Building blocks Hot topics Say hello, wave goodbye

Buildingblocks
Edition 3 2008
Hot topics
Say hello, wave goodbye
Letters of intent – beware!
The importance of novation
www.mills-reeve.com
Welcome to the third edition of
Building Blocks for 2008.
Contents:
In this edition, Martino Giaquinto and I write about the
proposed changes to the Housing Grants, Construction and
Regeneration Act, which the Government seems intent on
seeing through.
3
Hot topics
A brief summary of some
hot issues that may affect
you, including changes
to health and safety and
the new General Block
Exemption Regulation.
4
Say hello, wave goodbye
A look at proposed changes
to the Housing Grants,
Construction and
Regeneration Act.
6
Letters of intent – beware!
Recent case law – what to
watch out for.
7
The importance of novation
A report on the recent
case of Galliford Try
Infrastructure Limited v Mott
MacDonald Limited.
There is also commentary on recent cases on both letters of
intent and novation, as well as a short article in Hot topics
on the General Block Exemption for those involved in public
procurement. There will be a longer article on this in a future
edition of Building Blocks.
By popular demand, we are hosting a seminar on liquidated
damages, extension of time and loss and expense in Cambridge
on 8 October 2008 and in London on 29 October 2008. Both
seminars are oversubscribed and it is likely that we will hold a
repeat seminar in Cambridge. It will also be run in Birmingham
in the new year.
Other seminar dates for your diary are:
• Cambridge: 6 November 2008 – Comparing JCT, NEC3 and
GC Works;
• Norwich: 20 November 2008 – Insolvency in the construction
industry; and
• London: 26 November 2008 – Comparing JCT, NEC3
and GC works.
Watch out for the flyer in the next edition of Building
Blocks, which will provide details of our seminar
programme for 2009.
Alison Garrett
Editor
01223 222207
alison.garrett@mills-reeve.com
2
Alison Garrett
01223 222207
alison.garrett@mills-reeve.com
Nathalie Morris
01223 222502
nathalie.morris@mills-reeve.com
Hot topics
State aid – new General
Block Exemption Regulation
Health and Safety
(Offences) Bill
On 29 August 2008, the new General
Block Exemption Regulation came into
force. The effect of this is to exempt
certain schemes. One of the aims is to
make public procurement rules and
practices more easily accessible to small
and medium-size businesses (those with
fewer than 250 employees).
The Health and Safety (Offences) Bill was
introduced in the House of Commons on
7 December 2007. There was a second
reading of the Bill in the House of Lords
on 4 July 2008, with a third reading
expected in October. The Bill seeks to
amend the Health and Safety at Work Act
1974 to increase the maximum penalties
available to the courts for certain health
and safety offences.
The RICS has issued new forms of
consultants’ appointments in both a
standard form and short form. They
have also issued new forms for quantity
surveyor, building surveyor, employer
agent, project manager and CDM
co-ordinator services to be used with
these forms. There are also new
explanatory notes. Further information
can be obtained from the RICS at
www.rics.org
If it becomes law, the Bill will:
All in a day’s blog
The new regulations extend the exemption
from notification to the following:
• aid for environmental protection;
• aid in the form of risk capital;
• research and development aid for large
companies;
• innovation aid;
• aid for newly created small enterprises;
and
• aid for enterprises created by female
entrepreneurs.
• increase the maximum fine that the
lower courts may impose from £5,000
to £20,000;
• make imprisonment an option for more
health and safety offences; and
• make certain offences, which are
currently only triable in the lower courts,
triable in the lower or higher courts.
This is particularly relevant to the
construction industry. One area where
the industry may face particular issues
is with the removal of asbestos.
New RICS forms
Over the past few months, Stuart Pemble
has been a regular contributor to the
Business Blog section of the Birmingham
Post. The Post, one of the Trinity Mirror
Group’s most popular regional titles,
has rapidly developed a thriving online
discussion forum. Stuart’s blogs have
included discussions of Birmingham’s best
building, the merits of trial by jury and
why we should be proud of regional
accents. They can be found at
http://blogs.birminghampost.net/business/
stuart_pemble
3
Say hello,
wave goodbye
Government proposals to amend the Housing Grants, Construction and Regeneration Act
• Under the new regime, the
former toothless section 110
will play a leading role with
regard to payment under a
construction contract
4
• If the payer does not issue a
payment notice, the payee
has to give a “default
payment notice” in order
to get paid
• The consultation period
for the Bill ended on
12 September 2008
Martino Giaquinto
0121 456 8225
martino.giaquinto@mills-reeve.com
Alison Garrett
01223 222207
alison.garrett@mills-reeve.com
Just when you thought the law on
many of the significant issues relating
to adjudication had been made clear, it
seems things are about to change. The
Government has published its draft
Construction Contracts Bill 2008 (the Bill),
which proposes major amendments to Part
II of the Housing Grants, Construction and
Regeneration Act 1996 (the Construction
Act). This note looks specifically at the
proposed changes to sections 110 and 111
of the Construction Act.
