for individuals to providefor themselves in order to do their job;
2. provision of all materials – that aperson provides all materials required to complete a job; or
3. provision of other workers – that aperson provides other workers to carryout operations under the contract andis responsible for paying them.
ImplicationsThe Government claims the new test isboth clear and simple to use and isconsistent with the previous case law-based approach. A consultation period on the proposals has just closed and wemay hear more in the Pre-Budget Report.If the proposals become law, employerswill have to apply these criteria todetermine whether PAYE and nationalinsurance contributions are payable andthe self-employed will need to operateconsistently with the criteria on a day to day basis.
In the single largest probe ever conducted by the Office of Fair Trading (OFT), 112construction companies have been foundguilty of bid rigging. In August, with theOFT’s final verdict as to sanctions pending,the UK Contractors Group (UKCG) and theNational Federation of Builders (NFB)launched a Code of Conduct for the UKconstruction industry (the code). Designed toreassure regulators and clients that theindustry is abiding by their obligations, thecode sets out their commitment to complywith UK and EU competition law and adhereto the principle of free, fair and efficientcompetition.
In order to achieve these aims, the code sets out a number of specific obligations for construction companies:
• Not to restrain competition amongstthemselves.
• Bid for contracts and tendersindependently from their competitors.
• Not to share sensitive information in anattempt to co-ordinate competitivebehaviour, particularly information aboutpricing intentions.
• Only co-operate with competitors whenpermitted to do so by competition law.
• Implement internal compliance policiesand promote understanding of andcompliance with competition lawthroughout their supply chains. The code is backed up by guidance and training to ensure even small firms have effectivepolicies in place.
With both bodies’ member firms committedto the scheme, and the hope that it will be adopted industry wide, the codedemonstrates the industry’s will to address the OFT’s concerns. It has been recognisedas a “positive signal” by the OFT. SimonWilliams, senior director of cartels andcriminal enforcement, commented that it is “vital that construction companies …implement both the practice and spirit of the code proactively … so that a culture of competition can be fully embeddedwithin the industry”.
On 22 September the OFT handed downfines totalling £129.5 million to 103 firms.Although a seemingly large sanction, thefines could in fact have been much higher.The OFT has the power to impose a fine of up to 10 per cent of a firm’s annualturnover. The average level of fine in factonly amounted to 1.14 per cent of turnover.It is not clear whether the new code had any impact on the OFT’s decision. Perhaps it came too late on in the five yearinvestigation to significantly influence theoutcome. However, with the scandal backon the front page, the significance of thecode may come in restoring faith in theindustry and rebuilding its reputation.
Elizabeth Davies01223 [email protected]
Christopher Townsend01223 [email protected]
3
Playing fair: the constructionindustry’s new competition code
Construction workers: new tax proposals
4
Under the heading of “time” clauses 30-36of NEC3 brings together a number ofdifferent issues. This includes starting workon site; achieving completion; theprogramme; access to the site; stopping ordelaying works; taking over the works andacceleration. Each issue in itself deserves itsown separate article. However, I willcomment on the interesting points ofprinciple only. If you need more information,please contact me.
Let’s begin with the obvious. A contractorwill never start work on site until givenaccess, and access dates are set out by theemployer in the Contact Data Part One.That seems simple enough but there's alittle wrinkle, which I explain below.
The project manager decides the date ofcompletion, certifying within one week of itbeing achieved. Completion is not really adate under NEC3; it is a state to beachieved. Therefore, in theory, there shouldbe no outstanding work to be carried out atcompletion. Under JCT the practice is for acertificate of completion to be issued with alist of outstanding (ie, snagging) items, butNEC is not supposed to work that way. Thereality may be different.
The programme is given prominence withNEC, as it is in GC/Works. It is seen as anessential management tool and givencontractual status.
It is a Gantt not a simple bar chart. Thecontractor should provide for it and refer to it in his part of the Contract Data, in Part Two. If not, the employer can stipulatein the Contract Data when he wants aprogramme and revisions to it as the work progresses.
The wrinkle which is underplayed is that an astute employer can ensure no workstarts on site until a programme has beenaccepted, thereby pinning the contractordown to providing a meaningfulprogramme. The trick is ensuring that theaccess date and the date for acceptance of the programme coincide.
