Category: Europe

1
“Hardening” Market for Professional Indemnity Insurance
2
Wrongful Termination and Failed Wasted Costs Claim
3
COVID-19: EPC AND EPCM IN LARGE CONSTRUCTION PROJECTS POST COVID-19
4
COVID-19: UK Public Sector Construction – Cabinet Office publishes Guidance Notes for PPN02/20
5
COVID-19: UK Public Sector Construction – Cabinet Office publishes FAQs regarding PPN02/20
6
COVID-19: UK Coronavirus Act 2020 – Implications for the Construction Industry
7
COVID-19: UK Public Sector Construction – Cash Flow Relief for Suppliers
8
‘Fitness for Purpose’ and Conflicting Obligations in Offshore Wind Projects
9
Infrastructure Disputes: What the Future Holds For Us
10
K&L Gates Named a “Go-To Construction Law Firm”

“Hardening” Market for Professional Indemnity Insurance

By: Jim Alexander

Compelling evidence of the “hardening” of the professional indemnity insurance (PII) market post-Grenfell has been provided by a recent survey conducted by the Construction Leadership Council (CLC).

Significant cost increases and the introduction of new restrictions on PII are preventing companies from taking on projects and could delay essential work on building safety.

The CLC survey was carried out from mid-February to mid-March and covered 1066 responses from a mixture of consultants, contractors, and specialists. Respondents ranged in size, with half of the respondents being companies with an annual turnover of less than £2m and 10% of respondents having an annual turnover of over £50m.

Key findings of the survey include:

  • Over 60% of total survey respondents have some form of restriction on cover relating to cladding or fire safety.
  • One in three of the survey respondents have a total exclusion in place for cladding claims.
  • One in five respondents have a total exclusion in place for fire claims.
  • Over a quarter of the total survey respondents have lost jobs as a result of inadequate PII.
  • One in three respondents couldn’t do remedial work if they wanted to because of exclusions to their cover.
  • Almost a quarter of the total survey respondents have changed the nature of their work due to inadequate PII.
  • A majority of respondents buy £10m or less cover with very few buying over £20m.
  • Almost half of the respondents had been declined insurance by three insurers or more.
  • Two-thirds of respondents are carrying a claim excess imposed upon them by their insurers.
  • Premiums have increased nearly 4-fold at the last renewal, having doubled the year before; the average rate is 4% of turnover, but one in five who gave figures is paying more than 5% of their PI insurance turnover.

The results pointed to widespread incidence of companies having to change the type of work they do because of restrictions on cover, with a quarter losing jobs because of tough conditions and limitations placed on them by insurance firms. Even though two-thirds of respondents said that less than 5% of what they do is high-rise residential, almost one in three were unable to buy the cover they wanted or needed.

Although not covered directly by the survey, it is also apparent that many insured parties are facing difficulties in securing renewal of “any one claim” cover with “aggregate” cover being offered instead.

An “any one claim” policy provides cover up to the full limit for each individual claim made in the period of insurance, whereas an “aggregate” policy provides cover up to the full limit for all claims made in the period of insurance.

“The survey results confirm that there is a widespread problem for many firms in being unable to obtain essential PI cover, which is having an impact on the ability of the industry to work, and undermining efforts to deliver remedial work to ensure building safety.”

Andy Mitchell CBE, co-chair of the CLC

Samantha Peat, managing director, Wren Managers, and chair of the CLC PI Insurance Group, said that she was extremely worried by the extent of the PII problems and would be actively working with the Government and industry to identify solutions.

“The cost increases, exclusions, and claim excesses that companies are having to bear – even those that do not even work in high-rise residential – could make it unsustainable for them to stay in business.

“The survey results suggest firms will not be able to afford premiums and claim excesses, and they face the choice of refusing some work, or undertaking projects for clients with inadequate insurance cover.”

Samantha Peat

Increased PII premium costs will need to be met by contractors and consultants, but these are likely to be passed on to employers.

