The Budget 2014

Francis Ho

On Wednesday 19 March, the Olswang award-winning tax team will be discussing the changes announced by the UK’s Chancellor of the Exchequer in his 2014 Budget and providing expert commentary on their impact.  Despite the gathering pace of the UK economic recovery, the Chancellor has warned that there is a ‘long way to go’ and that 2014 will be ‘a year of hard truths’. With a 2015 general election looming, the Budget will be more political than most as the sitting Government coalition parties seek to set the scene for their forthcoming manifestos. It is likely to contain measures to boost housebuilding, exports and business investment.

 

Join the debate on the interactive tax blog – http://blogs.olswang.com/budgetblog.

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Louise Forbes

On 30 May 2013, the Government introduced a new Permitted Development Rights Order (“the Order”)* The polemic surrounding the Order’s relaxation of the requirement to obtain planning permission for conversion of office space into residential housing (namely automatic rights to change use from Class B1(a) to Class C3) shows no signs of abating. Further controversy was whipped up in December 2013, which saw Camden reject plans to convert offices in Primrose Hill into luxury flats and a coalition of London Boroughs launched a judicial review in respect of the Order. At the heart of the debate is a tug of war between two laudable aims: the protection of commercial space generating employment versus the growing need for housing supply.

Under the Order, developers are required to submit “prior approval” applications for such conversions, but applications can only technically be rejected on the grounds of flood risk, contamination and disruption to transport. Camden issued 15 reasons for its refusal including potential for parking stress and traffic congestion in the area. The residents’ economic arguments, that the local economy would suffer from loss of business space could not be legally factored into ‘prior approval’ decisions. Albeit, economic arguments are pertinent considerations for the Government.  Notably only 17 out of 165 Boroughs have areas exempt from the Order.

It remains to be seen whether the Order will make a notable contribution to increasing housing supply. Despite the controversy, residential developers are rightly beginning to capitalise on the opportunities, hence, ‘office-to-resi’ conversion must be considered carefully.

Square footage in London is worth more in a residential market. According to Nationwide, residential property prices rose in the capital by 9.4% from last year and the trend is forecast to continue. In particular, development potential is evident in offices within period buildings that were once homes and are no longer attractive in a commercial context which demands light, open plan office floorplates.

Residential developers must remember that changes to the external façade of a building, structural alterations (perhaps the addition of extra floorspace or fire escapes) or associated access to the building, will necessitate additional full planning applications. A careful strategy will, therefore, need to be employed to navigate the office-to-residential development hurdles without falling foul of the rules. Building Regulations (notably Part L regulations) are still applicable, for example, so fabric energy efficiency must be achieved. This may require significant and costly internal structural alterations. Similarly, fenestration would need to be provided (residential windows must generally be openable) without altering the external appearance of the property. Developers will have to consider the design life carefully as commercial buildings are usually designed for short-to-medium term leases and conversion to long lease residential use will require a longer design life to ensure marketability of dwellings.

The Order expires on 30 May 2016. It will be interesting to see whether it stimulates noticeable residential development or whether negative economic or social impacts will ensue from a loss of business space and affordable housing. There is no denying that a window of opportunity exists possibly for small or specialist residential developers, who seek to utilise redevelopment potential in existing buildings.

If you wish to discuss any of the issues in this artcile, please contact Caroline Vernon (Head of Residential on 020 7067 3357) or Suzan Yildiz (Head of Planning on 020 7067 3346)

* The Town and Country Planning (General Permitted Development) (Amendment) (England) Order 2013

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Francis Ho

Almost 11 years have passed since the JCT published its innovative Major Project Form 2003, now the Major Project Construction Contract 2011 (MP).

The JCT’s intent was to produce a form that reflected how its design and build contract, the Form of Building Contract 1998 Edition With Contractor’s Design – currently the Design and Build Contract 2011 (DB) – would typically look after the contract negotiations. The MP did away with the need for schedules of contract amendments. Conditions, schedules and the appendix amounted to only 40 pages.

In spite of its conciseness and plain English drafting the MP has not been widely used. This is not for a shortage of higher value projects. Instead, it highlights an incongruity in the construction world; while design and engineering techniques advance rapidly, as far as contractual relationships are concerned, it is more a case of evolution than revolution.

The MP applied amendments often made with more complex projects, such as introducing a design review procedure, defining practical completion, adding standards for skill and care, professional indemnity insurance and ground conditions risk transfer, and facilitating novation of the employer’s design team. Where obligations in the MP and the DB overlapped, the former opted for a more market-facing approach.