Then there is the treatment of float. Float isto be declared in the programme. NECguidance categorises float as “free”, “total”and “terminal” float. The last is owned bythe contractor, the others belong to theproject. The distinction is that terminalcovers all the programme; the others aretask related and aimed at slippage availableto complete a task.
You should note that:
• taking over equates to partial possession;and
• acceleration is a useful management tool.
Turning to testing and defects, the firstthing to note is that the requirements fortests and inspection should be set out indetail in the Works Information. After all, to quote clause 20.1 “the Contractorprovides the Works in accordance with theWorks information”. So if it is not in thereit’s not done.
I will continue with testing and defects andalso discuss payment in the next edition.
NEC tipster: time, testing and defectsHaving dipped our toes into NEC3 it is time to move on!
Ron Plascow01223 [email protected]
Earlier this year, I was instructed on thepurchase of recently built offices inStaffordshire. However, a site inspection bymy client’s surveyor revealed the presenceof Japanese knotweed at the property.
For the uninitiated, Japanese knotweed is“one of the most damaging invasive alienspecies in the UK”, with the capacity todamage drainage, concrete andfoundations. One square metre of theplant can, in worst case scenarios, costmany thousands of pounds to remove.
In my client’s case, the developerconceded that no remedial steps had beentaken at the build stage to neutralise theeffect of the knotweed. With our searchesalso revealing other problematic issues(and the seller refusing to give anindemnity) my client reluctantly withdrewits offer for the property.
The Government is proposing steps to tackle this issue. The result is aconsultation on the release of a non-nativeparasite (Alphalara itadori) which isJapanese in origin and has been shown to inhibit the growth of knotweed.
The proposals have potential implicationsfor native flora, but also give rise to issuessurrounding land ownership and access toaffected sites. As such, the consultationinvites comment from landowners anddevelopers, as well as environmentalists.
5
Vanessa Warren0121 456 [email protected]
Japanese knotweed: a threat to development …and bio-diversity
There are several amendments to the JCT inRevision 2. Two of the most important relateto the professional indemnity insuranceprovisions.
Revision 1 made the default position forpollution and contamination claims to bethe full amount of indemnity cover.
However, Revision 2 provides that if noamount is stated, such cover shall not berequired. A similar provision now exists forasbestos claims where the default position is, again, that no cover is required.
On the face of it, this seems like a veryminor amendment, simply requiring thelevel of cover to be agreed and included inthe contract particulars. The problemcomes, however, with the JCT’s explanationof these changes. These amendments aredescribed by the JCT in their Revision 2guide as being “in line with marketrealities”.
What the revision means is that it may nowbe possible to argue that requiring cover forcontamination, pollution and asbestos is notin line with the current insurance marketand point to the JCT’s Revision 2 guide forsupport.
A further amendment to note is that madeto the mediation provision. Under Revision 1 the parties “may by agreement” use a mediator. Revision 2 strengthens this by imposing an obligation for directnegotiations and that if these fail the parties must give mediation “seriousconsideration”.
As far as contractual language goes,“serious consideration” is hardlyunequivocal. However, what is clear is that the JCT is pushing negotiation andmediation higher up the agenda in line with the OGC’s “Achieving Excellence in Construction” initiative.
Robert Weatherley01223 [email protected]
Alexander Hunt01223 [email protected]
JCT Revision 2:insurance andmediation
6
The recent case of Costain Ltd v CharlesHaswell & Partners Ltd (2009) has clarifiedthe standard of care owed under aprofessional appointment.
This was actually not an area where the law needed any clarification. As far back as 1957, the decision of Bolam v FriernHospital Management Committeeestablished the principle that not everymistake by a professional gives rise to a valid legal cause of action. Although it is possible to impose a more onerousstandard, under Bolam a professional will not be negligent if the act in questionconformed to a practice accepted as proper by some responsible members of his or her profession.
In Costain, the contractor was suing theconsultant, Haswell, for allegedly negligentadvice in relation to the design offoundations for a water treatment works.The relevant clauses in the professionalappointment were clause 7.2, whicheffectively restated the Bolam principle inslightly more onerous terms, and clause 7.4.The question for the court was whetherclause 7.4, which stated that Haswell’sdesign was to “meet the requirements [of]the Specifications … the Tender Documents… the Contract or the written requirementsof Costain …”, imposed a strict liabilityobligation on Haswell (Costain’s argument)or, whether it was to be interpreted asbeing subject to the reasonable care andskill obligation in clause 7.2 (Haswell’sargument).