Typically, building contracts and consultant appointments contain a clause obliging the contractor and consultant to maintain PII cover at a defined level for a set period (usually 12 years for documents executed as a deed) provided that such cover is available on “commercially reasonable rates and terms.” If the contractually required level of cover is no longer available to the contractor or consultant, then breach of this obligation would (depending on the precise terms of the provision) potentially result. As PII is a “claims made” insurance, the key factor is the scope of insurance available when the claim is made, rather than when the contract is entered into, or the default occurs. This scenario could mean that any claim might not be backed by adequate insurance at the time that the claim is made, leaving a shortfall for the employer to be claimed against the assets of the contractor or consultant.

If the contractually required cover is still available in the market, but at a vastly increased premium cost and with exclusions to cover, then disputes may arise on the interpretation of “commercially reasonable rates and terms.” Often, building contracts and consultant appointments will contain provisions that oblige the contractor or consultant to notify the employer of such circumstances and to enter into dialogue to achieve a mutually agreeable solution.

Employers may wish to review the PII obligations of contractors and consultants on their projects and check that they are complying with the required obligations. Most PII clauses in building contracts and appointments allow employers to request such evidence, usually in the form of a current broker’s certificate.

Wrongful Termination and Failed Wasted Costs Claim

By: Nita Mistry

CIS General Insurance Ltd v. IBM United Kingdom Ltd

The Technology and Construction Court has recently handed down authoritative guidance on wasted costs and the characterization of damages arising out of termination of a contract. The court was asked to determine whether the claimant was entitled to recover £128 million in damages for wasted costs arising from the alleged wrongful termination of a contract.

Mrs. Justice O’Farrell ruled that IBM (the defendant in the case) was not entitled to exercise any right of termination because CISGIL (the claimant in the case) disputed a particular invoice within the time prescribed in the contract, and nonpayment of the invoice in those circumstances did not entitle IBM to terminate. Accordingly, IBM’s purported termination amounted to a repudiatory breach, which CISGIL was entitled to accept. Nonetheless, the court decided that IBM was ultimately entitled to payment of the invoice, set off against the damages awarded to CISGIL.

This case is another stark reminder of the inherent risks involved with terminating a contract and why termination should always be regarded as a measure of last resort. It is advisable to take legal advice when considering termination.

Background

CISGIL (a wholly-owned subsidiary of the Co-operative Group Limited), a company involved in the underwriting and distribution of general insurance products, engaged IBM to supply a new information technology (IT) system and manage the system for a term of 10 years. The services agreement between the parties provided for payment against certain milestones.

In early 2017, an issue arose as to whether or not the requirements of a particular milestone had been met. IBM submitted an invoice in the sum of c. £2.8 million on the basis that it considered the applicable milestone events and requirements to have been met.

CISGIL’s position was that the milestone had not been met (nor payment authorized), and it refused to accept or pay IBM’s invoice for the milestone payment. Following setoff notices (by CISGIL) and final payment notices (by IBM), IBM purported to exercise a contractual right of termination based on CISGIL’s failure to pay the invoice. CISGIL disputed IBM’s right to terminate and treated the purported termination as a repudiatory breach, which it accepted.

CISGIL brought a claim before the High Court seeking damages of £128 million, which it characterized as expenditure incurred in relation to the alleged wrongful termination by IBM, along with a number of alternative claims regarding breach of contractual warranty and delay claims. The characterization of CISGIL’s claim was significant, as the limitation of liability provision in the services agreement excluded claims for loss of profit, revenue, or savings.

IBM counterclaimed in the sum of c. £2.8 million for the unpaid invoice.

Judgment

A key issue considered by the court was whether IBM exercised a valid right of termination by reason of CISGIL’s failure to pay the invoice or whether its purported termination amounted to a repudiatory breach, which repudiation CISGIL was entitled to, and did, accept.

CISGIL’s position was not simply that the milestone had not been achieved. It also argued that it had not approved achievement of the milestone, which it said was a prerequisite to payment. CISGIL also argued that the invoice was not payable because (i) IBM failed to meet prior milestones, and (ii) the invoice was not correctly prepared or properly submitted. CISGIL also argued that (i) it was entitled to setoff against the invoice, (ii) IBM lost any right of termination by its delay, and (iii) IBM was in willful default as defined in the services agreement.

IBM’s position was that the milestone was not dependent on the achievement of any other milestones and that the invoice was correctly prepared and properly submitted. IBM argued that CISGIL did not dispute the invoice within the time frame prescribed by the services agreement and had failed to assert any rights of setoff against the invoice until the time for doing so had expired. IBM rejected CISGIL’s allegations of delay and willful default, arguing that notice of termination was served by IBM within a reasonable time of CISGIL’s purported default. Consequently, IBM maintained that it was entitled to payment of the invoice in the sum of £2,889,600.

