LAWBUILD Newsletter No. 2

• a slowdown in the progress of the works
  
  
• a reduction in the value of materials on site
  
  
• plant being moved off-site prematurely
  
  
• complaints from subcontractors, suppliers and statutory undertakers of delayed payments
  
  
• frequent changes of suppliers (may denote credit problems)
  
  
• requests for more frequent payments
  
  
• changes in site supervisory staff
  
  
• unusual visits to site from the contractor’s management
  
  
• a high proportion of defective work.

• Keep your suspicions confidential to the employer, the professional team, and the employer’s legal advisers: the contractor could sue for defamation if insolvency does not happen.
  
  
• The architect or ’s Agent (EA) should make preliminary plans for safeguarding and protecting the site, works and materials.Employer
  
  
• The architect or EA should advise the employer to provide temporary fences or other protection for security purposes.
  
  
• The architect or EA should consider whether to give the contractor a default notice on the grounds that he is failing to proceed regularly and diligently with the works or has wholly or substantially suspended the carrying out of the works.
  
  
• The employer should consider whether it is preferable to determine the contractor’s employment on the grounds of failure to comply with the default notice or on the grounds of insolvency (and this decision may largely depend on what the building contract and any performance bond say).
  
  
• The architect or EA should try to get the contractor to remedy any substandard or defective works.
  
  
• The quantity surveyor should ensure that valuations are accurate.
  
  
• The architect should advise the quantity surveyor whether there are any prematurely delivered materials which should not be included in the valuation.
  
  
• The architect should advise the quantity surveyor whether materials on site are properly protected and, if they are not, the quantity surveyor should exclude them from the valuation.
  
  
• The architect should bring all his instructions up to date.
  
  
• Where (normally) the project has been completed, the quantity surveyor should check that he has a copy of any final account documentation.
  
  
• The employer should check that all insurances are in force.

Insolvency of a contractor, if and when it happens, is one of the most complicated situations that can arise in a development.  It raises a great number and variety of issues, of which the following are a sample:

• how and when to quantify the claim against the liquidator and any surety
  
  
• whether or not post-termination legal costs are claimable
  
  
• ability to deduct direct payments to subcontractors from moneys payable to the contractor or liquidator
  
  
• whether or not the surety's liability under the bond is triggered by the contractor's insolvency or by determination of his employment under the contract
  
  
• subcontractors' rights to remove materials on site, both fixed and unfixed, on the grounds that they belong to them because of non-payment by the contractor
  
  
• hirers' rights to remove plant and machinery
  
  
• whether or not to attend the creditors' meeting
  
  
• surety's right to control or influence the selection of a new contractor to complete the works
  
  
• employer's duty to act reasonably in selecting the new contractor, and the consequences if he doesn't in terms of his claims against the liquidator and the surety
  
  
• form of building contract for the completion works
  
  
• completion contractor's right to use existing temporary buildings on site, plant and equipment, materials, and documents
  
  
• right to recover liquidated and ascertained damages from the liquidator
  
  
• which other "direct" losses are or are not recoverable
  
  
• desirability of requiring completion contractor to provide employer-subcontractor agreements (warranties)

It is beyond the scope of this commentary to attempt to answer these questions.  In any case, the answers will frequently depend on the facts of the particular case.

A glossary of construction law expressions: B is for ...

. lots of things, which we will come to below.  But first some feedback from our "A is for" selection in the last issue.

An architect writes

In Lawbuild Newsletter No. 1 we defined "Architect" as simply the principal designer.  In response, Andrew Forman of Finch Forman (www.finchforman.com) wrote: "Although the Architect may be the principal designer, the title is, in fact, protected by law and may only be used by those who are registered with the Architects Registration Board.  This is intended to ensure that only persons who have successfully completed their training use the title. It is one reason why the JCT contracts refer to either an Architect or a Contract Administrator (who may be another professional)."

He adds: "Hope this isn't too pedantic."  No, Andrew, I don't think it is, for the very good reason that, as your letter demonstrates, not every principal designer is an architect.  Our definition should have made that clear!

But to return to our moutons, B is for -

Bills of quantities

In traditional contracting, a contract document comprising a list of the materials required for the works and their estimated quantities, produced by the quantity surveyor.

The contractor tenders against this document, stating his price for supplying and installing each of the materials.

The total of the contractor's prices, added to his prices for the various items in the Preliminaries, forms the contract sum.

The contract sum cannot be varied just because the actual quantities differ from those in the bills of quantities, so the contractor must satisfy himself that the quantities shown are at least approximately correct.

