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Surviving the Construction Crunch

Surviving the Construction Crunch. Wednesday 25 th March 2009. The construction crunch contractual pitfalls. Richard Wade Partner, head of Construction and Development Blake Lapthorn Turnaround Managers Association 25 March 2009. Overview. The contractual set up The contractual pitfalls.

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Surviving the Construction Crunch

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  1. Surviving the Construction Crunch Wednesday 25th March 2009

  2. The construction crunchcontractual pitfalls Richard Wade Partner, head of Construction and Development Blake Lapthorn Turnaround Managers Association 25 March 2009

  3. Overview • The contractual set up • The contractual pitfalls

  4. Contract law – the basics Some essential characteristics • Agreement • Offer/acceptance • Consideration • Capacity • Written or oral or by conduct • Privity

  5. OWNER TENANTS AB College (Developments Limited) (Employer) FUND Q.S MAIN CONTRACTOR ARCHITECT M & E ENGINEER STRUCTURAL ENGINEER SUB-CONTRACTORS SUPPLIERS SUB-CONSULTANTS

  6. Key issues in contract law • Privity (see above) • Joint and several liability • Insurance • Insolvency

  7. The ‘Interested third parties’ • Owner/purchaser • Tenant • Fund • Employer • Employer’s associated company • Ultimate client/owner • Present/future?

  8. Protection of third parties’ interests • Warranties • Third party rights • Assignment • Future third parties • Importance of: • underlying contractual agreement • insurance

  9. Warranties • Enforceable contractual promise • Remedy in damages • Express or implied • Written or verbal • Protects the third party’s rights in case of exclusion of Contract (Rights of Third Parties) Act 1999

  10. The Paradox of modern developments: • Often the developer is not the end user/occupier • Linden Gardens Trust v Lenesta Sludge (House of Lords, 1993) (the St Martins Case); highlights the paradox and a possible solution but … • McAlpine – Panatown (House of Lords, 2000)

  11. OWNER TENANTS AB College (Developments Limited) (Employer) FUND Q.S MAIN CONTRACTOR ARCHITECT M & E ENGINEER STRUCTURAL ENGINEER SUB-CONTRACTORS SUPPLIERS SUB-CONSULTANTS

  12. Other methods of protection of third party interests • Bonds (performance/guarantee and ‘on demand’ or ‘conditional’) • Guarantees – must be written • Novation (not to be confused with assignment)

  13. Performance and behaviour Some contractual hotspots

  14. Disputes and how to avoid them • Why good contracts go bad • Legal problems • People and dispute resolution • Three useful tips

  15. Why good contracts go bad • Misunderstanding the law • Terms and Obligations not defined • Rash decision making • Breakdown in the management of the contract or relationships • Failure to adequately deal with disputes • One off contracts – no perceived benefit in continuing relationships • Margins too tight

  16. Legal problems • Misunderstanding the law (use of Letters of Intent, contract formation, suspension) • Lack of definition in terms and obligations (eg notice to correct breach, eg JCT SBC05 Clause 8.4) • Rash decision making (suspension and termination... repudiation?) • Breakdown in management of contract/relationships • Cashflow • Failure to plan • Failure to deal adequately with disputes

  17. A Case Study in Rash Behaviour (and Proportionality):Multiplex Construction (UK) Limited v Cleveland Bridge (TCC, 2008) • Judgment of Mr Justice Jackson 29 September 2008 • Award of £6 million damages to Multiplex • Overall legal costs incurred ... £22 million • Award of legal costs to winner … 20%

  18. Alternative dispute resolution (ie not litigation or arbitration) “ADR”... • Mediation • Dispute Resolution Board • Early neutral evaluation • ‘Med/Arb’ • Adjudication • Negotiation/collaborative working ‘clear’!

  19. Three useful tips to take away • Ensure clarity of contract terms etc... • Effectively manage disputes • If in doubt ... take good advice!

  20. And finally, a word about … … Insolvency (some specific issues for construction projects) • Using the contract to your advantage – Melville Dundas v Wimpey (2007) • Retentions of Title • Novation • Keeping the project alive

  21. The construction crunchcontractual pitfalls Mark Gordon Partner Ridge and Partners LLP Turnaround Managers Association 25 March 2009

  22. Overview • Heads of claim • Tactics • Commercial considerations

  23. Why is construction contentious?

  24. Heads of claim • Measured works • Variations • Prolongation and loss and expense • Disruption/acceleration • Remedial works • Contra-charges • Liquidated damages • Completion costs

  25. Prolongation • Major source of disputes • Money flows with liability • Check Contract terms; notice provisions, method of analysis, long-stop dates etc • ‘Black art’ – seek advice • Commonly over-stated

  26. Delay analysis • No single accepted method • Methodology can obscure facts • Misunderstood • Presentation

  27. Delay analysis - example

  28. Disruption/acceleration • Out-of sequence working • Cause + effect demonstration • Common amongst subcontractors • Instruction required for acceleration

  29. Remedial works • Common head of counter-claim • Not usually an issue until after termination • Betterment • Burden of proof

  30. Contra-charges • Eg damage, cleaning costs • Burden of proof • Quantum

  31. Liquidated damages • Employer / main contractor remedy for delay • Default position • Main contractor allocation • Withholding notice • Often applied toward end of works

  32. Completion costs • Contract must be terminated • Market price • Emergency works • Betterment • Check contract terms – loss suffered? • Survey of work completed • Avoid paying twice (direct payments)

  33. Common tactics • Unrealistic and inflated works completed • Inflated and spurious claims • Extensive contra-charges • Completion costs include betterment • Large value of management time claimed for completion • Invoices disputed on spurious grounds • Delayed payment • Ambush • Starve struggling companies

  34. Actions • Secure site, materials and records • Commission detailed survey of works completed • Review account and prepare final account • Appoint professionals to advise on entitlements • Consider adjudication as means of quick-win • Check for collateral warranties and guarantees • Check withholding notices • Move quickly • Don’t be put off!

  35. Commercial considerations

  36. Questions

  37. Our thanks go to the following: • ToBlake Lapthorn for hosting the event • To Richard Wade and Mark Gordon for speaking • To our members and guests attending • All of our Sponsors, including our Foundation Sponsors:

  38. Surviving the Construction Crunch Wednesday 25th March 2009

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