Construction & Engineering London Legal Update
CONSTRUCTION & ENGINEERING GROUPOctober 2013
Contents
Page
1. In this issue 1
2. Focus on the Middle East:
Bahrain; 2
Iraq; 4
Qatar; 6
Saudi Arabia. 8
3. Extras. 10
4. Myanmar (or Burma) – the opportunity and the uncertainty 17
5. Repudiation – what, how - and dangerous. 19
6. Mozambique – Africa’s new challenger. 21
7. What’s been happening @ Mayer Brown? 23
8. The contract, the whole contract and nothing but.....? 24
9. Case notes. 26
Issue 65October 2013
Construction & Engineering London Legal UpdateCONSTRUCTION & ENGINEERING GROUP
mayer brown 1
In this issue
Welcome to issue 65.
Brics are not as popular as they were, The rising stars of the global economy, Brazil,
Russia, India and China, are not shining as brightly on the economic front as they
were and in this issue we take a look at the implications of doing business elsewhere.
Raid Abu-Manneh is our guide to Bahrain, Iraq and Qatar and, with Wisam Sirham,
to Saudi Arabia, Kwadwo Sarkodie and Doye Balogun take us to Mozambique and
Kevin Owen and Ben Thompson explore the waking economy of Myanmar, or
Burma.
On the home front, Amber Chew and Richard Craven fish beneath the contract
surface for implied terms, Wisam Sirhan and Richard Craven examine the mechanics
of repudiation and there are the usual contract, regulation and case law updates.
We hope you enjoy the contents.
2 Construction & Engineering London Legal Update
Focus on the Middle East
BAHRAIN
‘Land of the two seas’ – and construction opportunitiesBahrain, ancient site of the immortal land of Dilmun, a pure and sacred place, the
‘Pearl of the Arabian Gulf ‘. On a more mundane level, it’s also a place with
opportunities for UK construction.
The opportunities?Bahrain may occupy just 277 square miles, with a population around 1.2 million but
it is the UK’s fastest growing market in the Gulf, with exports up by about 25% in
2012. Linked by the King Fahd Causeway to the key Eastern Province and GDP
powerhouse of Saudi Arabia, it remains, despite keen competition from Dubai, a
major financial and logistical centre and is the Gulf leader in Islamic finance. A
skilled workforce, zero taxation for private companies, few indirect taxes for private
enterprises and individuals, free movement of capital and the first GCC nation to
permit 100% foreign ownership of business assets and real estate in most sectors of
the economy combine to make a strong business case.
Infrastructure projects feature in its plans, road schemes, a rail link to Saudi Arabia
and an upgrade for Bahrain International Airport plus a government housing
strategy to build over 50,000 houses by 2017, not to mention 1.5 billion Bahraini
dinar (say £2.5 billion) to be spent on sanitary projects between now and 2030. And
Bahrain likes British companies, with nearly 100 already doing business there.
It ranks 42nd out of 185 countries in the 2013 World Bank ease of doing business tables
and jumps to a dizzy 7th place in the tables for construction permits. Its Civil Code is
based on the Egyptian Code, in line with other Gulf states, so the legal framework for
construction contracts will look familiar to contractors who work in the region, but not
identical. For instance, the expected decennial (literally ten year) liability is just five
years in Bahrain (Article 615) so local legal advice is, as usual, a must.
Enforcing contracts through the Bahraini courts is inevitably a great deal slower than
obtaining a construction permit (with a World Bank ranking of 113 out of 185) but
Bahrain has a positive and modern approach to arbitration. International
commercial high value (more then 500,000 Bahraini dinar, say £850,000) claims
and those involving a party licensed by the Central Bank of Bahrain that would
otherwise go to the Bahrain courts are, by law, referred to ‘statutory arbitration’ in
the Bahrain Centre for Dispute Resolution. The BCDR was established in 2009 in
partnership with the American Arbitration Association, whose Rules have been
adopted, with little change, by the BCDR, and the BCDR is said to be the world’s first
‘Free Arbitration Zone’, which means that a Bahraini arbitration award cannot be
challenged in Bahrain, so long as it is not being enforced in Bahrain and the parties
have agreed in writing that Bahraini law does not apply and that any challenge will
be before a competent tribunal in another state.
International arbitrations can also choose to use the BCDR, in the knowledge that
Bahrain has signed up to the New York Convention and that its arbitration law is
based on the UNCITRAL Model Law. Since 1995 the kingdom has also hosted the
Gulf Co-operation Council Commercial Arbitration Centre.
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And the risks?You don’t need to be a Formula One motor racing fan to have seen the press reports
headlining the anti-government protests and unrest that spring from the ongoing
political debate as to the need for reform and the tensions with the Shia community
and opposition.
But Bahrain has a plan, the 2030 plan, a ‘comprehensive economic vision’, to shift its
economy away from oil (13% of GDP) to a more diverse economy, to look to the
private rather than the public sector to stimulate growth and to provide better
services, jobs, training and skills development and quality of life for all Bahrainis.
And, significantly, Bahrain’s continued stability is important to its powerful
neighbour, Saudi Arabia.
In the Transparency International corruption tables Bahrain ranks 53rd out of 176
but the 2030 plan talks of rooting out corruption.
Ultimately the construction business is, of course, all about risk and, as the British
Ambassador has recently said: “...if you don’t go for the business, your competitors will.”
Raid Abu-Manneh
Construction & Engineering Group
This article first appeared in a slightly different form in Building.
4 Construction & Engineering London Legal Update
IRAQ
Doing business in Iraq – tread carefullyA decade after the invasion of Iraq there are opportunities for UK firms in the
country’s infrastructure sector. But they must be aware of the legal framework they
will be working in.
Oil, security, infrastructure, corruption, getting paid - all of these are factors to be
weighed in the scales when deciding whether to do business in Iraq. Ten years after
the 2003 invasion, where is the country now, in terms of opportunity, risk and law for
the UK construction industry?
UK investment?In 2010, according to a report of the National Investment Commission, in association
with UK Trade and Investment, published by Allurentis, the value of the UK’s
commercial activity in Iraq was $1,215m (£794m), 2.8% of foreign commercial
activity by value.
Way out ahead of the UK was Turkey – with its obvious geographical advantage –
at 34.9%. Another seven countries also sit in front of the UK, including, in
descending order, Italy, France, South Korea and the US.
What are the opportunities?Iraq has massive oil reserves. It has budgeted for exporting 2.9 million barrels a day
this year and its aim of producing 12 million barrels a day by 2017 would make it a
very major player among producers. But getting to this target requires infrastructure.
The oil will have to pay for this infrastructure - dams, railways, bridges, airports,
hotels, and millions of homes (200,000 units each year for a decade), plus roads,
sewers and services to support them. It amounts to a lot of work that should last for
years.
The risks?Security is an obvious risk, as we are constantly reminded by the press headlines.
Corruption is another. Iraq was ranked 169 out of 176 countries in the Transparency
International 2012 Corruption Perceptions Index. And Iraq was ranked 165 out of
185 in the World Bank 2013 ease of doing business tables. Time, energy and patience
are required to make progress through the bureaucracy.
And the legal framework?Investment is governed by Investment Law 13 of 2006 as amended by law No. 2 of
2010 and foreigners can take a 100% stake in an Iraq company. For those used to
doing business in the Middle East, the law in Iraq will look familiar. The Iraq Civil
Code, influenced, like other Arab codes, by the Egyptian Civil Code, takes precedence
over, for instance, Shari’a. Iraq cannot compete, however, with the more advanced
approach of Dubai and its International Financial Centre, to dispute resolution.
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Foreign arbitration is the usual contract dispute resolution route that sidesteps any
concerns about the speed, expertise or impartiality of local courts and the Iraqi
courts have recently adopted a welcome hands-off approach to foreign arbitrations.
But even if an arbitration award is obtained, there remains the important question of
enforcement. Iraq is not yet a signatory to the New York Convention (although this
may change before too long). A possible alternative is enforcement of an award in
Iraq under the Riyadh Convention, perhaps through the courts in Jordan.
All of which makes it important to take local legal advice in getting over legal and
administrative obstacles.
