Construction Law – Page 12 – Legal issues, news, and regulations concerning the construction industry

Illinois Now Allows Bonding Off of Mechanics Liens on Private Projects

Oct 15 2015

By Jesse G. Shallcross, K&L Gates, Chicago

On July 29, 2015, Illinois Governor Bruce Rauner signed into law an amendment to the Illinois Mechanics Lien Act which allows a property owner, contractor or other party with an interest in real property which is subject to a mechanics lien claim filed against the property by an aggrieved contractor, subcontractor or material supplier on a private project to substitute a surety bond for such mechanics lien claim.[1] The new law is scheduled to take effect on January 1, 2016.

Illinois now joins the ranks of no less than 35 other states that provide for the right of an interested party to substitute a surety bond for real property against which a mechanics lien claim is filed, also known as “bonding off” a mechanics lien claim, on private projects.

A New Australian Standard (AS 11000) to Replace the General Conditions of Contract (AS 4000 and AS 2124)

Oct 08 2015

By Sandra Steele, K&L Gates, Sydney

The AS 4000 and AS 2124 General Conditions of Contract are widely used forms of procurement in the Australian construction industry. A technical committee has recently drafted a new standard form contract (AS 11000) to supersede these previous forms.

The drafters have sought to provide a balanced approach to risk allocation and have updated the standards for certain legislative changes and case law including for GST and security of payment legislation. Despite the extensive amendments, as the AS 11000 is drafted as a national standard form contract, some State and Territory specific legislation and case law has not been included.

Harris v. West Bay Builders: Award of Attorney’s Fees Not Mandatory Under California Prompt Payment Statutes

Oct 01 2015

By Timothy L. Pierce and Hector H. Espinosa, K&L Gates, Los Angeles

California’s prompt payment statutes, found at Business and Professions Code section 7108.5 and Public Contract Code sections 7107 and 10262.5, each contain a fee-shifting provision, stating that the prevailing party “shall” be entitled to his or her attorney’s fees and costs. In James L. Harris Painting & Decorating, Inc. v. West Bay Builders, Inc. (No. C072169), the California Court of Appeals confirmed that a trial court can, in its discretion, choose not to award either party attorney’s fees under the prompt payment statutes if the trial court determines that neither party “prevailed.”

FTR v. Rio: Penalties Assessed Against School District for Withholding Contractor Funds

Sep 24 2015

By Timothy L. Pierce and Benjamin Kussman, K&L Gates, Los Angeles

In East West Bank v. Rio School District, 235 Cal. App. 4th 742 (2015), the California Court of Appeals upheld a trial court’s assessment of $1,537,404.96 in statutory penalties against the Rio School District (the “District”) for the District’s failure to timely release contractor funds pursuant to Public Contract Code Section 7107. The Court concluded, in what constitutes a departure from another recent Court of Appeals ruling interpreting the same statutory provision[1], that Section 7101 does not allow a public entity to withhold contractor retainage on the basis of a dispute over the cost of contract work.

Unreasonable disadvantage to contractor: Securing warranty claims by standard terms and condi-tions restricted by German Federal Supreme Court

Sep 03 2015

By Christoph Mank, K&L Gates, Berlin

Background
Standard terms and conditions in German construction contracts often contain requirements to provide a warranty bond to secure performance by the contractor of its warranty obligations under the contract. These requirements often stipulate the contractor to provide both a performance guarantee and a warranty bond.

The warranty bond secures the contractor’s warranty obligations during the warranty period (typically arising after the acceptance and take-over of the construction works) and is often in an amount of not more than 5% of the contract sum. This practice has been established due to prior case law by the German Federal Supreme Court. According to the Federal Supreme Court, the client´s security interest after acceptance of the construction is significantly lower than its security interest during performance.

Good Faith in the Middle East

Aug 27 2015

By Darran J. Jenkins, K&L Gates, Doha

The concept of good faith as applicable in the Civil law jurisdictions of Qatar and the United Arab Emirates (“UAE”) is one that may be unfamiliar to lawyers from a common law background where good faith is applies in a very limited fashion, if at all. [1]

The Position in the Middle East

The position in Qatar is set out in Article 172 of the Qatar Civil Code[2]:

“1. The contract must be performed in accordance with its contents and in a manner which consistent with the requirements of good faith.

