July 2002
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Lawbuild provides construction law expertise
to save clients time and money.
A personal message from Lawbuild's Principal
David Lewis
|
Dear Reader
I hope that you will find some of the articles
and features in Lawbuild Newsletter No. 3 not only
useful, and relevant to your business or profession, but
also an interesting and enjoyable read.
With kind regards.
Principal
Lawbuild, solicitors
Contents
News
and views
Tips and tricks
Lawbuild offers free legal services!
A glossary of construction law expressions: C is for ...
Introducing our featured article
Warranty or not warranty? VAT is
the question
This and that
Business Network International
About Lawbuild
About you
Lawbuild's new website up and running
Legal disclaimers and warnings relating
to this Newsletter: please read
How to contact Lawbuild (or unsubscribe)
News and views
Return to contents
Fire damage: designers liable but contractor
and subbie walk away
In 1993 Co-operative Retail Services (CRS)
engaged Wimpey as main contractor to build a large new office
block. Hall was the electrical subcontractor. Taylor Young
Partnership were the architects, and Hoare Lea & Partners
were the consulting engineers.
CRS, Wimpey and Hall were jointly insured against
fire damage to the works.
Before practical completion a fire extensively
damaged the new building. The insurers duly paid up; then
they looked around to see who might have been responsible,
through negligence, for the fire.
Had Wimpey or Hall been negligent? Maybe (it
hadn't been proved), but the insurers couldn't sue them
because Wimpey and Hall were their insured. However, because
the insurers had met the claim they could and did make CRS
sue the two consultants.
The consultants said: "It wasn't our fault,
or at least it wasn't only our fault: Wimpey and Hall were
negligent, and if we have to pay the insurers' losses then
Wimpey and Hall must pay us a contribution representing
their fair share of those losses."
To win that argument legally, the consultants
had to prove that Wimpey and Hall were liable to CRS for
the fire damage. And if Wimpey and Hall weren't liable
to CRS, then they weren't liable to the consultants.
It is usually cheaper and quicker for the courts
to sort out legal issues before factual ones. So the judges
assumed, purely for the purposes of legal argument, that
various negligent breaches of contract by Wimpey, Hall and
the two consultants were what caused the fire. But in fairness
to all concerned we should point out that no-one had yet
been proved negligent.
So (assuming negligence by the consultants,
the main contractor and the electrical subcontractor) were
Wimpey and Hall liable to CRS? The building contract was
the predecessor to today's JCT 98 Private With Quantities,
and the relevant clauses (20 and 22A) have not changed materially
since then. When you read them for the first time they
seem to exclude the contractor's liability for damage to
the works. When you read them a second time, especially
with a legal eye, you're not quite so sure.
This issue ended up in the House of Lords,
Britain's highest judicial authority, which gave judgment
at the end of April.
Lord Hope of Craighead said that in his opinion
the main contract did exclude Wimpey's liability to CRS
for loss and damage which was caused by the fire and due
to Wimpey's breach of contract. The same reasoning applied
to Hall, the electrical subcontractor. So, since CRS were
not entitled to recover compensation from Wimpey and Hall
for the fire damage, the two consultants could not recover
a contribution from Wimpey or Hall.
This conclusion could lead to a very unfair
result, as the consultants' counsel had pointed out: a party
with a very minor responsibility for causing a catastrophe
might end up bearing the entire financial consequences.
Lord Bingham of Cornhill noted:
"This is indeed a possible outcome, and may
be the case here. But this is the effect of the standard
form contract which CRS, Wimpey and Hall made, and it is
a standard form of which [the two consultants] and their
professional indemnity insurers must be taken to have been
aware. It would no doubt have been open to [the consultants]
to seek to be included as co-insured in the joint names
insurance, or to have made other arrangements. In reality,
the present issue arises between [the consultants'] indemnity
insurers on one side and the joint names insurers on the
other. The latter have provided the full indemnity they
undertook to give. The real complaint of the former is
the failure to take steps to guard against the contingency
which has in fact occurred, a contingency which could in
my opinion have been foreseen had the right questions been
asked at the right time."
So what can design consultants and/or their
insurers do to avoid carrying the can for the main contractor's
or a subcontractor's negligence?