What about contracts?Provisions relating to construction contracts appear in Articles 864-890 of the Iraqi
Civil Code. These provide a framework for the main requirements for contracts of
works. There are three key obligations:
• work should be in accordance with the provisions of the construction contract
between the parties;
• the contractor should deliver the works on completion;
• the contractor is liable for complete or partial collapse of the building.
This is a joint liability imposed on the contractor and designer for certain building
defects, known as decennial liability. This is similar to strict liability but is applied to
construction projects. This joint liability lasts for 10 years from completion and
means contractor and designer are jointly and severally liable for structural defects in
the works.
The next decade in Iraq for UK construction companies?Pass the crystal ball. As risks lessen, or are successfully managed, the opportunities
presented by Iraq become more attractive, but not, of course, just to the UK industry.
Less risk is likely to mean more competition. So - swings and roundabouts. But
perhaps it is also worth remembering the phrase “ fortune favours the brave”.
Raid Abu-Manneh
Construction & Engineering Group
This article first appeared in a slightly different form in Building.
6 Construction & Engineering London Legal Update
QATAR
To boldly go...where Boris has gone before?Once upon a time Qatar was a poor Gulf state, known for its pearl fishing. But
nothing stays the same and the discovery of vast oil and gas reserves has made it very
wealthy, with one of the highest rates of GDP per capita in the world. Owner of
Harrods, investor in the Shard, the Stock Exchange and Sainsburys and home of the
Al-Jazeera news network, it punches above its weight in world politics and in nine
years time the global focus will be on picking footballs, rather than pearls, out of the
net. So what are the commercial and legal prospects for doing construction business
there?
Opportunities?It has, despite the Arab Spring, a stable government and economy and, since June, a
new Emir, the youthful, 33 year-old Sheikh Tamim bin Hamad Al-Thani. His father,
Sheikh Hamad bin Khalifa Al-Thani, has stepped down, as has Prime Minister
Sheikh Hamad bin Jassim bin Jaber Al-Thani, who was also the Foreign Minister
and influential chief executive of the sovereign wealth fund, the Qatari Investment
Authority.
Plans for Qatar’s future are already in place. The Qatar National Vision 2030 points
the way and the National Development Strategy 2011–2016 provides a route map to a
sustainable economy less dependent on its oil and gas riches. And, as an incentive,
Qatar is, of course, expecting a lot of visitors in 2022, for the football World Cup.
There are 12 climate-controlled, carbon-neutral football stadiums on the to-do list,
not to mention 24 team hotels, 48 training sites and 80,000 hotel rooms.
The National Vision talks of Qatar investing in world class infrastructure and it is.
There is $36 billion to be spent on a high quality, integrated public transport system,
$20 billion for roads, a new Doha International Airport to handle 50 million
passengers a year, the new Port project and the Msheireb urban regeneration in
Doha. It is said that the total shopping bill for infrastructure over the decade could
hit the $100 billion mark. And all this with a population of less than two million, of
which expatriate workers may make up as much as 80%.
Difficulties?The World Bank Group 2013 ease of doing business table ranks Qatar at 40 overall,
out of 185, and at 18 for obtaining construction permits, and Qatar is at 27, out of 176,
equal with the UAE, in the 2012 Transparency International Corruptions Perception
Index.
Qatar likes joint ventures. Qatar’s Investment Law No. (13) of 2000 generally makes
foreign investment conditional on having a Qatari partner with no less than 51% of
the capital.
Qatari law will be familiar to contractors who work elsewhere in the Gulf because it
is based on the Egyptian Civil Code and well developed so, for instance, the concepts
of decennial liability and good faith make their customary appearance.
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Enforcement of contract entitlements through the local courts is likely to be slow and
lacking the necessary expertise in particularly large, complex infrastructure disputes,
so arbitration is the way forward. Currently dealt with in the Civil and Commercial
Procedure Law No. (13) of 1990, Qatar’s arbitration law could do with modernisation,
but the Qatar International Center for Conciliation and Arbitration, set up in 2006,
has its own arbitration and conciliation rules, issued last year and modelled on the
UNCITRAL 2010 rules. A choice of Qatari law, and arbitration under modern rules,
with the seat of the arbitration in Qatar, could be a practical solution in selecting
contract dispute resolution machinery.
Further support for arbitration is to be found in Qatar’s signature of the New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards and also
the ICSID Convention.
To go boldly?Competition for construction work in Qatar is inevitably fierce but the UK is one of
Qatar’s key trading partners. Qatar has significant investments in the UK and the
planned heavyweight infrastructure spending could offer significant construction
opportunities for those prepared to invest the necessary time, research and patience,
where London 2012 Olympic experience might just be key for World Cup projects.
Prince Charles and Boris Johnson have both made trips to Qatar this year to fly the
flag; Qatar could also be an important destination for the UK construction industry.
Raid Abu-Manneh
Construction & Engineering Group
This article first appeared in a slightly different form in Building.
8 Construction & Engineering London Legal Update
SAUDI ARABIA
Doing business and the big legal question The Kingdom of Saudi Arabia has big plans for the future. Billions are being spent on
infrastructure and that can mean significant opportunities for UK construction and
engineering companies. But there’s a legal question to think about. Modernisation is
being carried out against the background of a legal system that is, commercially,
fundamentally different not only from those of its neighbours but also from any
Western concept of what commercial law should be. So what might this mean for
those doing business there?
Opportunity?Saudi Arabia is the world’s largest oil producer and exporter and has the largest
known oil reserves. With GDP increasing by some 6% a year, it is in the middle of a
massive development programme, building new industrial cities and developing its
infrastructure to meet the needs of the 21st century. A key driver of this activity is its
growing young population, currently some 28 million, with 80% of its citizens under
40 and 35% under 15, and predicted to grow to 33 million over the next 12 years; add
to that its plan to diversify its economy away from dependence on oil and gas and it
becomes clear why the Kingdom intends to spend more than US$367 billion over the
next 10 years on infrastructure; new roads, railways and urban transport systems,
airport expansion, investments in water, sewerage, electricity plants, telecoms and
the IT sector and four million new homes.
The good news is that the Kingdom is the UK’s largest trading partner in the Middle
East and North Africa region and ranks 22nd out of 185 in the World Bank ease of
doing business tables. Inevitably, however, foreign businesses embarking on
construction in Saudi Arabia need to clear regulatory hurdles, including obtaining a
foreign investment licence from the Saudi Arabian General Investment Authority,
meeting relevant investment conditions, registration with the Ministry of Commerce
and Industry and setting up as a limited liability company or a joint stock company,
not to mention complying with Nitaqat, ‘Saudisation’, prioritisation of the
employment of Saudi workers.
But what about contract law?The law is based on Islamic or Shari’a law, a comprehensive code of behaviour that
embraces both ethical standards and legal laws. Commercial contract principles in
Saudi Arabia, unlike its neighbours, are mainly to be found in Shari’a, which aims for
justice and equity in contracts, for example through a requirement of good faith in
commercial transactions. And even government regulations must comply with the
overriding principles of Shari’a.
But, despite its importance, Shar’ia in the Kingdom is not codified as with the laws in
other Arab countries and the legal system and the Shari’a courts have no system of
binding precedent. Justice and equity therefore come at a price, that of predictability
and certainty.
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The obvious dispute resolution solution for those considering legal remedies in their
international commercial arrangements is arbitration, avoiding any issues as to lack
of expertise or speed in the local courts. Arbitration in Saudi Arabia has in fact taken
a significant step forward with the launch, last year, of its new Arbitration Law.
Broadly in line with the UNCITRAL Model Law, it brings Saudi Arabia into line with
other countries in the region. Saudi Arabia is also a signatory to the New York,
ICSID, Riyadh and GCC Conventions.
But one thing that the new Arbitration Law, and the enforcement regulations enacted
earlier this year, do not change is the fact that an award, or part of it, which conflicts
with Shari’a law, will not be enforced in the Kingdom.
Interpreting Shari’a principles to suit today’s commercial world and its desire for
predictability and certainty is a challenge for Saudi Arabia. It is also a reason for
potential investors to be mindful of a different legal landscape in a country which, at
the same time, offers huge opportunities.
