Surviving the Construction Crunch

Wednesday 25th March 2009

The construction crunch

contractual pitfalls

Richard WadePartner, head of Construction and Development

Blake Lapthorn

Turnaround Managers Association25 March 2009

Overview

The contractual set up

The contractual pitfalls

Contract law – the basics

Some essential characteristics

Agreement Offer/acceptance Consideration Capacity Written or oral or by conduct Privity

OWNER

FUNDAB College (Developments

Limited) (Employer)

TENANTS

MAIN CONTRACTOR ARCHITECT M & E ENGINEER STRUCTURAL ENGINEER

Q.S

SUB-CONTRACTORS SUPPLIERS SUB-CONSULTANTS

Key issues in contract law

Privity (see above)

Joint and several liability

Insurance

Insolvency

The ‘Interested third parties’

Owner/purchaser

Tenant

Fund

Employer

Employer’s associated company

Ultimate client/owner

Present/future?

Protection of third parties’ interests

Warranties

Third party rights

Assignment

Future third parties

Importance of:

– underlying contractual agreement

– insurance

Warranties

Enforceable contractual promise

Remedy in damages

Express or implied

Written or verbal

Protects the third party’s rights in case of exclusion of Contract (Rights of Third Parties) Act 1999

The Paradox of modern developments:

Often the developer is not the end user/occupier

Linden Gardens Trust v Lenesta Sludge (House of Lords, 1993) (the St Martins Case); highlights the paradox and a possible solution

but …

McAlpine – Panatown (House of Lords, 2000)

OWNER

FUNDAB College (Developments

Limited) (Employer)

TENANTS

MAIN CONTRACTOR ARCHITECT M & E ENGINEER STRUCTURAL ENGINEER

Q.S

SUB-CONTRACTORS SUPPLIERS SUB-CONSULTANTS

Other methods of protection of third party interests

Bonds (performance/guarantee and ‘on demand’ or ‘conditional’)

Guarantees – must be written

Novation (not to be confused with assignment)

Performance and behaviour

Some contractual hotspots

Disputes and how to avoid them

Why good contracts go bad

Legal problems

People and dispute resolution

Three useful tips

Why good contracts go bad

Misunderstanding the law

Terms and Obligations not defined

Rash decision making

Breakdown in the management of the contract or relationships

Failure to adequately deal with disputes

One off contracts – no perceived benefit in continuing relationships

Margins too tight

Legal problems

Misunderstanding the law (use of Letters of Intent, contract formation, suspension)

Lack of definition in terms and obligations (eg notice to correct breach, eg JCT SBC05 Clause 8.4)

Rash decision making (suspension and termination... repudiation?)

Breakdown in management of contract/relationships

Cashflow

Failure to plan

Failure to deal adequately with disputes

A Case Study in Rash Behaviour (and Proportionality):

Multiplex Construction (UK) Limited v Cleveland Bridge (TCC, 2008)

Judgment of Mr Justice Jackson 29 September 2008

Award of £6 million damages to Multiplex

Overall legal costs incurred ... £22 million

Award of legal costs to winner … 20%

Alternative dispute resolution (ie not litigation or arbitration)

“ADR”...

Mediation Dispute Resolution Board Early neutral evaluation ‘Med/Arb’ Adjudication Negotiation/collaborative working ‘clear’!

Three useful tips to take away

Ensure clarity of contract terms etc...

Effectively manage disputes

If in doubt ... take good advice!

And finally, a word about …

… Insolvency (some specific issues for construction projects)

Using the contract to your advantage – Melville Dundas v Wimpey (2007)

Retentions of Title

Novation

Keeping the project alive

The construction crunch

contractual pitfalls

Mark GordonPartner

Ridge and Partners LLP

Turnaround Managers Association25 March 2009

Overview

Heads of claim

Tactics

Commercial considerations

Why is construction contentious?

Heads of claim

Measured works

Variations

Prolongation and loss and expense

Disruption/acceleration

Remedial works

Contra-charges

Liquidated damages

Completion costs

Prolongation

Major source of disputes

Money flows with liability

Check Contract terms; notice provisions, method of analysis, long-stop dates etc

‘Black art’ – seek advice

Commonly over-stated

Delay analysis

No single accepted method

Methodology can obscure facts

Misunderstood

Presentation

Delay analysis - example

Disruption/acceleration

Out-of sequence working

Cause + effect demonstration

Common amongst subcontractors

Instruction required for acceleration

Remedial works

Common head of counter-claim

Not usually an issue until after termination

Betterment

Burden of proof

Contra-charges

Eg damage, cleaning costs

Burden of proof

Quantum

Liquidated damages

Employer / main contractor remedy for delay

Default position

Main contractor allocation

Withholding notice

Often applied toward end of works

Completion costs

Contract must be terminated

Market price

Emergency works

Betterment

Check contract terms – loss suffered?

Survey of work completed

Avoid paying twice (direct payments)

Common tactics

Unrealistic and inflated works completed

Inflated and spurious claims

Extensive contra-charges

Completion costs include betterment

Large value of management time claimed for completion

Invoices disputed on spurious grounds

Delayed payment

Ambush

Starve struggling companies

Actions

1. Secure site, materials and records

2. Commission detailed survey of works completed

3. Review account and prepare final account

4. Appoint professionals to advise on entitlements

5. Consider adjudication as means of quick-win

6. Check for collateral warranties and guarantees

7. Check withholding notices

8. Move quickly

9. Don’t be put off!

Commercial considerations

Questions

Our thanks go to the following:

To Blake Lapthorn for hosting the event

To Richard Wade and Mark Gordon for speaking

To our members and guests attending

All of our Sponsors, including our Foundation Sponsors:

Surviving the Construction Crunch

Wednesday 25th March 2009