January 2015 – Construction Law

European Court of Justice overturns additional requirements for the marketing of construction products in German Building Rules List

Jan 26 2015

By Christoph Mank and Eva Hugo, K&L Gates, Berlin

On 16 October 2014, the European Court of Justice[1] (ECJ) ruled that German law, which imposes additional authorization schemes on construction products even if they already bear the “CE” mark and are lawfully marketed in other member states of the European Union, violates the right on the free movement of goods on the single European market.

The facts

In the European Union, certain products are marked with the CE symbol to certify their compliance with product requirements under European Union law. Consequently, a CE-certified product is entitled to move freely on the European market and may be freely used for its intended purpose.

Nevertheless, German law, as reviewed by the ECJ, stipulates that CE-certified construction products are subject to additional approvals before their use and sale in the domestic market; such additional approvals are listed in building rules lists (Bauregellisten) A, B and C.

The present case solely referred to building rules list B and three construction products listed therein; namely, pipeline compressions, mineral wool insulating materials and gates, windows and exterior doors. All these construction products had in common was that they were marked with the CE symbol, which meant that they complied with requirements of the Construction Products Directive[2] of the European Union and, therefore, could be marketed and used freely on the European market. However, German public building law provides for additional national approvals for marketing the construction products on the German market.

Due to this practice, the European Commission received numerous complaints from manufacturers and importers who had difficulty in placing their construction products on the German market; the European Commission, therefore, launched infringement proceedings against Germany. Since Germany insisted during the preliminary procedure that the security of buildings cannot sufficiently be achieved by the CE marking alone, the European Commission decided to bring action before the ECJ.

The decision

The ECJ held that the additional approvals set out in building rules list B infringes article 4 paragraph 2 and article 6 paragraph 1 of the Construction Products Directive. According to those provisions, member states “shall not impede the free movement, placing on the market or use in their territory of products which satisfy the provisions of this Directive,” and were, correspondingly, CE-marked. The ECJ ruled that the German approval practice constitutes such an impediment.

The Court further stated that the Directive itself provides for specific procedures in the event that a member state considers the requirements of the Directive to be incomplete and insufficient. Due to the existence of those procedures, a member state is not allowed to arbitrarily impose its own additional requirements.

Consequences

Although the present decision refers only to the three aforementioned groups of construction products, the ruling will be applicable for all CE-marked construction products that are subject to further approvals according to German law. The European Commission, correspondingly, sees a precedent.

Nevertheless, it should be noted that the Court´s decision refers to the Construction Products Directive of 1989, replaced in 2013 by the Construction Products Regulation[3]. Hereafter, the CE marking no longer serves as a proof that the respective construction product complies with the requirements of European law. Now, it only shows that a declaration of performance has been issued by the manufacturer describing the performance of the construction product and its essential features; therefore, it is not clear whether, and to what extent, the member states are allowed to impose additional requirements under the new Construction Products Regulation. However, since the new Regulation also provides for special procedures in the event of incomplete and insufficient provisions, it can be assumed that member states will also not be allowed to impose their own additional requirements beyond the provided procedures. It remains to be seen if Germany will make use of those procedures.

Reactions to the present decision are quite different: while the European Commission and European associations welcome the decision with regard to the right of free movement of goods, German associations fear a decline in quality of construction products.

[1] Case no. C-100/13.

[2] Directive 89/106/EEC.

[3] Regulation EU 305/2011.

Welcome to the 28th Edition of Arbitration World

Jan 23 2015

Welcome to the 28th edition of Arbitration World, a publication from K&L Gates’ International Arbitration Group that highlights significant developments and issues in international and domestic arbitration for executives and in-house counsel with responsibility for dispute resolution.

To view Arbitration World, click here.

