LAWBUILD Letter No. 15

Wednesday, 31st January 2007

Lawbuild provides construction law expertise to save clients time and money. A personal message from Lawbuild's Principal David Lewis

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The Lawbuild Blog

If you’ve visited the Lawbuild website in recent weeks you may have noticed a new link leading to The Lawbuild Blog.

Strangely enough I’m still not entirely sure what a blog is, or how it differs from a website that you update yourself.  I used to think a blog was a kind of online diary, but the one I’ve got is more like a repository for articles.

I’ve been adding to my blog at a fairly slow pace, and there are only four articles so far.  Two of them I’ve written in recent weeks, and one is an older article.  One piece is not legal at all, and I am not its author: it’s my late father’s war memoirs; not a long piece, amusing, and worth a read if you’re interested in what it was like to serve in the British Army during the Second World War.

My personal favourites are those war memoirs, and also my article on the eminent construction lawyer Ian Duncan Wallace QC, who died in August.

I hope that, as and when the spirit moves me, the body of articles in my blog will gradually grow, and that you will visit it from time to time and find it entertaining and not too legalistic.

With kind regards.

Principal of Lawbuild, solicitors
Editor of the Lawbuild Letter

Parent company guarantees: not the Powerhouse we thought they were?

Powerhouse, the electrical retailer, had taken leases on stores which had proved unprofitable.  Powerhouse’s parent company had guaranteed the rent on these stores, which should have been a nice bit of comfort for the landlords.

Powerhouse then entered into a CVA: a Company Voluntary Arrangement.  To bind all Powerhouse’s creditors, the CVA had to be – and was - approved by at least 75% in value of its creditors.  Its claimed effect was to let Powerhouse quit its unprofitable stores and discard the rent guarantees given by its parent company.

This meant that the landlords couldn’t sue the parent company for the rent arrears.  In effect, 75% of the creditors had nullified guarantees given to other creditors.

I have no problem accepting that a qualified majority of a company’s creditors can take a decision affecting the rights of other creditors against the company.  But I do have a huge problem understanding how the majority creditors can nullify the rights of minority creditors against the company’s parent.  I’ve read various articles on the subject written by insolvency lawyers, but none of them addresses this (to me) absolutely fundamental question.  It’s a phenomenon I’ve often noticed: lawyers discussing barmy claims or court decisions quite uncritically.

Be that as it may, major landlords are intending to challenge the Powerhouse CVA in the courts, but until that happens there must be a question mark hanging over guarantees given by contractors’ parent companies to clients.  Yes, the Powerhouse situation is about rent guarantees given to landlords, but anyone in the construction industry will have spotted that the situation is equally applicable to contractors’ parent company guarantees given to employers.

Parent company guarantees are not as big in construction as they are in the property sector, but until the issues is resolved in the courts it would be wise for clients not to rely on them exclusively.  Oxford solicitors Henmans LLP advise landlords – for which read employers - to ensure that any parent company guarantee is drafted so as to strictly prohibit release under any future CVA, which sounds to this non-insolvency lawyer like good advice.

Hemans go on to suggest that landlords consider alternative security such as rental deposits, bank guarantees or third party guarantees; but if a CVA can nullify a parent company guarantee why couldn’t it equally kill any other kind of guarantee?

Landlord not liable to repair inherent defect

In the Janet Reger case (October 2006), a landlord was held not responsible for repairing a defective damp-proof layer in a basement under a lease containing a tenant’s covenant to keep in good repair.

In the light of this ruling, property lawyers have suggested that tenants should at the minimum seek a landlord's covenant to keep the structure "in good condition", and I have no doubt that this is sound advice.

But to a construction lawyer looking at the decision it seems that any contractor and subcontractor would very probably have been in breach of the building contract or subcontract; and that collateral warranties or third party rights could have given the tenant a remedy against those parties compensating for the failure of its action against the landlord.

If therefore landlords decline to give a covenant to keep the structure in good condition (as distinct from good repair), tenants might want to insist on collateral warranties or third party rights.

