rosenblatt view

Cladding – how the future looks

26/09/2017 | Elizabeth Weeks
The construction industry continues to focus on the ongoing review of cladding materials and their use as part of the fall-out from the Grenfell Tower fire. Renovation of Grenfell Tower saw new cladd

The construction industry continues to focus on the ongoing review of cladding materials and their use as part of the fall-out from the Grenfell Tower fire. Renovation of Grenfell Tower saw new cladding and insulation fitted to its exterior and it is suspected that the materials used were flammable and acted as a catalyst in spreading the fire. The Government has now approved the public inquiry’s terms of reference which include:

  • the design and construction of the building, including its refurbishment and management; and
  • the scope and adequacy of Building Regulations, including guidance on fire safety and other legislation, guidance and industry practice relating to the design, construction, equipping and management of high rise residential buildings.

 

It is worth noting that the inquiry’s remit falls short of examining the wider construction industry and the existing procurement landscape. That is to say that the inquiry will not deal with the often complicated division of design responsibility on a construction project and the different routes by which a construction project can be structured. Industry commentators have speculated that addressing those type of concerns would have assisted in dealing with the context of the procurement decisions taken in relation to Grenfell Tower and its refurbishment. Nevertheless, as a result of this recent tragedy, many in the construction industry have been undertaking a whole-scale review of their cladding works, materials and contractual responsibilities.

The majority of construction contracts require a contractor, sub-contractor or consultant to comply with good industry practice, undertake work with reasonable skill and care and comply with all relevant statutory requirements, which here would include compliance with Building Regulations. Additionally construction contracts usually contain clauses which prohibit the use and specification for use of deleterious materials. “Deleterious materials” is then usually defined as being those which are known or generally known to be or suspected of posing a health and safety threat, posing a threat to the structural stability or durability of the works or project and failing to be in accordance with industry standards and codes of practice.

It would be prudent for those involved in the review of existing cladding or specifying cladding materials for use in future projects to ensure that their contracts include adequate wording concerning the use and/or specification for use of deleterious materials. In terms of future projects it would be worth considering whether such contractual provisions are drafted widely enough to capture any particular concerns about cladding materials and whether these would be considered “deleterious” for the purposes of the contract. The requirement prohibiting the use of deleterious materials will generally be the more onerous contractual requirement.

As a consequence of testing and/or review, should it be found on a project that cladding has been installed in breach of these contractual obligations then responsibility will lie with the construction professional concerned. Formal legal proceedings may ensue if the relevant professional, more likely its insurers refuse to accept that responsibility and consequently pay out. In addition, the majority of construction contracts have either 6 or 12 year limitation periods, meaning that after that specified period of time, a claim under that contract would not be able to be brought. In identifying any possible issues, it would be prudent to ensure when contractual documentation was entered into in the event of a possible claim and whether this remains viable. As part of this exercise it would also be worthwhile to check that adequate insurance provisions are in place, particularly in the scenario of multiple sites. As part of that exercise a review of other security documentation (by way of example parent company guarantees and/or bonds) in place or to be put in place would ensure that the financial security and construction assurance on a project has been further assessed.

If you would like any further information, please contact Elizabeth Weeks on 0207 955 1469.

This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice, please contact Rosenblatt as above. 

This article was first published in Emap’s Construction News on 7 September 2017.

UPDATES TO THE PSC REGIME

09/08/2017
On 6 April 2016, the Small Business, Enterprise and Employment Act 2015 brought into effect changes to the Companies Act 2006 that required certain U.K. companies and LLPs to keep and maintain a regi

On 6 April 2016, the Small Business, Enterprise and Employment Act 2015 brought into effect changes to the Companies Act 2006 that required certain U.K. companies and LLPs to keep and maintain a register of any persons exercising significant control over that company or LLP (“PSCs”). Please click here to refer to our e-bulletin for further information regarding the introduction of the PSC regime.

On 26 June 2017, significant changes to the PSC regime were introduced following the U.K.’s transposition of the European Union’s Fourth Anti Money Laundering Directive (“4AMLD”) through the enactment of the Information about People with Significant Control (Amendment) Regulations 2017 and the Scottish Partnerships (Register of People with Significant Control) Regulations 2017 (together, the “2017 Regulations”). This article provides a summary of the principal changes introduced by the 2017 Regulations.