The court concluded that:

  1. CISGIL was obliged to approve the achievement of the milestone and was in breach of this obligation. CISGIL was not entitled to benefit from its own default in seeking to avoid payment by asserting the invalidity of the invoice based on the absence of approval.
  2. CISGIL’s complaints that the invoice was defective and/or not properly submitted had no merit.
  3. CISGIL did, however, validly dispute the invoice in accordance with the contractual mechanisms, entitling it to withhold payment against the invoice.
  4. The provisions of the services agreement, read together, were clear and unambiguous: they introduced a “pay now, argue later” principle, but they did not exclude any right of setoff; CISGIL would retain its right of setoff against future payments due and would retain its right to counterclaim for damages. However, there was a provision that restricted the exercise of such setoff rights against invoices to those in respect of which a valid notice of dispute had been given within seven days.
  5. IBM was not entitled to exercise any right of termination under the services agreement because CISGIL disputed the invoice within seven days of its receipt. In those circumstances, the purported termination amounted to a repudiatory breach, which CISGIL was entitled to accept. There was, however, no willful default.
  6. The court considered “A high-risk strategy was adopted on both sides; the AG5 milestone payment, a modest sum in relation to the high value of the overall project, was the vehicle used to bring the project to an end.”

Regarding the quantum of the claim, CISGIL’s position was that its claim for wasted expenditure was not a claim for loss of profit (which would be excluded by the limitation of liability provision in the services agreement). CISGIL argued that compensation for wasted expenditure puts it into “a break-even position” and that its benefits from IBM’s performance would have been worth at least as much to CISGIL as the amounts expended in reliance on the contract.

Applying principles from relevant authorities, Mrs. Justice O’Farrell said, “The starting point is to identify the contractual benefit lost as a result of IBM’s repudiatory breach of contract.” The contractual benefit CISGIL anticipated was “substantial savings, increased revenues and increased profits” from the new IT solution, which IBM promised to supply. The loss of bargain suffered by CISGIL comprised the savings, revenues, and profits that would have been achieved had the IT solution been successfully implemented. Mrs. Justice O’Farrell said, “CISGIL is entitled to frame its claim as one for wasted expenditure, but that simply represents a different method of quantifying the loss of the bargain; it does not change the characteristics of the losses for which compensation is sought” and concluded that CISGIL’s claim was excluded “whether it is quantified as the value of the lost profit, revenue and savings, or as wasted expenditure.”

As a result of the court’s findings, CISGIL was awarded damages of £15.9m in respect of additional costs incurred arising out of IBM’s wrongful termination instead of the £128 million in damages that CISGIL’s had claimed for wasted costs. The court also concluded that IBM was entitled to payment of the unpaid invoice in the sum of £2,889,600 and that IBM was entitled to setoff this sum against CISGIL’s claims.

COVID-19: EPC AND EPCM IN LARGE CONSTRUCTION PROJECTS POST COVID-19

Authors: Pawel Piotrowski and Nicola J. Ellis

COVID-19 has highlighted some of the existing problems in the construction market such as fragmentation, low profitability and often low satisfaction for both owners and contractors (due to time and budget overruns and lengthy claims procedures and disputes). In this article, we consider the choice of the procurement method for large construction projects and issues and risks raised by COVID-19.

EPC

Owners often procure major construction projects on a fixed price, lump sum turnkey contract whereby the contractor is responsible for all engineering, procurement and construction (EPC) aspects of the development by a specified date (subject to a limited number of circumstances which will provide the contractor with relief). Under this arrangement, the EPC contractor directly engages the supply chain and takes responsibility for building and delivering the project so that the owner simply has to ‘turn the key’. Any changes or variations that the owner may require to the original scope provided to the EPC contractor will be at the owner’s risk and therefore it is important to have a high degree of certainty and detail as to the scope of works, and often a detailed design provided by the owner to assist the EPC contractor in providing an accurate price.  

