Tag: The Local Democracy

The Scheme, “Part 2 – Payment”

In the previous post we looked at “Part 1 – Adjudication” of the The Scheme for Construction Contracts which gives a statutory right to the Alternative Dispute Resolution, Adjudication.

In this post we will look at “Part 2 – Payment.”

Entitlement to and amount of stage payments

  1.  Where the parties to a relevant construction contract fail to agree— (a) the amount of any instalment or stage or periodic payment for any work under the contract, or (b) the intervals at which, or circumstances in which, such payments become due under that contract, or

     (c) both of the matters mentioned in sub-paragraphs (a) and (b) above,

    the relevant provisions of paragraphs 2 to 4 below shall apply.

  2.  (1) The amount of any payment by way of instalments or stage or periodic payments in respect of a relevant period shall be the difference between the amount determined in accordance with sub-paragraph (2) and the amount determined in accordance with sub-paragraph (3).(2) The aggregate of the following amounts:

    (a) an amount equal to the value of any work performed in accordance with the relevant construction contract during the period from the commencement of the contract to the end of the relevant period (excluding any amount calculated in accordance with sub-paragraph (b)),

     (b) where the contract provides for payment for materials, an amount equal to the value of any materials manufactured on site or brought onto site for the purposes of the works during the period from the commencement of the contract to the end of the relevant period, and

     (c) any other amount or sum which the contract specifies shall be payable during or in respect of the period from the commencement of the contract to the end of the relevant period.

    (3) The aggregate of any sums which have been paid or are due for payment by way of instalments, stage or periodic payments during the period from the commencement of the contract to the end of the relevant period.

     (4)  An amount calculated in accordance with this paragraph shall not exceed the difference between:

     (a) the contract price, and

     (b) the aggregate of the instalments or stage or periodic payments which have become due.

     Dates for payment

  3. Where the parties to a construction contract fail to provide an adequate mechanism for determining either what payments become due under the contract, or when they become due  for payment, or both, the relevant provisions of paragraphs 4 to 7 shall apply.
  4. Any payment of a kind mentioned in paragraph 2 above shall become due on whichever of the following dates occurs later: (a) the expiry of 7 days following the relevant period mentioned in paragraph 2(1) above, or (b) the making of a claim by the payee.
  5. The final payment payable under a relevant construction contract, namely the payment of an amount equal to the difference (if any) between:(a) the contract price, and

     (b) the aggregate of any instalment or stage or periodic payments which have become due under the contract,

     shall become due on the expiry of:

     (a) 30 days following completion of the work, or

     (b) the making of a claim by the payee,

     whichever is the later.

  6. Payment of the contract price under a construction contract (not being a relevant construction contract) shall become due on (a) the expiry of 30 days following the completion of the work, or

     (b) the making of a claim by the payee,

     whichever is the later.

  7. Any other payment under a construction contract shall become due (a) on the expiry of 7 days following the completion of the work to which the payment relates, or (b) the making of a claim by the payee,

     whichever is the later.

     Final date for payment

  8. (1) Where the parties to a construction contract fail to provide a final date for payment in relation to any sum which becomes due under a construction contract, the provisions of this paragraph shall apply.(2) The final date for the making of any payment of a kind mentioned in paragraphs 2, 5, 6 or 7, shall be 17 days from the date that payment becomes due.Notice specifying amount of payment
  9. A party to a construction contract shall, not later than 5 days after the date on which any payment: (a) becomes due from him, or

     (b) would have become due, if:

    (i) the other party had carried out his obligations under the contract, and

    (ii)no set-off or abatement was permitted by reference to any sum claimed to be due under one or more other contracts,

     give notice to the other party to the contract specifying the amount (if any) of the payment he has made or proposes to make, specifying to what the payment relates and the basis on which that amount is calculated.

    Notice of intention to withhold payment

  10. Any notice of intention to withhold payment mentioned in section 111 of the Act shall be given not later than the prescribed period, which is to say not later than 7 days before the final date for payment determined either in accordance with the construction contract, or where no such provision is made in the contract, in accordance with paragraph 8 above.Prohibition of conditional payment provisions
  11. Where a provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective as mentioned in section 113 of the Act, and the parties have not agreed other terms for payment, the relevant provisions of:(a) paragraphs 2, 4, 5, 7, 8, 9 and 10 shall apply in the case of a relevant construction contract, and

     (b) paragraphs 6, 7, 8, 9 and 10 shall apply in the case of any other construction contract.

    Interpretation

  12. In this Part of the Scheme for Construction Contracts:

    “claim by the payee” means a written notice given by the party carrying out work under a construction contract to the other party specifying the amount of any payment or payments which he considers to be due and the basis on which it is, or they are calculated;

     “contract price” means the entire sum payable under the construction contract in respect of  the work;

     “relevant construction contract” means any construction contract other than one:

     (a) which specifies that the duration of the work is to be less than 45 days, or

     (b) in respect of which the parties agree that the duration of the work is estimated to be less than 45 days;

     “relevant period” means a period which is specified in, or is calculated by reference to the construction contract or where no such period is so specified or is so calculable, a period of 28 days;

     “value of work” means an amount determined in accordance with the construction contract under which the work is performed or where the contract contains no such provision, the cost of any work performed in accordance with that contract together with an amount equal to any overhead or profit included in the contract price;

     “work” means any of the work or services mentioned in section 104 of the Act.

 

The effect of “Part 1 – Adjudication” and “Part 2 – Payment”

Part II of the Housing Grants, Construction and Regeneration Act 1996 makes provision in relation to construction contracts where in Section 114 the Secretary of State is empowered to make the Scheme for Construction Contracts. Where a construction contract does not comply with the requirements of sections 108 to 111 (adjudication of disputes and payment provisions), and section 113 (prohibition of conditional payment provisions of the Housing Grants, Construction and Regeneration Act 1996), the relevant provisions of the Scheme for Construction Contracts have effect.