Key changes

Extension of the PSC regime

Previously, companies subject to Chapter 5 of the Disclosure Rules and Transparency Rules were not subject to the PSC regime. However, with effect from 24 July 2017, only those companies whose voting shares are admitted to trading on a regulated market within the European Economic Area will now fall outside the PSC regime.

The significance of this change is that companies listed on prescribed markets such as AIM and the NEX Exchange now fall within the scope of the PSC regime. Companies whose shares are admitted to trading on the London Stock Exchange’s Main Market will continue to fall outside the scope of the PSC regime.

With effect from 24 July 2017, certain unregistered companies that previously fell outside the PSC regime will also be required to keep and maintain a PSC register. Additionally, Scottish partnerships comprised entirely of corporate bodies and Scottish limited partnerships (“Eligible Scottish Partnerships”) will also be required to file information regarding their PSCs at Companies House (but will not have to maintain a PSC register).

Timescales for delivering PSC information to Companies House

Previously, a company’s / LLP’s PSC information was required to be updated on an annual basis through the filing of the annual Confirmation Statement at Companies House (unless an entity had already elected to maintain its PSC register at Companies House).

However, from 26 June 2017 (or 24 July 2017 for those entities mentioned in the previous section other than Scottish Eligible Partnerships), and in a move towards the event-driven filing requirements of 4AMLD, an entity falling within the PSC regime must now:

  • amend its PSC register within 14 days of receiving information regarding any relevant changes to the information entered on its PSC register; and
  • file notification of any such relevant changes at Companies House within 14 days of updating its PSC register.

Scottish Eligible Partnerships had 14 days from 24 July 2017 to file information regarding their PSCs at Companies House and are required to file notification of any subsequent relevant changes to that information within 14 days of receipt of that information.

Failure to comply with these timescales will constitute a criminal offence.

Practical considerations

AIM and NEX Exchange-listed companies should be aware of the burdensome obligation of having to comply with the requirements of both Chapter 5 of the Disclosure and Transparency Rules and the PSC regime, Such companies, along with Eligible Scottish Partnerships and unregistered companies that are now subject to the PSC regime, should begin making enquiries to identify whether they have any PSCs and subsequently update their registers (other than Eligible Scottish Partnerships) and make filings at Companies House.

Additionally, given the shift towards events-driven filings and the stringent timescales introduced through the implementation of 4AMLD, those entities subject to the PSC regime should review and consider who may constitute a PSC on an ongoing basis to ensure that all amendments to its PSC register, and any related filings at Companies House, are made within the statutory timescales.

Future changes

Whilst both companies and legal practitioners alike are still becoming accustomed to the changes to the PSC regime introduced by the transposition of 4AMLD, it is interesting to note that the Fifth Anti Money Laundering Directive (“5AMLD”) is on the horizon, which proposes to introduce even greater transparency on the identity of beneficial owners. Whilst not yet confirmed, 5AMLD could result in a lessening of the thresholds that need to be met by a person in order to constitute a PSC.

The extent to which any such changes will be introduced into U.K. law could well depend upon the timing of the European Union’s implementation of 5AMLD given the U.K’s impending departure from the European Union.

Further developments regarding 5AMLD are expected over the upcoming months.

Brexit and the British Legal Sector: Uncertainties, Solutions and Jewels in Crowns

12/06/2017 | Tom Spiller
The use of the legal sector by domestic and international parties is a huge contributor to the British economy in terms of: Jobs - with over 300,000 people directly employed; GDP - generating

The use of the legal sector by domestic and international parties is a huge contributor to the British economy in terms of:

  • Jobs – with over 300,000 people directly employed;
  • GDP – generating roughly 1.6% at around £30.6 billion per year; and
  • International trade – with an annual surplus of approximately £3 billion.

(more…)

Can’t pay or won’t pay – Court confirms insolvency proceedings are not appropriate for enforcing debts due under construction contracts

05/06/2017 | Elizabeth Weeks & Joshua Heavyside
Parties should settle construction disputes through adjudication or Court proceedings, according to High Court Judge Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division, has prov

Parties should settle construction disputes through adjudication or Court proceedings, according to High Court Judge

Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division, has provided further clarification on the appropriate avenue for parties to contest debts arising from construction contracts. In his Judgment in the recent decision, Breyer Group plc v RBK Engineering Ltd [2017] EWHC 1206 (Ch) (19 May 2017), Alexander QC stated that it would constitute “an abuse of process” for a party to pursue a winding up petition against a debtor in circumstances where it is “not a case of can’t pay, but won’t pay.” The proper place to settle such a dispute is either through adjudication or Court proceedings.

