Key construction issues for property professionals in 2016
The Supreme Court has reviewed the law relating to liquidated damages. In conjoined appeals (Cavendish Square Holdings BV v El Makdessi and Parking Eye Ltd v Beavis), the Supreme Court ruled that “the true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance.”
The Supreme Court also confirmed the judiciary's reluctance to interfere with liquidated damages rates in commercial contracts between properly advised parties of comparable bargaining power. In such cases, "the strong initial presumption is that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach".
The effect of this decision on the position under a typical construction contract is as follows:
- If the rate of liquidated damages is a genuine pre-estimate of the likely damage, it will continue to be enforceable;
- A rate of liquidated damages will not be unenforceable simply because it is not a genuine pre-estimate: it will only be unenforceable if it is out of "all proportion" to the likely damage. In this context, the courts will consider whether the rate is "unconscionable" or "extravagant" by reference to prevailing industry standards;
- There is an increased ability to allow, in the rate, for damage of a type which is not easily convertible into money, such as loss of reputation; and
- In a commercial context, the courts will be reluctant to interfere with the rate of liquidated damages.
Modern Slavery Act 2015
Aimed at human trafficking and modern slavery, this Act creates serious criminal offences covering:
- Slavery, servitude and forced or compulsory labour;
- Human trafficking; and
- Aiding, abetting, counselling or procuring any of the above.
These are serious criminal offences punishable by a maximum sentence of life imprisonment.
There is increased awareness in Government that human trafficking and modern slavery is a major problem, both internationally and in the UK. With recent reports highlighting the use of cheap trafficked labour by gang-masters in the UK, criminal convictions for the abduction of homeless men who were then forced into compulsory labour, and appalling conditions of servitude in certain industries internationally, there is a drive to ensure that supply chains are free of such practices.
Section 54 of the Act applies to commercial organisations which carry on business in the UK and have a yearly turnover over £36 million. All such organisations must produce a yearly slavery and human trafficking statement that details “the steps taken to ensure that slavery and human trafficking is not taking place in any of its supply chains and in any part of its own business”.
Construction (Design and Management) Regulations 2015 Update
Duty holders under the Construction (Design and Management) Regulations 2015 should be aware that new sentencing guidelines came into effect on 1 February 2016. The sentencing guidelines dramatically increase penalties for breach of duty holders' obligations under the Regulations. The new guidelines represent a different approach to that previously being followed by the courts, as for organisations the levels of fines depend upon the size of the organisation and the size of their turnover. The courts will also take into account culpability and aggravating factors (for example, evidence of cost-cutting by the client, at the expense of health and safety), or mitigating factors (such as a good health and safety record before the incident). Perhaps of more concern for directors is the threshold for custodial sentences for individuals, which would suggest that the most serious breaches will result in imprisonment. The harsher penalties are a stark reminder of the need to prioritise health and safety on projects.
Implied Terms Update
A recent case on implied terms is of particular relevance to those clients who tend to fall short on appointing consultants. Whilst not a construction case, Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another  UKSC 72 ("M&S") is a reminder that parties should have properly drafted consultants appointments which clearly set out their rights and obligations at the outset. If parties choose to rely on inadequate letters of appointment, ill-considered standard terms and conditions, or uncertain oral agreements, they are at risk of the court’s own interpretation of their agreement, with often unfavourable consequences. The M&S case makes clear that a term should not be implied merely because it appears “fair” or because the parties would have agreed with it if it had been suggested to them, and that parties should not rely on the courts to correct their omissions.
Pay Less Notices
Three relatively recent cases serve to illustrate the danger to employers of failure to issue the correct payment notices and in particular pay less notices:
- ISG Construction Ltd v Seevic College  EWHC 4007 (TCC) (“Seevic”)
- Galliford Try Building Ltd v Estura Ltd  EWHC 412 (TCC) (“Estura”)
- Harding v Paice and another  EWCA Civ 1231(“Paice”).