To download a printable PDF of the publication, open the link above and click on the fourth icon from the right in the magazine toolbar at the top of the page

In this edition, we summarise the key provisions of the new LCIA Rules, which came into effect on 1 October 2014, including provisions as to emergency relief and consolidation of arbitrations. We explore some of the issues related to “mediation/arbitration” or “med/arb” as an alternative approach to dispute resolution, and we continue our series on the growth of third-party funding in international arbitration. We include an article about a French court decision with important implications for parties in arbitration who face impecunious respondents or counterclaimants. We examine recent caselaw from Singapore on a gap in the dispute resolution procedures within the FIDIC Conditions of Contract. In a continuation of our series on tiered arbitration clauses, we look at recent developments in England. We analyse an ongoing debate in Australia about the use of investor-state dispute resolution clauses in bilateral investment treaties and look at a recent case in Australia regarding the courts’ approach to the question of when third parties can be bound by an arbitration agreement.

We also provide our usual update on developments from around the globe in international arbitration and investment treaty arbitration.

We hope you find this edition of Arbitration World of interest and we welcome any feedback (e-mail ian.meredith@klgates.com or peter.morton@klgates.com).

Event: Major Projects & Infrastructure Qatar – Contract Management & Dispute Resolution

Jan 20 2015

K&L Gates Doha partner Matthew Walker and associate Darran Jenkins will present at C5’s 2nd Forum on Major Projects & Infrastructure Qatar: Contract Management & Dispute Resolution. The forum will be held on 27 – 28 January 2015 at the InterContinental Doha – the City Hotel, Qatar.

Darran will be presenting Understanding the Complexities of Qatari Construction Contracts during a Pre-Forum Master Class on Monday, 26 January 2015.

Matthew will partake in a presentation titled Successfully Enforcing International Arbitration Awards on Wednesday, 28 January 2015.

For a full schedule and to register, please click here.

Recent English Court Case on FIDIC – Stay Permitted to Allow Mandatory DAB Referral under FIDIC Silver Book

Jan 14 2015

By Mike Stewart and Camilla de Moraes, K&L Gates, London

Following on from our recent blog post discussing the case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) (which can be found here), there has been another recent decision in the English courts regarding the International Federation of Consulting Engineers (FIDIC) suite of contracts. The case of Peterborough City Council v Enterprise Managed Services Ltd [2014] EWHC 3193 has confirmed that the referral of a dispute to a Dispute Adjudication Board (DAB) under FIDIC is mandatory and operates as a condition precedent to the dispute being referred to arbitration or litigation for final resolution. The case also discusses the well know “gap” in the provisions of clause 20 of the FIDIC conditions where arbitration is chosen as the final method of dispute resolution.

Facts

Under the terms of the contract, Enterprise Managed Services Ltd (EMS) agreed to design, supply, install, test and commission a 1.5 MW solar energy plant on the roof of a building owned by Peterborough City Council (the “Council”).

The form of contract was the FIDIC General Conditions of Contract for EPC/Turnkey Projects (the “Silver Book”). The works were completed in late 2011, and the Council alleged that the plant failed to reach the required output of 55kW. Disputes then arose between the parties as to the value of EMS’s executed work and whether or not liquidated damages were payable to the Council for failure to meet the required output.

On 21 July 2014, EMS gave notice under the contract of its intention to refer the dispute to adjudication. Despite this, on 11 August 2014, the Council issued proceedings. Shortly afterwards, the Council wrote to EMS disputing that it was obliged to refer the dispute to the DAB. On 27 August 2014, EMS issued an application to the court for an order to stay the action brought by the Council.

The Contract

Clauses 20.2–20.7 of the contract set out the procedure for dispute resolution by a DAB to be appointed on an ad hoc basis after any dispute has arisen. Clause 20.8 stated that if at the time a dispute arose there was no DAB in place, “whether by reason of the expiry of the DAB’s appointment or otherwise”, then either party could proceed to litigation.

The Issues

The issues to be decided were:

i) Whether the contract required a dispute to be referred to adjudication by a DAB as a condition precedent to issuing court proceedings; and

ii) If so, should the court exercise its discretion and order that the proceedings commenced by the Council should be stayed?