The EPC has many advantages for the owner, including that it places lower management burden on them. It provides a single point of responsibility for the project to the owner and gives the owner and any lenders a high degree of certainty as to the time and cost of the development. Since the owner has recourse against a single contractor rather than having to pursue multiple contractors and suppliers, the dispute resolution process is usually less complicated. The EPC contractor should therefore seek to pass down all main obligations from the EPC contract onto its subcontractors to mitigate its liability position.

In return for taking on a high amount of risk as to time and cost, contractors may reflect this in their pricing and may include a substantial risk premium in the contract price. Owners can mitigate this to some degree by procuring EPC contracts in competitive tenders where the lowest price is often the decisive factor. That, in turn, often results in EPC contracts carrying a risk of change orders / variations which can become very costly to the owners if agreed or potentially catastrophic to those contractors who haven’t included a sufficient risk premium when submitting a low price proposal, leading to a focus on cost control by the contractor.

In these unprecedented times, the risk of force majeure events, effects of a change in law, risk of supply chain disruptions and the risk of integrating the performance of the entire supply chain have posed a particular challenge for contractors.  As a result, contractors may become more reluctant to take on some of these risks and may seek to exclude or set parameters around their liability for such risks or owners may see tenders with higher risk premiums. 

EPCM

Where the owner wishes to retain greater control over the project, the owner may opt for an EPCM contracting structure. 

The EPCM or ‘engineering, procurement and construction management’ contract is a construction management agreement whereby the EPCM contractor is responsible for advising the client on the design and procurement of the project but also for overseeing and managing all construction and supply contracts. An EPCM contract can therefore be seen more as a professional services contract in contrast to EPC contracts which are design and construction contracts. The EPCM contractor does not perform construction work. It is the owner who directly enters into numerous contracts with various contractors and suppliers. 

EPCM has many advantages for owners, including greater flexibility allowing projects to be tailored to current conditions as owners can modify the design or procurement plan mid-project and negotiate directly with the relevant contractors or suppliers. This can mean early engagement of certain packages prior to finalising the scope of work which may result in an earlier completion date. 

The overall price of the project under an EPCM arrangement may be lower as most of the risk priced for in EPC contracts sits with the owner and the owner is able to negotiate with the supply chain itself. 

EPCM also has disadvantages. The administrative burden of the owner directly negotiating and contracting with each of the contractors or suppliers is far greater than under EPC and significant demands are placed on the owner’s skills and resources (although the EPCM contractor may be able to ease this burden). Interface risk and coordination between each contractor or supplier needs to be managed and this often sits with the owner.  Where a dispute arises, this is also more complex for the owner due to difficulties in allocating fault and risk amongst multiple contractors, rather than having a single point of responsibility as under EPC contracts.

However, from our experience, most of these disadvantages can be reduced by way of proper implementation strategy, planning, contracting and management. 

Both EPC and EPCM have advantages and disadvantages but can be beneficial when used in the right circumstances. The objectives, scope of work and risk profile should be clearly understood in choosing which method to use as the cost implications of choosing the incorrect form can be substantial for both parties. 

COVID-19: UK Public Sector Construction – Cabinet Office publishes Guidance Notes for PPN02/20

Author: Kiran Giblin

Further to our recent blog alerts “COVID-19: UK Public Sector Construction – Cash Flow Relief for Suppliers” and “COVID-19: UK Public Sector Construction – Cabinet Office publishes FAQs regarding PPN02/20”, the Cabinet Office has published construction sector-specific Guidance Notes to assist contracting authorities implementing PPN02/20 into existing works contracts.

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COVID-19: UK Public Sector Construction – Cabinet Office publishes FAQs regarding PPN02/20

Authors: Matthew E. Smith, Inga K. Hall, Kiran Giblin

Further to our recent blog post “COVID-19: UK Public Sector Construction – cash flow relief for suppliers” on 31 March 2020, in which we set out guidance on the Government’s Procurement Policy Note – Supplier relief due to COVID-19 PPN 02/20 (“PPN02/20”), the Cabinet Office has published a FAQs note providing further clarity and guidance regarding implementation of PPN02/20 in practice.

The 17 initial questions addressed in this FAQ note range across providing definitional clarity on terms used, further detail on how to make use of the Model Interim Payment Terms also published, the extent to which suppliers can also make use of other relief, such as via the Coronavirus Job Retention Scheme, and employers’ rights in terms of repayment, continued discharge of obligations, protection from double payments and the preservation of other contractual rights and remedies.