All three cases involved similar circumstances arising from employer-contractor disputes about payment under a JCT building contract. Broadly, in each case the employer had failed to issue a valid pay less notice in response to an application for payment by the contractor. The contractor had then brought “smash and grab” adjudication proceedings for payment on the basis of this technicality. In turn the employer had brought, or attempted to bring, by way of defence, a counter adjudication of its own on the issue of the true value of the contractor’s application.
Seevic and Estura
These cases concerned interim applications. The court confirmed that failure to issue a pay less notice meant that the employer had to be taken to have agreed the value of the contractor’s application right or wrong and there was no separate question of value upon which the employer could seek to adjudicate.
Conclusion: Where an employer fails to issue a pay less notice in response to an interim application and the contractor adjudicates for payment, it will not be open to the employer to raise a counter adjudication on the question of the true value of the contractor’s claim.
This case concerned a final payment application in the context of the termination of a JCT contract. The Court of Appeal confirmed that in these circumstances, despite failing to issue a pay less notice, the employer was not deemed to have agreed the value of the contractor’s application and was therefore entitled to bring its own adjudication to determine the question of value.
Conclusion: It is not clear whether the decision in Paice will apply to final applications in all circumstances or be limited to contract termination. There is some uncertainty therefore about whether an employer will be able to adjudicate on the question of true value of the contractor’s claim where it has failed to issue a pay less notice in response to a final application and where the contractor has adjudicated for payment on that basis.
Three further cases have arisen which emphasise the need for contractors’ payment applications to be clear and unambiguous:
- Caledonian Modular Ltd v Mar City Developments Ltd  EWHC 1855 (TCC) (“Caledonian”)
- Henia Investments Inc v Beck Interiors Ltd  EWHC 2433 (TCC) (“Henia”)
- Severfield (UK) Ltd v Duro Felguera Ltd  EWHC 3352 (TCC) (“Severfield”).
Each case concerned different facts but in all three cases the court assessed the validity of certain supposed payment applications made by contractors. The court considered this to be an important issue given that a valid payment application (in the absence of an employer’s payment notice) provides a ‘notified sum’ which triggers the employer’s payment obligations and potentially serious consequences for non-compliance. The court found that if contractors wanted the benefit of the Construction Act’s payment provisions then the corollary of the associated risks to the employer is that contractors’ payment applications must be clear and free from ambiguity.
These cases provide helpful guidance which can be summarised as follows:
Contractors' applications for payment must:
- set out the total sum due;
- set out the basis on which that sum has been calculated; and
- be clear and free from ambiguity.
In order to meet these requirements applications should probably also:
- clearly indicate the status of the documents i.e. be expressly described as a payment application; and
- clearly state the payment period to which it relates and the relevant due date.
It seems likely that the same standards of clarity could, in future, be applied to employers’ payment notices to ensure that they are also clear and unambiguous.
Other Recent Cases of Interest
Specific performance of building operations
Airport Industrial and others v Heathrow Airport and others: specific performance of a contractual obligation to carry out building works was ordered in advance of the contractual completion date – the failure to take the necessary steps towards completing the work by the contractual completion date could constitute an anticipatory breach of contract.
Exclusion clause covering negligence
Persimmon Homes v Ove Arup: a term that “liability for any claim in relation to asbestos is excluded” was held to be effective, even though the claim was founded in negligence and the exclusion clause did not specifically mention negligence. The normal rule is that liability for negligence can only be excluded by very clear words.
Strict notice provision enforced
Van Oord UK v Allseas UK: a contractor failed to comply with a requirement that it give notice of adverse ground conditions within strict time limits, failing which it would have no entitlement to additional payment. The Court upheld the provision, and ruled that the contractor had no claim.
Variation of contract by exchange of emails
C&S Associates UK v Enterprise Insurance: an exchange of Emails was sufficient to vary a contract, despite a requirement that any variation must be made in writing and be signed by or for each party.
- The JCT is finalising a revised set of building contracts – JCT 2016 – for publication later this year. These are currently expected to be published in late May or early June.
- Both the RICS and the CIArb have published new fast track arbitration rules.
- The Department for Business, Innovation and Skills is reportedly launching a review of the use of retention funds in construction contracts.
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