But these are provisions one might already see in a schedule of amendments. The MP went further, delving into conditions that the agreement of, even today, is by no means a slam-dunk on large projects. These include granting the contractor access rather than exclusive possession, permitting acceleration, rewarding early completion and value engineering and allowing testing of the completed works.

Those used to amending DB contracts may find it odd that the MP did not place single-point design liability on the contractor. The now-defunct Construction Confederation, which represented contractors in approving the standard form, would not budge on the issue.

Some contract matters were left to the Employer’s Requirements or contract amendments. There were, for instance, no provisions to deal with retention or off-site materials. The absence of an obligation to secure sub-contractor collateral warranties may, however, have been a cut too far since there was also no requirement for a contractor-procured performance bond or parent company guarantee.

Revisions over the years have focussed on tracking changes in law. As it transpired, the biggest obstacle to the MP achieving mainstream success was the DB’s popularity.

One could question why the MP has not merely been put out to pasture. However, that would discount an interesting alternative. What if the JCT abandoned the idea of keeping the MP concise and market facing and instead used each revision to implement cutting edge construction objectives, unencumbered either by other JCT forms or earlier editions? There’s much discussion regarding how contracts should deal with 21st century concepts such as BIM, payment security, scheduling, collaboration, green construction or expert determination. Perhaps the issue isn’t that the MP is too radical, it’s that it is no longer radical enough.

 

Francis Ho is Head of Construction at Olswang LLP. He can be contacted at francis.ho@olswang.com and on +44 0(20) 7067 3505. He Tweets at @fkyh.

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Louise Forbes

In Constructive’s final blog from the 2014 Construction Law Conference, we provide an overview of Andrew Aglionby’s speech about on arbitration.

Adjudication is an automatic right under any UK construction contract, and that process is generally considered to be swift and cost-effective. Other jurisdictions, such as Singapore and New Zealand, have followed suit in enacting similar legislation. With recourse to the courts as an alternative, many would ask why the construction industry would even consider arbitration as a route to dispute resolution. However, look more closely and you might find a host of situations in which arbitration might be a more appropriate medium for some cross-border construction contracts. It may be that projects involving parties (including suppliers) from other countries, particularly those outside of the European Union, should consider arbitration as it can allow parties to submit to dispute resolution without the formalities (and sometimes unpredictable nature) of their respective legal systems.

There are other pragmatic reasons why arbitration may be an attractive choice: it requires limited disclosure (an appealing proposal in a complex project where a party to a claim can be overwhelmed by reams of papers) and documents of all kinds may be served and shared electronically, speeding up the process and creating significant cost savings. Additionally, where the matter in hand is of a commercially sensitive nature, arbitration allows for private, closed hearings, delivering a ruling without the worry of washing one’s dirty laundry in public.

Arbitration is also widely internationally enforceable in other jurisdictions (much more so than court judgments, particularly outside the European Union)  by virtue of the 1958 New York Convention with generally limited rights for appeal, enabling the successful party to minimise the threat of having to go through the process again. Finally, the ability for the parties to choose their judges makes significant commercial sense in the context of a complex or technical construction dispute. Parties can choose the expertise and background of their arbitrator (or specify that an arbitrator is to be selected from a jointly-approved shortlist) giving greater peace of mind that the issue in hand will be understood and considered thoroughly.  

Arbitration is not for everyone; institutional fees and other associated costs such as paying for the arbitrators and for the hearing facilities may make the process prohibitively expensive. The UK courts, on the other hand, are primarily paid for by the taxpayer. In addition, the process is more lengthy than adjudication.  Although that allows a more thorough look at the issues, parties should allow, for example, 3 months to appoint a panel of three arbitrators.  However, the next time a construction dispute arises where confidentiality, a neutral tribunal, international enforceability or procedural flexibility offer advantages, you may wish to consider the alternative, dispute resolution route.

Andrew’s slides can be found here.

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Ben Worthington

Following a speech from the 2014 Construction Law Conference on record keeping, Constructive takes a look at what is considered by many to be the single most important aspect to establishing a successful claim: the availability of adequate records. 

Documents are the buildings blocks from which arguments are presented.  Nevertheless, parties often fail to comply with the contractual requirements in respect of the provision of documents.  This can be damaging to the project.  It can lead to a loss of trust between the parties (a certifier is less likely to accept the position of a contractor where it has no faith in its record keeping), and ultimately to a claims culture. 