Bond

A performance bond, which is given by a bank or insurance company as surety or bondsman, is not so much a guarantee of the contractor's performance but is rather an agreement to meet the employer's additional costs, up to an agreed maximum, if the contractor fails to perform (usually owing to insolvency).  The agreed maximum is usually 10% of the contract sum.

When a contractor becomes insolvent before completing the works, the employer does not of course have to continue paying him.  However, this saving is likely to be exceeded by the cost of paying a second contractor to complete the works, plus other direct losses, and the agreed maximum is a rough and ready pre-estimate of that extra cost and those losses.

A bond normally expires at practical completion or when defects appearing during the defects liability period have been made good.

Brief

A document prepared by the employer for consultants, to indicate the client's requirements.  May go into appointments, but is usually distinguished by its absence.

Building Contract

The contract for the works between the employer and the contractor.  Sometimes called the main contract (as distinct from the subcontracts).

Introducing our featured article

It is axiomatic that anyone developing commercial property for investment purposes must let it to a good tenant, at the best rent, and as quickly as possible.  While collateral warranties can hardly guarantee this outcome, their absence can certainly prevent it.

Now read on ...

Collateral warranties: an essential ingredient of a profitable development

The collateral warranty is one of the most important documents in construction and property.  It is an agreement under which a consultant, contractor or subcontractor ("warrantors" or "design and construction team") warrants, usually to a lender, tenant or buyer ("third parties" or "beneficiaries"), essentially that it has complied (and if appropriate will comply) with its appointment, building contract or subcontract ("construction agreements").

The warranty's chief purpose is to provide security for persons who are not a party to the construction agreements, thereby enhancing the viability and marketability of the development.

The Contracts (Rights of Third Parties) Act 1999 could in theory dispense with the need for warranties, but the construction industry has so far rejected the use of this enactment and most standard-form construction agreements exclude its operation.

Property agreements and collateral warranties

Property agreements typically require one party to procure collateral warranties from its design and construction team in favour of the other party, sometimes as a precondition of completing the transaction.

Thus agreements for sale and purchase may require the seller to procure warranties in favour of the buyer, before completing the sale.  Agreements for lease may require the landlord to get warranties for the tenant, before completing the lease.  And development and funding agreements may require the developer to obtain warranties for the landowner or lender, before the drawdown of money.

A person covenanting in one of these property agreements to procure collateral warranties in favour of another party must of course be certain that the construction agreements compel the design and construction team to provide those warranties and (in the case of a main contractor) to procure them from subcontractors.

Collateral warranties and assignment

The beneficiary of a warranty will normally insist on being able to transfer (or "assign") its benefit at least twice to a transferee of its interest in the property (or to another lender refinancing the development).  Unless the warranty can be assigned in this way it may have limited value to the beneficiary, so assignability makes the property more marketable.

A third party, properly advised, would be reluctant to lend money to a developer, or to buy or take a lease of a substantial property, unless it gets assignable warranties from the design and construction team.

Generally, if an agreement contains no prohibition or restriction on assignment each party may freely assign its benefit in the agreement to whomever it pleases (the assignee), and the assignee may further assign the agreement.

As an alternative to collateral warranties, a developer could assign construction agreements to a third party.  But this would mean that the developer retains no further interest in the construction agreements, so it may not be practicable to assign a construction agreement before works are complete, or to assign construction agreements to (say) a tenant of part of the site: because the developer could not then (a) sue the consultant or contractor or (b) assign the agreement to a tenant of a different part of the site.  Moreover, a lender may require the developer to assign the agreements to him by way of charge, thereby precluding assignments to a buyer before the debt is repaid.

Warranties themselves are frequently assigned.  For example, a developer may hold a contractor's warranty and subcontractors' warranties in favour of himself (the latter are usually called employer-subcontractor agreements).  The developer can in turn assign those warranties to a buyer.

Standard-form warranties: a warning

A warranty is only as good as the construction agreement whose performance it warrants.  It follows that the construction agreements, as well as the warranties themselves, must be satisfactory in order to attract funding and ensure the marketability of a property.

As an example of warranties which can fall short of institutional requirements, the standard-form warranties published by the British Property Federation (BPF) and the Joint Contracts Tribunal (JCT), may hamper the letting of a substantial retail unit because they limit the warrantor's liability in ways which a good retail tenant might well find unacceptable.

This and that

"Shift from where you are now to where you want to be" is the strapline of Tricia Boyd, a life and business coach and former member of BNI.  She gave us some business coaching late last year which included some excellent ideas, one of them being this newsletter.  We would like to thank Tricia for her suggestion: although we are lawyers, not journalists, we have had a lot of fun putting together the two issues we've produced so far, and they keep us in touch with clients and other business friends and produce useful feedback which can help us improve our service.