In a decision which you may find surprising,the judge, Richard Fernyhough QC agreedwith Costain: it was “… quite plain thatClause 7.4 … add[ed] something different to Clause 7.2, otherwise it would not needto be there”.
Although, on the facts, the strict liabilityobligation was found not to be a relevantfactor in deciding whether or not Haswellwas negligent (in fact the judge decidedthat Haswell had failed to meet thestandard in clause 7.2 in any event), thisdecision is important as it raises thepossibility that in certain instances thecourt will disregard any allowance forhuman error. This may well be an issue thatclients and consultants and their insurerswill wish to revisit in their negotiations.
Fitzroy Robinson Ltd (FR) was a firm ofarchitects appointed by Mentmore TowersLtd to redevelop two substantial properties.In 2005 Mentmore deliberately approachedand negotiated with a specific director of FR(Jeremy Blake). The appointments enteredinto confirmed that Mr Blake was to be the“team leader” and would be “personallyavailable and responsible for the overallmanagement supervision and co-ordination… there will be no change of responsibilitywithout the prior written agreement of[Mentmore]”.
Mr Blake resigned from FR in March 2006,which was some weeks before the formalappointments were entered into. FR omittedto inform Mentmore of the resignation(having asked Mr Blake to keep it quiet)until November 2006. In December 2007the project was suspended and FRcommenced court proceedings, allegingunpaid fees.
Mentmore raised the concealment of MrBlake’s resignation as a counterclaim and a High Court judge in the Technology and Construction Court held that theconcealment constituted a fradulentmisrepresentation by FR.
Professional organisations should ensurethat where key individuals are named intheir appointments, timely notification ofany significant changes are communicated.Even if the facts do not extend quite as faras the Mentmore case so as to result in afinding of fraudulent misrepresentation, afailure to notify, or other false statement,may still result in a negligent misstatement,breach of contract and/or a breach of theprofessional’s body’s codes of conduct.
Similarly, those employing a firm with theexpectation of certain key people beinginvolved should ensure that their position is properly protected by adopting suitableclauses in the appointments.
Paul Slinger0121 456 [email protected]
The buck stops here
Who’s the man? Fitzroy Robinson Ltd v Mentmore Towers
Nicola Savery0121 456 [email protected]
Stuart Pemble0121 456 [email protected]
7
The Sentencing Guidelines Council (SGC)has issued a second consultation on draftsentencing guidelines for corporatemanslaughter and health and safetyoffences causing death. These come,coincidentally, at the same time as the HSE publishes statistics for the first yearfollowing the introduction of the CorporateManslaughter and Corporate Homicide Act 2007.
Whilst the HSE rightly welcomes the newsthat the number of work related fatalitieshas fallen to a record low of 180, it is keento warn that, historically, a rise out ofrecession sees a corresponding increase ininjuries. The full report can be located at:http://www.hse.gov.uk/statistics/overall/hssh0809.pdf
Whether the fall in fatal accidents has beenin any way shaped by the introduction ofthe Corporate Manslaughter and CorporateHomicide Act 2007 is an interestingquestion, but one that cannot be easilyanswered. The new offence certainly helpedmove health and safety up the boardroomagendas and the first consultation exerciseby the SGC worried many boards,suggesting fines as high as 10 per cent ofgross annual turnover.
Having considered the earlier responses theSGC has decided to move away from the
formulaic approach it previously consideredand has returned to a less controversial andmore conventional analysis of the culpabilityof the organisation itself. It sets outs severalfactors that the court can consider to assessthe gravity of the offence before it and thenproduces a list of potentially aggravatingand mitigating features that will be familiarto anyone used to dealing with Health andSafety at Work Act offences.
The only mention of specific figures comesin section D, stating simply that “Theappropriate fine [for manslaughter offences]will seldom be less than £500,000 and maybe measured in millions of pounds” and inrespect of health and safety offences finesshould “seldom be less than £100,000 andmay be measured in hundreds of thousandsof pounds or more”.
These words, in isolation, are difficult to fitwith the many cases where firms have beenfined millions of pounds under the Healthand Safety at Work Act 1974. Few wouldmeasure Transco’s £15 million fine for thegas explosion at Larkhill in hundreds ofthousands.