Raid Abu-Manneh Wisam Sirhan
[email protected] [email protected]
Construction & Engineering Group
This article first appeared in a slightly different form in Building.
10 Construction & Engineering London Legal Update
Extras
CONTRACTS AND PROCUREMENT
IChemE revise the contract formulaIn February the IChemE launched new editions of its forms of contract, the Red
Book, Green Book, Brown Book, Burgundy Book and Yellow Book. The IChemE says
that the forms have been extensively revised and updated to reflect best practice in
project delivery and the latest developments in law and project implementation.
See: http://www.icheme.org/media_centre/news/2013/revised%20forms%20of%20
contract%20published%20by%20icheme.aspx
A new NEC3 edition...In April the NEC3 unveiled an updated edition of the NEC3 contracts which includes the
new Professional Services Short Contract, developed with the Association for Project
Management, and seven guides, including a guide to using BIM with NEC3 Contracts.
See: http://www.neccontract.com/news/article.asp?NEWS_ID=840
And a new CIOB complex projects contractAnd there is also a new Chartered Institute of Building contract - for complex
projects. The contract is said to be suitable for works of high value or complexity,
engineering, infrastructure and major real estate projects but less suitable for simpler
or short duration works, construction management/EPCM without amendment and
inexperienced clients/contractors.
Accompanying the 8 page contract agreement, 83 page conditions and appendices are 81
pages of user notes (plus time-line and flow charts) and a cross-referencing general index.
See: http://www.ciob.org.uk/CPC
Government code to crack PPP savings plus PF2 management unitThe Government now has a ‘best practice’ guide, a voluntary code that sets out how
the public and private sector can work together to make savings from Public Private
Partnership contracts.
Not intended to be legally binding, the code has eight commitments for each of the
private and public sector parties and also contains new guidelines on transparency,
including updating on consumables and energy costs and ownership changes.
See: https://www.gov.uk/government/news/
public-and-private-sector-support-cutting-costs-of-public-infrastructure-with-new-
code-of-conduct
There is also a new Treasury unit to represent the public sector on the boards of new
PF2 projects and to manage its future minority stake in public infrastructure
including schools and hospitals.
See: https://www.gov.uk/government/news/
new-unit-of-experts-to-manage-government-investment-in-infrastructure
and
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https://www.gov.uk/government/
consultations/a-new-approach-to-public-private-partnerships-consultation-on-the-
terms-of-public-sector-equity-participation-in-pf2-projects
The Treasury has an antidote for optimismThe Treasury has issued Green Book supplementary guidance on how to counter the
risk of over-optimism in estimating project costs, benefits and duration. The
guidance recommends that estimates should be based on data from past or similar
projects, and adjusted for the unique characteristics of the project in hand.
The guidance provides cost and time uplift percentages for generic project categories
which should be used in the absence of more robust primary data. There is separate
supplementary guidance for transport infrastructure projects.
See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/
file/191507/Optimism_bias.pdf
Government dos and don’ts for procurementThe government has produced a leaflet that sets out a checklist of tips for those
involved in public sector procurement.
Top tips are to be clear about what is wanted, signal demand early, talk to the market
early, be open to new ideas and use the Lean sourcing process. Highlighted key
mistakes to avoid include the use of extensive selection criteria through a PQQ,
assuming that larger firms are better to do business with, large scale requirements
and long contract durations, sole reliance on financial assessment criteria at the
selection stage and insistence on onerous insurance requirements.
See: https://www.gov.uk/government/publications/procurement-for-growth
Government contract tax checksThe government plan for tax compliance self-certification on UK central government
above-threshold contracts started on 1 April. The government’s Action Note 06/13 of
25 July 2013 sets out the scope and background of the new policy, advises on how to
take account of it in procurement documentation and provides further detailed
guidance on how Departments should assess suppliers’ responses and the inclusion of
new clauses in contract terms.
See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/
file/225407/PPN_2_TAX.pdf
Late payment law given EU updateContracts entered into on or after 16 March 2013 are subject to the updated late
payment regulations, following the EU Late Payment Directive, which say that:
• the payment period set in business to business contracts should be no more than
60 days, unless otherwise agreed, and provided the terms are not “grossly unfair”;
• public authorities must pay suppliers under commercial contracts within 30
calendar days of receipt of an undisputed invoice (matching UK government
standard public sector practice);
• the acceptance and verification period for public authorities is set at no more than 30
days, unless otherwise agreed, and again provided the terms are not “grossly unfair”;
12 Construction & Engineering London Legal Update
The EU Directive fixes minimum compensation at €40 but the amended UK
legislation retains the current three tier charge scale and additional reasonable debt
recovery costs may also be claimed.
See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/
file/138129/bis-13-705-a-users-guide-to-the-recast-late-payment-directive.pdf
But parliamentary inquiry recommendations target late paymentA cross-party inquiry into late payment to small and medium sized enterprises has
come up with eleven recommendations for action, which include:
• establishing a Construction Code of Conduct, with contractually agreed payments
held in an independent trust and an independent adjudicator for mediation;
legislation would be required for this; (in the Government’s Construction 2025
plans, the Institute of Credit Management is to develop a construction supply
chain payment charter.)
• a Retentions Monies Bill with retained money held in a trust;
• all new Government contracts to include Pre Qualification Questions on past
payment performance, with consideration of payment history as part of the
bidding process;
• making fair payment a contractual requirement in new Government contracts,
with Tier 1 contractors paid within 14 days, Tier 2 within 19 days and Tier 3
within 23 days.
See: http://www.debbieabrahams.org.uk/wp-content/uploads/2013/07/FINAL-
REPORT-ALL-PARTY-INQUIRY-REPORT-INTO-LATE-PAYMENTS-IN-SMEs1.pdf
New government construction project portalA new government online portal, the Government Construction Pipeline, now
provides information on proposed Government construction projects, updated to
2020 and beyond.
An updated National Infrastructure Plan is scheduled to be published at the time of
the Autumn Statement and will include a more comprehensive update of the
infrastructure investment pipeline.
See: https://www.gov.uk/government/
news/109-billion-of-future-government-construction-opportunities-up-for-grabs
Supply chain payment on the agenda in SME public procurement consultationThe government has consulted on proposed reforms to create an SME-friendly ‘single
market’ for public procurement. The government proposals include:
• eliminating pre-qualification questionnaires for low value contracts;
• a mandatory core PQQ with standard questions for high value contracts;
• allowing suppliers to provide PQQ data only once;
• all new contract opportunities and awards over £10,000 to be advertised online;
• public sector reporting of its performance on spend with SMEs and on centrally
negotiated deals;
• the standard payment terms that public bodies offer prime contractors to be
passed all the way down the supply chain;
mayer brown 13
• consideration of whether performance bonds can be an unnecessary barrier for
SMEs; and
• encouraging the use of e-invoicing in the public sector.
See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/
file/243685/SME_consultation_-_publication_version_-_18september.pdf
14 Construction & Engineering London Legal Update
PLANNING, BIM, REGULATIONS AND COURT RULE CHANGES
High speed planning route for more developmentsThe government is to extend the fast track, one year, one stop, infrastructure
planning procedure to nationally significant business and commercial projects.
Projects eligible to opt into the procedure will include car factories, food processing
plants, sports stadiums, theme parks, hotel complexes, offices and research and
development centres, warehousing, storage and distribution sites, conference and
exhibition centres and sand and gravel. The new categories do not include retail-led
schemes and residential proposals and existing requirements to consult local
communities are retained.
The Government expects only a ‘very small’ number of applications to choose this
route.
See: https://www.gov.uk/government/news/
fast-track-planning-opens-to-more-business
CIC BIM ProtocolIn February the Construction Industry Council published its Building Information
Modelling Protocol. Drafted for use on all common construction contracts the CIC
say that it should be suitable for use on all Level 2 BIM projects. It is a contractual
document which takes precedence over existing agreements and requires the
Employer to appoint a party to undertake the Information Management Role.
