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 [email protected] 2 Alison Garrett 01223 222207 [email protected] Nathalie Morris 01223 222502 [email protected] 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 [email protected] Alison Garrett 01223 222207 [email protected] 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 [email protected] 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 [email protected] 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 www.mills-reeve.com Telephone: 0844 561 0011 BIRMINGHAM • CAMBRIDGE • LEEDS • LO N D O N • M A N C H E ST E R • N O RW I C H Mills & Reeve LLP is a limited liability partnership regulated by the Solicitors Regulation Authority and registered in England and Wales with registered number OC326165. Its registered office is at Fountain House, 130 Fenchurch Street, London, EC3M 5DJ, which is the London office of Mills & Reeve LLP. A list of members may be inspected at any of the LLP's offices. The term "partner" is used to refer to a member of Mills & Reeve LLP. Mills & Reeve LLP will process your personal data for its business and marketing activities fairly and lawfully in accordance with professional standards and the Data Protection Act 1998. If you do not wish to receive any marketing literature from Mills & Reeve LLP please contact Rachel Tonkin on 0121 456 8429 or e-mail [email protected] The articles featured in this publication have been selected and prepared with a view to disseminating key information. Space dictates that any article may not deal with individual concerns but the author would be pleased to respond to specific queries. No liability can be accepted in relation to particular cases. Before taking action, you should seek specific legal advice. Copyright in this publication belongs to Mills & Reeve LLP. Extracts may be copied with our prior permission and provided that their source is acknowledged. October 2008