To read the full alert, please click here.

COVID-19: UK Coronavirus Act 2020 – Implications for the Construction Industry

 Authors: Inga K. Hall, Saya Lee

The 359-page emergency Coronavirus Bill received royal assent on 25 March 2020. This newly passed Coronavirus Act 2020 (the “Act”) contains extensive powers and additional measures to equip the UK government and other authorities to better respond to the COVID-19 outbreak in the UK. The new Act is time-limited to two years by a sunset clause (Section 89) and will be subject to six-month parliamentary reviews (Section 98)

The Act is primarily aimed at easing the burden on the frontline staff working for ‘essential services’ including the NHS, schools, police and courts, as well as providing measures for containing and slowing the spread of the virus and supporting businesses and workers. Although there are no sections in the Act specifically addressing the construction industry, the wide-ranging powers that are granted to the authorities to enable such actions and outcomes also have the potential to have an impact on the construction industry as summarised below.

For the full alert, please click here.

COVID-19: UK Public Sector Construction – Cash Flow Relief for Suppliers

 Authors: Daniel T. Lopez de ArroyabeInga K. HallKevin Greene

The impact of COVID-19 on the construction industry has been the subject of much debate this week, as discussed in our blog article “COVID-19 Construction Industry – Operating in a Pandemic”, with businesses split over whether or not to shut down operations in order to protect the health and safety of those working on construction sites. The division has been exacerbated by the lack of a clear Government directive either way, meaning that it has – for the time being at least – been left in the hands of individual companies to decide whether or not to stop work.

While that issue continues to divide opinion, what is clear is that the pandemic and the fall-out from it will place an unprecedented strain on supply chains, and one of the main challenges currently faced by the industry is how to maintain cash flow so that businesses are able to survive and continue working once we emerge through the other side. In this regard the Government has taken steps to provide further clarity and guidance, with the publication on 20 March of Procurement Policy Note – Supplier relief due to COVID-19 PPN 02/20 (“PPN02/20”).

Taking immediate effect until 30 June 2020, PPN02/20 applies to all contracting authorities (including central government departments, executive agencies, non-departmental public bodies, local authorities and NHS bodies) and covers goods, services and works contracts being delivered in the UK.

To read the full alert, please click here.

‘Fitness for Purpose’ and Conflicting Obligations in Offshore Wind Projects

Authors: Charles Lockwood and Owen Chio

Two recent cases in the UK illustrate the tricky issues Employers and Contractors have to grapple with in defining the responsibilities of contractors involved in the construction of offshore wind projects.

There are no established standard form contracts for offshore wind farm projects. The standard forms that are often adapted for this purpose include traditional offshore forms used in the oil and gas industry such as the LOGIC forms and standard engineering contracts more commonly used for onshore projects such as FIDIC, particularly the FIDIC Yellow Book.

Neither form is ideally suited for use in the offshore wind industry and they are often heavily amended, particularly in relation to design obligations. The cases summarized below illustrate some of the tensions that can arise, particularly in relation to design and fabrication of monopiles and transition pieces and requirements that they should be fit for their intended purpose.

To read the full alert, please click here.

Infrastructure Disputes: What the Future Holds For Us

On 12 September 2019, Matthew Smith and Nita Mistry spoke on a panel at CIArb’s Infrastructure Disputes Conference.

Among the topics covered, Matthew discussed the challenges and opportunities relating to infrastructure mega project management, and Nita concentrated her remarks on arbitration proceedings arising out of mega projects.

Please click here for full coverage of their panel.

K&L Gates Named a “Go-To Construction Law Firm”

K&L Gates is pleased to have been named the “Best Firm to Handle the Construction Project of the Future” by Above the Law.

“The construction industry has been around for centuries, but that doesn’t mean it hasn’t adapted to the changing times. The Construction and Infrastructure Group at K&L Gates draws from vast past experience to focus on ensuring that construction projects are sustainable for the next generation. The firm’s lawyers specialize in niche areas like integrating technology and IP into construction projects and incorporating clean energy and green initiatives. When you’re planning a construction project for a better tomorrow, K&L Gates is thinking ahead.”

For the full article, please click here.

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