Buildingblocks

Edition 4 2009

www.mills-reeve.com

Editorial

Contents: 3
Playing fair: the construction industrys new competition code The UK Contractors Group and the National Federation of Builders New Code of Conduct Construction workers: new tax proposals Proposals to deal with employees who present themselves as being self-employed for tax and national insurance purposes

Welcome to the last edition of Building Blocks for 2009. In keeping with previous end of year editions, this edition contains shorter articles than usual. If you prefer this format please let me know. In this edition there are articles as diverse as tax proposals for construction works, commentary on both the NEC3 and JCT standard forms, the invasive Japanese knotweed and finally in a reflection of the present economic climate, what a pre-pack is. Also with this edition you will find a flyer which sets out our programme of seminars for spring 2010. If you would like to attend any of these please contact Rachel Snow; email: rachel.snow@mills-reeve.com. Best wishes for Christmas and the New Year.

NEC tipster time, testing and defects Ron Plascow continues his series of articles on NEC3 clauses

Alison Garrett Editor 01223 222207 alison.garrett@mills-reeve.com

Japanese knotweed: a threat to development and bio-diversity The Government consultation on inhibiting the growth of Japanese knotweed JCT Revision 2 insurance and mediation Recent amendments to the JCT 2005

Stop Press!

Changes to the Construction Act The Local Democracy, Economic Development and Construction Act 2009 received Royal Assent on 12 November, making it far more likely that it will actually become law. When the Act does come into force, there will be wholesale changes to the way that payment must be made (and withheld), which will apply to construction contracts, whether they are in writing or not. The rules regarding payment of adjudicators fees will also change. A date has not yet been set for the Act to come into force. It is understood that the Government intends to consult with the industry about the best way to implement the changes before announcing the date. In due course we will be running a series of seminars at a number of our offices addressing the practical effect of the changes.

The buck stops here The recent case of Costain Limited v Charles Haswell and Partners Limited Whos the man? Fitzroy Robinson Ltd v Mentmore Towers What happens when the team changes?

Corporate manslaughter new sentencing guidelines The second consultation by the Sentencing Guidelines Counsel

Distressed developments The risks in the current economic climate Pre-packs What are they?

Playing fair: the construction industrys new competition code

In the single largest probe ever conducted by the Office of Fair Trading (OFT), 112 construction companies have been found guilty of bid rigging. In August, with the OFTs final verdict as to sanctions pending, the UK Contractors Group (UKCG) and the National Federation of Builders (NFB) launched a Code of Conduct for the UK construction industry (the code). Designed to reassure regulators and clients that the industry is abiding by their obligations, the code sets out their commitment to comply with UK and EU competition law and adhere to the principle of free, fair and efficient competition. In order to achieve these aims, the code sets out a number of specific obligations for construction companies: Not to restrain competition amongst themselves. Bid for contracts and tenders independently from their competitors. Not to share sensitive information in an attempt to co-ordinate competitive behaviour, particularly information about pricing intentions. Only co-operate with competitors when permitted to do so by competition law. Implement internal compliance policies and promote understanding of and compliance with competition law throughout their supply chains. The code is backed up by guidance and training to ensure even small firms have effective policies in place. With both bodies member firms committed to the scheme, and the hope that it will be adopted industry wide, the code demonstrates the industrys will to address the OFTs concerns. It has been recognised as a positive signal by the OFT. Simon Williams, senior director of cartels and criminal enforcement, commented that it is vital that construction companies implement both the practice and spirit of the code proactively so that a culture of competition can be fully embedded within the industry.

Elizabeth Davies 01223 222327 elizabeth.davies@mills-reeve.com

On 22 September the OFT handed down fines totalling 129.5 million to 103 firms. Although a seemingly large sanction, the fines could in fact have been much higher. The OFT has the power to impose a fine of up to 10 per cent of a firms annual turnover. The average level of fine in fact only amounted to 1.14 per cent of turnover. It is not clear whether the new code had any impact on the OFTs decision. Perhaps it came too late on in the five year investigation to significantly influence the outcome. However, with the scandal back on the front page, the significance of the code may come in restoring faith in the industry and rebuilding its reputation.