Competition

Your task in The Lawbuild Letter No. 14 was to shorten and clarify the following clause (which seems to get worse every time I read it):

The Employer and the Contractor shall together seek to agree a fair and reasonable period for each Extension Period and when each such Extension Period has been agreed or (in the event of dispute) determined by an Independent Person acting as an expert in accordance with clause 13 each such Extension Period shall be granted to the Contractor and all the dates and periods in this Agreement which are expressed to be extendable by reason of such delay shall be treated as deferred (or further deferred if prior Extension Periods have already been granted) by such agreed or determined Extension Period and so that if the Contractor fails to comply with its obligations to achieve the matters the subject of this Agreement by the date specified in this Agreement referable to such matters but would have so complied but for the Extension Events giving rise to the relevant Extension Period then for the purposes of this Agreement the Contractor shall be treated as having so complied with such obligation [169 words]

Paul Jackson of The Electrical Contractors Association offered this solution:

Delay periods, not at the contractor’s risk, and for which the contract periods can be extended shall be agreed between the parties. An independent expert, in accordance with Clause 13, will settle any dispute, in this regard. Extension Periods agreed or so determined, will extend the period by which the obligations are to be fulfilled. The contractor is deemed to have fulfilled his obligations, if completion occurs by the date of this agreement but so amended by the sum of any awarded Extension Period(s).  [84 words]

Before I set the competition, I had a go at drafting my own solution, which looks like this:

Each Extension Period shall be determined by agreement or by an Independent Person under clause 13 and shall be added to any Extension Periods previously determined to form the Total Extension Period; and where this Agreement requires the Contractor to do anything by a stated date the Total Extension Period shall be added to that date.  [56 words]

I prefer my version, but then I would, wouldn’t I?  However, I have to admit that Mr Jackson has covered the essentials.  I think his version would probably stand up in court; and I suppose my chief criticism of it is stylistic, in that the lawyers and judges involved would (in my opinion) have to read his version a couple of times to be sure of the parties’ intentions.  No “winner”, as Paul Jackson’s was the only entry.

A glossary of construction law expressions: S is for …

Sectional completion

Sometimes called phased completion.  The contract may divide the works into two or more separate sections, each of which forms a mini-contract with its own dates for possession and completion and its own liquidated and ascertained damages.

Services

Has two meanings, depending on context.

When an appointment refers to “services”, it usually means all the services to be performed by the consultant under it.

The second meaning is mechanical and electrical services such as heating and air-conditioning.

Services engineer

Another expression for a mechanical and electrical services engineer.

Snagging list

A list of defects and uncompleted items of work.  The contract administrator may attach it to the certificate or statement of practical completion (a procedure not catered for by JCT contracts), or (more correctly) he may issue it during the defects liability period.

A snagging list should not contain items known at practical completion to be incomplete or defective unless the standard form of building contract is suitably amended or the contractor formally undertakes to complete or make good the items on the list.

Specification

A contract document, written by a designer, and specifying the works or some element of the works (e.g. electrical services).

Step-in

Where a bank or other institution is forward-funding a development, its security could be jeopardised by defaults of the employer: (a) if any consultant, or the contractor, terminates its appointment or the building contract because of a breach by the employer, or (b) if the employer breaches the funding agreement.

Warranties to funds therefore contain "step-in" provisions which allow the fund in those circumstances to take over the appointment or building contract, standing in the shoes of the client or employer and paying any sums due.  Step-in is a form of novation.

Structural engineer

The engineer responsible for designing the structural elements.

Where a subcontractor designs structural elements such as piling or structural steelwork, the structural engineer is usually responsible for designing any interface with the rest of the building (e.g. the structural steelwork connections).

Subcontract

A contract between a main contractor and a subcontractor for particular elements or trades.  Typical subcontract "packages" include piling, structural steelwork, cladding (the non-structural part of a building's exterior), windows and glazing, roofworks, electrical services, mechanical services, and of course many others.

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About Lawbuild

Lawbuild is a specialist construction law practice offering expert advice and services to anyone carrying out or lending money for construction, and to any buyer, seller, landlord or tenant of recently built or refurbished property.

We also enable commercial property solicitors to provide a construction service to their clients, and quantity surveyors to provide a legal service to theirs.

We do development work.  Despite writing occasional articles on litigation, arbitration and adjudication, we do not undertake dispute resolution but will offer to refer callers to various associates who do this work.

Lawbuild’s principal, David Lewis, has been a solicitor since 1969 and has more than 30 years’ experience in contracts and construction law.

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