The Scheme in effect in Part I provides for the selection and appointment of an adjudicator, gives powers to the adjudicator to gather and consider information, and makes provisions in respect of his decisions and in Part II makes provision with respect to payments under a construction contract where either the contract fails to make provision or the parties fail to agree:

  • The method for calculating the amount of any instalment, stage or periodic payment
  • The due date and the final date for payments to be made
  • Prescribes the period within which a notice of intention to withhold payment must be given

The last two past are what the current regulatory framework (in February 2017) defines and requires. However we will return to this subject again later as this is a constantly moving as the courts interpret and have effect on how the legislation is to be interpreted.

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The Scheme, “Part 1 – Adjudication”

In recent posts we have seen two pieces of Primary Legislation being referred to, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. Intrinsic to this legislation is The Scheme for Construction Contracts, a Statutory Instrument that has come into force following these acts to regulate key elements of the construction process. In this post we will examine The Scheme and its major points in Part 1 which gives a statutory right to the Alternative Dispute Resolution, Adjudication.

In effect if you read the wording of the Statutory Instrument it sets out the step by step process under which Adjudication is contested and the following text is the text of the Statutory Instrument.

Notice of Intention to seek Adjudication

  1. (1) Any party to a construction contract (the “referring party”) may give written notice (the “notice of adjudication”) of his intention to refer any dispute arising under the contract, to adjudication.

    (2) The notice of adjudication shall be given to every other party to the contract.

    (3) The notice of adjudication shall set out briefly—

           (a) the nature and a brief description of the dispute and of the parties involved,

           (b) details of where and when the dispute has arisen,

           (c) the nature of the redress which is sought, and

    (d) the names and addresses of the parties to the contract (including, where   appropriate, the  addresses which the parties have specified for the giving of notices).

  2.  (1) Following the giving of a notice of adjudication and subject to any agreement between the parties to the dispute as to who shall act as adjudicator: (a) the referring party shall request the person (if any) specified in the contract to act as adjudicator, or

     (b) if no person is named in the contract or the person named has already indicated that he is unwilling or unable to act, and the contract provides for a specified nominating body to select a person, the referring party shall request the nominating body named in the contract to select a person to act as adjudicator, or

     (c) where neither paragraph (a) nor (b) above applies, or where the person referred to in (a) has already indicated that he is unwilling or unable to act and (b) does not apply, the referring party shall request an adjudicator nominating body to select a person to act as adjudicator.

     (2) A person requested to act as adjudicator in accordance with the provisions of paragraph (1) shall indicate whether or not he is willing to act within two days of receiving the request.

    (3) In this paragraph, and in paragraphs 5 and 6 below, an “adjudicator nominating body” shall mean a body (not being a natural person and not being a party to the dispute) which holds itself out publicly as a body which will select an adjudicator when requested to do so by a referring party.

  3. The request referred to in paragraphs 2, 5 and 6 shall be accompanied by a copy of the notice of adjudication.
  4. Any person requested or selected to act as adjudicator in accordance with paragraphs 2, 5 or 6 shall be a natural person acting in his personal capacity. A person requested or selected to act as an adjudicator shall not be an employee of any of the parties to the dispute and shall declare any interest, financial or otherwise, in any matter relating to the dispute.
  5. (1) The nominating body referred to in paragraphs 2(1)(b) and 6(1)(b) or the adjudicator nominating body referred to in paragraphs 2(1)(c), 5(2)(b) and 6(1)(c) must communicate the selection of an adjudicator to the referring party within five days of receiving a request to do so.

    (2) Where the nominating body or the adjudicator nominating body fails to comply with paragraph (1), the referring party may:

     (a) agree with the other party to the dispute to request a specified person to act as adjudicator, or

     (b) request any other adjudicator nominating body to select a person to act as adjudicator.

     (3) The person requested to act as adjudicator in accordance with the provisions of paragraphs (1) or (2) shall indicate whether or not he is willing to act within two days of receiving the request.

  6. (1) Where an adjudicator who is named in the contract indicates to the parties that he is unable or unwilling to act, or where he fails to respond in accordance with paragraph 2(2), the referring party may:

    (a) request another person (if any) specified in the contract to act as adjudicator, or

     (b) request the nominating body (if any) referred to in the contract to select a person to act as adjudicator, or

    (c) request any other adjudicator nominating body to select a person to act as adjudicator.

     (2) The person requested to act in accordance with the provisions of paragraph (1) shall indicate whether or not he is willing to act within two days of receiving the request.

  7.  (1) Where an adjudicator has been selected in accordance with paragraphs 2, 5 or 6, the referring party shall, not later than seven days from the date of the notice of adjudication, refer the dispute in writing (the “referral notice”) to the adjudicator.(2) A referral notice shall be accompanied by copies of, or relevant extracts from, the construction contract and such other documents as the referring party intends to rely upon.

     (3) The referring party shall, at the same time as he sends to the adjudicator the documents referred to in paragraphs (1) and (2), send copies of those documents to every other party to the dispute.

  8. (1) The adjudicator may, with the consent of all the parties to those disputes, adjudicate at the same time on more than one dispute under the same contract.

    (2) The adjudicator may, with the consent of all the parties to those disputes, adjudicate at the same time on related disputes under different contracts, whether or not one or more of those parties is a party to those disputes.

     (3) All the parties in paragraphs (1) and (2) respectively may agree to extend the period within which the adjudicator may reach a decision in relation to all or any of these disputes.

     (4) Where an adjudicator ceases to act because a dispute is to be adjudicated on by another person in terms of this paragraph, that adjudicator’s fees and expenses shall be determined in accordance with paragraph 25.

  9. (1) An adjudicator may resign at any time on giving notice in writing to the parties to the dispute.

    (2) An adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to adjudication, and a decision has been taken in that adjudication.

