Surviving the Construction Crunch Wednesday 25th March 2009
The construction crunchcontractual pitfalls
Richard WadePartner, head of Construction and DevelopmentBlake Lapthorn
Turnaround Managers Association25 March 2009
OverviewThe contractual set upThe contractual pitfalls
Contract law the basicsSome essential characteristics
AgreementOffer/acceptanceConsiderationCapacityWritten or oral or by conductPrivity
OWNERFUNDAB College (Developments Limited) (Employer)TENANTSMAIN CONTRACTORARCHITECTM & E ENGINEERSTRUCTURAL ENGINEERQ.SSUB-CONTRACTORSSUPPLIERSSUB-CONSULTANTS
Key issues in contract law
Privity (see above)
Joint and several liability
Insurance
Insolvency
The Interested third partiesOwner/purchaserTenantFundEmployerEmployers associated companyUltimate client/ownerPresent/future?
Protection of third parties interestsWarrantiesThird party rightsAssignmentFuture third partiesImportance of:underlying contractual agreementinsurance
WarrantiesEnforceable contractual promiseRemedy in damagesExpress or impliedWritten or verbalProtects the third partys 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)
OWNERFUNDAB College (Developments Limited) (Employer)TENANTSMAIN CONTRACTORARCHITECTM & E ENGINEERSTRUCTURAL ENGINEERQ.SSUB-CONTRACTORSSUPPLIERSSUB-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 behaviourSome contractual hotspots
Disputes and how to avoid them
Why good contracts go badLegal problems People and dispute resolution Three useful tips
Why good contracts go badMisunderstanding the lawTerms and Obligations not definedRash decision makingBreakdown in the management of the contract or relationshipsFailure to adequately deal with disputes One off contracts no perceived benefit in continuing relationshipsMargins too tight
Legal problemsMisunderstanding 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/relationshipsCashflowFailure to planFailure 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...
MediationDispute Resolution BoardEarly neutral evaluationMed/ArbAdjudicationNegotiation/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 crunchcontractual pitfalls
Mark GordonPartnerRidge and Partners LLP
Turnaround Managers Association25 March 2009
OverviewHeads of claimTacticsCommercial considerations
Why is construction contentious?
Heads of claimMeasured worksVariationsProlongation and loss and expenseDisruption/accelerationRemedial worksContra-chargesLiquidated damagesCompletion costs
ProlongationMajor source of disputesMoney flows with liabilityCheck Contract terms; notice provisions, method of analysis, long-stop dates etcBlack art seek adviceCommonly over-stated
Delay analysisNo single accepted methodMethodology can obscure factsMisunderstoodPresentation
Delay analysis - example
Disruption/accelerationOut-of sequence workingCause + effect demonstrationCommon amongst subcontractorsInstruction required for acceleration
Remedial worksCommon head of counter-claimNot usually an issue until after terminationBettermentBurden of proof
Contra-chargesEg damage, cleaning costsBurden of proofQuantum
Liquidated damagesEmployer / main contractor remedy for delayDefault positionMain contractor allocationWithholding noticeOften applied toward end of works
Completion costsContract must be terminatedMarket priceEmergency worksBettermentCheck contract terms loss suffered?Survey of work completedAvoid paying twice (direct payments)
Common tacticsUnrealistic and inflated works completedInflated and spurious claimsExtensive contra-chargesCompletion costs include bettermentLarge value of management time claimed for completionInvoices disputed on spurious groundsDelayed paymentAmbushStarve struggling companies
ActionsSecure site, materials and recordsCommission detailed survey of works completedReview account and prepare final accountAppoint professionals to advise on entitlementsConsider adjudication as means of quick-winCheck for collateral warranties and guaranteesCheck withholding noticesMove quicklyDont 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
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