Our sessions with Tricia - an experienced businesswoman in her own right - convinced us that business coaching can really help entrepreneurs who want to set or implement business goals.  If you would like to contact Tricia to see how coaching might help your business, her email address is triciaboyd@hotmail.com.

A slight misunderstanding

We've had separate conversations recently with two building contractors, one large and one small, whom we had not met before.  After we introduced ourselves as construction lawyers, both men made the identical comment: "I hope I never need your services!"

As you have probably realised, they were assuming that we, as construction lawyers, specialise in building litigation, arbitrations, adjudications, and disputes generally: and nothing else.

While this is certainly true of many construction lawyers, it is not always the case.  Some construction lawyers deal not only with disputes but also with non-contentious or development work.  A few, like Lawbuild, deal primarily with non-contentious work and do not conduct litigation.

Lawbuild's focus is on avoiding and preventing disputes.  We do this in two ways: first, by making all our agreements as clear as possible, which helps the parties to resolve issues without resorting to litigation or other dispute resolution processes because clear drafting makes it easier to predict what a judge, arbitrator or adjudicator will say; and secondly, by giving clients sensible and realistic advice in the early stages of a dispute, or before one arises.

Sometimes litigation is inevitable.  If so then we can, on your instructions, obtain a fee quotation from one or more of a number of solicitors who specialise in construction litigation and with whom we have established good relationships, and either instruct them on your behalf or leave you to do so.

Getting back to the two contractors, what we found even more interesting about their reactions ("I hope I never need your services") is that they seemed to be unaware that solicitors specialising in non-contentious construction law even existed, or that they could be of any use to them.

One of the contractors told me that all his building contracts are in standard JCT forms, and that his policy (and we often hear this) is to put them in a drawer and hope that no-one will ever need to refer to them.  The other contractor said that he reviews all contracts he is presented with, and makes and negotiates his own amendments to them where necessary.

You probably think we are going to tell you that these two contractors are both walking a dangerous tightrope which they are in imminent danger of falling off unless they consult an experienced firm of construction lawyers (i.e. Lawbuild) immediately.  Not so!  Standard unamended JCT contracts largely favour contractors, so the first man may be reasonably safe for much of the time.  And we have no reason to think that the second builder - evidently an able and intelligent man with a full order book to November - is not perfectly competent to do his own amending and negotiating.

Commercial lawyers are not cheap (though Lawbuild is a lot cheaper than most), and we don't blame any business person who wants to avoid paying their fees.  A sensible compromise for such people is to run a typical or specimen contract past the lawyer, get his comments, and then apply the advice to other contracts.  Using your lawyer to train yourself in the basics of construction law and practice can be more economical than bringing him in on every routine case.

Input/output

On the subject of Lawbuild's fees, you may be interested to know that we are currently road-testing a new method of charging for work which would normally attract an hourly rate.

In fact Lawbuild is, as far as we know, the first law firm in the UK (or anywhere else for that matter) to charge on this new basis.

Where possible we will continue to give firm quotes for work whose scope is reasonably predictable.  Where the work is less predictable we will quote on the new basis but with a cap or ceiling.  And where the volume of work is quite unpredictable, and for extra work falling outside the services for which we have quoted a fixed fee or cap, we will charge entirely on the new basis.

What is this new charging basis?  We call it output charging.  For example, if we are working for a medium-sized company on a project whose cost is £100,000 or more but below £1,000,000, our charges might be £180 per "output".

What are outputs?  They are any of the following activities:

Giving you any advice of substance at any one time. Makes no difference if it’s given by phone or in writing. Could be advice on one issue or lots of issues. And we can’t “cheat” (not that we would) by splitting the advice among several phone calls or emails: if we could and should have advised on all outstanding issues at the same time, it counts as only one output.

• Writing a letter, fax or email of substance to a third party on your behalf. Same rules: we have to put as much as possible into one communication, or it still counts as only one output.
  
  
• Sending you and/or a third party a necessary draft of any document of substance prepared, amended or approved by us.
  
  
• Completing any document, or sending it to you or a third party for completion, whether or not prepared by us.
  
  
• Attending a meeting. For ten minutes or ten hours, makes no difference, although we don’t call or attend meetings more frequently or for longer than is necessary.
  
  
• Travelling (any distance at one time). This is perhaps the only “output” which does not necessarily benefit the client directly, except where it saves him the trouble of visiting Lawbuild’s offices.

Output charging gives you far greater control over our fees, and also incentivises us to be more efficient.  How so?  Here are some more bullet points:

• You will know, whenever you ask us for advice, request a meeting with us, or ask us to write to “the other side”, that you are incurring the agreed fee for one output. (Or two outputs if you want us to meet away from Lawbuild’s office.)
  