    (3) Where an adjudicator ceases to act under paragraph 9(1)—

     (a) the referring party may serve a fresh notice under paragraph 1 and shall request an adjudicator to act in accordance with paragraphs 2 to 7; and

    (b) if requested by the new adjudicator and insofar as it is reasonably practicable, the parties shall supply him with copies of all documents which they had made available to the previous adjudicator.

    (4) Where an adjudicator resigns in the circumstances referred to in paragraph (2), or where a dispute varies significantly from the dispute referred to him in the referral notice and for that reason he is not competent to decide it, the adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.

  10. Where any party to the dispute objects to the appointment of a particular person as adjudicator, that objection shall not invalidate the adjudicator’s appointment nor any decision he may reach in accordance with paragraph 20.
  11. (1) The parties to a dispute may at any time agree to revoke the appointment of the adjudicator. The adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.

     (2) Where the revocation of the appointment of the adjudicator is due to the default or misconduct of the adjudicator, the parties shall not be liable to pay the adjudicator’s fees and expenses.

     Powers of the adjudicator

  12. The adjudicator shall:

     (a) act impartially in carrying out his duties and shall do so in accordance with any relevant terms of the contract and shall reach his decision in accordance with the applicable law in relation to the contract; and

    (b) avoid incurring unnecessary expense.

  13. The adjudicator may take the initiative in ascertaining the facts and the law necessary to determine the dispute, and shall decide on the procedure to be followed in the adjudication. In particular he may:

     (a) request any party to the contract to supply him with such documents as he may reasonably require including, if he so directs, any written statement from any party to the contract supporting or supplementing the referral notice and any other documents given under paragraph 7(2),

     (b) decide the language or languages to be used in the adjudication and whether a translation of any document is to be provided and if so by whom,

    (c) meet and question any of the parties to the contract and their representatives,

    (d) subject to obtaining any necessary consent from a third party or parties, make such site visits and inspections as he considers appropriate, whether accompanied by the parties or not,

    (e) subject to obtaining any necessary consent from a third party or parties, carry out any tests or experiments,

    (f) obtain and consider such representations and submissions as he requires, and, provided he has notified the parties of his intention, appoint experts, assessors or legal advisers,

     (g) give directions as to the timetable for the adjudication, any deadlines, or limits as to the length of written documents or oral representations to be complied with, and

     (h) issue other directions relating to the conduct of the adjudication.

  14. The parties shall comply with any request or direction of the adjudicator in relation to the adjudication.
  15. If, without showing sufficient cause, a party fails to comply with any request, direction or timetable of the adjudicator made in accordance with his powers, fails to produce any document or written statement requested by the adjudicator, or in any other way fails to comply with a requirement under these provisions relating to the adjudication, the adjudicator may:

     (a )continue the adjudication in the absence of that party or of the document or written statement requested,

    (b) draw such inferences from that failure to comply as circumstances may, in the adjudicator’s opinion, be justified, and

     (c )make a decision on the basis of the information before him attaching such weight as he thinks fit to any evidence submitted to him outside any period he may have requested or directed.

  16. (1) Subject to any agreement between the parties to the contrary, and to the terms of paragraph (2) below, any party to the dispute may be assisted by, or represented by, such advisers or representatives (whether legally qualified or not) as he considers appropriate.

     (2) Where the adjudicator is considering oral evidence or representations, a party to the dispute may not be represented by more than one person, unless the adjudicator gives directions to the contrary.

  17. The adjudicator shall consider any relevant information submitted to him by any of the parties to the dispute and shall make available to them any information to be taken into account in reaching his decision.
  18. The adjudicator and any party to the dispute shall not disclose to any other person any information or document provided to him in connection with the adjudication which the party supplying it has indicated is to be treated as confidential, except to the extent that it is necessary for the purposes of, or in connection with, the adjudication.
  19. (1) The adjudicator shall reach his decision not later than:

     (a) twenty eight days after the date of the referral notice mentioned in paragraph 7(1), or

     (b) forty two days after the date of the referral notice if the referring party so consents, or

    (c) such period exceeding twenty eight days after the referral notice as the parties to the dispute may, after the giving of that notice, agree.

     (2) Where the adjudicator fails, for any reason, to reach his decision in accordance with paragraph (1)

     (a) any of the parties to the dispute may serve a fresh notice under paragraph 1 and shall request an adjudicator to act in accordance with paragraphs 2 to 7; and

    (b) if requested by the new adjudicator and insofar as it is reasonably practicable, the parties shall supply him with copies of all documents which they had made available to the previous adjudicator.

    3) As soon as possible after he has reached a decision, the adjudicator shall deliver a copy of that decision to each of the parties to the contract.

     Adjudicator’s decision

  20. The adjudicator shall decide the matters in dispute. He may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute. In particular, he may:

    (a) open up, revise and review any decision taken or any certificate given by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive,

     (b) decide that any of the parties to the dispute is liable to make a payment under the contract (whether in sterling or some other currency) and, subject to section 111(4) of the Act, when that payment is due and the final date for payment,

     (c) having regard to any term of the contract relating to the payment of interest decide the circumstances in which, and the rates at which, and the periods for which simple or compound rates of interest shall be paid.

  21. In the absence of any directions by the adjudicator relating to the time for performance of his decision, the parties shall be required to comply with any decision of the adjudicator immediately on delivery of the decision to the parties in accordance with this paragraph.
  22. If requested by one of the parties to the dispute, the adjudicator shall provide reasons for his decision.

    Effects of the decision

  23. (1) In his decision, the adjudicator may, if he thinks fit, order any of the parties to comply peremptorily with his decision or any part of it.

     (2) The decision of the adjudicator shall be binding on the parties, and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement between the parties.