Origins of the dispute

Breyer Group plc (“Breyer”) was a contractor on a building project and had appointed RBK Engineering Ltd (“RBK”) in May 2015 as a sub-contractor to carry out certain refurbishment and electrical works. The appointment was formalised at the time by a contract between the parties containing standard terms and conditions, including terms relating to payment (including interim payment) and an express dispute resolution clause.

The work performed by RBK continued beyond the term of the contract, late into 2016. However, although a subsequent draft contract was never signed by either Breyer or RBK, it was clear both parties considered the relationship to be governed by the terms of the original contract.

By the end of 2016, a dispute had arisen between the parties with Breyer contesting the contents of RBK’s payment applications and alleging that RBK had carried out defective works, which Breyer would have to remedy at its own cost. In December 2016 the parties entered into a settlement agreement, which included provisions setting out a number of payments to be made by Breyer to RBK. Ultimately however, on 1 March 2017, when the final payment was due, Breyer served a Pay Less Notice on RBK, which in fact required RBK to settle a small balance to Breyer arising from the defects which had been disputed between the parties.

The winding up petition

The parties failed to reach agreement and on 22 March 2017 RBK filed a winding up petition against Breyer, claiming the contractor was indebted to it in the sum of £258,729.16. However, following the application of Breyer and an assessment of its finances, the Deputy Judge elected to strike out the winding up petition.

Alexander QC’s Judgment

In his Judgment, Alexander QC concluded that Breyer was “plainly not insolvent in the sense of being unable to pay the alleged debt.” Rather, a “genuine dispute” had arisen between the parties, to which Beyer had arguable defences and substantial cross-claims of its own.  Breyer’s position was predicated on its concerns regarding the quality of RBK’s electrical works, together with a dispute about which contract terms were operative. To therefore continue insolvency proceedings in such circumstances would be “oppressive” and an inappropriate forum for settling the dispute. Instead, Alexander QC held, the dispute could be readily resolved either through adjudication or Court proceedings.

In conclusion, where a dispute is purely about money and late payment, issuing a statutory demand for payment can be a cost effective and straightforward way to seek to extract timely settlement. However, should a dispute resulting in unpaid monies actually concern “won’t pay” issues, as was the case in Breyer, then the Court has made clear that the proper forum to seek resolution is adjudication or litigation. It appears as though the Court has one eye on seeking to dissuade parties from using the commercial threat of a winding up petition in circumstances where there are more substantive issues to be ventilated.

Adjudication

Adjudication is a prescribed “fast track” procedure designed to settle disputes arising from a construction contract. Adjudication is available to all parties to a construction contract, unless one of the contracting parties is a residential occupier or another exclusion is applicable. Statutory adjudication was introduced by the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”), with the Scheme for Construction Contracts Regulations 1998 (the “Scheme”) providing the procedural fall back in the event that the construction contract in question does not contain all of the adjudication provisions of the Construction Act.

Pursuant to the Construction Act, any party to a construction contract has the right to refer a dispute to adjudication. Typically, adjudication will last only 28 days, although it is possible for the parties to extend this period by agreement.

Under the Scheme, the parties appoint an adjudicator to consider the issues in dispute, with the decision treated as interim-binding (unless the construction contract provides otherwise), meaning an adjudication decision is binding until finally determined by legal proceedings, arbitration or agreement. A successful party will most commonly seek to enforce an adjudicator’s decision in the Technology and Construction Court.

Rosenblatt offers expertise on all forms of construction disputes, including adjudication and arbitration, as well as court proceedings in complex and multijurisdictional litigation, supported by its Dispute Resolution team. The firm has extensive experience in the Technology and Construction Court. Rosenblatt’s Construction and Projects team also provides expert advice on non-contentious construction matters, working closely with its Real Estate department. For more information, please contact Rosenblatt’s Construction and Projects team.

The content of this bulletin should not be construed as legal advice. If you do require legal advice, please contact a solicitor at Rosenblatt.

Liquidated damages: how much is too much?