The CIC also published two other BIM documents at the same time, a Best Practice
Guide for Professional Indemnity Insurance when using BIM and an Outline Scope of
Services for the role of Information Management. All three documents can be
downloaded free at: www.cic.org.uk
And a new BSI standard for BIMThe British Standards Institution subsequently launched a new standard for BIM:
PAS 1192-2 “Specification for information management for the capital/delivery phase
of construction projects using building information modelling”. Sponsored by the
Construction Industry Council, the new standard is intended to support the
Government’s Construction Strategy objectives, in particular that of achieving Level
2 BIM on all public sector asset procurement (by 2016).
Still to be developed is PAS 1192-3, which will offer guidance on the use and maintenance
of the asset information model (AIM) to support the planned preventative maintenance
programme and the portfolio management activity for the life of the asset.
See: http://shop.bsigroup.com/en/forms/PASs/PAS-1192-2/
Government sets April 2014 date for revamped Part L Building RegsChanges to the energy efficiency requirements in Part L of the Building Regulations
(Fuel and Power) will come into force on 6 April next year. In addition to the
amending regulations and associated Impact Assessment, updated statutory
guidance and calculation methodologies will be published, to give the industry time
to prepare.
mayer brown 15
And 1 October 2013 for revised guidance in Approved Documents A and CChanges to the guidance in Approved Documents A and C came into force on
1 October. The revised Approved Document A (Structure) now reflects the
introduction of the Eurocodes, with additional guidance being given to minimise the
impact on business. The major change to Approved Document C (Site preparation
and resistance to contaminants and moisture) deals with radon gas.
See: http://www.publications.parliament.uk/pa/ld201314/ldhansrd/text/130730-
wms0001.htm#13073027000025
Site waste management regulations to be dumped Following public consultation by Defra, the 2008 Site Waste Management Plans
Regulations are to be repealed, as part of the Red Tape Challenge that is intended to
remove regulations that are ineffective or hold back growth. The impact assessment
is said to demonstrate that repealing the Regulations should reduce the regulatory
burden on business without any significant environmental impact.
The date set for the repeal to come into effect is 1 December 2013, postponed from 1
October.
See: https://www.gov.uk/government/consultations/site-waste-management-plans
New roads policy to boost large developmentsA new transport policy ‘The Strategic Road Network and the Delivery of Sustainable
Development’ is intended to make it easier to take forward large development
projects adjacent to motorways and major ‘A’ roads.
Key changes in the policy include:
• easing restrictions on new access roads and junctions on motorways;
• removing the need for developers to pay for mitigation measures, unless the
impacts of their proposals are severe, and reducing the scale of any work that may
be required as a consequence;
• a commitment to support the delivery of developments that have been approved in
a Local Plan;
• simplifying the mandatory requirements that must be provided at every service
area and roadside facility; and
• devolving decisions on the minimum spacing for service areas to the planning
system.
See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/
file/237412/dft-circular-strategic-road.pdf
Court offer rules to give 10% extraPart 36 of the court rules provides costs and interest incentives for parties to
litigation to make offers to settle court proceedings. For claimants who now make
offers under Part 36 there is an extra incentive.
If the defendant does not accept a claimant’s offer and the claimant obtains a court
judgment at least as good as the offer, the claimant will be entitled to:
16 Construction & Engineering London Legal Update
• 10% extra damages, for money claims; or
• 10% extra of the costs awarded in non-money claims; or
• 10% extra of the money element of mixed (money and non-money) claims,
tapering, for claims between £500,000 and £1m, to a cap of £75,000. This is in
addition to the existing entitlement (unless the court thinks it unjust) of indemnity
costs and interest at up to 10% above base rate on money and costs awarded.
New rules to move the judicial review goal postsCourt rule changes to the judicial review process, intended by the Government to
attack use of the process as a “cheap delaying tactic”, took effect in July.
The changes include halving the time limit for applying for judicial review of a
planning decision, from three months to six weeks, and cutting the time limit for
applying for judicial review of a procurement decision from three months to 30 days.
See: http://www.legislation.gov.uk/uksi/2013/1412/pdfs/uksi_20131412_en.pdf
mayer brown 17
Myanmar (or Burma) – the opportunity and the uncertainty
The uncertainty begins with the name, Myanmar or Burma, as President Obama
recognised on his visit to Yangon or, if you prefer, Rangoon. A country of 60 million
has emerged blinking into the light after years of political and economic hibernation.
It has great needs and, consequently, great possibilities for foreign investors.
McKinsey have suggested the economy could grow to more than $300 billion by
2030, there is a huge shortage of infrastructure in power, water and transport and
supply chain opportunities at all levels. But just how hard is it for UK construction to
do business there?
BUSINESS
Very little international business has been done in Myanmar for over 20 years and
the World Bank ease of doing business tables do not give a ranking. Sanctions have
been in place but, since former Prime Minister U Thein Sein became President in
March 2011, Myanmar’s political and economic reforms and the release of Aung San
Suu Kyi have encouraged the U.S. and other countries to ease sanctions.
The country’s current reform agenda includes breaking up large monopolies, a major
privatisation programme and working with the IMF on the unification and flotation of
the exchange rate. Major challenges remain, not least updating the banking system,
improving infrastructure and communications, and establishing a stock exchange.
LAW
The Foreign Investment Law was substantially revised in 2012, with the ultimate
objective of attracting more foreign investors. It provides a roadmap for investment;
for example, legislation issued under the Law requires a joint venture for construction
and infrastructure projects, including bridges, highways, and golf courses, and
development and sale of residential and office buildings.
But behind every construction contract there needs to be a legal safety net and on
that front Myanmar has some catching up to do. Its legal framework is based on a
combination of laws from different periods of its history, from colonial past to present
day. Much of the law is recognisable to English and other common law lawyers but
much has fallen into disuse since 1962. Its implementation is consequently subject to
local practice and that means unwelcome uncertainty.
Enforcement under the common law-style judicial system is also a problem. Many
foreign companies have shown reluctance to invest in Myanmar because it still lacks
appropriate dispute resolution machinery. The judiciary’s independence, impartiality
in international commercial disputes and effectiveness of the rule of law are all
concerns, not to mention the usual issues as to expertise and speed and potentially
obstructive regulations left over from the socialist period.
18 Construction & Engineering London Legal Update
There is, of course, arbitration, governed by the 1944 Arbitration Act, that gives local
courts broad authority to intervene in arbitration, including power to remove an
arbitrator and modify the award. Domestic arbitration processes are not efficient and the
Foreign Investment Law allows foreign investors to opt for foreign arbitration in their
contracts but the Foreign Investment Rules require the investor to notify the Myanmar
Investment Commission of a dispute and the resolution procedure to be used.
Contracts between foreign companies and state-owned enterprises generally specify
Myanmar law as the governing law and provide for disputes to be arbitrated in
Myanmar under the 1944 Act.
Myanmar’s decision this year to accede to the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards is a positive move but
Myanmar is currently not a party to the ICSID Convention.
CORRUPTION
And then there is corruption, said to be endemic throughout Myanmar and the target
of government efforts to reduce it. Myanmar is ranked at 172 in the 2012
Transparency International Corruption Perceptions Index, with only Sudan,
Afghanistan, North Korea and Somalia with worse ratings.
Myanmar also appears in the global standards-setting Financial Action Task Force
June Public Statement due to deficiencies in their anti-money laundering and
counter-terrorist financing regime.
DOING BUSINESS?
So opportunity in Myanmar, or Burma, comes with the uncertainty of a country
whose legal infrastructure is yet to catch up with the 21st century and where
corruption is a key concern. But Hilary Clinton has said that investors should be
agents of positive change and Coca-Cola is now being bottled in Myanmar for the
first time in 60 years. The tide is turning – but proceed cautiously.
Kevin Owen Ben Thompson
[email protected] [email protected]
Construction & Engineering Group Mayer Brown Global Projects Group
Mayer Brown JSM, Singapore
This article first appeared in a slightly different form in Building.
mayer brown 19
Repudiation – what, how - and dangerous
Repudiation – a funny legal word – with consequences. It happens, for example,
when people stop doing things that they should under contracts and entitles the
innocent party to bring a contract to an end and sue for damages. Perhaps because of
the current economic climate, it features in recent case reports. So what do these
cases tell us about repudiation and how it works? And why should it come with a
financial health warning?
