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Edition 4 2009
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Editorial
Contents: 3
Playing fair: the construction industrys new competition code The UK Contractors Group and the National Federation of Builders New Code of Conduct Construction workers: new tax proposals Proposals to deal with employees who present themselves as being self-employed for tax and national insurance purposes
Welcome to the last edition of Building Blocks for 2009. In keeping with previous end of year editions, this edition contains shorter articles than usual. If you prefer this format please let me know. In this edition there are articles as diverse as tax proposals for construction works, commentary on both the NEC3 and JCT standard forms, the invasive Japanese knotweed and finally in a reflection of the present economic climate, what a pre-pack is. Also with this edition you will find a flyer which sets out our programme of seminars for spring 2010. If you would like to attend any of these please contact Rachel Snow; email: rachel.snow@mills-reeve.com. Best wishes for Christmas and the New Year.
NEC tipster time, testing and defects Ron Plascow continues his series of articles on NEC3 clauses
Japanese knotweed: a threat to development and bio-diversity The Government consultation on inhibiting the growth of Japanese knotweed JCT Revision 2 insurance and mediation Recent amendments to the JCT 2005
Stop Press!
Changes to the Construction Act The Local Democracy, Economic Development and Construction Act 2009 received Royal Assent on 12 November, making it far more likely that it will actually become law. When the Act does come into force, there will be wholesale changes to the way that payment must be made (and withheld), which will apply to construction contracts, whether they are in writing or not. The rules regarding payment of adjudicators fees will also change. A date has not yet been set for the Act to come into force. It is understood that the Government intends to consult with the industry about the best way to implement the changes before announcing the date. In due course we will be running a series of seminars at a number of our offices addressing the practical effect of the changes.
The buck stops here The recent case of Costain Limited v Charles Haswell and Partners Limited Whos the man? Fitzroy Robinson Ltd v Mentmore Towers What happens when the team changes?
Corporate manslaughter new sentencing guidelines The second consultation by the Sentencing Guidelines Counsel
Distressed developments The risks in the current economic climate Pre-packs What are they?
On 22 September the OFT handed down fines totalling 129.5 million to 103 firms. Although a seemingly large sanction, the fines could in fact have been much higher. The OFT has the power to impose a fine of up to 10 per cent of a firms annual turnover. The average level of fine in fact only amounted to 1.14 per cent of turnover. It is not clear whether the new code had any impact on the OFTs decision. Perhaps it came too late on in the five year investigation to significantly influence the outcome. However, with the scandal back on the front page, the significance of the code may come in restoring faith in the industry and rebuilding its reputation.
2. provision of all materials that a person provides all materials required to complete a job; or 3. provision of other workers that a person provides other workers to carry out operations under the contract and is responsible for paying them. Implications The Government claims the new test is both clear and simple to use and is consistent with the previous case lawbased approach. A consultation period on the proposals has just closed and we may hear more in the Pre-Budget Report. If the proposals become law, employers will have to apply these criteria to determine whether PAYE and national insurance contributions are payable and the self-employed will need to operate consistently with the criteria on a day to day basis.
Under the heading of time clauses 30-36 of NEC3 brings together a number of different issues. This includes starting work on site; achieving completion; the programme; access to the site; stopping or delaying works; taking over the works and acceleration. Each issue in itself deserves its own separate article. However, I will comment on the interesting points of principle only. If you need more information, please contact me. Lets begin with the obvious. A contractor will never start work on site until given access, and access dates are set out by the employer in the Contact Data Part One. That seems simple enough but there's a little wrinkle, which I explain below. The project manager decides the date of completion, certifying within one week of it being achieved. Completion is not really a date under NEC3; it is a state to be achieved. Therefore, in theory, there should be no outstanding work to be carried out at completion. Under JCT the practice is for a certificate of completion to be issued with a list of outstanding (ie, snagging) items, but NEC is not supposed to work that way. The reality may be different. The programme is given prominence with NEC, as it is in GC/Works. It is seen as an essential management tool and given contractual status. It is a Gantt not a simple bar chart. The contractor should provide for it and refer to it in his part of the Contract Data, in Part Two. If not, the employer can stipulate in the Contract Data when he wants a programme and revisions to it as the work progresses.
The wrinkle which is underplayed is that an astute employer can ensure no work starts on site until a programme has been accepted, thereby pinning the contractor down to providing a meaningful programme. The trick is ensuring that the access date and the date for acceptance of the programme coincide. Then there is the treatment of float. Float is to be declared in the programme. NEC guidance categorises float as free, total and terminal float. The last is owned by the contractor, the others belong to the project. The distinction is that terminal covers all the programme; the others are task related and aimed at slippage available to complete a task. You should note that: taking over equates to partial possession; and acceleration is a useful management tool. Turning to testing and defects, the first thing to note is that the requirements for tests and inspection should be set out in detail in the Works Information. After all, to quote clause 20.1 the Contractor provides the Works in accordance with the Works information. So if it is not in there its not done. I will continue with testing and defects and also discuss payment in the next edition.