In relation to the first issue, the Council argued that Clause 20.8 operated as an “opt-out” from DAB adjudication. However, even if such a reference was mandatory, the Council argued that it would be a time consuming, expensive and ultimately unproductive exercise to conduct an adjudication which would almost certainly provoke a notice of dissatisfaction from one or other of the parties, and therefore, a stay should not be granted.

The Decision

In respect of the Council’s argument that Clause 20.8 operated as an ‘opt-out’ from DAB adjudication, the judge held that Clause 20.8 would “probably” only grant the parties a unilateral right to opt out of the DAB adjudication if the parties had agreed to appoint a standing DAB at the outset. This was because an ad hoc DAB would only ever be appointed after a dispute had arisen. Otherwise, Clauses 20.2 and 20.3 would have no application because, under those sub-clauses, there had to be a dispute before the process of appointing a DAB began. Given that Clause 20.2 provided for ad hoc DAB appointments and on the Council’s argument Clauses 20.2–20.7 would have been rendered meaningless, the judge accepted EMS’s argument that the contract required disputes to be resolved by way of DAB adjudication prior to litigation.

As to the Council’s submission that the “rough and ready” process of adjudication was entirely unsuitable to resolve the dispute between the parties, although the judge agreed, he stated that this was an inherent feature of adjudication. The judge, however, referred to the presumption that parties should be left to resolve their disputes in the manner provided for in their contract. He stated that the factors and rival scenarios between the parties were finely balanced, and that the Council had failed to make out a sufficiently compelling case to displace the presumption and, accordingly, had failed to make out a sufficient case for resisting a stay.

It was held that the parties must be left to resolve their dispute in accordance with the contractual mechanism, namely adjudication.

“Gap” in FIDIC Clause 20

As part of its submissions, the Council argued that there is a gap in Clauses 20.4–20.7, such that these clauses should be unenforceable for lack of certainty. This so-called “gap” has been the subject of much commentary.

Clause 20.4 of the FIDIC conditions provides that, where a party gives a notice of dissatisfaction after a DAB decision, then the decision must be given effect to (pending final determination). It is therefore binding, but it is not final and binding. The Council argued that if the unsuccessful party subsequently failed to comply with the DAB’s decision, then the only remedy for the successful party would be to refer the refusal to comply to a DAB. The fact that the unsuccessful party is left without an effective remedy (other than to refer the original dispute to arbitration or litigation) is the “gap” which the Council argued rendered the particular clauses unenforceable.

The judge rejected the Council’s argument that Clauses 20.4–20.7 were unenforceable for lack of certainty. The judge held that although the “gap” point was arguable if the contract contained an arbitration clause, it fell away if litigation was the forum for final dispute resolution. This was because a court could intervene and order specific performance of the obligation to comply with the DAB’s decision (something which an arbitrator may not have jurisdiction to do).

Interestingly, there has been a recent case heard by the Swiss Federal Supreme Court where it was decided that, although the DAB procedure was a condition precedent to arbitration, the parties did not have to go through the process if doing so would amount to an abuse of rights/breach of the principle of good faith. Given that there is no underlying principle of good faith in English law, it would be unlikely if such arguments were deployed before the English courts to rebut the presumption that parties should be left to resolve their disputes in the manner provided for in their contract.

How’s the Weather? Construction Contracts Should Be Prepared for Any Answer.

Jan 12 2015

By Ryan D. DeMotte, K&L Gates, Pittsburgh

Mother Nature can often be an unwelcome intruder on a construction project. Heavy rains, snow, ice, wind, extreme cold, extreme heat; there are any number of weather events that can delay a project. While parties to a construction contract cannot control the weather, they can and should anticipate the possibility of adverse weather and address it in their contracts. Prudent contract provisions addressing bad weather events can help owners and contractors minimize the disputes that can develop when rain, snow, ice, and other weather events delay the project.