The changes proposed in the Bill will see
the almost familiar section 111 going out
the window, with the disappearance
overnight of “withholding” notices and all
that we understand about them. Under
the new regime, the former toothless
section 110 will play a leading role with
regard to payment under a construction
contract. Perhaps more a matter of
“when” rather than “if” the new sections
are ultimately introduced, we shall see
case law developed under the existing
sections (particularly section 111)
becoming obsolete.
New payment notices
Section 110 of the Construction Act will be
armed with new sections 110A and 110B
dealing with payment notices. The new
provisions require either the payer (which
includes his architect or engineer) or payee to
give notice specifying the sum due no later
than five days after the “payment due date”.
The “payment due date” means the date
provided in the contract as the date on
which the payment is due. The parties
must still give a payment notice, even if the
amount of the payment notice will be zero.
If the payer does not give the payment
notice, the payee may at any time before
the final date for payment give a “default”
payment notice. But there is no sanction
on the payer for failing to give such
notice. Therefore, it follows that, if the
payer does not issue a payment notice,
the payee has to give a “default payment
notice” in order to get paid.
If the payee gives a notice to the payer,
as part of the payment mechanism of the
contract (such as an application for payment
leading to an interim certificate) that
amounts to a “payment notice”. The
payee cannot then claim a higher sum by
serving a “default” payment notice if, for
instance, the architect or engineer does
not issue an interim certificate.
Counter-notices
The proposed section 111 is intended
to replace the existing section 111 and
to be an integral part of the “payment
mechanism” of the amended sections
110, 110A and 110B.
The new section 111 is intended to
require payment of the sum referred to
in a payment notice (referred to as the
“notified sum”) unless the payer gives
a new section 111(3) “counter-notice”
confirming his intention to pay less than
the notified sum. Rather than referring to
a right to “withhold”, the new section
would require the payer to identify:
• a different sum it says is due to the
payee at the date of the new section
111 notice; and
• the basis on which that sum is
calculated.
Familiar aspects of the new section 111
include:
• an obligation to serve a payer’s counternotice within the “prescribed period”,
ie, not later than seven days before the
final date for payment;
• if the payer serves a valid counter-notice,
the obligation to make payment is limited
to the amount specified in the counternotice; and
• if an adjudicator determines a dispute
that requires an additional payment to
the sum notified by the payer under his
payment notice or counter-notice, the
additional sum shall be paid not later
than seven days from the adjudicator’s
decision or the contractual final date
for payment, whichever is the later.
It is worth noting that there is currently
no provision in the Bill for the proposed
amendments to have any retrospective
effect, ie, construction contracts entered
into before the proposed amendments
coming into force.
The consultation period for the Bill ended
on 12 September 2008. It remains to be
seen in what form the draft proposals
will be adopted but, if the Bill becomes
law (which is likely), it will hopefully
improve payment practices within the
construction industry.
Other changes to the
Construction Act
The proposed key amendments
also include:
• a widening of the definition of a
contract in writing, which will mean
more construction contracts will be
referable to adjudication;
• contractual provisions which provide
that one party will pay the cost of any
adjudication can be ruled unreasonable
by the adjudicator;
• contract clauses which state that
interim payment decisions are
conclusive will be prohibited; and
• where one party has the right to
suspend work, they will also have the
right to claim a reasonable amount for
the costs and expenses incurred as a
result of the suspension.
5
Letters of intent –
beware!
The courts have been warning again about using letters of intent.
This May, in the case of RTS Flexible
Systems Limited v Molkerei Al Müller,
the court said:“this case is another
example of the perils of proceeding
with work under a letter of intent”.
In June, in the case of Diamond Build
Limited v Clapham Park Homes Limited,
it said: “the case illustrates the dangers
posed by letters of intent which are
not followed up promptly by the parties’
processing of the formal contract
anticipated by them at the letter of
intent stage”.
The RTS case related to the supply of
automated machines for packaging and
product handling to the manufacturers of
“Müller” yoghurts. The equipment being
supplied by RTS was to be complemented
by equipment from Müller to automate
the production of multipacks of its
different flavoured yoghurts.
The intention had been to base the
contract on an amended form of MF/1
contract and sign it within four weeks
from the initial letter of intent, which was
issued by Mller on 21 February 2005.
The letter’s duration was extended over
time by agreement to 27 May 2005.
On 19 May 2005, the latest draft contract
was circulated. It was stated to be fine
except for “one issue”.
The parties got on with the production
of the equipment required and contract
discussions stopped. A problem then
arose: RTS’s equipment could not meet
Müller’s requirements within the time
period stipulated by them. Equally, Müller
were late in supplying their equipment.
