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K&L Construction Law Blog

Legal issues, news, and regulations concerning the construction industry

“Badges” of Fraud Allow a Construction Contractor to Pierce the Corporate Veil of an Insolvent Developer and Hold the Principals Personally Liable

Posted in Case Summaries, The Americas

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

In a recent decision from the 1st District Appellate Court of Illinois, A.G. Cullen Constr., Inc. v. Burnham Partners, LLC, defendants husband and wife were held personally liable for roughly $450,000 due to unpaid construction work performed under contract with the limited liability company controlled by the couple.

Robert Halpin owned defendant Burnham Partners, LLC (“Burnham”), a real estate development company with a 90 percent stake in defendant Westgate Ventures, LLC (“Westgate”), and Halpin’s wife, Lori, ran the bookkeeping for both companies.  Westgate engaged plaintiff A.G. Cullen Construction, Inc. (“Cullen”) to build a warehouse and distribution facility in Big Beaver, Pennsylvania.

During the course of construction, Westgate refused to approve one of Cullen’s payment requests for work performed, and Cullen took the dispute to arbitration.  The arbitrator awarded Cullen $448,406.87 for the unpaid work and associated expenses and penalties, and the award was reduced to a judgment in Allegheny County, Pennsylvania.

Shortly before the arbitration hearing, Westgate sold the project and Halpin began winding up Westgate’s affairs and liquidating its assets, using the proceeds of the sale to pay other creditors.  He also paid a $400,000 developer’s fee to Burnham and transferred roughly $97,500 to himself and his wife, leaving a zero balance in the operating account of Westgate and no means with which to pay the Pennsylvania judgment.

Cullen filed suit in Cook County, Illinois against Westgate, Burnham and the Halpins to recover the amount owed by Westgate on the Pennsylvania judgment.  In attempting to hold Burnham and the Halpins liable for Westgate’s debts, Cullen argued that Burnham, through Halpin, perpetrated a fraud by transferring all of Westgate’s assets to themselves and other creditors.  The trial court ruled in favor of the defendants, however, finding that Cullen failed to present “undisputed evidence” of fraud.

The appellate court reversed the trial court’s decision and ruled in favor of Cullen, finding that the activity of the defendants presented nine of the 11 factors or “badges of fraud” set forth in the Illinois Uniform Fraudulent Transfer Act (UFTA) (740 ILCS 160/5) which give rise to an inference or presumption of fraud:

  1. There was a transfer of funds to a company “insider”, which term includes individuals who control the company and the relatives of such individuals, such as Robert and Lori Halpin.
  2. The action of transferring assets out of Westgate was concealed from Cullen.
  3. The transfer of Westgate’s assets to Burnham served to remove or conceal the assets themselves from Cullen.
  4. Before any of the transfers occurred, Cullen’s demand for arbitration had put the defendants on notice of a threatened lawsuit.
  5. Substantially all of Westgate’s assets were transferred.
  6. Westgate did not receive “reasonably equivalent value” in exchange for (a) its payment of a $400,000 development fee to Burnham or (b) its repayment of a $120,000 “loan” from the Halpins, the original payment of which, the court found, should have been a capital contribution from Burnham to Westgate under the terms of the company operating agreement.
  7. Westgate became insolvent after the transfers.
  8. The transfers occurred just 10 months after Cullen’s demand for arbitration and two months before the arbitration award was entered.
  9. Westgate had transferred assets to Burnham, a lienor, and Burnham then transferred those assets to the Halpins, who were insiders.

The court found that the defendants’ transfers of Westgate’s assets to themselves and other unsecured creditors when they knew about Westgate’s potential liability to Cullen amounted to fraud in violation of the UFTA.

While this finding of fraudulent activity of the defendants was a victory for Cullen, it did not necessarily follow that each of the defendants would be held personally liable for the obligations of Westgate to pay Cullen.  This is because a company is ordinarily treated as a separate legal entity, the debts and liabilities of which its shareholders or principals are not responsible for.