  24. Section 42 of the Arbitration Act 1996 shall apply to this Scheme subject to the following modifications:

    (a) in subsection (2) for the word “tribunal” wherever it appears there shall be substituted the word “adjudicator”,

     (b) in subparagraph (b) of subsection (2) for the words “arbitral proceedings” there shall be substituted the word “adjudication”,

    (c) subparagraph (c) of subsection (2) shall be deleted, and

    (d) subsection (3) shall be deleted.

  25. The adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.
  26. The adjudicator shall not be liable for anything done or omitted in the discharge or purported discharge of his functions as adjudicator unless the act or omission is in bad faith, and any employee or agent of the adjudicator shall be similarly protected from liability.

 

In effect these 26 clauses define the process of Adjudication and are relatively unambiguous, although this does not translate into Adjudication being a simple and straight forward process. We will return to this subject and look at the 4 stages that the Statutory Instrument defines.

The reality is the process is complex and requires a specialist to be employed in order to obtain the successful outcome sought by a referring party. Ansell Murray Limited have represented as both referring and responding parties and are well placed to provide strategic advice on whether or not Adjudication should be undertaken as well as representation.

The Scheme for Construction Contracts

In recent posts we have seen two pieces of Primary Legislation being referred to, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. Intrinsic to this legislation is The Scheme for Construction Contracts, a Statutory Instrument that has come into force following these acts to regulate key elements of the construction process. In this post we will examine The Scheme and its major points.

We must first remember that this legislation refers to “construction activities” as defined in the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations”.

Which leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider The Scheme for Construction Contracts. Firstly we must remember that there are a different set of regulations in place in England & Wales to those in place in Scotland. In this post we will consider the regulations as they apply in England & Wales.

The Scheme for Construction Contracts

The Scheme for Construction Contracts (England and Wales) Regulations to give them their full title apply when construction contracts do not comply with the primary legislation and either supplements the provisions of the contract where it has deficiencies relative to the requirements of the Act or replaces the contract where it is non-compliant. The purpose is to allow the contract capable of being performed (reducing the likelihood of frustration) whilst allowing regulatory control over its provisions.

The Housing Grants, Construction and Regeneration Act applies  to all contracts for “construction operations” and sets out the requirements relating to Adjudication and payment, including:

  • The right to commence Adjudication
  • To be paid in interim, periodic or stage payments.
  • To be informed of the amount due, or any amounts to be withheld.
  • To suspend performance for non-payment.
  • Disallowing pay when paid clauses.

Part 1 of the Scheme makes provision for Adjudication where the contract does not comply with the requirement and Part 2 replaces those provisions in relation to payment that do not comply.

The 2011 amendments to The Housing Grants, Construction and Regeneration Act

The Housing Grants, Construction and Regeneration Act 1996 was amended in October 2011 by the Local Democracy, Economic Development and Construction Act 2009 to close loop holes within the original legislation and as a result The Scheme for Construction Contracts was also amended to reflect the amendments. These amendments and their implication have been outlined in previous posts but can be broadly summarised as follows:

  • The act now applies to all construction contracts, even those not evidenced in writing
  • Adjudication clauses must still be in writing
  • Who will bear the cost of Adjudication can no longer be defined in the contract
  • The Adjudicator has the right to correct errors in contracts within 5 days of delivering a Determination
  • Payment dates must be set out in the contract.
  • A Payment Notice must be issued five days of the date for payment, even if no amount is due, although alternatively, if the contract allows, the Contractor may make an application for payment, which is treated as if it is the Payment Notice
  • A Pay Less Notice (previously a Withholding Notice) must be issued where it is intended to pay less than the amount set out in the Payment Notice, including the basis of calculation of the amount being paid less
  • The notified sum is payable by the final date for payment
  • Where a Payment Notice is not issued, the Contractor (or Sub-Contractor) may issue a Default Payment Notice
  • Pay when certified clauses are no longer allowed and retention release cannot be prevented by conditions within another contract.
  • The provisions around the right to suspend for non-payment have been expanded to allow costs to be claimed as well as the right to an Extension of time as consequences of any statutory suspension

These amendments apply to construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

In the next post we will look at Part 1 (Adjudication) of The Scheme for Construction Contracts and the legal requirements and in the post after that Part 2 (Payment).

How does PPP work

Public / Private Partnerships originated in Australia as governments sought new way of dealing with public procurement of infrastructure in the 1980’s. In the intervening periods they have remained similar as a financial model but as governments like to change the name when there is a new administration in a misguided attempt to make it look like a new policy as opposed to a rehash of the old ones there have been various iterations in the United Kingdom.

The last Conservative Government of John Major started using these financial models and they were knows as a Public Private Partnership (PPP). While in opposition Gordon Brown called into question PPP’s and made it clear they would not be used if Labour won the next General Election. So were born the  Private Finance Initiative (PFI) which as the Labour government became tired and ran out of steam were ridiculed by Gideon Osbourne and would not form part of any incoming Conservative government procurement plans. Of course a little tweak here and there and now we have Private Finance 2 (PF2).

Yet in reality they are little changed, save for the minor tweaks.

What are Public Private Partnerships?

Public Private Partnerships are generally where public services or private business ventures are funded and operated through a partnership between the Government and one or more private sector companies.

They allow Government to contract out the design, building and operation of a facility for the benefit of the public to a private sector company usually for a period of 25 to 30 years usually based on a “value for money” test over traditional procurement. In effect government had two ways to procure:

  • A standard procurement structure, in which the Government specified what it wanted in terms of an asset and then paid a contractor to build that asset. The Government then took ownership of the asset, and took on the obligation to maintain it, after it was built; or
  • A PPP structure in which the Government specified what it wanted in terms of a service and either pay a service provider to make that service available, or allow the service provider to retain the resulting revenue or share it with the Government.

However the effective result of PPP is that everything is procured through the PPP model and has resulted in almost every aspect of what the government provided being effectively sub-contracted, through large service providers, such as Capita. There is some miss-guided notion that a private company can run the service for less money and still make a profit than government after factoring in inherent inefficiency. The actual result is usually poorer service. There is a scandal every so often, the culprit is given a token ban from securing government work, but this is soon dropped and they back on the gravy train.