Logically, any industry-wide solution would
have to either absolve designers from liability or impose
liability on main contractors and subcontractors. The first
option would need the agreement of the insurance companies
who cover damage to the works, and the second would need
the consent of contractors and subcontractors. In our view,
none of these powerful interests can realistically be expected
to make such concessions to designers, and the likely long-term
consequence is yet more increases in consultants' insurance
premiums.
For a fuller report on Co-operative Retail
Services v. Taylor Young Partnership & Hoare Lea &
Partners, House of Lords, 25 April 2001, click here.
Tips and tricks
Return to contents
There's a snag in this contract
JCT contracts require the architect or contract
administrator named in the contract, or - under JCT 98 With
Contractor's Design - the employer (usually acting through
the employer's agent), to certify practical completion (PC)
when the contractor has completed the works in accordance
with the contract. In theory the certifying consultant
may be entitled to withhold the PC certificate if there
are any defects or incomplete work, though judicial statements
indicate that construction work is not like the manufacture
of goods and that absolute perfection cannot be expected.
Be that as it may, in practice there is often
economic, commercial or political pressure by the employer
on the consultant to certify PC notwithstanding a degree
(sometimes quite a large degree) of defective or incomplete
work. For instance, the employer may suffer a financial
disadvantage if a retail tenant is unable to occupy the
completed property before the Christmas shopping period,
and neither he nor the tenant will want to delay the handover
on account of a handful of minor defects.
How can the consultant protect himself vis-à-vis
the employer, and the employer vis-à-vis the contractor,
if he certifies PC despite defects or incomplete work?
First, he should obviously make sure that the
employer has authorised him to issue a PC certificate in
those circumstances, i.e. where the building contract does
not oblige him to do so, and that no question can arise
in the future as to whether or not this authorisation was
given.
Secondly, he should make sure that the contractor
will be contractually obliged to complete any outstanding
work and make good the defects.
But (we hear you say), surely all the consultant
has to do is include the defects and incomplete work in
a snagging list and attach it to the PC certificate. Right?
Wrong! Because these particular "snags" are
not ones that appear after PC but are known to exist at
PC.
This makes a difference, because under some
JCT contracts the post-PC contractual procedure for making
good defects only applies to defects appearing after
PC.
For example, JCT 98 Private With Quantities,
clause 17.2: "Any defects, shrinkages or other faults which
shall appear within the Defects Liability Period
. shall be specified by the Architect . and . shall be made
good by the Contractor .".
Remember, the defects liability period (DLP)
begins at PC, so "within" the DLP must mean after PC.
And MW 98 talks about defects which appear
"within three months" of PC. Again, this seems to mean
after PC (though it could be read differently).
On the other hand, IFC 98 refers to defects
etc. "which appear . not later than 14 days after the expiry
of the defects liability period". Logically that could
include defects appearing before PC.
The best practice when using JCT contracts,
is to prepare a snagging list and require the contractor
to sign an undertaking, before the PC certificate is issued,
to complete or make good the items listed.
If you don't do this, you may find that the
contractor is not legally obliged to make good the defects
which existed at completion, or to complete the outstanding
work, even though you have attached a snagging list to the
PC certificate. He could simply say, "I'm only required
to make good defects which appear within the DLP. These
defects existed before the DLP began, so I'm not required
to remedy them."
The contractor may nonetheless be liable to
pay damages to the employer for the cost of remedying those
defects or completing the outstanding work because the contractor
is still in breach of contract: in fact the snagging list
is evidence that the employer hasn't waived his right to
sue. But a duty to pay damages is not the same as a duty
to actually go back to the site and make good the defects
etc.
The contractor's undertaking should be along
these lines:
To the Employer
Dear Sirs
Lawbuild House, London N3
In consideration of your authorising the [Architect]
[Contract Administrator] [Employer's Agent] to issue a [certificate]
[statement] of practical completion [for Section 00] notwithstanding
the defects and incomplete work in the attached snagging
list, we will make good such defects and complete such work
at no cost to you by not later than [date].
Yours etc.
[Signed by Contractor]
Once the employer has that signed undertaking,
the consultant can issue the PC certificate (with or without
the snagging list attached to it) in the knowledge that
the contractor will be under a contractual obligation to
deal with those snags.
Lawbuild offers free legal services!