A common approach is to give contractors additional time but not costs for weather delays. Many commonly-used contract forms provide for weather-based time extensions if the weather event was “abnormal, “unforeseeable,” or “not reasonably anticipated.” Thus, in order to evaluate a request for a time extension based on adverse weather, the parties must first establish the appropriate weather baseline against which to measure the weather event at issue. Was the rainfall unusually heavy during a particular month? Was the temperature colder than previous years? If the contract itself does not define the baseline weather measurement, this can often be a point of dispute between parties. Some parties may try to minimize these disputes by providing detailed provisions for baseline weather measurements in the contract in the form of 10-year averages or other objective measures. Whether or not these types of provisions are useful depends on the project and its sensitivity to weather variations.

The parties must also determine how the weather caused the delay. Did cold temperatures delay paving work? Did heavy winds or sandstorms prevent the delivery and installation of sensitive equipment? In trying to answer these types of questions, the parties may dispute whether the delays were the result of the abnormal weather or the result of other causes.

Finally, owners and contractors need to consider why certain work was being performed during the adverse weather. For example, if, through a contractor’s own early delays it is still working outdoors at a time when it initially planned to be completing the interior of a building, an owner may be able to argue that the contractor is not entitled to an extension for any weather-related delays to its outdoor work. Conversely, if a contractor’s work is delayed by the owner’s delays, it may have a strong argument for any delays it incurs as it tries to complete the work in less-than-optimal weather conditions. A contractor may also be able to claim costs if it is pushed by owner delays into bad weather.

Given the inherent uncertainty of the weather, some parties decide to build into the contract and project schedule a certain number of extra days to absorb any weather delays.

As the above issues demonstrate, owners and contractors should give careful thought to the various types of weather risks their project may face when negotiating a construction contract and creating the project schedule.

Technological Advances in Construction Payment Management

Jan 05 2015

By Jesse G. Shallcross and Daniel E. Raymond, K&L Gates, Chicago

A number of technology companies offer construction billing-management software designed to assist in the construction invoicing and payment collection process by electronically integrating billing, process claims, lien waiver collection, statutory declarations, sub-tier waivers, compliance management and payments.

Construction billing-management software has become increasingly popular among general contractors; a major reason is the simplification of the lien wavier collection process. Before construction billing-management software, most general contractors managed the lien waiver process manually by creating a spreadsheet of all prime subcontractors, sub-tier contractors, and suppliers. This process was time consuming, prone to error, and required updating. Construction billing-management software eases this process by streamlining the collecting and tracking of lien waivers. When a general contractor uses construction billing-management software, prime subcontractors are required to submit their contractor and material supplier information at the beginning of the project or the start of a new contract. The information input by the prime subcontractors automatically appears in the general contractor’s master tracking index. Further, the master tracking index is updated any time a prime subcontractor enters a change—thereby easing the general contractor’s burden of manually creating a spreadsheet and updating it. The real benefit to general contractors, however, comes from construction billing-management software’s automated prime and sub-tier lien waiver collection process. The software allows for electronic signature of prime and sub-tier lien waivers, and the general contractor’s master tracking sheet is updated as the electronic lien waivers are received. As a further benefit, construction billing-management software automatically prevents payments to subcontractors that are missing or include incorrectly submitted lien waivers. As a result of using construction billing-management software, general contractors can be assured a streamlined and efficient lien waiver process.

But, construction billing-management software’s efficiency does not come without a cost. Often, subcontractors are unaware that projects they are bidding on require the use of construction billing-management software; accordingly, subcontractors take a significant financial hit by being unable to include the subscription cost in their bid. The American Subcontractors Association, Inc., addressed this issue with a leading construction billing-management software company a few years ago; in response, the company altered its pricing from pre-transaction to a subscription model, with the idea this would simplify pricing.[1] With the addition of possible fees for the use of construction-billing management software, subcontractors should be even more vigilant in determining whether a general contractor requires the use of construction billing-management software before bidding on a contract.

[1] Letter from Walter Bazan Jr., President, American Subcontractors Association, Inc., to membership (September 2013), available here.

Archive:January 2015