2. The contract is not confined to obliging a contracting party to its contents, but also includes its requirements in accordance with the law, custom and equity as per the nature of the obligation.”

The corresponding article in the UAE Civil Code[3] is Article 246 which states:

“(1) The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith.

(2) The contract shall not be restricted to an obligation upon the contracting party to do that which is (expressly) contained in it, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the transaction.”

In Bahrain, Article 127 of the Civil Code[4] requires:

“A contract is not only limited to its expressed conditions, but also as regards everything which according to law, usage and equity is deemed in view of the nature of the obligation, to be a necessary sequel to the contract, taking into consideration custom and usage, requirements of equity, nature of business, good faith and honesty.”

And Article 129 provides:

“A contract must be performed in accordance with its contents and in compliance with the requirements of good faith and honesty.”

Each of these Civil Codes takes an almost identical approach to the treatment of good faith. As a result, a contract will not be interpreted using solely its terms but will be interpreted against the requirements of customs, equity and good faith.

The requirement to act in good faith is a strong, positive obligation on the parties to a contract. It is not merely a requirement not to act in bad faith and not to deceive one another. Each party is instead under a legal obligation to exercise good faith in the performance of its contractual obligations and it is dealings with the other party. In a construction context, the duty of good faith would require an employer to cooperate with the contractor and deal with change requests in a timely and fair manner, whilst a contractor would be obliged to avoid delaying the performance of their works.

It is interesting to note that the obligation within the Qatar Civil Code is to perform the contract in good faith but it does not extend to negotiating the contract in good faith. The parties are free to adopt an adversarial approach to negotiation of the contract to try to obtain the best possible deal for themselves. Only once the contract has been signed does the duty to act in good faith arise.

In relation to insurance contracts, the duty to perform in good faith under the Civil Code does not in any way limit the duty of the insured to act with utmost good faith when placing the policy. This is because the Civil Code also recognizes and enforces a higher standard of care where the parties have agreed it should apply.

[1] Please note, all English extracts in this Article are taken from an unofficial English translation of the Qatar and UAE Civil Code, reference should always be made to the original Arabic text.

[2] Law Number 22 of 2004

[3] Law Number 5 of 1985

[4] Law Number 19 of 2001

FIDIC Update: Further clarity provided by Obrascon Huarte Lain SA v HM Attorney General for Gibraltar

Aug 20 2015

By Mike R. Stewart and Mary E. Lindsay, K&L Gates, London

We wrote recently on the case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC). The case provided welcome clarity on the interpretation of Sub-Clauses 4.12 (Unforeseeable Physical Conditions) and 20.1 (Contractor’s claims) and Clause 15 (Termination). The matter was appealed and dismissed unanimously in Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2015] EWCA Civ 712 (http://www.bailii.org/ew/cases/EWCA/Civ/2015/712.html).

The dispute arose out of the design and construction by Obrascon Huarte Lain SA of a road and tunnel under the runway of Gibraltar airport. The contract was an amended form of the FIDIC Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor, 1st edition, 1999; the Yellow Book.

In the first instance case, Mr Justice Akenhead was required to consider whether the employer was entitled to terminate.

In addition, the judgment clarified that, under Sub-Clause 20.1 of the FIDIC Conditions (Contractor’s Claims), time does not start running for the Contractor to give notice until the date on which he is aware (or should have been aware) of the delay resulting from a particular event or circumstance. The court only considered Sub-Clause 20.1 in relation to the extension of time, but the same principle is expected to apply to claims for additional payment made pursuant to the same provision.

The contractor appealed on the grounds that the court had incorrectly found that contamination encountered was foreseeable, failed to find that documents provided by the engineer constituted variations and failed to find that the employer had invalidly terminated the contract. The contractor’s appeal against Mr Justice Akenhead’s decision was unanimously dismissed by the Court of Appeal. The appeal judgment provides contractors with some helpful explanation in respect of each of these grounds of appeal.