However, the common law system has developed a legal doctrine by which the principal of a company may be held liable for the debts and obligations of the company.  Where the principal has, for example, treated the company as a mere “alter ego”, failed to obey corporate formalities, or engaged in fraudulent activity, courts may “pierce” or “lift” the corporate veil to hold the principals liable for the actions of the company.

Under Illinois law, efforts to pierce the corporate veil of a company are governed by the law of its state of incorporation.  As Westgate was a Delaware limited liability company, the court applied Delaware law, which states that the corporate veil may be pierced where there is fraud.  The presence of nine of the 11 “badges of fraud” was enough to convince the court that the defendants had engaged in fraud.  As a result, the court ruled that Cullen may pursue each of Burnham and the Halpins for the $457,416.37 Pennsylvania judgment against Westgate.

Security of Payment Legislation and Set-Off Under Commonwealth Insolvency Laws

Posted in Asia Pacific, Case Summaries

By Jenny K. Mee and Jemimah Roberts, K&L Gates, Sydney

A recent Victorian Supreme Court case[1] has clarified the impact of Commonwealth insolvency set-off provisions on State-based security of payments legislation.

The case demonstrates that although a principal is generally precluded from relying on a set-off or counterclaim in certain contexts under the Building and Construction Industry Security of Payment Act 2002 (Vic) (BCISP Act), this does not apply if the claimant is in liquidation, due to the operation of section 553C of the Corporations Act 2001 (Cth) (Corporations Act).

The case also provides useful commentary on what is considered a ‘payment schedule’ for the purposes of the BCISP Act.

If you would like to read more about this case, please click here.

[1] Façade Treatment Engineering Limited v Brookfield Multiplex Construction Pty Ltd [2015] VSC 41.

Time Bars in Construction Contracts – A Comparison between Jurisdictions

Posted in Articles and Publications, Europe, Middle East

By Jafar S. Khan, K&L Gates, Doha and Inga K. Hall, K&L Gates, London

The consequences for a contractor who delays in submitting an application for an extension of time, or who gets his payment application in late, can differ dramatically depending on the contract terms and also the governing law of the contract.

In order to ensure contractors submit their claims as they arise (rather than ‘roll them over’ to the end of a project) and to assist in efficient cash-flow management, it is common practice for both bespoke and standard form contracts to include express procedures for submitting claims for time, money or other relief. Provisions dealing with claims for an extension of time for example will frequently stipulate time limits for each of the following:

  • the initial notification of the events giving rise to the claim,
  • submission of particulars,
  • a response/request for further particulars on behalf of the employer, and
  • an assessment of what if any extension should be awarded.

What happens though if one of the parties does not complete the relevant action or step forming part of the procedure within the stipulated time?

This will depend first on what the contract says the consequences are to be. The usual practice in the standard forms mentioned above is to expressly provide that a failure to (say) submit the particulars of the claim strictly in accordance with the time period prescribed will invalidate the claim i.e the claim becomes “time barred”. Looked at in another way, such express provisions are seeking to make timely submission of the required particulars a condition precedent to recovery.

This raises the interesting question of whether such time bars are enforceable. On the one hand it would seem disproportionate to bar a substantial claim if a contractor was only one day late in filing its claim, but on the other hand, an employer might have made certain assessments as to liability and closed its position with respect to issues in relation to the events surrounding the claim. It would arguably be unfair to ignore the terms of the contract and permit the employer to continue to be exposed to claims.

The issue of enforceability will depend to a significant extent on the law of the contract. In common law systems such as the United Kingdom for example, clearly drafted time bars (such as those found in FIDIC sub-clause 20.1 and NEC3 clause 61.3) have in the past generally been enforced.

An issue which is however currently generating debate in the UK is how to properly assess the time period for first notifying an event. NEC3 clause 61.3 states that if the contractor does not notify a compensation event (i.e a variation) “within 8 weeks of becoming aware of the event, he is not entitled to a change in the Prices [or] the Completion Date”. FIDIC sub-clause 20.1 requires the contractor to give notice “as soon as practicable and not later than 28 days after the contractor became aware, or should have become aware of the event or circumstance [giving rise to the claim]”. Although both clearly state the condition precedent aspect of the timely giving of notice, the more difficult issue is when does that time start running?