There are different varieties of repudiation. One is breach of a condition (in the
technical, legal sense – a key term); another is breach of an unclassified
(‘innominate’) term that deprives the injured party of substantially the whole benefit
of the contract. The last, sometimes called renunciation, is where the contract-
breaker demonstrates an intention not to perform the contract.
For example, under an agreement to construct and lease commercial units in a
development for 999 years, developers had to carry out the works with “due diligence”
and to use reasonable endeavours to meet target dates. Because of funding difficulties
they suspended work on two blocks for more than a year and, shortly after work had
resumed, the prospective tenant claimed the suspension was a repudiation and
accepted it. But was it?
The Court of Appeal disagreed. The actual and reasonably foreseeable effects of the
breaches at the date of purported termination, a six month gap in handover, in the
context of an agreement to grant 999 year leases, would not deprive the tenant of a
substantial part, let alone the whole, of the benefit of the contract.
But repudiation on its own is not enough. A repudiatory breach of contract gives the
innocent party a choice, to accept it or affirm the contract, and acceptance must be
clear and unambiguous. A specialist aerodynamics company working for a Formula 1
racing team disabled the team’s connection to their servers because of the team’s
delays and failures in paying sums due under the contract. At the same time, however,
it issued a fee invoice for the subsequent period, having just said it would resume
work after the Formula 1 shutdown.
The Court of Appeal said that acceptance requires no particular form; it is enough
that the communication or conduct clearly and unequivocally conveys to the
repudiating party that the aggrieved party is treating the contract as at an end. The
aggrieved party does not even have to notify the repudiating party personally, or by
an agent, so long as it comes to the repudiating party’s attention.
Disabling of the server connection on the same day as sending the invoice was not a
clear and unequivocal communication that the contract was at an end, although a
later conversation was.
And why does repudiation need a health warning? Because if you accept a
repudiation but it isn’t, you might find that you have yourself repudiated the contract,
which entitles the other party to accept, stop the contract and sue you for damages.
From victim to contract-breaker in one go.
20 Construction & Engineering London Legal Update
But because renunciation repudiation is a drastic conclusion, the courts need to be
satisfied that, objectively, there clearly is a refusal “..in a matter going to the root of the
contract..” to perform contractual obligations. And the issue is highly fact sensitive.
So in another Court of Appeal case, miscalculating a notice period for a notice to
complete and serving formal notice of rescission too early was therefore not a
repudiation.
All of which underlines the health warning. Repudiation is a powerful weapon but its
lack of precision can turn it into a loose cannon. So be careful what you do with it.
Wisam Sirhan Richard Craven
[email protected] [email protected]
Construction & Engineering Group
This article first appeared in a slightly different form in Construction News.
mayer brown 21
Mozambique – Africa’s new challenger
What happens when one of the world’s poorest nations discovers some of the world’s
richest energy reserves?
The answers may be found in Mozambique, where recent years have seen the
discovery of some of the world’s largest unexploited reserves of coal and a huge
natural gas field off the northern coast, which could rank Mozambique fourth in the
world in terms of gas reserves. One answer has certainly been dramatic GDP growth.
Since 2001 Mozambique’s annual growth rate has been reported in the world’s top
ten but this is from such a low base that Mozambique remains among the world’s
poorest nations. Another answer is the need for improved infrastructure that will be
vital, both for effective exploitation of natural resources and for development of a
country still to recover fully from the effects of 15 years of civil war that ended in
1992. These factors combine to highlight the importance of, and opportunities
offered by, construction and infrastructure development in Mozambique.
What are the issues for those entering the Mozambican market?
DOING BUSINESS
Mozambique ranks 149th out of 185 countries for ease of doing business in the IFC
“Doing Business” Report 2013.
Its construction sector is still relatively small and characterised by low productivity
and high costs. Most construction activity is in public works, and primarily donor-
funded. This may change, however, as Mozambique has had mixed success in using
the donor funds made available to it, and, in any case, donor-funded programmes are
expected to decrease as a share of GDP as development continues. The bureaucratic
challenges faced by the construction industry are significant, even by the standards of
the region – it typically takes 377 days to obtain a construction permit.
Nevertheless, Mozambique has become an extremely attractive destination for
investment. It is estimated that energy firms will invest over $50 billion over the next
decade, developing a full-scale liquefied natural gas industry in a country ideally
placed to serve the Asian export markets. Investment on this scale could increase
efficiencies across the whole economy, including the construction sector.
PROCUREMENT
The procurement process in Mozambique is noted for long delays, often requiring
public tenders to be re-issued because of changing external conditions. Procurement
is governed by the Unit for the Supervision of Acquisitions, under the recently-
updated procurement statute – Decree 15/2010 of 24 May 2010 which requires:
• bidders for public works projects to comply with minimum requirements as to
legal and financial standing, technical qualifications and payment of tax; and
• that all documents relating to the procurement process be in Portuguese,
although tenders may simultaneously be issued in other languages.
22 Construction & Engineering London Legal Update
Measures in the statute to favour domestic bidders restrict the participation of
foreign bidders in lower-value projects and apply margins (of up to 15%) of domestic-
bidder preference on other projects. To qualify as a domestic bidder, a bidding
company must be incorporated in Mozambique and be 50%-owned (directly or
indirectly) by natural persons of Mozambican nationality.
CORRUPTION
New anti-corruption laws have recently been endorsed by the country’s highest
decision-making body, the Council of Ministers. Such measures are of real
importance, given the widely-reported cases of high-profile corruption and
Mozambique’s decline over recent years in Transparency International’s index of
global corruption perceptions from 116th place (out of 174 countries) in 2010, to 120nd
in 2011 and 123rd in 2012.
RESOLVING DISPUTES
Litigation in the Mozambique courts tends to be slow and expensive. Consequently,
contract documentation governing major projects commonly provides for arbitration.
Mozambique has acceded to the New York Convention and accordingly, under
Mozambican law, the enforcement of a private arbitral award can usually only be
denied on the limited grounds in the Convention. Arbitral awards made in other
contracting states thus benefit from the Convention’s recognition and enforcement
regime.
CONCLUSIONS
It is no exaggeration to say that Mozambique’s natural gas discoveries could be truly
transformational. If, as expected, a large share of the revenues derived will be
invested in construction and infrastructure, as well as meeting key needs for
Mozambique, this will also provide rewards for those prepared to take the time to
learn to navigate this challenging business environment, and to play a part in this
crucial stage of Mozambique’s development.
Kwadwo Sarkodie Doye Balogun
[email protected] [email protected]
Construction & Engineering Group Finance Group
This article first appeared in a slightly different form in Building.
mayer brown 23
What’s been happening @ Mayer Brown?
• In April Jonathan Hosie gave a presentation at the SGCL Construction Law
Conference on “EPC and EPCM contracts for international projects – uses and
abuses”
• In May Raid Abu-Manneh was a speaker at the Construction Law: Contracts and
Dispute Management conference on “Middle East and Africa: Construction Law
and Dispute Resolution.”
• In June Kwadwo Sarkodie spoke at the Water Management Society on the topic
“Pitfalls and consequences” (of acting as expert witness).
• And at the beginning of July Jonathan Hosie was a speaker in the Lexis Nexis:
Construction Law webinar - on “Project security – what options are available?”
where he spoke on the subject of Project Bank Accounts.
• Congratulations to Mark King and James Morris on their promotion to Senior
Associate.
• Welcome to Hannah Cartwright, Marcus Walsh and Alex Reuben, on joining the
Construction & Engineering Group as Associates.
24 Construction & Engineering London Legal Update
The contract, the whole contract and nothing but.....?
A written construction contract is, you might say, rather like a millpond. All may
look fine on the surface, but what lies beneath it can upset the contractual calm. The
words written down may not tell the whole story. One party may have exerted
illegitimate pressure, or said something incorrect, or made a promise that cut across
what the written contract said, in order to get the other party to sign up. Duress,
misrepresentation or a collateral contract, for example, can all make waves but, of all
the unseen contractual ingredients, possibly the most challenging are implied terms.