A worked example

For the purposes of this example we will assume the highway authority want to provide traffic relief by building a new toll road (such as the M6 toll which by-passes Birmingham via Cannock in the West Midlands) and maintaining and managing the asset for a 25 year period.

There would clearly be key functions that would need to be considered and evaluated by the PPP operator, such as

  • The cost of building and operating the road would need to secured
  • The PPE contractor would have to engage a designer to determine the layout and specification of the road
  • A contractor would need to be appointed to construct the road
  • A service organisation would be required to clean the road, replace damaged infrastructure from crashes, provide and maintain lighting, institute a “smart” tolling system (Such as at the Dartford Crossing of the Thames River
  • Cyclical maintenance such as resurfacing would need to undertaken
  • A mechanism would need to be established of what the handover procedure is when the lifecycle of the PPP ends

As can be seen this is a multi-disciplinary activity and the government would in effect expect the cradle to grave cycle to be undertaken by the successful bidding organisation. This generally means that the bidders are Joint Ventures (JV) (incorporated or unincorporated) that allow the main Special Purpose Vehicle (SPV) that will hold the effective PPP contract to cover different competencies. In our example the SPV could be made up of a Finance House, Design Organisation, Main Contractor and Service Provider. However despite this make-up of the JV the actual works will still be sub-contracted even to a partner company. This is because the trend has been for these SPV’s to be sold off after a defined period. In effective the SPV is a shell because it owns no physical assets, employs few (if any staff) and exists to own the head contract for the PPP being contracted for.

Risk is obviously a major consideration in these projects because of their complexity and part of the PP process would be for government to transfer risk to the SPV and its agents. This could be done as follows:

  1. Risks that Government want to pass to the PPP SPV would be set out in the contract between the parties, or assumed by the SPV as applicable at law to its activities, such as liability for contamination during the construction phase
  2. As the SPV is project specific and does not own anything physically these risks and obligations are allocated to the various members of the supply chain where applicable or where this cannot happen will be left as a risk the SPV holds with some form mitigation to cover the financial consequences of the risk crystallizing. In effect the cost of this type of risk would be a component of one of the costs of the service
  3. During the construction phase – for example, liability for environmental pollution during construction phase the risks would be passed down by the SPV to a Contractor (who could further pass down the risk to Sub-Contractors) through “back-to-back” provisions in their contracts. In effect this means the Contractor agrees to perform all the defined services the SPV has agreed to provide to the government. The Contractors programme would be of equal length of shorter than the SPV, to build a road to the same specification required by the government in the head contract and to ensure the SPV would not be in breach of contract and subject to Liquidated and Ascertained Damages. (LAD’s) However there would be a “back to back” provision that would make the Contractor liable to the SPV for LAD’s at the same level in the event he was in breach of contract. In effect mitigating this risk for the SPV. The effective purpose would be to leave the allow the SPV neutral and the Contractor managing the risks involved in the construction of the asset
  4. When the road was complete and able to operate as a toll road, the SPV would operate the road and, again, these obligations would sub-contracted to an Operating Company using a similar methodology as detailed in the previous point. However it is possible that not all operation and maintenance risk could be passed to the Operating Company, two examples would be:
  • “Day-to-day” operation and maintenance could be passed on but obligations to undertake periodic, major maintenance, such as resurfacing for wear and tear may not be subcontracted at the start but remain an SPV risk, and contracted for separately when required (where defined in the head contract) or as due when there are sufficient funds and resources
  • “Change in Law” provision are a risk that cannot be evaluated at the start and that the Operating Company could not take on because of the length of the service contract. These risks are to a large extent under the control of government as the legislator. It is likely this would be a shared risk between government and the SPV and be dealt with as and when the risk crystallises following a change in law.
  1. The SPV has to finance the construction and initial operational activities, in effect the construction costs of the road would need to be paid for, and the money for this would need to be repaid from revenue generated by the road when it opened for traffic. The financial model would see the funding requirements should exactly match the SPV’s liabilities to pay its subcontractors. In effect a lean organisation

 Nature of risks with this PPP project

At the simple level the risks would be:

  • Can the road be built on time and to the required specification
  • Can the road be operated as the government requires
  • Will revenue generation be as expected as the financial model will be based on revenue assumptions

We could now expand these sub heading and detail some of the specific further risk that could be associated with each.

Built on time and to the required specification

  • Does the SPV have the necessary access to the site
  • What happens if ground conditions are different from expected
  • What happens if the law relating to road construction changes during the construction period
  • What happens if resources that the contractor is expecting to use are not available or in short supply
  • Who takes the risk that the road costs more to build than expected
  • What happens if a natural disaster occurs

Operated as the government requires

  • Does the SPV have the required access to the site
  • What happens if the law relating to road operation changes during the operating period
  • What happens if resources that the operator is expecting to use are not available or in short supply
  • Who takes the risk that the road costs more to operate than expected
  • What happens if a natural disaster occurs

Revenue generation expectations

  • Has the road been built to specification
  • Is the road being operated according to the Government’s requirements
  • Demand risk: will cars, lorries etc want to use the road
  • Payment risk: will cars, lorries etc want to pay to use the road
  • Are the operating costs, including finance cost fixed or variable

 These risks are typical but not exhaustive and each would require a provision in the contract to deal with. Some we have already looked at in other blog posts such as access (frustration) or natural disasters (Force Majeure). However Demand Risk could be dealt with where government makes up for any shortfall in notional demand. Of course this really means the taxpayer is obligated to pay the shortfall.

However in the alternative these risks would exists under traditional procurement where the accepted norm is to contract out the running.

