Construction Law

Legal issues, news, and regulations concerning the construction industry

1
Building Safety Act 2022 – What’s Changed?
2
Construction Executive Ranks K&L Gates Among The 2021 Top 50 Construction Law Firms™
3
Construction and Projects in Qatar: Overview
4
Qatar – An Opportunity for Operation and Maintenance PPPs
5
“Hardening” Market for Professional Indemnity Insurance
6
Wrongful Termination and Failed Wasted Costs Claim
7
Court of Appeals Confirms One-Year Statute of Limitations for Disgorgement Claims That Is Not Subject to the Discovery Rule
8
COVID-19: EPC AND EPCM IN LARGE CONSTRUCTION PROJECTS POST COVID-19
9
K&L GATES RECOGNIZED AS A TOP CONSTRUCTION LAW FIRM BY CONSTRUCTION EXECUTIVE
10
COVID-19: Update – What You Need to Know As New Jersey and New York Construction Projects Begin to Reopen

Building Safety Act 2022 – What’s Changed?

By Kevin Greene and Ruth Chang

Background

The Building Safety Bill received Royal Assent on 28 April 2022, and has now completed all the parliamentary stages in both Houses to become an Act of Parliament – i.e. the Building Safety Act 2022 (the “Act”).

According to the Government, many of the measures included within the 262-page Bill are likely to take between a year and 18 months to introduce, as the Act will require the formation of secondary legislation to support actual implementation of the measures.

Who does the Act apply to?

The provisions set out in the Act will apply to building owners and the built environment industry. This includes those who commission building work and who participate in the design and construction process, including clients, designers, consultants and contractors alike. Given the wide and far-reaching implications of the Act, potentially any parties engaged in the construction process of a building will likely be affected by the Act in one way or the other. 

Whilst the Act will cover all buildings (and not just high rise residential), measures within the Act have a special focus on higher-risk buildings which are defined as buildings that are at least 18m in height or have at least 7 storeys and have at least two residential units.  Care homes and hospitals meeting the same height threshold during design and construction will also be classified as a “higher-risk building”.

Introduction of a Building Safety Regulator

Under the Act, a new Building Safety Regulator will be responsible to carry out the following three main functions:

  • Overseeing safety and standards and performance of all buildings;
  • Helping and encouraging the built environment industry and building control professionals to improve their competence; and
  • Leading the implementation of new regulatory framework for high-rise buildings

The Building Safety Regulator is to be established by the Health and Safety Executive (“HSE”).

Introduction of concepts of “Gateways”

 Three new concepts of “Gateways” are developed and these must be satisfied before occupation of a building can take place.

Gateway one  – Planning Gateway

 Planning Gateway one will:

  • Involve the HSE becoming a statutory consultee before permission is granted for development which involves or is likely to involve a high-rise residential building in certain circumstances.
  • Require relevant applications for planning permission to include a fire statement to ensure applicants have considered fire safety issues as they relate to land use planning matters (for example, access and layout issues).
  • Help inform effective decision-making by local planning

Gateway two – Pre-construction stage

Gateway two requires the Building Safety Regulator to be satisfied that a building’s design meets the functional requirements of the Building Regulations. Construction duty holders will need to submit essential information to the Building Safety Regulator to demonstrate how the building, once built, will fulfil all the requirements of Building Regulations.

Gateway three – post completion

Gateway three takes place when construction of the building is completed, and the building control body determines whether the work has been carried out in accordance with the Building Regulations. Documents and information on the final, as-built building must be submitted to the Building Safety Regulator who will then issue a completion certificate, if and when the specified requirements are being fulfilled.

All the gateways are put in place to create ‘golden thread’ of safety information required for a building, ensuring the appropriate information is available to appropriate personnel at all times.

Introduction of New Home Warranties

All developers will be required to provide a minimum of 15 year warranty for all new build homes. 

Introduction of New Homes Ombudsman Scheme

The main proposals in the Act are to introduce a New Homes Ombudsman to serve as a system of redress and develop a code of practice with developers to set standards on sales, marketing, and the standard and quality of workmanship. All developers of new homes will be required to join the scheme.

Limitation period issues under the Defective Premises Act 1972 (“DPA”)

One of the most notable focuses of the Act relates to the limitation periods for claims brought under the DPA. The current limitation period for a claim under s1 of the DPA is 6 years from the date of practical completion of the relevant works. The Act extends the limitation period to 15 years prospectively for claims under s1 and s2A (i.e. for claims that accrue after the Act takes effect) and up to 30 years retrospectively for claims under s1 only (for claims that accrued before the Act takes effect)

The provisions to give effect to the changes concerning limitation period (as detailed above) are intended to come into force as soon as 2 months after Royal Assent.

Fire Safety remediation

The Act made clear that historic remediation obligations now rest primarily with landlords and developers, and not leaseholders.

Under the Act, house builders are firmly held liable for paying for any cladding-related remediation works, and that the Government can prevent any house builder from building homes “for any purpose” connected with “securing the safety of people or improving the standard of buildings”.  Under a scheme named “Building Safety Pledge”, under which 53 of the largest house builders in the UK are invited to sign up to this, the house builders are required to rectify any “life-critical fire safety defects” on all buildings over 11m constructed by all these developers in the last 30 years.