There are several amendments to the JCT in Revision 2. Two of the most important relate to the professional indemnity insurance provisions. Revision 1 made the default position for pollution and contamination claims to be the full amount of indemnity cover. However, Revision 2 provides that if no amount is stated, such cover shall not be required. A similar provision now exists for asbestos claims where the default position is, again, that no cover is required. On the face of it, this seems like a very minor amendment, simply requiring the level of cover to be agreed and included in the contract particulars. The problem comes, however, with the JCTs explanation of these changes. These amendments are described by the JCT in their Revision 2 guide as being in line with market realities.
What the revision means is that it may now be possible to argue that requiring cover for contamination, pollution and asbestos is not in line with the current insurance market and point to the JCTs Revision 2 guide for support. A further amendment to note is that made to the mediation provision. Under Revision 1 the parties may by agreement use a mediator. Revision 2 strengthens this by imposing an obligation for direct negotiations and that if these fail the parties must give mediation serious consideration. As far as contractual language goes, serious consideration is hardly unequivocal. However, what is clear is that the JCT is pushing negotiation and mediation higher up the agenda in line with the OGCs Achieving Excellence in Construction initiative.
In a decision which you may find surprising, the judge, Richard Fernyhough QC agreed with Costain: it was quite plain that Clause 7.4 add[ed] something different to Clause 7.2, otherwise it would not need to be there. Although, on the facts, the strict liability obligation was found not to be a relevant factor in deciding whether or not Haswell was negligent (in fact the judge decided that Haswell had failed to meet the standard in clause 7.2 in any event), this decision is important as it raises the possibility that in certain instances the court will disregard any allowance for human error. This may well be an issue that clients and consultants and their insurers will wish to revisit in their negotiations.
acceptable in some cases, although smaller organisations will be given time to pay. Public sector organisations should expect a punitive fine as the standards expected of a local authority, NHS trust or police force are the same as for the private sector. However, the impact on the provision of services must be considered by the court and a different approach may well be justified. For that read smaller fine. The guidelines also set out the details of how those convicted of a corporate manslaughter offence may be required to publicise the fact. With an object of both deterrence and punishment, the organisations own website will be required to publicise the conviction and details of the fine. Not the kind of news the marketing staff would have been planning to include. Newspapers may also be used, but it is recognised that in many cases, that will be unnecessary. The front page of every national newspaper is likely to be free for the first household name convicted of the new offence. Mills & Reeve LLP will be responding to the consultation and full details are available on the SCSs website: www.sentencing-guidelines.gov.uk For more information, or to add your views to our submission, please contact me.
Distressed developments
Given the current market conditions few developers may be commencing new schemes at the moment, but there are of course some development schemes underway which are exposed to various risks, including some relating to the construction industry. Issues such as the insolvency of a member of the professional team or indeed the developer can be a serious risk on the completion and delivery of the project, or completing the project within the anticipated budget. A developer may be looking to extend any agreed payment period to fit in with its funding arrangement (often because of pressure from the funder to the developer to control costs and fund any cost overruns). Any such extended periods for payment can expose the professional team to more financial risk. In turn this may adversely affect all payment arrangements within the supply chain. Contractors, on the other hand, will be looking for advance payments where the contract permits and to minimise payment periods. Where developers are receiving grant funding, the contractor will be keen to receive early payment if the grant funding is only guaranteed within a particular accounting period. Where contracts provide for a retention (usually held for a specified period of between 6 and 12 months following practical completion) then in the current market conditions, some contractors are asking the developer to hold this in a separate bank account to cover the risk of the developers insolvency. It is important for all parties involved in a development scheme to review their position (both financially as well as contractually) and keep on top of the position, taking early legal advice where there is any cause for concern.
Pre-packs
More and more these days we are receiving enquiries about pre-packs. What are they? What can I do about one? Are they fair? The term pre-pack is applied to the sale by an administrator of the assets and business of an insolvent company to a third party. So far so straightforward but the perceived unfairness tends to arise because: the sale takes place a matter of moments after the company goes into administration; often the third party will be owned and managed by the same people who ran the insolvent company; and there is an absence of consent to the sale either from creditors or a court. Pre-packs are controversial but they do have some advantages. For instance, a pre-pack can minimise the erosion of supplier, customer and employee confidence and can save jobs. If the company is subject to a protracted normal administration process then key employees are more likely to lose confidence that the company can be saved and seek alternative employment. The courts have looked hard at pre-packs but have generally supported their use. However, in response to creditor concerns professional guidelines were introduced in January 2009 requiring administrators to give much more detailed information to creditors, albeit after the event. It is difficult to challenge a pre-pack. Creditors have a statutory right to bring an action against an administrator relating to his conduct but will have to show that the administrators actions have caused that creditor particular prejudice. A less formal and cheaper way of potentially challenging a pre-pack is to contact the Insolvency Services pre-packs complaints line.
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December 2009