In theory, although not written down, their detection should not be a problem. There
is, according to Lord Hoffmann, just one question: what the contract, read as a whole
against the relevant background, would reasonably be understood to mean. It is a
forensic exercise, looking at the contract through the eyes, not of the parties, but of an
objective third party armed with the parties’ background knowledge (perhaps these
days a commuter on a Boris bike, rather than the pensioned-off (or privatised)
Clapham omnibus).
Implied terms might be seen as the ‘of course’ clauses, found beneath the surface of
contracts governed by English contract law. Take the law on damages and
remoteness, for instance. If the parties have not written a term in their contract to
deal with the types of losses for which a contract breaker accepts potential liability,
then, according to the Court of Appeal in Grimes v Gubbins, the law in effect
implies a term to determine the answer. Normally, applying the well-worn case law
starting with Hadley v Baxendale, this implied term is an acceptance of
responsibility for the types of losses reasonably foreseeable at the contract date as not
unlikely to result from a breach. Unless, however, there is evidence that the implied
assumption of responsibility is inappropriate for a particular type of loss.
Or take the tricky issue of a duty of good faith. Lord Justice Jackson has recently
confirmed, in the Court of Appeal in Compass Group UK v Mid Essex Hospital Services NHS Trust (which involved the hospital’s contractual right to levy
performance-related deductions under a facilities management contract), that
English contract law has no general doctrine of “good faith” (unlike, for instance,
Sharia law, the U.S., France or Australia). Such a duty needs to be expressly agreed,
although a duty of good faith is implied by law in certain categories of contract, for
instance, employment and partnership.
But in Yam Seng v International Trade Corporation, Mr Justice Leggatt could see
no difficulty, following the established English law approach to implying terms in
fact, in implying a good faith duty in any ordinary commercial contract, based on the
parties’ presumed intention.
Applying Lord Hoffmann’s simple test for implied terms may not, however, be as
straightforward as it sounds. The law reports remind us that different judges and
different courts may come to different views as to what our contract law avatar might
reasonably understand a contract to mean. In the Compass case, Mr Justice
Cranston had originally concluded that there was an implied term. The Court of
Appeal, overruling him, said there was not.
So what does this mean for construction contracts? If implied terms are detected
mayer brown 25
they should, in theory, come as no surprise because the court is only drawing out
what the contract, objectively, would reasonably be understood to mean, taking into
account the parties’ background knowledge. This underlines the need for the good
old-fashioned virtue of recording agreements clearly and comprehensively so that a
court does not have to look beneath the surface. Still waters, they say, run deep and,
as a venerable great-aunt used to add, there’s often mud at the bottom.
Amber Chew Richard Craven
[email protected] [email protected]
Construction & Engineering Group
This article first appeared in a slightly different form in Construction News.
26 Construction & Engineering London Legal Update
Case notes
TRUST ME; I’M AN ADJUDICATOR
On a remediation project using NEC3, the Project Manager instructed the contractor
to carry out additional work in two separate locations but later purported to
withdraw his instructions. The contractor successfully obtained an adjudication
award on the issue in respect of the first location and then a second award, from a
different adjudicator, in respect of the second location. The employer resisted
enforcement of the second award, in particular because of the way that the second
adjudicator had taken account of the first adjudicator’s decision. But just how far can
an adjudicator take into account or adopt a previous adjudicator’s reasoning?
Mr Justice Akenhead said that it was neither wrong nor unjustified, let alone
improper, for the second adjudicator to have regard to the first adjudicator’s decision
or for the contractor to submit a copy of it to the second adjudicator. Adjudicators
must generally be trusted to reach honest and intelligible views as to the extent to
which earlier decisions are relevant or helpful and generally it would be wrong of an
adjudicator to ignore any material put before them.
Arcadis UK Ltd v May and Baker Ltd (t/a Sanofi) [2013] EWHC 87
UNITED FRAGRANCE RAISES A QUESTION OF FAITH
English contract law, unlike many other legal systems, has no general duty of good
faith. Or does it? An agreement to distribute Manchester United brand ‘fragrances’
in specified territories in Africa, Asia, the Middle East and Australasia ended up in
the English courts and one of the questions for the judge was whether there was an
implied duty of good faith.
It seemed to Mr Justice Leggatt that, despite English contract law’s traditional
hostility to a doctrine of good faith, there is no difficulty, following the established
English law on implying terms, in implying a duty of good faith in any ordinary
commercial contract as a matter of fact, based on the presumed intention of the
parties, as distinct from any general default principle of law. Since the test of good
faith is objective, there was, in his view, nothing novel or foreign to English law in
recognising an implied duty of good faith in the performance of contracts. It was
already reflected in other, well established, case law and there is nothing unduly
vague or unworkable about the concept. Its application involves no more uncertainty
than is inherent in contractual interpretation.
Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111
mayer brown 27
THE TRUTH, THE WHOLE TRUTH ... OR?
Statements of truth are required for certain key court documents – for instance
witness statements and pleadings, but what if the contents are incorrect?
A subcontractor successfully fought off the contractor’s application for a stay of
execution of the judgment on an adjudication award with witness statements, signed
with a statement of truth, from two directors, in which they described the
subcontractor as a solvent profitable going concern with good prospects. Three and a
half months later, the subcontractor went into administration and the contractor
applied to the court for permission to apply for committal for contempt of the two
directors.
Dismissing the application, Mr Justice Akenhead said that it could be contempt of
court for a witness to make a statement, supported by a statement of truth, recklessly,
i.e. the witness could be proved, beyond reasonable doubt, to have said something
with no idea whether it was right or wrong. People who sign or authorise the signing
of statements of truth must appreciate that there is a real possibility that the court
might act on the basis that they are true and that the opposing party might well have
regard to them also. People who sign them knowing that the contents of the attested
document are untrue must also appreciate that they may face contempt proceedings
and, possibly, independent criminal proceedings.
Berry Piling Systems Ltd v Sheer Projects Ltd [2013] EWHC 347
HOME IS WHERE ... SECTION 106 APPLIES
A construction contract for refurbishment of the house at 3 Cavendish Avenue was in
writing but had no adjudication clause. Did the Construction Act apply, so that the
adjudication was valid and the contractor could enforce the adjudication award, or
did section 106 of the Act stand in the way?
Section 106 says that the Act does not apply to a construction contract with a
“residential occupier”, who occupies, or intends to occupy, a dwelling as their
residence. In Westfields Construction Ltd v Lewis it was accepted that an employer
under a construction contract could only occupy one residence at a time but did the
exception apply? No, decided Mr Justice Coulson, because the employer’s intention, at
all times, was to let the property and there was no residential occupation, either
ongoing or at the date of the contract. The judge did, however, question whether it is
time to do away with section 106.
Westfields Construction Ltd v Lewis [2013] EWHC 376
28 Construction & Engineering London Legal Update
USING YOUR DISCRETION? DON’T BE IRRATIONAL.
If a party to a contract has a discretion, for instance to make an assessment or to
choose from a range of options, taking into account the interests of both parties, is
there any check on the way that they exercise that discretion?
The Court of Appeal has confirmed that there is. The cases say that, in any contract
under which one party has such a discretion (which is more than a simple decision
whether or not to exercise an absolute contractual right), there is an implied term,
“extremely difficult to exclude”, that, in essence, it will not exercise its discretion in an
arbitrary, capricious or irrational manner.
Lord Justice Jackson also said that there is no general doctrine of “good faith” in
English contract law, although a duty of good faith is implied by law in certain
categories of contract. If the parties wish to impose such a duty they must do so
expressly.
Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a
Medirest) [2013] EWCA Civ 200
NO DPA LIABILITY FOR DREAM HOME OWNERS
A claim over structural defects in a house that was subsequently demolished,
judgment against a builder with no apparent assets and an architect who might not
have any professional indemnity cover. Did the claimants, the Zennstroms, have any
other options?
They chose a claim under the Defective Premises Act against the sellers of the house.