  
• You can save up your requests for advice so that our reply to all the requests comprises a single output.
  
  
• You can choose to meet us at our offices in Finchley, thereby saving yourself one output for travelling.
  
  
• We have an incentive to deal as quickly as possible with all requests for advice, because if we delay our reply you could send us a further request in the meantime and we would be able to charge only one output instead of two.
  
  
• We have an incentive to be more efficient and to focus on what matters to you: because the longer we take to produce an “output”, and the more time we spend on the administrative aspects of the matter, the less we are earning per hour of our time.

Why did we devise output charging?  Why not stick with the tried and tested system of hourly rates?  Because we are not comfortable with a system that makes you pay for work over which you have little or no control.

We may take longer to give a piece of advice because we have to do some research: why should you pay more on that account?  And why should you pay for administrative work, filing, etc., which may be necessary but gives you no direct benefit?

A frequent result of hourly charging is that when we present our invoice to the client we hear a sharp intake of breath, because the client often has no idea why legal work takes as long as it does.  And it is almost impossible for us to explain this because, frankly, it takes as long as it takes.

We would much prefer to be able to say to the client: "We have given you legal advice on eight occasions.  We have sent out two drafts of one document and four drafts of another document.  We have completed both documents.  We had one meeting for which we had to travel to your offices.  We wrote six letters to the other side's solicitors.  That is a total of 24 outputs.  At the agreed rate of £180 per output, that makes £4,320 (plus VAT).  And if you think that any of these outputs was unnecessary (or not a communication of substance), and if we agree with you, then we will reduce our fee by £180 per output."

The purpose of output charging is not to increase or reduce our fees.  If our calculations are correct, we should be earning much the same as we would by charging hourly rates.  And if they are not correct then it will be up to us to adjust our charges per output in subsequent fee quotations until we get them about right.

We have outlined the benefits to our clients in terms of greater control.  The main benefit to us is that we no longer have the impossible task of justifying - to ourselves or our clients - the number of hours we spend on each matter.  Our bills will effectively be self-justifying.

We would repeat that we are still going to give fixed price or capped quotations wherever possible.  And since it is easier for us to estimate the number of outputs than the number of hours, it will also be easier for us to provide a fixed price or capped quotation which is fair to both you and us.

Of course, the new system doesn't apply to any matter for which we may have already sent you a fee proposal on a different basis, unless we and you decide to renegotiate and agree a new fee arrangement based on output charging.

What do you think about Lawbuild's new system of output charging?  Would you prefer a charge per output to an hourly rate?  Do you think there are any ways we could improve the system for your (or our) benefit?  Please give us your "input" on Lawbuild's "output": your views are very important to us.  And remember: Lawbuild is probably the first law firm in the world to use output charging instead of hourly rates!

Some feedback on Lawbuild Newsletter No. 1

"A very good read.  I look forward to the next one.  Good luck!"  Jeffrey Finegold, Howard Schneider Spiro and Steele (solicitors), www.conveyancing.co.uk, j.finegold@groundrent.co.uk.

 ". very interesting and informative and I look forward to receiving the next one."  Andrew Forman, Finch Forman (architects), www.finchforman.com, Finch.Forman@btinternet.com.

"Congratulations, David, well done!"  Tricia Boyd, LifeAims (life and business coach), triciaboyd@hotmail.com.

Business Network International^®

Lawbuild and David Lewis are proud to be a member of the Victoria (London) Chapter of Business Network International (BNI), a group of businesses which meets weekly.  BNI's insistence on references before a member can be accepted, and the code of ethics which members must sign up to, tends to ensure that only quality businesses become and remain members.

So whether you need a solicitor or a financial adviser, a florist or a carpenter, before you pick up the Yellow Pages have a word with us.

You can also contact us to ask about the benefits of becoming a BNI member, and we can arrange for you to attend one or two meetings as a visitor.

How to contact Lawbuild (or unsubscribe)

To remove your name from the mailing list for this newsletter, please email unsubscribe@lawbuild.co.uk (or request removal in a reply to the email enclosing this newsletter).

To add your name to our mailing list, please email subscribe@lawbuild.co.uk (or reply to the email enclosing this newsletter, requesting inclusion).

All feedback is very welcome.  We would like to hear from you if you have any comments, queries, corrections or suggestions!

Here's how to get in touch with us:

Email

newsletter@lawbuild.co.uk (better than replying to the email enclosing this newsletter because when we print your reply we'd rather not end up printing the entire newsletter!)

Phone

020 8346 6424

Fax

020 8346 0745

Mobile

078 8775 7606

Post

David Lewis
Lawbuild, solicitors
37 The Grove
LONDON
N3 1QT

Website

www.lawbuild.co.uk