Currently the Act has also in place a waterfall process with regards to fixing non-cladding defects, which will see leaseholders only pay towards costs if the developers cannot be found or freeholders are unable to pay. These are, so far, capped at £15,000 for those in London and £10,000 for those outside of the capital.

Quality of construction products

Under the Act a construction products regulator will also have powers to remove any dangerous construction products from the market. 

What next?

A recent survey by Construction Management found that only 23% of construction professionals think that they and their organisations are ready for the Act.

Given this Act is representing one of the biggest overhauls in building safety regulations in nearly 40 years, construction industry stakeholders will need to come together, understand one another’s perspective and viewpoints, before each and every stakeholder will be readily available to cope with any of the challenges that may arise in complying with the Act.

Construction Executive Ranks K&L Gates Among The 2021 Top 50 Construction Law Firms™

For the 2021 survey for the annual U.S. ranking of The Top 50 Construction Law Firms™, Construction Executive’s editorial team reached out to dozens of attorneys at the nation’s best construction law firms to learn how the legal landscape is changing, as well as how legal teams are aiding clients with sharpening contract language and pivoting in response to challenges in the wake of the COVID-19 pandemic.

To see the full list, CLICK HERE.

Construction and Projects in Qatar: Overview

By: Paweł Piotrowski, Matthew Walker, and Amjad Hussain

A Q&A guide to construction and projects in Qatar.

The Q&A is part of the global guide to construction and projects. Areas covered include trends and significant deals, the main parties, procurement arrangements, transaction structures and corporate vehicles, financing projects, security and contractual protections required by funders, standard forms of contract, risk allocation, exclusion of liability, caps and force majeure. Also covered are material delays and variations, appointing and paying contractors, subcontractors, licences and consents, project insurance, labour laws, health and safety, environmental issues, corrupt business practices and bribery, bankruptcy and insolvency, public private partnerships (PPPs), dispute resolution, tax, the main construction organisations, and proposals for reform.

Qatar – An Opportunity for Operation and Maintenance PPPs

By: Pawel Piotrowski and Hena Sial

According to MEED.com Qatar awarded projects worth over US$136 billion between 2011–2020. Over the last decade, the focus of Qatar’s investment has been on the development of infrastructure related to the FIFA World Cup to be hosted in 2022. This includes stadiums and ancillary infrastructure such as metro lines, an airport expansion, expressways, and hotels.

In light of the great investment made by Qatar and with much of this infrastructure already built and the rest well underway, it may be worth shifting focus to the future of such infrastructure. Some questions that may assist such inquiry include, what are the best means to utilize this infrastructure to its full potential and how to best fund and deliver long-term infrastructure improvements that may be required over the upcoming decades.

In this article we will consider:

  • What are the benefits of using PPPs in the context of long-term O&M and infrastructure rehabilitation
  • How Qatar may utilize the existing legal framework for PPPs to ensure proper maintenance and rehabilitation of the state infrastructure; and
  • How PPPs should be delivered in order to minimize the risk of potential failures.

“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.

Court of Appeals Confirms One-Year Statute of Limitations for Disgorgement Claims That Is Not Subject to the Discovery Rule

Authors: Timothy L. Pierce, Hector H. Espinosa, and Samira F. Torshizi

In a recently published case dealing with issues of first impression, the California Court of Appeal Second Appellate District in Los Angeles held that the disgorgement penalty under Business and Profession Code § 7031(b) must be made within one year of completion or cessation of the performance of the project, and that time is not extended by the discovery rule.  Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc., 2020 WL 5035826 (Cal. Ct. App., Aug. 26, 2020).  BPC § 7031(b) permits a party who uses the services of an unlicensed contractor to recover any and all money paid to the contractor for its work—regardless of the quality of the work (indeed, even if the construction was flawless).  The purpose of this harsh forfeiture provision is to deter unlicensed contractors from performing construction.

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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. 

K&L GATES RECOGNIZED AS A TOP CONSTRUCTION LAW FIRM BY CONSTRUCTION EXECUTIVE

Construction news outlet Construction Executive has again recognized K&L Gates LLP among the top 15 firms in the publication’s rankings of the 50 leading law firms throughout the United States with dedicated construction practices.

The survey, “The Top 50 Construction Law Firms,” considered practice-specific revenue; number of lawyers in the practice; percentage of firm’s total revenues derived from its construction practice; number of states in which the firm is licensed to practice; and the year in which the construction practice was established to develop the rankings. The busiest areas of practice were also discussed; dispute resolution, construction defects, and contract documents and administration are dominating the share of legal work for firms surveyed.

K&L Gates has one of the most diverse and technically skilled construction law practices in the world, with its lawyers working with clients throughout each phase of the industry, from the early stages of finance, development, and design through implementation, construction, and project close-out. The group often partners with lawyers across practice areas such as mergers and acquisitions, labor and employment, real estate, intellectual property, and immigration to fully serve clients across the firm’s platform.

COVID-19: Update – What You Need to Know As New Jersey and New York Construction Projects Begin to Reopen

Authors: Patrick J. Perrone, Loly Garcia Tor, and Tara L. Pehush

On 13 May 2020, New Jersey and New York announced that construction in both states would resume, but projects that are reopening must adhere to detailed and specific guidance. This alert addresses the new requirements for construction operations in New Jersey and New York.

CLICK HERE to read more.

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