(i) What would constitute unforeseeable physical conditions under Clauses 1.1.6.8 and 4.12?

In this respect, the Court of Appeal was reluctant to overturn findings of fact made at the first instance, particularly in the case of appeals from a specialist court such as the English Technology and Construction Court (the TCC).

However, the Court of Appeal did note that Mr Justice Akenhead had “held that an experienced contractor would make its own assessment of all available data. In that respect the judge was plainly right. Clauses 1.1 and 4.12 of the FIDIC conditions require the contractor at tender stage to make its own independent assessment of the available information. The contractor must draw upon its own expertise and its experience of previous civil engineering projects. The contractor must make a reasonable assessment of the physical conditions which it may encounter. The contractor cannot simply accept someone else’s interpretation of the data and say that is all that was foreseeable.”

(ii) Had the Engineer issued instructions which varied the Works?

Again, on some points, the Court of Appeal was reluctant to interfere in the findings of the TCC.

The Court of Appeal found that the documents referred to it did not amount to instructions to vary the contract. They were either matters which were the contractor’s obligations in any case, concessions by the employer which could be withdrawn and were not contractual or matters which the contractor had not, in fact, acted upon.

The analysis here (at paragraphs 101 to 112) of the judgment gives some indication of the Court’s interpretation of a variation instruction.

(iii) What would give rise to a failure to proceed with the works under Clause 8 and so justify termination pursuant to Clause 15.2?

The first instance court had summarised the relevant legal principles. These were not challenged but the contractor appealed the court’s application of the principles.

The Court of Appeal first addressed the contractor’s claim that it was undertaking a re-design of the works with which the employer and contractor had elected. However, the Court of Appeal found “it is clear that neither GoG nor the Engineer made an election which committed them to adopting the re-design and rejecting the original design of the tunnel. The Engineer made it plain that the original design was perfectly satisfactory and capable of being constructed without any risk to health or safety. The Engineer was simply considering the re-design as a modification put forward by OHL”.

In addition, when the engineer considered the contractor’s design under Clause 5.2, he was considering whether the design was technically acceptable and whether, if the design was implemented, the completed works would accord with the contract. If the re-design is satisfactory in all those respects, it is not for the Engineer to reject the design because he thinks it will take too long to build as the contractor claimed.

The Court of Appeal then considered termination under Clauses 15.2(b) and 15.2(c)(i) and the obligation under Clause 8 of the FIDIC Conditions to “proceed with the works with due expedition and without delay”. The Court decided that the obligation under Clause 8 is not directed to every task on the contractor’s to-do list. Rather it is directed to activities which “are or may become critical”.

The Court of Appeal then considered whether there was a “reasonable excuse”, within the meaning of clause 15.2(c), for the contractor’s failure to proceed with the works. On examination of the facts, it found there was no reasonable excuse.

As we have said, the appeal was unanimously rejected and agreed that the employer had validly terminated the contract. The decision provides helpful clarity and reasoning to understand the FIDIC Conditions and should, combined with the first instance judgment, provide some welcome guidance in the areas considered.

State v. Perini: New Jersey Supreme Court Has Its Say on Statute of Repose

Jul 23 2015

By Denise N. Yasinow, Christopher A. Barbarisi, and Loly G. Tor, K&L Gates, Newark

Recently, the New Jersey Supreme Court shed some new light on an old question impacting construction claims, i.e., when does the statute of repose commence? In New Jersey, the statute of repose[1] bars actions “arising out of the defective and unsafe condition of an improvement to real property” that are brought “more than 10 years after the performance or furnishing of such services and construction.”[2] In State v. Perini Corporation,[3] the Court examined the question in the context of a claim involving an improvement that serviced a larger, phased construction project. The Supreme Court affirmed, as modified, the Appellate Division’s decision,[4] holding that the statute of repose did not commence until the date of substantial completion of the entire overall phased project. Read More

Liquidated Damages in the UAE, Qatar, and Saudi Arabia

Jul 06 2015

By Harriet C. Jenkins, K&L Gates, Doha

INTRODUCTION

Liquidated Damages (LDs) are treated very differently across the Gulf region and from the position as understood within the English common law jurisdiction.