The parties to a contract are well advised to take note of what their contracts say about record keeping.  Under the FIDIC Red Book, there are obligations upon the contractor to provide detailed monthly reports with information on progress as well as the use of staff, labour and equipment, whereas the current JCT Standard Building Contract does not directly impose those kinds of obligations. Nevertheless, in the event of a claim for more time or money under the contract the same kind of information will be important, since the contractor is required to “supply such further information as the Architect/Contract Administrator may at any time reasonably require.”

In the event that a contractor seeks to establish entitlement under a contract, it will generally be required to demonstrate that:

  • the employer was contractually responsible for the event (liability);
  • it incurred some loss (damage);
  • the loss was caused by the event complained of (causation).  This is often the most difficult aspect to prove.

To establish a relationship between liability, loss and causation, a judge or adjudicator will normally need to see a mixture of witness evidence and expert analysis. However, factual and expert evidence which is not underpinned by contemporaneous evidence is unlikely to be persuasive to a tribunal.

Here are some of Constructive’s record keeping tips:

  • make sure systems and procedures are put in place to adequately record events and their effects on a contemporaneous basis;
  • invite the other party to agree correspondence and meeting minutes when they are issued (it will be more difficult for a party to dispute the veracity of a document that it has not objected to);
  • ensure that staff are aware of the contractual requirements in respect of record keeping and are adequately trained in the relevant systems;
  • audit the system – avoid the assumption “we are already doing this”;
  • employers should consider incorporating specific contractual requirements in respect of record keeping.

If it becomes necessary to establish a claim before a judge or adjudicator, the party who holds the best records will be in the best position.  It’s inconvenient, but in the long run, it pays to get your house in order.

Slides from the 2014 Construction Law Conference can be found here.

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Managing BIM

Louise Forbes

Sarah Rock gave us an introduction to BIM in her 2014 Construction Law Conference talk. In particular, she focussed on the importance of client-led BIM for a successful BIM project. By leading the project themselves, the client can facilitate the design process by putting in place a BIM plan and process map from the outset. These can be implemented at the start of a project alongside the Employer’s Information Requirements (EIRs) which set out the technical, management and commercial requirements for the BIM. By establishing EIRs the client sets their standards for what they expect from the process and the ultimate model.

A BIM Manager has responsibility for assisting the client in putting together the EIRs, BIM plan and process map. This role is specific to the BIM process but is already being shown to be a vital one. A good BIM Manager facilitates and manages the model and process allowing the designers to design. The BIM Manager can act as a facilitator between the client and the design team but can also act as a facilitator within the design team. By developing and implementing a project specific BIM Protocol (which can be appended to, or incorporated within, the appointments of the design team members to make it legally binding) the BIM Manager can manage the process and ensure all design team members adhere to this document.

For further information on BIM, you can view Constructive’s BIM blog series:

A Model Contract

BIM – Is it legal?

BIM and CPC 2013

Are you BIM enough?

Use or BIM?

BIM – Looking inside the model

Sarah’s slides can be found here.

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Louise Forbes

A Round-Up of Key Construction Cases in 2013

In this summary of one of the talks from the 2014 Construction Law Conference, we consider two cases Kathryn Noble discussed in her round-up of key cases from 2013. She discussed a third case, Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited [2013] EWHC 2665 (which has implications for collateral warranties), which was considered in our blog last year ‘Collateral Damage’.

Remoteness of loss

In John Grimes Partnership Limited v Gubbins [2013] EWCA Civ 37  a delay to the completion of a construction project resulted in loss to the developer as a consequence of reduction in the market value of the completed property over the delay period. The Court of Appeal held that the engineer who had caused the delay (John Grimes Partnership Limited) should be held liable for the developer’s losses as it was reasonably foreseeable that property values would decline in the market at the time and that there was an implied responsibility on the parties for such losses. The practical implications of this case may be wide reaching and include a potential rise in claims by employers where a delay in completion coincides with a fall in property value. Conversely, if the delay leads to the value of the development increasing (in the context of a rising market) and the employer profits from the delay, then the contractor could potentially claim that any damages against the contractor should be reduced accordingly. However, liquidated damages for delayed completion, which should be a pre-estimate of loss as would be reasonable in the minds of the parties at the date when such rate of damages is agreed, should ordinarily be unaffected by any fluctuations in the market. That’s not to say though that such fluctuations cannot be taken into account when arriving at the pre-estimate, of course, although given how accurately predicting future performance of the property market has proved beyond many property analysts, the likelihood that such fluctuations could be agreeably hedged for would remain to be seen.