This left the court to pick over the extent
of the contractual relationship. The court
concluded that there had been a series of
offers and counteroffers. Although a final
draft contract of terms and conditions had
been prepared, that did not become
binding because the parties did not intend
it to have any effect until it was formally
executed and signed by them.
In the Diamond Build case, Clapham Park
Homes wanted to have refurbishment
and regeneration work carried out to a
number of houses and flats.
The letter of intent referred to a
specification that contained reference
to the form of contract, a JCT IFC 2005
with contractor’s design form with
amendments. It went on to describe
the work required and the contract sum,
with the letter expiring upon the
execution of the formal contract.
Work got under way. There was a delay
and Clapham Park Homes gave notice
that no further work was to be carried
out. Diamond Build asserted that the JCT
IFC form was the relevant contract, not
the letter of intent.
“Essentially, letters of intent
are a sticking plaster.”
6
Ron Plascow
01223 222261
ron.plascow@mills-reeve.com
The courts concluded that the letter
of intent gave rise to a simple form of
contract with a commencement date,
a completion date, an overall contract
sum and an undertaking to pay
reasonable costs in the interim. Until the
contract was signed, the letter of intent
contained the terms dictating the rights
and obligations of the parties. Diamond
Build’s attempt to rely upon the JCT IFC
form failed and Clapham Park Homes was
entitled to stop the work.
What conclusions should be drawn from
these cases?
Essentially, letters of intent are a sticking
plaster. If you remove the plaster, either
the wound is healed (the formal contract
is put in place) or there is still a gaping
wound with nothing there
to close it. You then make the best of
the situation you are in.
Letters of intent will not go away. However,
they need to be well drafted with the
courts’ comments firmly in mind.
The importance
of novation:
lessons to be
learned from
Galliford Try
Robert Weatherley
01223 222338
robert.weatherley@mills-reeve.com
The recent ruling in Galliford Try
Infrastructure Limited v Mott MacDonald
Limited (QBD, 17 July 2008) highlights
two points:
• the difficulty in establishing that a duty
of care exists between two noncontracting parties; and
• the need for any contractor taking on
full design responsibility to enter into
a novation agreement with the design
consultants.
The details of the case can be summarised
as follows.
In 1998, the defendant, Mott MacDonald
(MM), was appointed by a wholly-owned
subsidiary of Morrison Property Solutions
(MPS) to provide structural and building
engineering services, including major
elements of the design for a proposed
project on the site of the former Victorian
Birmingham Children’s Hospital (the site).
In January 2000 the claimant, Galliford Try
(GT), was appointed by MPS to be the
design and build contractor for the
redevelopment of the site.
GT and MM began to liaise directly about
structural design work relating to the
project during the tender stage.
However, shortly before GT was appointed
as contractor, it instructed a specialist
sub-contractor to carry out and take over
responsibility for the steelwork design.
In spite of this, once GT had been
appointed as contractor, discussions
took place with a view to novating
MM’s appointment over to GT. Crucially,
however, irreconcilable differences
between the two parties meant that the
wording of the novation agreement was
never agreed and thus no formal contract
between GT and MM ever existed.
As it turned out, the project was
completed considerably later than
anticipated, which resulted in GT making
payment of liquidated damages to MPS.
As a result, GT made a claim against MM
arguing that, in tendering for the contract,
it had relied upon MM’s design concept,
which it alleged included negligent advice
about bracing a pile wall and support for
the existing façade of the building that
was to be retained.
The court held that MM did not owe GT
a duty of care for a number of reasons:
• the majority of the alleged
misstatements said to have been made
by MM and relied upon by GT during
the tender stage were oral (not written)
and were made at informal meetings
between the two parties;
• GT did not involve MM in any aspect of
its contract pricing or programming; and
• GT was evidently dissatisfied with MM’s
informal “advice”, which is why it
appointed its own sub-contractor for the
steelwork design. As such it could not be
said that GT was relying on the quality
or completeness of MM’s designs.
The lesson to be learned from this
judgment is simple. If you are a contractor,
make sure that you enter into a novation
agreement with the design consultants in
order to ensure that you will have recourse
against a negligent design consultant upon
whose advice you rely. A properly worded
(invariably bespoke) form of novation
agreement should make it clear that the
contractor will be entitled to rely upon the
performance of the consultant and that
the consultant is bound by the terms of
the appointment as if the contractor had
been named in the original appointment
rather than the employer.
It is sometimes the case (as in Galliford Try)
that a form of novation agreement cannot
be agreed by the parties. In such a case,
an employer may choose to retain a
specific design consultant on a design and
build contract under which the contractor
takes full design responsibility. The best
course of action in such a case is for the
contractor to require the consultant to
execute a collateral warranty in favour of
the contractor so that there is a direct
contractual relation between the
contractor and consultant.
7
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October 2008