As the Local Democracy, Economic Development and Construction Act [2009] outlawed Conditional Payment clauses, although this is the standard in PPP contracts where the SPV is created for the sole purpose of procuring the project has no assets and is not intended to have any liability unless it is first paid. Therefore PPP contracts have an Exclusion Order where Conditional Payment provisions will exist, although in the longer term this may need to be subject to further legislation. However because of the nature of the contracts and that they are bespoke, heavily negotiated forms this is a risk known to all parties at the outset.

The Exclusion Order means that provisions in first tier PPP sub-contracts which make payments in such contracts conditional upon obligations being performed in other contracts (such as providing certificates and ‘pay when paid’ clauses) will be effective.  However, ‘pay when paid’ clauses will, generally speaking, continue to be ineffective in accordance with the Local Democracy, Economic Development and Construction Act [2009]


PPP as a procurement model has been with us for over 20 years. It’s a simple and legal way for government to not have to declare obligations as government debt. In an overwhelming majority of cases where a dual analysis of PPP and traditional procurement has been evaluated, the assumptions are skewered to assist in ensuring the PPP option is the governments preferred procurement route. However when costs are well known and become public knowledge PPP proves itself to be poor value for money.

But the reality is it’s here to stay, even if when the current Conservative government runs out of steam and the electorate give another party the opportunity to govern, probably Labour once again once they have dispensed with their insane trip back to 1920’s state control under Jeremy Corbyn and his “brothers” and “sisters”. One thing is sure PPP will continue, it will just be called something else.

Maybe they could call it Stakeholder Hybrid Infrastructure Term Schemes.

Termination & Suspension clauses in construction contracts

Legally speaking in a contract there is very small differences between Termination clauses and Suspension clauses. Although there is now a Statutory Right to suspend works in construction contracts for non-payment.

It is therefore imperative when agreeing a contract, particularly for the supply of goods and services a termination and suspension clause should be included, if for nothing else to ensure the reasons for suspension cannot be regarded as termination. As this would usually come about when there is some dispute and / or claim between the parties, this only seeks to reinforce the requirement for clearly defined suspension clauses, that may lead to termination, but not when first triggered.

Termination clauses in construction contracts

Standard form of contract will contain express provisions on the rights of either party to terminate the contract in defined circumstances. By way of an example, if the contract is in effect a Sub Contract and therefore a further party is the employer, an insolvency event of the employer would allow the contractor to terminate the contract with the sub contract.

Non-contractual rights to terminate

The contract is entered into and usually implies that the parties will diligently carry out the works being contracted for within prescribed timeframes and then the obligation on the other party would be to make regular payment on a fair and reasonable basis. Usually under the services being contracted for the party providing the services would be required to “carry out and complete” the services, The definition of complete will usually even be defined in its own right, so there is no ambiguity in this that can lead to dispute.

Even with these terms there can still be reasons why the contract would end up being terminated, such as the following:

Frustration

Frustration can occur when neither party has defaulted on the contract but circumstances have intervened to prevent the contract from being performed as originally intended making further performance of the contract is impossible, illegal or significantly different to the circumstances and understanding when the parties entered into the contract.

Where frustration occurs the contract automatically terminates and the parties are excused from their future obligations, although any accrued liabilities remain.

It is therefore vitally important to ensure (and in effect for both parties to agree) that frustration has occurred, justifying the termination. This would be to avoid by consequence of terminating for frustration to being in breach of contract, where frustration has not actually occurred.

By way of examples, where a contract becomes more expensive to perform through any number of issues which should have been considered as part of the negotiation of the value of the contract, this will not be a frustration event or where an event is set out as being possible and how it is dealt with is set out as an effective potential variation (change) to the contract this will not be a frustration event.   Case law gives some examples of events that are not frustrating events. The parties need to be wary of Force Majeure clauses and their potential overlap. This will be investigated further in a later post.

An event that could be regarded as frustration would be where an employer instructs an architect to design a house to be built by a Contractor on a piece of land that the employer is in the process of purchasing. If the sale of the land falls through, the contract would be frustrated as the design for will no longer be required.

Repudiation

Repudiation occurs when a party commits a breach of contract sufficiently serious that it entitles the injured party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract. If this is a material or anticipatory breach will depend upon the severity and effect of the breach, and whether it goes to the root of the contract.

Certain extreme types of breach will amount to a clear repudiation of a construction contract, such as:

  • Refusal to carry out work;
  • Abandonment of the site
  • Removal of plant by the contractor;
  • Employing other contractors to carry out the same work;
  • Failure by an employer to give access to the site.

These examples above are clear and unambiguous and grounds for repudiation. However other breaches may not be clear-cut and like frustration need to be clearly grounds to ensure that where the injured party treats the contract as repudiated as a consequence of the breach, which is not repudiatory; this will be wrongful termination and be a breach in its own right.

Whilst damages for repudiation may be higher than for other for other breaches, the parties should ensure they have that all important right to terminate for repudiation before doing so and where possible should try to utilise a more clear cut contractual right to terminate if available.

Further repudiation by one party will not by itself bring an end to further contractual obligations, the repudiation has to be accepted by the injured party. While there is no prescribed form of acceptance, it must be unequivocal acceptance by both parties. Where both parties accept the contract is repudiated, each side is released from performance of their respective unperformed obligations and damages are assessed under the normal rules and payable by the party at fault. The principle of these damages is to put the injured party in the same position they would have been in had the contract been properly completed.

However if the injured party does not accept the repudiation it “affirms” the contract is to continue, it is still entitled to claim damages for the breach but the contract will continue.

A further difficulty can be where the injured party instead of accepting repudiation, inadvertently “affirms” by their actions that contradicts acceptance or is equivocal in some way. This in itself could lead to the injured party being in breach of contract if it stops performing its obligations in the mistaken belief repudiatory breach has been accepted.

Just to confuse matters in this complex and complicated area of contract law, in some cases a breach may give the injured party the right to terminate for repudiation and a defined right under the contract.