Delayed completion resulting in loss of mortgage offer

Urban I (Blonk Street) Limited v Simon Martin Ayres & Nicola Jane Ayres [2013] EWCA Civ 816 considered whether time was of the essence in contracts for sale of land in the context of a mortgage-funded purchase of an “off-plan” apartment. Here, the buyers lost their 90% mortgage offer during the delay period. The Court of Appeal held that the delay in completing the apartment did not entitle the buyers to terminate their agreement held with the developer as the buyers were not substantially deprived of the substantially the whole benefit of the contract for the lease of the apartment.

The case considered the implied term in the contract that completion of the development was to be within a reasonable time and paid particular attention to the fact that the contract did not contain a fixed long-stop date nor did it expressly provide for the buyers to terminate the contract if the building was not handed over by a specified date. From a practical perspective this case acts as a reminder to parties that financing by way of mortgage carries with it inherent risk on the part of the buyer. For parties concerned about being tied into open-ended commitments, it may be worthwhile considering including fixed long-stop dates within their contracts.

A copy of Kathryn’s slides from the Conference can be found here.

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Louise Forbes

We follow our last blog with a summary of changes to the Building Regulations as discussed by Kate Wansbrough-Jones at the Olswang 2014 Construction law Conference.

When the Government announced its plans in 2006 to make new-build homes in England zero-carbon by 2016, there were mutterings that the target was unachievable. Now, over seven years on, ‘zero-carbon’ still seems a long way off.

Last year’s Housing Standards Review recommended the winding down of the Code for Sustainable Homes putting the focus on the Building Regulations as a primary source of buildings emissions legislation. This puts added pressure on the consultation on amendments to Part L of the Regulations (which governs thermal efficiency standards) to bear green fruit.

However, the results of the review’s consultation (the announcement of which was delayed to the frustration of many) have largely been viewed as underwhelming. Described by Andrew Warren of the Association for the Conservation of Energy as “akin to an elephant’s pregnancy that has produced a mouse”, the required reduction of emissions by 6% and 9% from the 2010 targets for residential and non-residential new-builds respectively is considered far softer than the targets mooted prior to the consultation. In addition, the scrapping of the proposed Quality Assurance Certification plans, which proposed that builders would have to become accredited to avoid having to deliver a further 3% reduction on carbon emissions seems to some to be a missed opportunity. Further accreditation may have given the Government powers to inspect buildings during construction and to require certain build standards in order to assure reduced carbon emissions.

The amendments would perhaps have been fortified by the inclusion of “Allowable Solutions”; a scheme which would allow developers the chance to off-set the carbon emissions from their newly built developments against investment or contribution on some other, local, green project for example LED street lamps. The Government launched an Allowable Solutions consultation shortly after announcing the changes to Part L, but the details of the plans remain in their infancy and any implementation of the scheme is unlikely to occur much before the 2016 target.

In short, changes to the Building Regulations are a positive step on the road to greener development, but whether they’re robust enough to make real changes to building practices remains to be seen.

Copies of Kate’s slides from the 2014 Construction Law Conference can be found and downloaded here.

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Louise Forbes

Following the 2014 Olswang Construction Law Conference on 6 February 2014, Constructive will be taking a look at various highlights from the key issues explored by our speakers over the next few days.

The theme of this year’s conference was “21st Century Construction”. How can clients and contractors procure construction projects more efficiently? How can they get better value for our money? But it’s not just cost savings that matter. It’s about finding the right balance of risk, administration and time and managing projects to minimise cost overruns and disputes. The Conference focused on how legal structures can help achieve all of this.

The first in this series of blogs on the Olswang Construction Law Conference picks out highlights from the first talk. This discussed how collaborative working ties into industry trends for 2014.

The Office of National Statistics states that UK construction output is up 2.2% over 2013, making it the strongest year from the sector since 2007.

Constructive has seen the effects of a sustained recovery in the economy as well the effects of the Help to Buy scheme and the housing shortage. Overseas buyers are helping to heat up the London market but significant growth can also be seen further afield in Yorkshire, Wales and the South-East.

The buzzword amongst experienced developers at the minute is ‘collaboration’. Collaboration can make projects come in on time and on budget and sidestep the pitfalls created by adversarial relationships such as delays, cost overruns and disputes. In his speech, Francis Ho mentioned what he considers to be the growing trifecta of collaboration: framework agreements, two-stage tendering and, perhaps unusually, construction management.

Framework agreements allow the contractual terms of a relationship between a supplier (such as a consultant and contractor) and employer to be negotiated under an umbrella agreement that forms the basis of an appointment for multiple sets of works or services then instructed under an “order” or call-off agreement. The project-specific details are agreed for each separate set of requirements in an order. Establishing a relationship under such a mechanism avoids costly negotiation of an individual appointment for each set of works and creates long-term relationships with suppliers. It can also provide a mechanism for benchmarking long-term performance through key performance indicators and may allow suppliers to be appointed.