Construction workers: new tax proposals

The Treasury estimates that false selfemployment in the construction industry costs the exchequer 350 million a year. The Treasury has announced proposals to deal with the problem of workers who are actually in an employment relationship presenting this relationship as one of self-employment for tax and national insurance purposes. The proposals Under the proposals, workers in the construction industry will be deemed to be in receipt of employment income unless they meet one or more of the three following criteria: 1. provision of plant and equipment that a person provides the plant and equipment required for the job they have been engaged to carry out. This will exclude the tools of the trade which it is normal and traditional in the industry for individuals to provide for themselves in order to do their job;

Christopher Townsend 01223 222387 christopher.townsend@mills-reeve.com

2. provision of all materials that a person provides all materials required to complete a job; or 3. provision of other workers that a person provides other workers to carry out operations under the contract and is responsible for paying them. Implications The Government claims the new test is both clear and simple to use and is consistent with the previous case lawbased approach. A consultation period on the proposals has just closed and we may hear more in the Pre-Budget Report. If the proposals become law, employers will have to apply these criteria to determine whether PAYE and national insurance contributions are payable and the self-employed will need to operate consistently with the criteria on a day to day basis.

NEC tipster: time, testing and defects

Having dipped our toes into NEC3 it is time to move on!

Under the heading of time clauses 30-36 of NEC3 brings together a number of different issues. This includes starting work on site; achieving completion; the programme; access to the site; stopping or delaying works; taking over the works and acceleration. Each issue in itself deserves its own separate article. However, I will comment on the interesting points of principle only. If you need more information, please contact me. Lets begin with the obvious. A contractor will never start work on site until given access, and access dates are set out by the employer in the Contact Data Part One. That seems simple enough but there's a little wrinkle, which I explain below. The project manager decides the date of completion, certifying within one week of it being achieved. Completion is not really a date under NEC3; it is a state to be achieved. Therefore, in theory, there should be no outstanding work to be carried out at completion. Under JCT the practice is for a certificate of completion to be issued with a list of outstanding (ie, snagging) items, but NEC is not supposed to work that way. The reality may be different. The programme is given prominence with NEC, as it is in GC/Works. It is seen as an essential management tool and given contractual status. It is a Gantt not a simple bar chart. The contractor should provide for it and refer to it in his part of the Contract Data, in Part Two. If not, the employer can stipulate in the Contract Data when he wants a programme and revisions to it as the work progresses.

The wrinkle which is underplayed is that an astute employer can ensure no work starts on site until a programme has been accepted, thereby pinning the contractor down to providing a meaningful programme. The trick is ensuring that the access date and the date for acceptance of the programme coincide. Then there is the treatment of float. Float is to be declared in the programme. NEC guidance categorises float as free, total and terminal float. The last is owned by the contractor, the others belong to the project. The distinction is that terminal covers all the programme; the others are task related and aimed at slippage available to complete a task. You should note that: taking over equates to partial possession; and acceleration is a useful management tool. Turning to testing and defects, the first thing to note is that the requirements for tests and inspection should be set out in detail in the Works Information. After all, to quote clause 20.1 the Contractor provides the Works in accordance with the Works information. So if it is not in there its not done. I will continue with testing and defects and also discuss payment in the next edition.

Ron Plascow 01223 222261 ron.plascow@mills-reeve.com

Japanese knotweed: a threat to development and bio-diversity

Earlier this year, I was instructed on the purchase of recently built offices in Staffordshire. However, a site inspection by my clients surveyor revealed the presence of Japanese knotweed at the property. For the uninitiated, Japanese knotweed is one of the most damaging invasive alien species in the UK, with the capacity to damage drainage, concrete and foundations. One square metre of the plant can, in worst case scenarios, cost many thousands of pounds to remove. In my clients case, the developer conceded that no remedial steps had been taken at the build stage to neutralise the effect of the knotweed. With our searches also revealing other problematic issues (and the seller refusing to give an indemnity) my client reluctantly withdrew its offer for the property. The Government is proposing steps to tackle this issue. The result is a consultation on the release of a non-native parasite (Alphalara itadori) which is Japanese in origin and has been shown to inhibit the growth of knotweed. The proposals have potential implications for native flora, but also give rise to issues surrounding land ownership and access to affected sites. As such, the consultation invites comment from landowners and developers, as well as environmentalists.

Vanessa Warren 0121 456 8298 vanessa.warren@mills-reeve.com

JCT Revision 2: insurance and mediation

There are several amendments to the JCT in Revision 2. Two of the most important relate to the professional indemnity insurance provisions. Revision 1 made the default position for pollution and contamination claims to be the full amount of indemnity cover. However, Revision 2 provides that if no amount is stated, such cover shall not be required. A similar provision now exists for asbestos claims where the default position is, again, that no cover is required. On the face of it, this seems like a very minor amendment, simply requiring the level of cover to be agreed and included in the contract particulars. The problem comes, however, with the JCTs explanation of these changes. These amendments are described by the JCT in their Revision 2 guide as being in line with market realities.

