Construction Law – Page 14 – Legal issues, news, and regulations concerning the construction industry

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.

Changes to Building and Construction Industry Payments Act 2004 (Qld) Have Now Come into Force

Dec 22 2014

By Sandra Steele and Marcel Marquardt, K&L Gates, Sydney

The amendments to the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA) came into force yesterday. Last minute further amendments to the BCIPA were passed on 26 November 2014, relating to the transitional provisions of the amending Act. Existing contracts are now subject to the new recovery of progress payments procedures, subject to a few exceptions. Industry participants will need to be aware of these recent amendments, particularly coming into the Christmas and New Year holiday shut down period, as the timing of all payment claims, payment schedules and adjudications will be impacted.

To read the full alert, click here.

General Contract Law Update

Dec 15 2014

As part of K&L Gates’ commitment to continuing professional development, the lawyers in our London office’s Energy, Infrastructure and Resources group regularly provide presentations and seminars on a wide range of legal issues.

The attached slides are taken from a presentation by Matthew Smith, Inga Hall and Daniel Lopez de Arroyabe on the subject of recent developments in contract law. The presentation looked at cases on general commercial and contractual issues, as well as focussing more particularly on those relating specifically to construction law matters.

To view the presentation, click here.

Federal Government Issues Advanced Release of Revised Building and Construction Code

Dec 09 2014

By Duncan Fletcher, K&L Gates, Perth and Matthew Parker, K&L Gates, Sydney

The Federal Government has issued an advance release of its revised Building and Construction Industry (Fair and Lawful Building Sites) Code 2014 (Revised Code), which will come into effect when the Building and Construction Industry (Improving Productivity) Bill 2014 (Bill) commences as an Act. Once enacted, the Bill will also reestablish the Australian Building and Construction Commission.

To read the full alert, click here.

Here’s a Tip: There are several ways contracts can help you avoid delays in design approval.

Dec 04 2014

By Ryan D. DeMotte and Richard F. Paciaroni, K&L Gates, Pittsburgh

The design/build delivery model offers owners and contractors the potential for greater efficiencies in the construction process, but if the parties do not carefully manage the design review process, the project can experience unnecessary delays to procurement and construction that can cascade throughout the project.

To read more in an article published in the November/December 2014 issue of Construction Today, please click here.

Reposted with permission.

Adjudicator Has No Jurisdiction Because Of “A Very Strong Prima Facie” Case Of Fraudulent Misrepresentation At Appointment Stage

Nov 12 2014

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

Eurocom Limited v Siemens PLC

[2014] EWHC 3710 (TCC)

http://www.bailii.org/ew/cases/EWHC/TCC/2014/3710.html

It is never easy to resist an action for enforcement of an adjudicator’s decision. Speed and certainty are central tenets to the adjudication mechanism provided by the Housing Grants Construction and Regeneration Act 1996. However, the judgment in the recent case of Eurocom Limited v Siemens PLC shows that the courts will not put enforcement of the adjudicator’s decision above basic legal principles.

The dispute arose in relation to a sub-contract allowing for the installation of communication systems in the London Underground. Siemens terminated the sub-contract in August 2012. A first adjudication took place and the decision made on 27 September 2012. That decision provided that a net sum was due from Eurocom to Siemens. Eurocom served a second notice of adjudication on 21 November 2013 and it was that adjudication that gave rise to these enforcement proceedings.

In the enforcement proceedings the judge considered, amongst other things, whether appointment of the second adjudicator was valid.

The adjudicator was appointed under the RICS’s nomination procedure. This required Knowles, acting for Eurocom, to complete a form in which it was asked to identify “any Adjudicators who would have a conflict of interest” in the case (who would not thereby be appointed). A number of adjudicators, the adjudicator in the first adjudication (who might very well and sensibly have been appointed as adjudicator in the second adjudication) and a firm of solicitors were listed in this section of the form. The form was not initially shared with Siemens.

However, it subsequently came to light and it transpired that the adjudicators identified did not in fact have a conflict of interest in the case. Knowles accepted they did not “properly” answer the question asked by the RICS about conflicts of interest, but merely referred to people without any conflicts who they did not want to be appointed.

Siemens’ primary case was as follows:

The application form sent to the RICS by Knowles seeking the appointment of an adjudicator misrepresented to the RICS that a number of individuals had a conflict of interest;
This was a false statement, made deliberately and/or recklessly by Knowles; and
A nomination based upon such a fraudulent misrepresentation is invalid and a nullity, such that the adjudicator has no jurisdiction.

The Court decided the point as follows (at para 65 of the judgment):

“… there is a very strong prima facie case that [Knowles] deliberately or recklessly answered the question “Are there any Adjudicators who would have a conflict in this case?” falsely and that therefore he made a fraudulent representation to the RICS as the adjudicator nominating body.”

The Court said that the consequence of this was as follows (at para 75 of the judgment):

“… I conclude that the fraudulent misrepresentation would invalidate the process of appointment and make the appointment a nullity so that the adjudicator would not have jurisdiction.”

The Court also agreed with Siemens’ alternative case that the completion of the form gave rise to a breach of an implied term to act honestly. Here the Court referred to the judgment in Makers v Camden (at [29(7)]) that there might be an implied term “by which the party seeking a nomination should not suborn the system of nomination”. Eurocom, through its advisors, had sought through fraudulent misrepresentation to influence the discretion to be applied by the appointing body, the RICS. Eurocom should not benefit from this benefit and the appointment of the adjudicator was invalid.

The ramifications of this decision will be keenly monitored by the industry.

High Court Finds No Duty of Care From Builder to Owners Corporation

Oct 22 2014

by Sandra Steele, Belinda Montgomery, Marcel Marquardt, Matthew G. Sier, K&L Gates, Sydney

The High Court has held that a builder of a serviced apartment complex does not owe a duty of care in negligence for financial loss arising from defects in common property to an owner’s corporation (Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36).

The serviced apartments were built by the builder under a design and construction contract with a developer. The owner’s corporation was a subsequent owner of the land.

This is an important decision for the building and construction industry as it has defined the circumstances in which a commercial builder will be found liable for defective works in negligence.

To read the full alert, click here.

Enforcing Notice Provisions in Construction Contracts in the United States

Oct 20 2014

By Kimberly L. Karr, K&L Gates, Pittsburgh

Notice provisions are a key part of construction contracts. These provisions typically require a contractor to notify the owner of the project (or an owner-designated representative) when the contractor believes that it is entitled to extra costs or additional time for the project. Notice provisions generally require that notice be given within a certain time period and that the contractor back its claim with supporting information.

Notice provisions are often the source of disputes between owners and contractors. This post provides an overview of common issues that owners and contractors in the United States should consider when negotiating notice provisions and addressing notice of potential claims during a project.