Two-stage tendering is a process by which the preferred contractor is selected in the first stage through competitive tender and the contract terms and process with this party are finalised in the second stage. The advantage of this added layer of negotiation is that the contractor inputs into design and buildability from the outset which may achieve more cost ortime certainty on a more complex project. As the market heats up, we’ll see more of this as employers seek to derisk more complex projects and major contractors, with fuller order books, are able to choose the projects they wish to undertake.

Finally, where clients are experienced in hands-on development, electing construction management as a procurement route may encourage stronger collaboration between employer and contractor and allow for flexibility to change designs where required. Indeed, effective collaboration is necessary to make construction management a success. Due to bad press and the rise of design and build procurement, construction management has become a much unloved procurement route but is making a comeback in specialist engineering projects and housebuilding as employers and contractors realise that it, in the right circumstances, it can deliver better value and outcomes.

Copies of Francis’ slides from the 2014 Construction Law Conference can be found and downloaded here:

Opening Remarks

Collaborative Working

If you have any queries on the 2014 Olswang Construction Law Conference or would like to be kept informed of future Olswang Construction events, please do email constructionevents@olswang.com. You can also Tweet us at Twitter with the hashtag #olswangconstruction.

Our next blog in this series will discuss changes to the Building Regulations.

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Ben Worthington

Last year saw a number of cases concerning good faith in construction contracts.  As parties increasingly use concepts such as “good faith” and “reasonableness” in their contracts, further judicial examination of these concepts is likely; what did we learn about them in 2013?

In TSG Building Services Plc v South Anglia Housing Limited the parties’ TPC 2005 contract provided that they were to work together and individually in the spirit of trust, fairness and mutual co-operation.  It further stated that “in all matters governed by the Partnering Contract they shall act reasonably and without delay”.  

The parties fell out.  The contract included a termination clause which either party could exercise on 3 months’ notice (a so called “termination at will” provision).  South Anglia wrote to TSG giving 3 months’ notice to terminate the contract.  No reasons were given.

TSG sought damages for breach of contract.  The question for the Court was whether the contract, as a matter of construction, provided any constraint on the right of either party to terminate for convenience.

The Judge held that the wording of the good faith clause was not intended to apply to each and every obligation in the Contact.  There were certain absolute rights which could always be exercised, reasonably or not.  The effect of the termination at will clause was that either party, for no, good or bad reason could terminate at any time before the contract term was completed.  The judge also rejected the contention that there was an implied term of good faith in the Contract – “the parties had gone as far as they wanted in expressing terms… about how they were to work together in a spirit of “trust fairness and mutual cooperation” and to act reasonably”.

In Mid Essex NHS Trust v Compass, Compass contracted with the Trust to provide catering and cleaning services at hospitals in Essex.  The contract set out detailed performance criteria and the Trust was entitled to levy Service Failure Points (SFPs) if Compass failed to meet the criteria. The accumulation of SFPs carried serious consequences under the contract.

The contract stated that the parties must “co-operate with each other in good faith“.  Nevertheless, the Trust made what the Judge at first instance later described as “absurd assessments” when “awarding” SFPs.  Compass terminated the contract and the Trust claimed repudiatory breach.   The judge at first instance held that there was an implied term that the Trust would not exercise its discretion to award SFPs and make deductions in an arbitrary, capricious or irrational manner. 

The Trust appealed.  The Court of Appeal noted that the contract contained precise rules for determining how many SFPs had accrued; if the Trust awarded more SFPs than the contract allowed, that was a breach of the express provisions of the contract.  There was, therefore no justification, or need, to imply a term that the Trust would not act unfairly.  Indeed, the only discretion that the Trust could exercise was whether to levy correctly calculated SFPs at all and there could be no criticism of it where it decided to exercise an absolute contractual right.

The Court of Appeal also found that there was no general duty of good faith – such duty could only be imposed expressly by the parties.  In this instance, there was an express duty of good faith but it was not a general one which qualified or reinforced all of the obligations on the parties.

The Trust had, therefore, validly terminated its contract.

What are the practical consequences of these decisions for those agreeing contract terms?  It is clear following Compass that there is no general implied contractual obligation to act in good faith.  Further, even where parties agree a contractual term imposing such a duty, it is likely to be narrowly construed.  The parties must, therefore, be clear and specific with regard to those contractual obligations they wish to be exercised in good faith.

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