The DPA places obligations of strict liability not only on those who ‘take on work’ for
or in connection with a dwelling, e.g. designers and builders, but also on those who,
in the course of a business of providing or arranging to provide dwellings, arrange for
others to take on this work. In the judge’s view it was not necessary that the arranger
has already developed a dwelling in the course of the business before they could be
under the DPA duty in respect of the dwelling in question. So were the homeowners
who arranged for No. 22 Crowsport to be completely rebuilt and sold to the
Zennstroms, less than a year after practical completion, liable under the DPA?
No, because the judge was satisfied that, when the owners embarked on the
rebuilding of No. 22, they had no intention of selling it. It was to be their dream
home.
Zennstrom & Anor v Fagot & Ors [2013] EWHC 288
mayer brown 29
SCOTTISH COURT REFUSES ADJUDICATION ENFORCEMENT ON HUMAN RIGHTS GROUNDS
Several years after completion of its bottling plant, Whyte and Mackay obtained an
adjudication award, on a professional negligence claim, for almost £3 million. The
claim was against consulting engineers Blyth & Blyth over settlement of the plant
and the omission of piling, but the plant could be used for its intended purpose, the
piling omission saved Whyte and Mackay £894,674 and the bulk of the claimed
losses would not occur until 2035/6.
The court found that the adjudicator’s decision was in breach of the rules of natural
justice, because he did not deal with an important submission from the engineers. It
also decided that enforcement of the decision would be in breach of Article 1 of the
first protocol to the European Convention on Human Rights, as an unjustified
interference with the engineers’ peaceful enjoyment of their possessions. It would be
“disproportionate and wrong” to enforce the award, especially in the absence of any
security for repayment in the event that the engineers were ultimately successful in
defending the claim. The court did not consider, however, that its decision would
upset the proper working of the compulsory adjudication regime.
http://www.scotcourts.gov.uk/opinions/2012CSOH89.html
FIXING A CONTRACT BREAKDOWN - WHAT ABOUT THE COSTS?
Azzurri Communications supplied the AA with telephone handsets for its UK call
centres but there were problems with the handsets. Azzurri investigated the faults
and it emerged that the handsets might be counterfeit. Azzurri surrendered the
handsets to the manufacturer and bought 1077 replacements for the AA. Included in
Azzurri’s claim against the handset supplier was a claim for the management and
staff time spent in fault investigation and supplying the replacement handsets.
The case law says that, to recover this type of loss, the claimant must establish the
fact and extent of the diversion of staff time and that the diversion caused significant
disruption to its business. Ordinarily, unless the defendant can establish the contrary,
it is reasonable for the court to infer from the disruption that staff would otherwise
have applied the time to activities which would, directly or indirectly, have generated
revenue for the claimant at least equal to the costs of employing them during that
time.
Azzurri failed in its claim for the management costs of investigating the faults,
because fault-finding and correction were, in the judge’s view, part of its support
function, but it succeeded in its management costs claim in respect of replacing the
handsets.
Azzurri Communications Ltd v International Telecommunications Equipment Ltd
(t/a SOS Communications) [2013] EWPCC 17
30 Construction & Engineering London Legal Update
WOT - NO REFERRAL? JUST ASK!
A dispute under an ACA project partnering contract raised the question of whether
an adjudication referral had been properly served. It turned out that it had been sent
to the adjudicator in the key 7 day period after service of the notice of adjudication
and that, said the judge, is what gives the adjudicator jurisdiction. Failure to provide
the other party with the referral in the 7 days does not prevent the adjudicator having
jurisdiction but it might, depending on the circumstances, raise a natural justice
issue.
In any event, the project partnering contract required the parties to work together to
achieve transparent and cooperative exchange of information “in all matters relating
to the project” which, in the judge’s view, included dispute resolution. The judge would
therefore have expected the defendant to contact the claimant to clarify the position
concerning the referral and the defendant could not complain if it was itself in breach
of the cooperation obligation.
The defendant also complained that the adjudicator could not decide two disputes
between the same parties at the same time, although the disputes were the subject of
separate adjudications. The judge said that the one dispute per adjudication
restriction did not apply where a party has started more than one adjudication, each
dealing with a single dispute, and they are dealt with by the same adjudicator.
Willmott Dixon Housing Ltd v Newlon Housing Trust [2013] EWHC 798
COULD REASONABLENESS OR GOOD FAITH GET IN THE WAY OF TERMINATION?
A housing association terminated a gas servicing contract just 17 months into a four
year term. The termination clause entitled either party to terminate, on notice,
without any reason being required but the contract was based on an ACA term
partnering form requiring partnering team members to work together in a spirit of
“trust, fairness and cooperation” and “to act reasonably ...in all matters governed by
the Partnering Contract”. No breach was alleged and the contractor claimed that the
association must therefore act reasonably in deciding whether to terminate. It also
claimed there was an implied term that each party should act in good faith, in
particular in operating the termination clause.
Both arguments failed. If the duty to act reasonably in “all matters” meant that the
association must act reasonably in exercising all its powers and rights, that would
undermine a significant number of other contract clauses that the parties had agreed
the association could exercise unconditionally or subject to conditions. And the judge
considered there was no implied term of good faith. The parties had gone as far as
they wanted in the clause requiring them to work together in a spirit of “trust,
fairness and mutual cooperation” and to act reasonably. Even if there was such a
term, it could not restrict what the parties had expressly agreed in the termination
clause.
TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151
mayer brown 31
COURT REJECTS NATURAL JUSTICE CHALLENGE TO ADJUDICATOR WITH EXPERTISE
A contractor challenged an adjudicator’s award, claiming that, in deciding on a rate
for valuing compensation events under an NEC3 subcontract, the adjudicator had
taken a point against it that neither party had advanced. Rejecting the argument, the
judge noted that the adjudicator had asked for the parties’ submissions on the point
and had determined the appropriate rate based on what had been submitted. It is not
practicable, he said, for the adjudicator to go back to the parties with each
provisional conclusion which represented some intermediate position for which
neither party was contending. The parties had chosen an adjudicator who was the
author of a commentary on the NEC3 Conditions and evidently he was chosen
because of that expertise.
The contractor also applied, unsuccessfully, to stay enforcement on the basis of the
subcontractor’s financial position. It was not shown that the subcontractor was
insolvent or that its financial position was any different from when it entered into the
subcontract. The judge also confirmed that there is no general obligation on a party
seeking enforcement to disclose confidential information of its financial and business
position, so that the other party can consider if there are grounds for seeking a stay. If
there was, parties could gain the benefit of that confidential information. In the
competitive construction industry, that could have serious consequences in relation
to tendering or dealing with disputes.
Farrelly (M & E) Building Services Ltd v Byrne Brothers (Formwork) Ltd [2013]
EWHC 1186
SIX MONTH DELAY ON 999 YEAR LEASES NOT A REPUDIATION, SAYS COURT OF APPEAL
Under an agreement to construct and lease commercial units in a development for
999 years, developers had to carry out the works with “due diligence” and to use
reasonable endeavours to procure completion by target dates or as soon as reasonably
possible thereafter. The developers put work on two of the blocks on hold for more
than a year, because of funding difficulties. Shortly after work had resumed, the
prospective tenant claimed the suspension was a repudiation, which they accepted.
But was it?
The Court of Appeal, overturning the original judgment, said it was not. The position
had to be considered as at the date of the purported termination, when work had
actually restarted and been in progress for two and a half weeks. It was not possible
to say, at that date, that the actual and reasonably foreseeable effects of the breaches
of contract would deprive the proposed tenant of a substantial part (let alone
substantially the whole) benefit of the contract and, as time had not been made of the
essence, delay, even with its attendant uncertainties, would only become a
repudiatory breach if the delay was so prolonged as to frustrate the contract. In the
context of an agreement to grant 999 year leases, the case was far from that. The
increased gap in handover of the blocks caused by the suspension was in fact six
months.
Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577
32 Construction & Engineering London Legal Update
SUPREME COURT REINFORCES THE ‘CORPORATE VEIL’
The law gives companies that go through the process of incorporation a legal
‘personality’ of their own so that they can, for instance, make contracts or own
property quite separately from their shareholders or directors. Sometimes, however,
the courts talk of ‘piercing the corporate veil’, i.e. disregarding the separate legal
personality of the company. But when?