The universal starting point for LDs is in contract; parties should pre-determine the rate of damages a contractor should pay to the employer in the event of a (specified) breach, most commonly that of late completion. For the purposes of this article, we shall consider LDs solely in the context of delay damages, whereby in the event of delay to project completion, an employer can demand a fixed compensatory sum from the contractor.

The position of the civil law jurisdiction of the Middle East is very different from that understood within the English common law system. It is commonly accepted that English courts are generally very reluctant to look beyond the contractual position and open up any agreed position on LDs.[1] Across the Gulf however, differing civil codes empower courts (and tribunals) to look behind the parties’ contract and adjust delay damages based upon principles of actual loss and fairness.

This article discusses the differing treatments of LDs across three Gulf jurisdictions (namely, the United Arab Emirates, Qatar and Saudi Arabia), and reveals what parties can expect in regards to their compensation for delay.[2]

Independent evidentiary proceeding—A legal tool in Germany to avoid construction court proceedings

Apr 29 2015

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

The dilemma

A construction principal faces a lot of questions if material defects occur while a building is still under construction: he can decide to continue with construction in order to prevent a delay in completion, but faces the risk that it might be difficult, or rather, impossible, to outline and, in particular, to later prove the background and causes of defects. Furthermore, warranty claims against contractors or architects can become time-barred if the works continue for years without clarification of the defect. On the other hand, if construction stops until a court proceeding takes place, the project might be delayed due to the excessive duration of German construction court proceedings, possibly causing enormous financial losses. Besides the principal, contractors and architects also have an interest in the causes and responsibility for an occurring, material construction defect being promptly clarified and assessed.

Aims of independent evidentiary proceedings

Independent evidentiary proceedings, as provided in the German Code of Civil Procedure, can help those principals, contractors and architects involved in construction project to step out of the above scenarios.

Independent evidentiary proceedings are initiated by the application of one party. It is not required that a court proceeding be pending. Independent evidentiary proceedings aim to secure the state of construction and to clarify the causes of, and responsibilities for, a defect through an expert’s participation. This enables construction parties, for example, the principal and a contractor, to come to an agreement and to avoid a subsequent court proceeding. The defect can be remedied and the project continued to completion. Even if an agreement cannot be reached and a court proceeding follows, an independent evidentiary proceeding will help accelerate the construction court proceeding, because the independent evidentiary proceeding’s results will be considered as evidence in the court proceeding.

Legal requirements

Independent evidentiary proceedings have to be applied for at the court that would also settle the legal matter. Furthermore, the applicant party has to provide a legitimate interest to establish the state or value of an object, the cause of property damage or a material defect or the effort required to remedy the property damage or material defect by a written expert opinion. Such a legitimate interest is statutorily presumed if the establishment serves to avoid a court proceeding.

Evidence can be taken by way of written expert opinion. In its application, the applicant has to precisely designate the opponent, as well as the facts and circumstances on which evidence should be taken; it is not allowable to describe vague, unsubstantiated facts only for the purpose of obtaining information to concretize an argument of fact. However, it is permitted to describe the facts as they appear to the applicant as a lay person in construction matters. The court then decides whether to take evidence on the application, and chooses an expert to be instructed. The expert´s opinion only assesses the case on a factual basis; legal questions and interpretations are excluded.

Independent evidentiary proceedings end with the delivery of the expert´s opinion and, possibly, with an agreement between the parties, which then will be recorded by the court, but not by a contentious decision of the court. The court may set a time period within which the parties can raise objections to the expert´s opinion and may apply for appointments to orally discuss the opinion with the expert. If, however, the case is later brought before court by one of the parties as the result of the independent evidentiary proceedings, the expert´s opinion will be treated as if it was obtained during the court proceeding.

The opening of an independent evidentiary proceeding also affects the underlying claims. The limitation of those claims, especially warranty claims, will be suspended from the beginning of the independent evidentiary proceeding until six months after its end, a further advantage of this special type of proceeding.