In these circumstances the injured party does not necessarily have to elect to use one right or the other. However where exercising the contractual right is inconsistent with acceptance of repudiation, where the consequences of terminating under the contractual right are different or the response to the breach is less than unequivocal the injured party will be taken to have “affirmed” the contract and will have to rely on the contractual right rather than repudiation. As stated previously this could have consequences in relation to the level of damages for the breach.

Contractual rights to terminate

Termination clauses in contracts give parties right to terminate in certain circumstances and usually are in relation to breaches of specified contractual obligations as well as Force Majeure events which will be investigated separately.

Termination for convenience

Termination “at will” or “for convenience” wording can be inserted into a contract allowing one party to terminate without having to establish that some event has occurred or breach has been committed by the other party.

By way of an example, where an employer reconsiders the use to which land where they cannot secure financing for the whole of the project or cannot secure anchor tenants’ the contractor finds the project will be unprofitable or too risky, or the project has been suspended for a significant period with no prospect of it being recommenced could be grounds to terminate “at will” or “for convenience”. This could in effect reduce the possibility of dispute or claim later and the termination would be in the long term interests of the parties.

Traditionally this form of provision has been less common than those permitting termination for default in some of the un-amended standard forms. Employers in New Engineering Contract (NEC) 3 and the majority of Public / Private Partnerships (Private Finance Initiative and Private Finance Initiative 2) (PFI & PFI2) do have these rights usually. However, contractors and consultants are rarely given the right to terminate for convenience.

 Precedent and Compensation with terminate “at will” clauses

In these matters the only way to fully determine if the termination was legal and lawful is by having it determined by the courts. The matter could be subject to Adjudication, however the losing party would in all likelihood not accept the finding if they were to suffer financial loss.

As Public / Private Partnerships are a concept that originated in Australia, historically the English courts have looked to the Australia system for guidance around  termination “at will” or “for convenience.” It has been established through case law that in the absence of sufficient wording, it will be a breach of contract to exercise a termination for convenience clause simply for the employer to obtain a better price to complete the works from another contractor. This would be consistent as in effect it’s a higher form of “subby bashing” if we take the view the Employer and Contractor as effective in a Sub Contract arrangement. Further it has been established that a contract may provide no express limitation on when, or in what circumstances, a termination for convenience clause can be operated.

To be effective, termination for convenience clauses need to provide for contractor compensation. Standard forms do contain these clauses and there is a precedent that where compensation is provided for in the contract in clear, unambiguous terms it will usually be enforceable.

The key phrase there is “clear wording” as this will be required before a termination for convenience clause can be fully effective. Unreasonable provisions, such as allowing the employer to pass work on to a third party, must be stated in clear, unambiguous terms otherwise they will be unenforceable.

The courts have also determined that the use of omissions clauses to tackle bad bargains cannot be used as an omissions clause to get out of what it now considers to be a bad bargain. It is further doubtful (although not tested) if this type of clause could be relied on exclusively by an employer to switch contractors in the event of dissatisfaction with the current contractor’s work.

Case law precedent warns us that even if the contract does contain an express provision dealing with termination for convenience trivial breaches may preclude termination and harsh objectives need clear wording otherwise termination will be seen as an intrusion on the contractor’s right to finish the work. It has further established that work transferred between contractors is questionable and an employer cannot use an omissions provision to get out of a bad bargain, and it is also doubtful it can be used if the employer is dissatisfied with a contractor’s performance a termination clause should provide for compensation to avoid being treated as unenforceable because it is unfair.

Suspension clauses

As stated at the outset there is a very close relationship between suspension and termination. Dependent on how the clause is drafted the end result of a suspension clause may be much the same as a termination clause in that either party will have the right to terminate the contract at the end of the agreed suspension period where the reason for suspension has not been removed

The issue is that when negotiating terms and conditions of a contract in an effect to ensure the termination clauses are consistent and adequately protect both parties, defined suspension terms tend to be overlooked.

Just as with termination clauses, suspension can take many forms and the onus is on what is agreed between the parties. It should be stated that the terms and mechanism for suspension should be well defined to ensure that this in itself does not result in a dispute.

One of the key reasons to suspend previously was for non-payment; this is now a statutory right with the changes in the Local Democracy, Economic Development and Construction Act [2009].

Broadly speaking the justification for suspension clauses will be similar to termination. Suspension could be a sensible mechanism for example to be used by one party where the scope and proposed outcome of a project has changed significantly but without the constraint to allow it to be developed. A suspension here for a mutually agreed timeframe would benefit both parties, if kept within certain boundaries. There could for example be agreement on a demobilisation and remobilisation cost during the suspension. This would be on the basis all parties have the desire to complete what was started, but just to a different scope. An example would be where historical artefacts are discovered that mean a proposed development has to have a significant re-design to allow for this. It would be far more sensible to suspend the works while the optioneering takes place that to let design to continue where it may only be subject to further re-design.

However it must be considered that conventional wisdom is that in the absence of an express contractual term it is difficult to argue that a general right to suspend exists in law as the courts have consistently refused to recognise such a right, save for the statutory provisions. This makes a defined suspension clause a sensible inclusion to benefit both parties.

When this clause is drafted however care needs to be taken to ensure that lifting the suspension is dealt with as well as the practical consequences of suspension and how long a contract can be suspended for before termination may occur

 

In conclusion as this is a complex and subjective area on contract law, where using these clauses you must proceed with caution. Where these clauses are going to be invoked you need to be absolutely clear that you strictly follow the contract’s notice and procedural requirements.

Implied Terms in Contracts

With the United Kingdom having shaken up the selling of goods and services with the passing on the Consumer Rights Act [2015], it will be interesting to look at a case that was appealed to the Court of Appeal and see if anything different would or could happen under the new legislation.

The case of Lowe and Another v W Machell Joinery Ltd [2011] EWCA Civ 794 shook up the law with regard to terms implied into contracts.

