Surviving the Construction Crunch Wednesday 25th March 2009

The construction crunchcontractual pitfalls

Richard WadePartner, head of Construction and DevelopmentBlake Lapthorn

Turnaround Managers Association25 March 2009

OverviewThe contractual set upThe contractual pitfalls

Contract law the basicsSome essential characteristics

AgreementOffer/acceptanceConsiderationCapacityWritten or oral or by conductPrivity

OWNERFUNDAB College (Developments Limited) (Employer)TENANTSMAIN CONTRACTORARCHITECTM & E ENGINEERSTRUCTURAL ENGINEERQ.SSUB-CONTRACTORSSUPPLIERSSUB-CONSULTANTS

Key issues in contract law

Privity (see above)

Joint and several liability

Insurance

Insolvency

The Interested third partiesOwner/purchaserTenantFundEmployerEmployers associated companyUltimate client/ownerPresent/future?

Protection of third parties interestsWarrantiesThird party rightsAssignmentFuture third partiesImportance of:underlying contractual agreementinsurance

WarrantiesEnforceable contractual promiseRemedy in damagesExpress or impliedWritten or verbalProtects the third partys rights in case of exclusion of Contract (Rights of Third Parties) Act 1999

The Paradox of modern developments:

Often the developer is not the end user/occupier

Linden Gardens Trust v Lenesta Sludge (House of Lords, 1993) (the St Martins Case); highlights the paradox and a possible solution

but

McAlpine Panatown (House of Lords, 2000)

OWNERFUNDAB College (Developments Limited) (Employer)TENANTSMAIN CONTRACTORARCHITECTM & E ENGINEERSTRUCTURAL ENGINEERQ.SSUB-CONTRACTORSSUPPLIERSSUB-CONSULTANTS

Other methods of protection of third party interests

Bonds (performance/guarantee and on demand or conditional)

Guarantees must be written

Novation (not to be confused with assignment)

Performance and behaviourSome contractual hotspots

Disputes and how to avoid them

Why good contracts go badLegal problems People and dispute resolution Three useful tips

Why good contracts go badMisunderstanding the lawTerms and Obligations not definedRash decision makingBreakdown in the management of the contract or relationshipsFailure to adequately deal with disputes One off contracts no perceived benefit in continuing relationshipsMargins too tight

Legal problemsMisunderstanding the law (use of Letters of Intent, contract formation, suspension)Lack of definition in terms and obligations (eg notice to correct breach, eg JCT SBC05 Clause 8.4)Rash decision making (suspension and termination... repudiation?)Breakdown in management of contract/relationshipsCashflowFailure to planFailure to deal adequately with disputes

A Case Study in Rash Behaviour (and Proportionality):

Multiplex Construction (UK) Limited v Cleveland Bridge (TCC, 2008)

Judgment of Mr Justice Jackson 29 September 2008

Award of 6 million damages to Multiplex

Overall legal costs incurred ... 22 million

Award of legal costs to winner 20%

Alternative dispute resolution (ie not litigation or arbitration)ADR...

MediationDispute Resolution BoardEarly neutral evaluationMed/ArbAdjudicationNegotiation/collaborative working clear!

Three useful tips to take away

Ensure clarity of contract terms etc...

Effectively manage disputes

If in doubt ... take good advice!

And finally, a word about Insolvency (some specific issues for construction projects)

Using the contract to your advantage Melville Dundas v Wimpey (2007)Retentions of Title

Novation

Keeping the project alive

The construction crunchcontractual pitfalls

Mark GordonPartnerRidge and Partners LLP

Turnaround Managers Association25 March 2009

OverviewHeads of claimTacticsCommercial considerations

Why is construction contentious?

Heads of claimMeasured worksVariationsProlongation and loss and expenseDisruption/accelerationRemedial worksContra-chargesLiquidated damagesCompletion costs

ProlongationMajor source of disputesMoney flows with liabilityCheck Contract terms; notice provisions, method of analysis, long-stop dates etcBlack art seek adviceCommonly over-stated

Delay analysisNo single accepted methodMethodology can obscure factsMisunderstoodPresentation

Delay analysis - example

Disruption/accelerationOut-of sequence workingCause + effect demonstrationCommon amongst subcontractorsInstruction required for acceleration

Remedial worksCommon head of counter-claimNot usually an issue until after terminationBettermentBurden of proof

Contra-chargesEg damage, cleaning costsBurden of proofQuantum

Liquidated damagesEmployer / main contractor remedy for delayDefault positionMain contractor allocationWithholding noticeOften applied toward end of works

Completion costsContract must be terminatedMarket priceEmergency worksBettermentCheck contract terms loss suffered?Survey of work completedAvoid paying twice (direct payments)

Common tacticsUnrealistic and inflated works completedInflated and spurious claimsExtensive contra-chargesCompletion costs include bettermentLarge value of management time claimed for completionInvoices disputed on spurious groundsDelayed paymentAmbushStarve struggling companies

ActionsSecure site, materials and recordsCommission detailed survey of works completedReview account and prepare final accountAppoint professionals to advise on entitlementsConsider adjudication as means of quick-winCheck for collateral warranties and guaranteesCheck withholding noticesMove quicklyDont be put off!

Commercial considerations

Questions

Our thanks go to the following:

To Blake Lapthorn for hosting the event To Richard Wade and Mark Gordon for speaking To our members and guests attending All of our Sponsors, including our Foundation Sponsors:

Surviving the Construction Crunch Wednesday 25th March 2009