The consequences of any fine must betaken into account by the court, but theimpact on innocent employees is of morerelevance than the effect on shareholdersand directors. Bankruptcy may be
acceptable in some cases, although smallerorganisations will be given time to pay.Public sector organisations should expect apunitive fine as the standards expected of alocal authority, NHS trust or police force arethe same as for the private sector. However,the impact on the provision of services mustbe considered by the court and a “differentapproach” may well be justified. For thatread “smaller fine”.
The guidelines also set out the details ofhow those convicted of a corporatemanslaughter offence may be required topublicise the fact. With an object of bothdeterrence and punishment, theorganisation’s own website will be requiredto publicise the conviction and details of thefine. Not the kind of “news” the marketingstaff would have been planning to include.Newspapers may also be used, but it isrecognised that in many cases, that will beunnecessary. The front page of everynational newspaper is likely to be free forthe first household name convicted of thenew offence.
Mills & Reeve LLP will be responding to theconsultation and full details are available onthe SCS’s website: www.sentencing-guidelines.gov.uk
For more information, or to add your viewsto our submission, please contact me.
Corporate manslaughter:new sentencing guidelines
Duncan Astill0121 456 [email protected]
More and more these days we are receivingenquiries about pre-packs. What are they?What can I do about one? Are they fair?
The term pre-pack is applied to the sale by anadministrator of the assets and business ofan insolvent company to a third party. So farso straightforward but the perceivedunfairness tends to arise because:
• the sale takes place a matter of momentsafter the company goes intoadministration;
• often the third party will be owned andmanaged by the same people who ran the insolvent company; and
• there is an absence of consent to the saleeither from creditors or a court.
Pre-packs are controversial but theydo have some advantages. Forinstance, a pre-pack can minimisethe erosion of supplier, customerand employee confidence and cansave jobs. If the company is subject to aprotracted normal administration processthen key employees are more likely to loseconfidence that the company can be savedand seek alternative employment.
The courts have looked hard at pre-packs buthave generally supported their use. However,in response to creditor concerns professionalguidelines were introduced in January 2009requiring administrators to give much moredetailed information to creditors, albeit afterthe event.
It is difficult to challengea pre-pack. Creditorshave a statutory right tobring an action against anadministrator relating to
his conduct but will have toshow that the administrator’s
actions have caused that creditor particularprejudice. A less formal and cheaper way ofpotentially challenging a pre-pack is tocontact the Insolvency Service’s pre-packscomplaints line.
Given the current market conditions fewdevelopers may be commencing newschemes at the moment, but there are of course some development schemesunderway which are exposed to various risks, including some relating to theconstruction industry.
Issues such as the insolvency of a member of the professional team or indeed thedeveloper can be a serious risk on thecompletion and delivery of the project, or completing the project within theanticipated budget.
A developer may be looking to extend anyagreed payment period to fit in with itsfunding arrangement (often because ofpressure from the funder to the developer to control costs and fund any cost overruns).
Any such extended periods for payment can expose the professional team to morefinancial risk. In turn this may adversely affectall payment arrangements within the supplychain.
Contractors, on the other hand, will belooking for advance payments where thecontract permits and to minimise paymentperiods. Where developers are receivinggrant funding, the contractor will be keen toreceive early payment if the grant funding isonly guaranteed within a particularaccounting period.
Where contracts provide for a retention(usually held for a specified period ofbetween 6 and 12 months followingpractical completion) then in the currentmarket conditions, some contractors are
asking the developer to hold this in aseparate bank account to cover the risk of the developer’s insolvency.
It is important for all parties involved in adevelopment scheme to review their position(both financially as well as contractually) andkeep on top of the position, taking early legaladvice where there is any cause for concern.
Laura Holdaway [email protected] 222308
Helen Prandy01223 [email protected]
www.mills-reeve.comTelephone: 0844 561 0011
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The articles featured in this publication have been selected and prepared with a view to disseminating key information. Space dictates that any article may not deal with individual concerns but the author would be pleased to respond to specific queries.
No liability can be accepted in relation to particular cases. Before taking action, you should seek specific legal advice. Copyright in this publication belongs to Mills & Reeve. Extracts may be copied with our prior permission and provided
that their source is acknowledged.
December 2009
Pre-packs
Distressed developments