30/05/2017 | Matthew Littlestone
When two parties enter into a commercial contract, they do so with the best intentions.  After all, neither party wants to spend time, energy and money involved in a dispute over the performance of

When two parties enter into a commercial contract, they do so with the best intentions.  After all, neither party wants to spend time, energy and money involved in a dispute over the performance of the contract.

However, back in the real world, parties will continue to enter into agreements and subsequently fail to comply with their contractual obligations.  In most cases, a breach of the contract will require the offending party to pay the innocent party damages for such breach.  But how much will the innocent party be entitled to in damages?

Generally speaking, the guilty party will pay damages as required under common law.  However, in order to avoid the difficulties that can arise in calculating how much this will be, and to provide a level of certainty, parties will often make provision in the contract for the level of damages to be awarded to the innocent party by including a liquidated damages clause.  A liquidated damages clause also has the advantage, for the guilty party, of limiting its liability where the stipulated sum is less than the actual loss.

So if a contract includes a liquidated damages clause, that is the end of the problem right? Well, not quite.

One of the defences to a claim for liquidated damages is that the clause is unenforceable on the basis that it is a penalty.  If a clause is considered by the Court to be a penalty, then it will not be enforced beyond the actual loss incurred by the innocent party.  But under what circumstances is a liquidated damages clause deemed a penalty?

For over a century, the leading case on this particular question was Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 in which a liquidated damages clause was deemed to be a penalty if it is extravagant or unconscionable, with the predominant aim of deterring a party from breaching the contract, instead of compensating the innocent party by way of a genuine pre-estimate of loss.  In Dunlop, Lord Dunedin referred to the following four tests to help determine whether a clause is extravagant or unconscionable:

  • A clause may be penal if it is extravagant by comparison to the maximum possible loss arising from the breach.
  • A clause may be penal if the breach of contractconsists only of not paying a sum of money, and the amount stipulated as damages is greater than the sum that ought to have been paid (if assessed at common law).
  • A clause may be penal when a single lump sum is made payable by way of compensation, on the occurrence of one or more events, some of which may cause serious and others “trifling” damage.
  • A clause is not a penalty merely because a precise pre-estimation of loss is impossible.

It remains the case that determining whether a liquidated damages clause is a penalty or not will depend on many factors, including the wording of the clause itself and the circumstances at the time of making the contract (rather than the time of the breach).  The tests set out in Dunlop also remain relevant when considering straightforward liquidated damages clauses.

However, the Supreme Court, in Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67 stated that the real question is whether the clause is penal and not whether it is a genuine pre-estimate of loss.  It held that in considering whether a provision in a contract is a penalty:

The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.  The innocent party can have no proper interest in simply punishing the defaulter.  His interest is in performance or some appropriate alternative to performance.”

As such, while the fact that the clause is not a genuine pre-estimate of loss may be relevant, it is necessary to consider other factors such as whether the innocent party has a commercial interest in the performance by the other party of its obligations under the contract.  Similarly, even if the clause seeks to protect a legitimate interest of the innocent party, it may still be a penalty if it is extravagant or unconscionable.

So what can be deemed to be a legitimate interest of a party?

At its simplest, it may be the case that a party’s legitimate interest is to receive compensation for breach of a contract.  However, there are more complex scenarios where compensation may not be the only legitimate interest.  Whether a clause is justified will depend upon the facts of the case.

For instance, in Cavendish, the relevant clause in question was in a share purchase agreement which provided that, if the sellers carried out certain activities which competed with the interests of the relevant company, the buyers could withhold any outstanding deferred consideration payments and exercise a call option over the sellers’ remaining shares.  The Supreme Court held that the buyers had a legitimate interest in the observance of the covenants which aimed to protect the goodwill of the business and the loyalty of the sellers was essential to preserve that goodwill.

In ParkingEye, the relevant clause imposed a charge for overstaying the free period of parking in a car park.  The Supreme Court held that although the claimant had not suffered any direct financial loss from the defendant overstaying the period of free parking, it had a commercial interest in the observance of the terms of its contract with the defendant which extended beyond the recovery of any loss (i.e. the management of the efficient use of parking space and the generation of income to run the scheme).

In light of these cases, when drafting a liquidated damages clause, it is worth bearing in mind that not only should you ensure that the figure in the clause can be justified as a genuine pre-estimate of loss but also that it is commercially justified.

This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice, please contact Rosenblatt as above.

  • contact

Latest news