Backgrounds

Mr and Mrs Lowe converted a barn for residential use and placed a number of orders with W Machell Joinery Limited. Crucially this was done during a conversation with no formal written quotation. The element of this order that led to this case was a bespoke, elaborately designed wooden staircase costing £16,000 (Exclusive of Value Added Tax).

The Lowe’s paid for the staircase on 4th June 2009 and it was delivered to their property on 5th June 2009. However on 12th June 2009 the Lowe’s rejected the staircase by letter and had another staircase supplied by another company. It was claimed by the Lowe’s that they were entitled to reject the staircase because the verbal contract with W Machell Joinery Limited included the installation of the staircase and it should have been installed.

Mr and Mrs Lowe issued proceedings to recover the price of the staircase in July 2009.

Technology and Construction Court (TCC) decision

The trail was heard in July 2010 and by this time the Lowe’s relied on further reasons justifying their rejection of the staircase which included that had the staircase been installed, it would not have complied their Building Regulations.

At the TCC hearing in Leeds, Yorkshire the judge held that the original reasons for rejecting the goods were unjustified.  However, he further held that W Machell Joinery Limited were in breach of contract as the staircase did not comply with Building Regulations. However this breach was not sufficient justification for the Lowe’s to reject the staircase as he reasoned it would have been easy to modify the staircase in a number of ways to ensure compliance with Building Regulations.

The judge therefore dismissed the claim and you would expect this to be the end of the matter.

Court of Appeal

Mr and Mrs Lowe appealed against the decision to the Court of Appeal.

Here they raised an argument on appeal that was not fully relied upon in the original trial. This being that Section 14 of The Sale of Goods Act [1979] implied terms into the contract between the parties which W Machell Joinery Limited subsequently breached entitling the Lowes to reject the staircase.

Section 14(2) of the Act provided that where goods are sold by a seller in the course of a business transaction there is an implied term that the goods are of satisfactory quality.

Section 14(3) provided that when goods are sold by a seller in the course of a business transaction where the buyer makes the seller aware that the goods have a particular purpose, a term is implied that the goods are fit for the purpose for which they have been supplied.

Therefore the Lowe’s also argued the term should be implied into the contract between the parties that the staircase would comply with the relevant Building Regulations and British Standards.

Court of Appeal Decision

The Court of Appeal found that there was a breach of contract and overturned the decision handed down in the TCC where he found this breach entitled the Lowes to reject the staircase.

The Judge found that the breach of the contract was of the implied terms that the staircase had to be of satisfactory quality and, because J Machell Joinery Limited was aware that the barn was to be converted to residential use, it needed to be fit for purpose as required by the Act.

The Court found “fit for purpose” included compliance with Building Regulations and therefore there was an implied term that the staircase would comply with the relevant Building Regulations and British Standards, albeit under cover of “fit for purpose”.

While the only way to see if this would hold true under the Consumer Rights Act [2015] as the legislation still requires these tests, it is highly likely a similar case would result in the same outcome.

Is this fair?

W Machell Joinery Limited contracted with the Lowes to supply a staircase that did not comply with Building Regulations. Further W Machell Joinery was not responsible for obtaining Building Regulation approval for the staircase.  Yet to show how obtuse the law can be, if W Machell Joinery Limited changed the specification of the staircase to be compliant with Building Regulations, this would not be compliant with the design requested by the Lowes. Therefore either way, J Machell Joinery Limited would be in breach of contract.

The solution to this anomaly from the Court of Appeal to avoid this situation was that W Machell Joinery Limited should have made the Lowe’s aware the staircase was not compliant with Building Regulations before it had been manufactured.  The Lowe’s would have had the choice to continue with the design and risk the staircase not complying with Building Regulations, or to alter the design to make it compliant.

Implied terms generally

From a construction industry perspective both The Housing Grants, Construction and Regeneration Act [1996] as amended by The Local Democracy, Economic Development and Construction Act [2009] and The Supply of Goods and Services Act [1982] as superseded by the Consumer Rights Act [2015] imply terms into construction contracts.

Housing Grants, Construction and Regeneration Act 1996

This Act implied terms which included:

  • Entitlement to stage payments
  • Limit to right to withhold payment
  • The right to refer disputes to adjudication
  • Mechanism for payment, including payment date and notice of amount
  • Prohibiting conditional payment provisions
  • Right to suspend for non-performance

If the above provisions were not included in a construction contract, the Scheme for Construction Contracts applies, in effect being the implied terms.

 Supply of Goods and Services Act 1982 
This Act implied terms that:

  • Service will be carried out with reasonable care and skill
  • Supplier will carry out the service within a reasonable time
  • Supplier will be paid a reasonable charge

These are still required under the Consumer Rights Act [2015].

Further the courts are empowered to also imply terms into contracts, and these fall into two categories:

  1. Where a contract has been entered into between the parties, to make the contract work successfully a term needs to be implied into the contract.  For example, the language may be ambiguous and require clarifying; and
  2. In construction contracts there are certain usual terms that are implied unless the parties wish to exclude or change these implied terms.  An examples of these implied terms for would be that the parties will co-operate with each other, and that the parties will not prevent completion from taking place.

Can you prevent the Lowe v W Machell Joinery Limited happening?

The primary issue that allowed the dispute to reach the conclusion it did was that no written contract or terms of agreement existed between the parties, setting out the contract terms and what was to be delivered.

Where there is supply or manufacture and supply of high value items you should always draft a contract which details the obligations and liabilities of each party.

This will enable both parties to understanding their duties and obligations and hopefully avoid disputes arising in the future.

Further this will prevent terms being implied into contracts which were not the parties’ intentions at the time the contract was made. In reality the material fact there was no written document allowed the Lowe’s to have the court rule in their favour on matters that were unforeseen at the time of agreement to supply the staircase.

Ansell Murray Limited has experience of drafting bespoke contracts as well as ensuring standard forms are correctly assembled.