There is frequently a delay between the time an event occurs, and when the effect of that event as giving rise to a claim is identified. Equally, for an ongoing event which spans several days or weeks (such as a prolonged period of bad weather), should notice be given on day one (on a ‘just in case’ basis even though the duration and effect of the event are unknown) or at the end of the event (which the effect is known but with the risk the employer will say you have given notice too late?). These were the type of issues considered by the UK courts in the 2014 case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar[1] where the court said the notice provisions should be construed broadly, meaning the time should be calculated from when the contractor became aware (or should have become aware) of the delay, rather than from the date of the event itself.

Across the common law jurisdictions, the hardest line against time bars is taken in Australia, with the 2012 decision in Andrews v Australia and New Zealand Banking Group Ltd[2] that such time bars can be unenforceable as penalties.

The approach in civil code jurisdictions such as the GCC generally take the middle ground.

The UAE Civil Code neither expressly prohibits time bars nor enforces them.

Instead, prescribed time periods need to be read in the context of certain provisions of the UAE Civil Code including:

  • Article 106 – prohibiting the exercise of rights if the desired interest or result is disproportionate to the harm that will be suffered by the other party;
  • Article 246 – requiring the parties to act in good faith; and
  • Article 249 – prohibiting a party from exercising its rights in a manner that is oppressive or abusive

These provisions, read together, have the effect of meaning that time bars are neither expressly permitted nor expressly prohibited under UAE law. Instead, consideration will be given to matters which under common law are considered as being “equitable principles” such as whether the parties were acting in good faith, whether the actions are oppressive or unconscionable, and whether the benefit enjoyed by one party will be disproportionate to the harm suffered by the other party. Although such an approach is to be commended, since it ensures that a party is prevented from unnecessarily abusing its position under the contract, it does mean that the terms of the contract may be ignored in some instances. It is not clear as to the frequency at which courts in the UAE are willing to intervene and override the express terms of the contract, and this is an area we are continuing to monitor with interest.

Of course, a different scenario arises if a clause is silent on the consequences of a failure to submit a claim strictly in accordance with the time period prescribed by the construction contract. The question then becomes whether a time bar is implied when the prescribed steps to making a claim are not followed. One of the leading authorities on time-bars is Brember Handels GmbH v Vanden Avenne Izegem PVBA[3], HL which is authority for the proposition that, for a notice requirement clause to be a condition precedent, the clause must state the precise time for service and make it plain by express language that unless the notice is served within that time, the party required to give notice will lose its rights under that clause. Hence the conclusion should be that time bars will never be implied. However notably Jackson J in Multiplex Construction (UK) Ltd v Honeywell Control Systems[4] permitted a time bar to be implied despite the contract being silent on the matter. Some commentators however have suggested that a clear intention for a condition precedent is required, and that the decision in Multiplex can be distinguished on the basis of the Prevention Principle. Although there is no clear guidance in the UAE on whether a UAE court would be willing to view notice requirements as a condition precedent without clear words to that effect, in our view the UAE courts do not follow the principles which are equivalent to those in Brembar but instead weigh up the circumstances of each case and determine the fairest approach.


 

[1] [2014] EWHC 1028 (TCC)

[2] (2012) 290 ALR 595

[3] [1978] 2 Lloyd’s Rep 109

[4] [2007] EWHC 477 (TCC)

No Contract, No Problem: HICPA Does Not Prevent Contractors From Recovery Under A Quantum Meruit Theory

Posted in Articles and Publications, Case Summaries, The Americas

By  Jackie S. Celender and Leigh Argentieri Coogan, K&L Gates, Pittsburgh

I. HICPA Does Not Foreclose Contractors From Recovery Under A Theory Of Quantum Meruit.

The Supreme Court of Pennsylvania recently held that the Home Improvement Consumer Protection Act, 73 Pa. C.S. § 517.1-517.18 (“HICPA”), does not preclude a contractor from recovering under the theory of quantum meruit in the absence of a valid and enforceable home improvement contract.  Shafer Elec. & Const. v. Mantia, 96 A.3d 989 (Pa. 2014).  The decision affirmed the holding of the Superior Court of Pennsylvania, albeit on slightly different grounds.