In Prest v Petrodel the Supreme Court said that the principle applies when someone
deliberately evades, or frustrates enforcement of, an existing legal obligation or
liability or legal restriction by interposing a company under their control. The court
can then ‘pierce the corporate veil’, but only for the purpose of depriving the company
or its controller of the advantage they would otherwise have obtained by the
company’s separate legal personality. The principle is limited, because in almost
every case where the test is satisfied, the facts will in practice disclose a legal
relationship between the company and its controller which will make it unnecessary
to pierce the corporate veil.
Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34
CONTRACT DAMAGES: WOT, NO LOSS?
Damages for breach of contract are intended to compensate the innocent party for
loss of the contract performance they were entitled to receive. But what if they did
not suffer any loss?
In Co-operative Group Ltd v Birse Developments Ltd the defendants objected to
an amendment to a defects claim because, they said, total replacement of a floor slab
was being carried out essentially for reasons that could not be claimed against them.
In deciding that the claimants had a reasonably arguable case for the amendment,
the judge had to consider key principles governing recovery of damages for breach of
contract. The leading case of Ruxley v Forsyth (http://www.bailii.org/uk/cases/
UKHL/1995/8.html) said that it is necessary to ascertain the loss the claimant has
actually suffered by reason of the breach. If the claimant has suffered no loss, as
sometimes happens, they can recover no more than nominal damages because the
object of damages is always to compensate the claimant and not to punish the
defendant.
Co-operative Group Ltd v Birse Developments Ltd & Ors [2013] EWHC 1790
WHO DO WE THINK YOU ARE?
The sole director and shareholder of a furniture company signed a letter containing
the written terms of a contract with a firm of engineers. Below the signature was his
name and, beneath that, the trading name of the company, with no reference to a
limited company or the company’s name. So who had contracted with the engineers?
The Court of Appeal, who decided that the director had contracted personally, said
that, in determining the identity of a contracting party, the court’s approach is
objective. What would a reasonable person, possessing the relevant information,
conclude? The person who signed is the contracting party unless the document
makes clear that they signed as agent for a ‘sufficiently identified’ principal or as the
mayer brown 33
officer of a ‘sufficiently identified’ company, or extrinsic evidence establishes that
both parties knew the person was signing as agent or company officer. But if the
extrinsic evidence establishes that a party has been misdescribed in the document,
the court may correct that error as a matter of construction, without any need for
formal rectification.
Hamid (t/a Hamid Properties) v Francis Bradshaw Partnership [2013] EWCA Civ 470
ADJUDICATOR GETS CLAUSE INTO AWARD – WITH FATAL CONSEQUENCES
It’s not often that an adjudication award is struck down because an adjudicator has
failed to observe the rules of natural justice. Errors of fact or law on their own are not
enough; there also needs to be a serious failure of the process on the part of the
adjudicator. An adjudicator’s award relied on a clause that neither party had
mentioned and which he had not mentioned to them before issuing the award. Was
that a fatal mistake?
Yes, said Mr Justice Akenhead. The adjudicator had decided a key issue in the
adjudication by referring to, and relying on, the clause without giving the parties a
chance to comment. As the issue was at least of considerable potential importance to
the outcome of the resolution of the dispute and could well have been decisive, this
was a material breach of the rules of natural justice and the award was invalid.
ABB Ltd v Bam Nuttall Ltd [2013] EWHC 1983
HOW NOT TO BE A NUISANCE
If global warming, or just soggy British weather, is going to cause flooding, the
veteran tort of nuisance could have a role to play. In 2000 Cornwall Council installed
drains and gullies in a section of road prone to flooding, after heavy rain, but on two
subsequent occasions, when the gullies were blocked with leaves and debris, the road
flooded and caused damage to an adjacent holiday village. Was the council liable for
not clearing the gullies?
The Court of Appeal ruled that a landowner owes a ‘measured duty’ in negligence and
nuisance to take reasonable steps to prevent ‘natural occurrences’ on their land (e.g.
flood water or tree roots) from causing damage to neighbouring properties. In
determining the content of this duty, the court must consider what is fair, just and
reasonable as between the two neighbouring landowners and have regard to all the
circumstances, including the extent of the foreseeable risk, the available preventive
measures and their cost, and both parties’ resources. If the defendant is a public
authority with substantial resources, the court must take into account the competing
demands on those resources and the public purposes for which they are held. It may
not be fair, just or reasonable to require a public authority to expend those resources
on infrastructure works in order to protect a few individuals against a modest risk of
property damage. The Court was doubtful that the availability of insurance was a
relevant factor in this enquiry.
The Court confirmed that the council was liable because they should have taken (but
did not take) reasonable steps to keep the drainage installation functioning properly.
Vernon Knight Associates v Cornwall Council [2013] EWCA Civ 950
3 4 Construction & Engineering London Legal Update
COURT OPENS DOOR TO WARRANTY ADJUDICATION CLAIMS
Is a collateral warranty a ‘construction contract’ under the Construction Act, so that a
claim under a warranty could go to adjudication?
The answer in Parkwood Leisure Ltd v Laing O’Rourke was that it could be. In
Parkwood the warranty was ‘clearly one “for the carrying out of construction
operations by others”’ and a ‘construction contract’ but the judge said that not all
collateral warranties will be Construction Act ‘construction contracts’. It is necessary
to determine, in the light of the wording and the relevant factual background,
whether a warranty is a construction contract for the carrying out of construction
operations. A ‘very strong pointer’ that it is will be whether the contractor is
undertaking to the beneficiary of the warranty to carry out construction operations.
A pointer against may be that all the works are completed and that the contractor is
simply warranting that they have reached a certain level, quality or standard.
Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665
ANOTHER CONTRACT IDENTITY CRISIS
A tender, letter of intent and draft contract documents all identified the contractor as
‘Cuddy Group’, the trading name of Cuddy Demolition and Dismantling Limited, but,
after website searches, the employer’s solicitors mistakenly identified a different and
dormant Cuddy company, Cuddy Civil Engineering Limited, as carrying out the
works and requested that CCEL be substituted for ‘Cuddy Group’ in the contract,
which it was. After the contract was signed, could the mistake be corrected by the
court (replacing CCEL with CDDL)?
No, said the court. For the court to correct a mistake, as a matter of interpretation, in
identifying a party, there must be a clear mistake on the face of the document when it
is read by reference to its background or context and it must be clear what correction
should be made to cure the mistake.
On an objective analysis, the parties intended that the party acting as the contractor
should change from ‘Cuddy Group’ to CCEL, as requested by the employer, without
discussion, no matter who was then carrying out the works. They had not intended
to refer to CDDL, rather than CCEL, as the contracting party and the employer’s
claims that CCEL was a misnomer for CDDL, that there was a common or unilateral
mistake in respect of the contracting party, that the contract should be rectified and
that CDDL was estopped from denying that it was the contracting party, all failed.
Liberty Mercian Ltd v Cuddy Civil Engineering Ltd [2013] EWHC 2688
MAKING A CONTRACT – SO DID THEY OR DIDN’T THEY?
Sometimes construction contracts are never finalised; completing the project on time
and budget and to specification are the priority and agreeing and signing the contract
can take second place. Sometimes, however, the problem with commercial contract
negotiations is whether the parties achieved a binding contract. Proton v Orlen Lietuva was just such a case and provides a useful reminder of contract basics.
mayer brown 35
An oil spot deal was negotiated very quickly, with some terms to be negotiated later,
but was there a legally binding contract? The court said that, objectively, there was. It
was a classic spot deal where the speed of the market required the parties to agree the
main terms and leave the details, some of which could be important, to be discussed
and agreed later. As the Supreme Court has said, whether there is a binding contract
(and, if so, its terms) depends on what the parties have agreed, what was
communicated between them by words or conduct, and whether, objectively, they
intended to create legal relations and had agreed all the terms which they, or the law,
considered essential to form legally binding relations. Even if significant terms have
not been finalised, an objective appraisal of their words and conduct may conclude
that they did not intend agreement of those terms to be a precondition to a legally
binding agreement.
Proton Energy Group SA v Lietuva [2013] EWHC 2872 (Comm)
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0269conOctober 2013