Return to contents
Subject to conditions (see below), Lawbuild
is offering 1h 30m of free legal services to readers of
our Newsletter whose organisations are either property
developers, local authorities, charities, construction companies,
or specialist contractors.
If that description fits you, then to benefit from this offer please
email questionnaire@lawbuild.co.uk
by not later than Friday 12 July 2002.
During the following week we will email you a market
research questionnaire for you to complete and email back
to us by Wednesday 31 July 2002. Your replies will be treated
in strict confidence.
After returning the completed questionnaire
to us by 31 July, you can instruct us at any time between
1 August 2002 and 31 December 2002 to provide up to 1h 30m
of whatever legal advice, drafting, negotiation or other
legal services you or your company may need.
This offer is subject to the following conditions:
A glossary of construction law expressions: C is for ...
Return to contents
CDM
The Construction (Design and Management) Regulations
1994. Health and safety regulations requiring clients to
appoint a planning supervisor and a principal contractor,
and providing for a health and safety plan and a health
and safety file.
Client
The person commissioning the works, who is
called the client in appointments, the employer in building
contracts, and the developer in development agreements and
funding agreements.
Collateral warranty
The theoretical reasons for collateral warranties
are twofold: (1) the common law doctrine of privity of contract,
which prevents a person from suing under a contract to which
he is not a party; and (2) rulings of the House of Lords
in 1989 and 1990, which prevent the recovery of "economic
loss" (i.e. the cost of remedial work) in an action in tort
for negligent design or construction.
The collateral warranty is one of the most
important documents in construction. Its main purpose is
to provide security for a fund, tenant or buyer ("third
party"). It's an agreement under which a consultant,
contractor or subcontractor warrants to a third party (essentially)
that it has complied (and/or will comply) with its appointment,
building contract or subcontract.
It is important that the benefit of the warranty
should be freely assignable, usually twice. Unless it can
be assigned to a buyer the warranty is valueless to him,
so assignability makes the property more marketable.
If a third party can't take an assignable warranty,
it may be reluctant to lend money to the developer, or to
buy or take a lease of the property.
The Contracts (Rights of Third Parties) Act
1999 has modified the doctrine of privity of contract, but
has so far had little or no impact on collateral warranties.
(We did once believe that the Act would eventually be used
to replace warranties from subcontractors and trade contractors,
but that time now seems to be some way off.)
In 1997 the Construction Law Journal published
an article by our Principal, David Lewis, about the JCT
standard forms of agreement for collateral warranty, which
contained a brief history of collateral warranties.
Judges sometimes consult articles in learned
publications before arriving at their decisions. In this
way it is occasionally possible for the writer of such essays
to influence the development of the common law or the interpretation
of enactments. And, as it happened, in 2000 Lord Goff of
Chieveley and Lord Millett mentioned David Lewis's article
in a leading House of Lords case on collateral warranties,
Alfred McAlpine Construction Ltd v. Panatown Ltd.
Lord Goff said:
".I have been impressed by the suggestion of
Mr. David Lewis . that the real purpose of the [duty
of care deed, i.e. collateral warranty] was to provide a
contractual remedy in negligence (comparable to that formerly
available in tort under Anns v. London Merton Borough
Council [1978] A.C. 728 before that case was departed
from by your Lordships' House in Murphy v. Brentwood
District Council [1991] 2 A.C. 398) against McAlpine
by subsequent owners of the building."
Lord Millett said:
"I agree with the Court of Appeal that the
[collateral warranty] was primarily designed to cater for
subsequent purchasers. This is also the view expressed by
Mr. Duncan Wallace Q.C. in "Third Party Damages: No
Legal Black Hole?" (1999) 115 L.Q.R. 394 and is confirmed
by an article by Mr. David Lewis in (1997) 13 Const.
L.J. 305. He notes that the widespread use of collateral
warranties . derives from the change in the law of tort
which occurred in 1990 when the House decided Murphy
v. Brentwood District Council [1991] 1 A.C. 398 and
departed from Anns v. Merton London Borough Council [1978]
A.C. 728."
You can read our featured article on Alfred McAlpine
Construction Ltd v. Panatown Ltd in this newsletter.
Construction Act
Part II of the Housing Grants, Construction
and Regeneration Act 1996, which provides for adjudication
and also regulates the payment provisions of appointments,
building contracts and subcontracts.