Instead of focusing on the General Assembly’s intent (as the Superior Court of Pennsylvania did),[1] the Court relied on Durst v. Milroy General Contracting, Inc., 52 A.3d 357 (Pa. Super. 2012), holding that “the plain, unambiguous language of Section 517.7(g)[2] does not prohibit the cause of action in quantum meruit.”  Shafer Elec. & Constr., 96 A.3d at 996.  The Court noted that “[i]t is well settled at common law . . . that a party shall not be barred from bringing an action based in quantum meruit when one sounding in breach of express contract is not available,” and that “[w]hile traditional contract remedies may not be available due to the contractor’s failure to adhere to Section 517.7(a) . . . Section 517.7(g) does not contemplate the preclusion of common law equitable remedies such as quantum meruit when a party fails to comply with subsection (a).”  Id.  The Court concluded that “[i]f the General Assembly had seen it fit to modify the right of non-compliant contractors to recover in contract or quasi-contract, statutory or common law, or otherwise, it could have done so,” but did not.  Id.

The Court’s decision has important implications for contractors’ ability to use Pennsylvania’s mechanics’ lien law, 49 P.S. § 1101, et seq. as a tool in recovering unpaid amounts owed for work performed on a home improvement project.  In Pennsylvania, mechanics’ liens must be based on a contract, either express or implied.  See 49 P.S. § 1201 (defining “contractor” as one who, by contract with the owner, express or implied, erects, constructs, alters or repairs an improvement . . . or furnishes labor, skill or superintendence . . . or supplies or hauls materials, fixtures, machinery or equipment reasonably necessary for and actually used . . .”) (emphasis added).  The Court’s holding preserves a home improvement contractor’s ability to file and obtain a judgment on a mechanics’ lien based on an implied contract and in the absence of an express contract (i.e., where the contract does not comply with Section 517.7(a) of HICPA).

II. Quantum Meruit Allows Recovery Of The Value Of The Work Performed.

The Supreme Court of Pennsylvania’s decision in Shafer makes clear that contractors found to have an invalid home improvement contract under HICPA are still able to recover money for work performed by bringing a quasi-contract claim under a theory of quantum meruit.  Where a contractor is successful in bringing a cause of action in quantum meruit, the contractor is entitled to recover the value of the benefit conferred on the homeowners.  See, e.g., Durst, 52 A.3d at 360 (quoting Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526, 532 n.8 (2010) (“Quantum meruit is an equitable remedy to provide restitution for unjust enrichment in the amount of the reasonable value of services.”) (citing Black’s Law Dictionary (8th ed. 2004))); Com., Dep’t of Pub. Welfare v. UEC, Inc., 397 A.2d 779, 782 (Pa. 1979) (amount owed under a quantum meruit theory was “the reasonable value of the services performed”).  As such, contractors should be prepared to prove the value of the services performed and materials provided on the project to recover under a theory of quantum meruit.  Although the cost of materials and labor expended is normally a good proxy for the value conferred on a particular project, contractors should be mindful that under certain circumstances the value conferred may exceed the contractors’ costs and that, in those circumstances, relying on the contractors’ costs may undervalue the contractors’ quantum meruit claim.

III. The Case Law Interpreting HICPA Is Scarce.

There is a relative lack of caselaw interpreting HICPA and stating under what circumstances HICPA should apply.  The legislative history of HICPA suggests that HICPA should not apply to all home improvement projects—in particular, those involving sophisticated homeowners (i) who have a contractor that fully performed, and (ii) who have obtained all of the benefits of the contract but have not complied with the burdens (i.e., payment).[3]  Given the undeveloped nature of the caselaw interpreting HICPA, contractors attempting to recover payment for unpaid work based on a home improvement contract should (if the facts permit) assert causes of action (or facts supporting causes of action) for both breach of contract and, in the alternative, quantum meruit recovery.

 

[1] The Superior Court of Pennsylvania focused its rationale on canons of statutory construction to ascertain legislative intent.  See Shafter Elec. & Constr., 96 A.3d at 996.