What the revision means is that it may now be possible to argue that requiring cover for contamination, pollution and asbestos is not in line with the current insurance market and point to the JCTs Revision 2 guide for support. A further amendment to note is that made to the mediation provision. Under Revision 1 the parties may by agreement use a mediator. Revision 2 strengthens this by imposing an obligation for direct negotiations and that if these fail the parties must give mediation serious consideration. As far as contractual language goes, serious consideration is hardly unequivocal. However, what is clear is that the JCT is pushing negotiation and mediation higher up the agenda in line with the OGCs Achieving Excellence in Construction initiative.

Robert Weatherley 01223 222338 robert.weatherley@mills-reeve.com

Alexander Hunt 01223 222385 alexander.hunt@mills-reeve.com

Nicola Savery 0121 456 8312 nicola.savery@mills-reeve.com

The buck stops here

The recent case of Costain Ltd v Charles Haswell & Partners Ltd (2009) has clarified the standard of care owed under a professional appointment. This was actually not an area where the law needed any clarification. As far back as 1957, the decision of Bolam v Friern Hospital Management Committee established the principle that not every mistake by a professional gives rise to a valid legal cause of action. Although it is possible to impose a more onerous standard, under Bolam a professional will not be negligent if the act in question conformed to a practice accepted as proper by some responsible members of his or her profession. In Costain, the contractor was suing the consultant, Haswell, for allegedly negligent advice in relation to the design of foundations for a water treatment works. The relevant clauses in the professional appointment were clause 7.2, which effectively restated the Bolam principle in slightly more onerous terms, and clause 7.4. The question for the court was whether clause 7.4, which stated that Haswells design was to meet the requirements [of] the Specifications the Tender Documents the Contract or the written requirements of Costain , imposed a strict liability obligation on Haswell (Costains argument) or, whether it was to be interpreted as being subject to the reasonable care and skill obligation in clause 7.2 (Haswells argument).

Stuart Pemble 0121 456 8335 stuart.pemble@mills-reeve.com

In a decision which you may find surprising, the judge, Richard Fernyhough QC agreed with Costain: it was quite plain that Clause 7.4 add[ed] something different to Clause 7.2, otherwise it would not need to be there. Although, on the facts, the strict liability obligation was found not to be a relevant factor in deciding whether or not Haswell was negligent (in fact the judge decided that Haswell had failed to meet the standard in clause 7.2 in any event), this decision is important as it raises the possibility that in certain instances the court will disregard any allowance for human error. This may well be an issue that clients and consultants and their insurers will wish to revisit in their negotiations.

Whos the man? Fitzroy Robinson Ltd v Mentmore Towers

Fitzroy Robinson Ltd (FR) was a firm of architects appointed by Mentmore Towers Ltd to redevelop two substantial properties. In 2005 Mentmore deliberately approached and negotiated with a specific director of FR (Jeremy Blake). The appointments entered into confirmed that Mr Blake was to be the team leader and would be personally available and responsible for the overall management supervision and co-ordination there will be no change of responsibility without the prior written agreement of [Mentmore]. Mr Blake resigned from FR in March 2006, which was some weeks before the formal appointments were entered into. FR omitted to inform Mentmore of the resignation (having asked Mr Blake to keep it quiet) until November 2006. In December 2007 the project was suspended and FR commenced court proceedings, alleging unpaid fees. Mentmore raised the concealment of Mr Blakes resignation as a counterclaim and a High Court judge in the Technology and Construction Court held that the concealment constituted a fradulent misrepresentation by FR. Professional organisations should ensure that where key individuals are named in their appointments, timely notification of any significant changes are communicated. Even if the facts do not extend quite as far as the Mentmore case so as to result in a finding of fraudulent misrepresentation, a failure to notify, or other false statement, may still result in a negligent misstatement, breach of contract and/or a breach of the professionals bodys codes of conduct. Similarly, those employing a firm with the expectation of certain key people being involved should ensure that their position is properly protected by adopting suitable clauses in the appointments.