Construction management
A procurement system which cuts out the main
contractor. The employer enters into trade contracts direct
with companies who would normally be subcontractors but
who are called trade contractors under construction management.
Often the employer will appoint a construction
manager (who may be a contractor's subsidiary, but is more
like a consultant than a contractor) to plan and manage
the project, and to invite tenders for and negotiate, and
then administer and supervise, the trade contracts. But
this function can also be undertaken by the employer in-house
or by the quantity surveyor or another consultant with project
management ability.
Consultant
A professional with technical qualifications.
Can be a designer (architect, structural engineer, mechanical
and electrical services engineer). Can also be a quantity
surveyor, project manager, environmental consultant or planning
supervisor.
Contract administrator
Under traditional contracting, a consultant,
or an employee of the employer, whose job it is to issue
instructions to the contractor, to certify payments under
the building contract, to certify practical completion and
completion of making good defects, and to issue the final
certificate.
The contract administrator is often the architect.
The equivalent in design and build is the Employer's
Agent (who is likely to be a quantity surveyor or project
manager).
Contract sum
The consideration which the employer pays the
contractor for the works, and for the completion of any
design.
The contract sum is usually stated in the articles
of agreement in the building contract. However, it can
be changed up or down by variations, ascertained direct
loss and/or damage, liquidated and ascertained damages,
and other contractually permitted adjustments.
Prime cost forms of contract (such as the management
contract) do not state the contract sum in the articles
of agreement because it cannot be ascertained when the building
contract is signed.
The contract sum is usually payable by monthly
instalments. Under traditional contracting the quantity
surveyor produces a (usually monthly) "valuation" of the
work properly executed to date. By "valuing" the work the
quantity surveyor is calculating the proportion of the contract
sum which is attributable to the work done. The contract
administrator then issues a (monthly) interim certificate
stating the appropriate payment to the contractor, which
is the quantity surveyor's valuation less (a) sums previously
certified and (b) retention.
Contract Sum Analysis
In design and build, a breakdown of the contract
sum. Its main purpose is to enable the Employer's Agent
to value Changes in the Employer's Requirements (or variations).
Usually found at the end of the Contractor's Proposals.
Contractor's Proposals
A document prepared by the contractor under
design and build procurement, showing how the contractor
proposes to meet the Employer's Requirements.
Contracts (Rights of Third Parties) Act
1999
This enactment came fully into force in May
2000.
It enables someone who is not a party to a
contract - a third party - to sue either party to the contract
where the contract expressly gives him the right to enforce
a particular provision or the provision shows an intention
to benefit him. The Act also allows a third party to use
any defence which the contract makes available to him, e.g.
to an action by either party in tort.
The parties can agree in the contract to exclude
the Act, and many if not most construction agreements do
this.
The Act was originally seen as an instrument
for replacing collateral warranties, but warranties continue
to flourish.
Introducing our featured article
Return to contents
A timeless theme running through construction
case law is the problem of the contracting party with no
legal interest in the subject-matter of the contract.
The House of Lords delivered judgment on one
of these cases on 27 July 2000. This briefer than usual
article summarises the current state of the law, and offers
some general views on the dangers of focusing too hard on
tax avoidance alone.
Now read on (and please excuse the atrocious
pun in the title) .
Warranty or not warranty? VAT
is the question
Return to contents
Alfred McAlpine Construction Ltd v. Panatown Ltd arose out
of the development of an office building in Cambridge belonging
to Unex Investment Properties Ltd (UIPL).
You would have expected UIPL to have entered
into the building contract with the contractor, McAlpine.
But that's not what happened. As you know, many transactions
are tax-driven, and in this case there was a big VAT saving
to be made if the contractor was engaged not by UIPL but
by its sister company, Panatown, both companies being members
of the Unex Group.
Panatown later sued McAlpine, for defective
work and delay.
The House of Lords did not let Panatown recover
substantial damages from McAlpine in its own right, because
Panatown had no duty to account to UIPL, and because it
had no intention of using the damages to effect remedial
works.
They also refused to let Panatown recover the
cost of remedial works on behalf of UIPL, because McAlpine
had given a collateral warranty to UIPL, thereby enabling
it to sue the contractor direct.