[2] Section 517.7(g) “Contractor’s recovery right,” provides:

Nothing in this section shall preclude a contractor who has complied with subsection (a) from the recovery of payment for work performed based on the reasonable value of services which were requested by the owner if a court determines that it would be inequitable to deny such recovery.

Shafer Elec. & Constr., 96 A.3d at 992.

[3] The General Assembly enacted HICPA to protect vulnerable consumers, such as the elderly, infirm, and first-time homebuyers from predatory contractors (i.e., contractors that abscond with homeowners’ money without completing the work).  See 2008 Pa.H.R. Jour., No. 65 p.2292 (Statement of Representative Preston) (“If you care about the senior citizens or the young couple who is buying a first-time starter house and they want to be able to remodel it and not be able to be ripped off,” then “I am going to ask [those] members…to support the Tomlinson bill.”); 2008 Pa.H.R. Jour., No. 64, p.2199 (Statement of Representative Marsico) (the Pennsylvania Legislature’s intent behind HICPA was to “address the problems of home improvement contractors who take people’s money and leave town without doing the work”).

Procurement Strategies for Major Rail Projects: International Railway Summit 2015

Posted in Articles and Publications, Asia Pacific, Europe, Industry Events, Middle East, The Americas

London partner Matthew Smith recently attended the International Railway Summit 2015 in Barcelona. The International Railway Summit provides a meeting ground for senior decision makers from the world’s key rail operators, transport ministries and solution providers. Matthew had the opportunity to discuss the importance of risk assessment, project delivery structure, and risk allocation in rail contracts as a presenter at the conference.

To view a copy of the full presentation titled “Procurement Strategies for Major Rail Projects,” please click here.

New Jersey Supreme Court Calls for More Specific Language in Arbitration Agreements: Atalese and Beyond

Posted in Case Summaries, The Americas

By Christopher A. BarbarisiLoly G. Tor, and Christopher J. Archer, K&L Gates, Newark

Introduction:

A recent decision by the New Jersey Supreme Court in Atalese v. U.S. Legal Servs. Grp., and subsequent opinions by New Jersey’s state and federal courts applying Atalese, strongly suggest that arbitration provisions contained in contracts relating to construction and engineering projects and services will not be enforceable under New Jersey law unless they contain clear and unambiguous language signaling that the parties are surrendering their rights to pursue their claims in court.

The Atalese Decision

In its September 2014 opinion in Atalese, the New Jersey Supreme Court reversed the rulings of the lower courts and held that an arbitration provision in a consumer contract was unenforceable because it “did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court.”  Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430, 99 A.3d 306 (2014).  A detailed discussion of the Supreme Court’s holding in Atalese can be found in our October 2014 Commercial Disputes Alert.

Recent Decisions Applying Atalese

In the months since Atalese, New Jersey’s state and federal courts have already cited the Supreme Court’s opinion on several occasions and, in doing so, have rejected arguments that Atalese is limited to consumer contracts and that it does not apply to contracts involving sophisticated business parties and/or parties that are represented by counsel in connection with execution of the contract.  To the contrary, New Jersey’s Courts have expanded the Atalese requirement for arbitration provisions to apply to a broad variety of contracts types:

  • Asset Purchase Agreements: In Rosenthal v. Rosenblatt, the Appellate Division of the New Jersey Superior Court applied Atalese to an arbitration provision contained in an asset purchase agreement for the sale of a dentistry practice.  See A-3753-12T2, 2014 WL 5393243, at *4 (App. Div. Oct. 24, 2014).  The court held that the arbitration provision was unenforceable because it did not contain “clear and unambiguous language that plaintiff is giving up his right to bring his claims in court or have a jury resolve the dispute,” as required by the Atalese decision, despite stating that all disputes between the parties “shall be exclusively resolved as provided herein through mediation and arbitration.”  The court specifically stated that the Atalese requirement for arbitration applied even between parties engaged in sophisticated business transactions.
  • Condominium Purchase Agreements: In Dispenziere v. Kushner Cos. (the first published opinion to apply Atalese), the Appellate Division held that an arbitration provision contained in purchase agreements between a condominium developer and condominium unit purchasers was not enforceable because, like the provision involved in Atalese, it was “devoid of any language that would inform unit buyers such as plaintiffs that they were waiving their right to seek relief in a court of law.”  438 N.J. Super. 11, 18 (App. Div. 2014).  The Appellate Division expressly rejected the position that Atalese—which only involved causes of action pursuant to the New Jersey Consumer Fraud Act and the New Jersey Truth-in-Consumer Contract Warranty and Notice Act—is limited to claims for statutory violations and, instead, held that Atalese applies equally to common-law causes of action.  The Appellate Division also rejected the argument that Atalese should not apply when the parties are represented by counsel in connection with the execution of the contract.
  • Collective Bargaining Agreement: In the Appellate Division’s unpublished opinion in Kelly v. Beverage Works N.Y. Inc., the court applied Atalese to an employment discrimination case and held that an arbitration provision contained in a union employee’s collective bargain agreement (CBA) was unenforceable because the provision did not “put plaintiff on notice that he was waiving his right to try his claims in court.”  L-1285-13, 2014 WL 6675261 (App. Div. Nov. 26, 2014).  The Appellate Division specifically rejected the argument that Atalese applied only to “consumer service agreement[s],” explaining that it “discern[s] no reason to conclude that employees bound by a CBA should be charged with greater understanding of their rights than the average consumer.”

New Jersey’s federal courts have also applied Atalese on at least two occasions.  In Guidotti v. Legal Helpers Debt Resolution, the District Court of New Jersey held that an arbitration provision contained in an agreement to provide debt-adjustment services was unenforceable because it failed to advise the plaintiff of the provision’s effect and significance, “namely, that it bars [plaintiff] from seeking court relief.”  No. 11-1219, 2014 WL 6863183, *1 (D.N.J. Dec. 3, 2014).  In Ricci v. Sears Hldg. Corp., the District Court cited Atalese and held that an arbitration provision in an employment agreement containing the following language was enforceable: “[This agreement to arbitrate] constitutes a waiver of [the employee’s] right to bring the current action in a court of law and, instead, requires arbitration of [the employee’s] claims.”  No. 14-3136-RMB-JS, 2015 WL 333312, at *1, 5 (D.N.J. Jan. 23, 2015).

Moving Forward

On January 21, 2015, the defendant in Atalese filed a Petition for Writ of Certiorari with the United States Supreme Court, arguing that the New Jersey Supreme Court’s decision contradicts the plain language of the Federal Arbitration Act and conflicts with the decisions of other federal and state courts.  Whether the Court will grant the Petition in Atalese is questionable.  The New Jersey Supreme Court framed the question in Atalese as one of purely New Jersey contract law, and the United States Supreme Court receives approximately 10,000 petitions for a writ of certiorari each year but grants only 75–80.  For now, Atalese is binding precedent, and companies doing business in New Jersey should review their contracts to evaluate whether they comply with Atalese.  Companies should be mindful that they may face uphill battles enforcing arbitration provisions that were routinely enforced prior to Atalese.  Moreover, the opinions in Rosenthal, Dispenziere, Kelly, Guidotti, and Ricci demonstrate that courts will not limit Atalese to statutory claims, and may extend Atalese beyond consumer contracts.  Companies should also be mindful that Atalese will apply in federal court when the contract is governed by New Jersey law.

Health Care Industry Finds Cure to Save Time and Money on New Facilities

Posted in Articles and Publications, The Americas

By Gregory R. Andre, K&L Gates, Chicago

To meet the demands of an aging population and health care reform, many new hospitals and other health care facilities are being built. These projects are typically large, costly and complex and, therefore, merit careful attention to cost control and efficiency. The health care industry is using new teamwork approaches to design and construct new facilities that significantly reduce project costs, shorten schedules, minimize claims and disputes and improve overall project quality.

To read the full alert, click here.

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

Posted in Articles and Publications, Case Summaries, Europe

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

Posted in Asia Pacific, Europe, International Arbitration, Middle East, The Americas

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

Posted in Industry Events, Middle East

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.