Paul Slinger 0121 456 8385 paul.slinger@mills-reeve.com

Corporate manslaughter: new sentencing guidelines

The Sentencing Guidelines Council (SGC) has issued a second consultation on draft sentencing guidelines for corporate manslaughter and health and safety offences causing death. These come, coincidentally, at the same time as the HSE publishes statistics for the first year following the introduction of the Corporate Manslaughter and Corporate Homicide Act 2007. Whilst the HSE rightly welcomes the news that the number of work related fatalities has fallen to a record low of 180, it is keen to warn that, historically, a rise out of recession sees a corresponding increase in injuries. The full report can be located at: http://www.hse.gov.uk/statistics/overall/hssh 0809.pdf Whether the fall in fatal accidents has been in any way shaped by the introduction of the Corporate Manslaughter and Corporate Homicide Act 2007 is an interesting question, but one that cannot be easily answered. The new offence certainly helped move health and safety up the boardroom agendas and the first consultation exercise by the SGC worried many boards, suggesting fines as high as 10 per cent of gross annual turnover. Having considered the earlier responses the SGC has decided to move away from the formulaic approach it previously considered and has returned to a less controversial and more conventional analysis of the culpability of the organisation itself. It sets outs several factors that the court can consider to assess the gravity of the offence before it and then produces a list of potentially aggravating and mitigating features that will be familiar to anyone used to dealing with Health and Safety at Work Act offences. The only mention of specific figures comes in section D, stating simply that The appropriate fine [for manslaughter offences] will seldom be less than 500,000 and may be measured in millions of pounds and in respect of health and safety offences fines should seldom be less than 100,000 and may be measured in hundreds of thousands of pounds or more. These words, in isolation, are difficult to fit with the many cases where firms have been fined millions of pounds under the Health and Safety at Work Act 1974. Few would measure Transcos 15 million fine for the gas explosion at Larkhill in hundreds of thousands. The consequences of any fine must be taken into account by the court, but the impact on innocent employees is of more relevance than the effect on shareholders and directors. Bankruptcy may be

Duncan Astill 0121 456 8318 duncan.astill@mills-reeve.com

acceptable in some cases, although smaller organisations will be given time to pay. Public sector organisations should expect a punitive fine as the standards expected of a local authority, NHS trust or police force are the same as for the private sector. However, the impact on the provision of services must be considered by the court and a different approach may well be justified. For that read smaller fine. The guidelines also set out the details of how those convicted of a corporate manslaughter offence may be required to publicise the fact. With an object of both deterrence and punishment, the organisations own website will be required to publicise the conviction and details of the fine. Not the kind of news the marketing staff would have been planning to include. Newspapers may also be used, but it is recognised that in many cases, that will be unnecessary. The front page of every national newspaper is likely to be free for the first household name convicted of the new offence. Mills & Reeve LLP will be responding to the consultation and full details are available on the SCSs website: www.sentencing-guidelines.gov.uk For more information, or to add your views to our submission, please contact me.

Distressed developments
Given the current market conditions few developers may be commencing new schemes at the moment, but there are of course some development schemes underway which are exposed to various risks, including some relating to the construction industry. Issues such as the insolvency of a member of the professional team or indeed the developer can be a serious risk on the completion and delivery of the project, or completing the project within the anticipated budget. A developer may be looking to extend any agreed payment period to fit in with its funding arrangement (often because of pressure from the funder to the developer to control costs and fund any cost overruns). Any such extended periods for payment can expose the professional team to more financial risk. In turn this may adversely affect all payment arrangements within the supply chain. Contractors, on the other hand, will be looking for advance payments where the contract permits and to minimise payment periods. Where developers are receiving grant funding, the contractor will be keen to receive early payment if the grant funding is only guaranteed within a particular accounting period. Where contracts provide for a retention (usually held for a specified period of between 6 and 12 months following practical completion) then in the current market conditions, some contractors are asking the developer to hold this in a separate bank account to cover the risk of the developers insolvency. It is important for all parties involved in a development scheme to review their position (both financially as well as contractually) and keep on top of the position, taking early legal advice where there is any cause for concern.

Laura Holdaway laura.holdaway@mills-reeve.com 01223 222308

Pre-packs
More and more these days we are receiving enquiries about pre-packs. What are they? What can I do about one? Are they fair? The term pre-pack is applied to the sale by an administrator of the assets and business of an insolvent company to a third party. So far so straightforward but the perceived unfairness tends to arise because: the sale takes place a matter of moments after the company goes into administration; often the third party will be owned and managed by the same people who ran the insolvent company; and there is an absence of consent to the sale either from creditors or a court. Pre-packs are controversial but they do have some advantages. For instance, a pre-pack can minimise the erosion of supplier, customer and employee confidence and can save jobs. If the company is subject to a protracted normal administration process then key employees are more likely to lose confidence that the company can be saved and seek alternative employment. The courts have looked hard at pre-packs but have generally supported their use. However, in response to creditor concerns professional guidelines were introduced in January 2009 requiring administrators to give much more detailed information to creditors, albeit after the event. It is difficult to challenge a pre-pack. Creditors have a statutory right to bring an action against an administrator relating to his conduct but will have to show that the administrators actions have caused that creditor particular prejudice. A less formal and cheaper way of potentially challenging a pre-pack is to contact the Insolvency Services pre-packs complaints line.

Helen Prandy 01223 222344 helen.prandy@mills-reeve.com

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December 2009