But couldn't UIPL have sued McAlpine under
the warranty? Yes, but the warranty was not legally strong
enough. And therein lies one key lesson of this case, which
demonstrates the need for a party at risk to have direct
and adequate security.
A further point occurs to us. We don't know
exactly how much VAT was saved by making Panatown enter
into the building contract instead of UIPL, but from internal
evidence we would guess that it was around £1.3 million.
And according to Lord Goff of Chieveley, "The defects in
the building alleged by Panatown are very serious; indeed
it appears that the building may have to be demolished and
rebuilt. The total damages claimed by Panatown run to many
millions of pounds."
So it seems that the Unex Group tried to save
themselves around £1.3 million by structuring this development
in a way which ended up costing them "many millions of pounds".
If this analysis is correct, does it suggest
that tax-saving devices should be shunned? Not at all.
It is however a strong argument for examining not only the
tax implications but also other relevant considerations:
in this case, the construction law consequences.
You can read the transcript of Alfred McAlpine Construction
Ltd v. Panatown Ltd by clicking here.
This
and that
Return to contents
Missed Lawbuild Newsletters
Nos. 1 and 2?
Email backissues@lawbuild.co.uk
to request either or both of our previous issues.
A case of mistaken identity
We recently sent a mailshot promoting Lawbuild
to a number of companies. Generally the response was polite
and positive, except for a fax we received from a man who
was under the impression that we were "the same Mr Lewis"
who had acted for him in connection with a property in a
town or village we had never heard of before.
He wrote that he was most unhappy with the
manner in which he alleged we had handled this matter, and
with "the grossly excessive charges." Moreover, he did
not understand how we could purport to be solicitors, when
we did not have, as he recalled, "a recognised qualification."
He added a handwritten postscript, perhaps
redundantly: "PS - I am not interested!"
We sent him a polite reply, explaining that
we had never acted for him or his company, and pointing
out that David Lewis had become a solicitor in 1969 and
had held a practising certificate continuously since then.
We also promised to remove his name from our mailing list.
Incidentally, our correspondent (who has not
favoured us with an apology since receiving our reply) is
no junior member of staff but is the managing director of
a public limited company.
We're not quite sure what the moral (or even
the point) of this story is. "Don't jump to conclusions",
perhaps.
Business Network International®
Return to contents
Lawbuild and David Lewis are a member of the
Victoria (London) Chapter of Business Network International
(BNI).
BNI is a business and professional networking
organisation whose purpose is to generate quality referred
business for its members. BNI can claim to be the most
successful organisation of its kind in the world, as it
records the business transacted on a weekly basis. In 2001
the 50,000 members of BNI worldwide passed 2,100,000 referrals
generating over £500 million of business. Currently, there
are more than 2,300 groups, of which 330 are in the UK and
Ireland.
BNI groups limit membership to one person per
business, so members have an opportunity to lock out their
competition.
BNI insists on references before a member can
be accepted, and requires members to sign up to a code of
ethics. These safeguards, together with testimonials from
other members, promote confidence in the products and services
offered by members. So whether you need a financial adviser,
a florist or a carpenter, before picking up the Yellow Pages
it may be worth having 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 and without obligation.
To learn more, visit the BNI website.
About Lawbuild
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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 are experienced, thorough and professional.
Our aim is to save clients time and money, and our charges
are very reasonable.
Lawbuild is equally at home with contracts
for services and with many other kinds of non-specialist
agreement.
Lawbuild's principal, David Lewis, has more
than 25 years' experience in contracts and construction
law.
About you
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We are sending this newsletter to a number
of people we know (and to some we don't) in the property
and construction sectors and the legal profession, and to
selected members of BNI (Business Network International).
Even if you don't instantly recall the names "Lawbuild"
and "David Lewis" (though we hope you will), it may well
be that you have met us before, and possibly in the past
few months.
We hope you will find this newsletter of interest
to you, but if you prefer not to receive future issues you
may easily "unsubscribe"
by emailing us to that effect.
In any event, please feel free to forward
this newsletter to anyone else you think might like to receive
it. And we shall be glad to add that person to our
mailing list for future newsletters (we plan to increase
their frequency to six times a year) if you or they will
send us their email address.
Lawbuild's new website up and
running
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On 23 May 2002 our new website went live on
the Internet. Designed by BNI member Karim Cortbawi of
Betternet, the
new site -
