Below we outline the UK updates from our annual Year in Review 2019 report
Cancellation of projects - what does it mean and how to protect your business
2019 saw the launch of a review of HS2, putting the threatened cancellation of one of the UK's largest infrastructure projects onto front pages everywhere.
At a time of political and economic uncertainty, employers and contractors start to think about how best to protect their businesses if a construction project goes off the rails. Cancelling or terminating a project is always a last choice and businesses should do what they can to avoid it – but if it has to be done, it is crucial to do it properly. The common law provides twomain methods of termination:repudiation or frustration. Repudiation applies where a party commits a breach that goes to the heart of the contract – for
example, the contractor abandons the site without cause; or the employer fails to give access to the site. If the non-defaulting party 'accepts' the repudiation, then the contract comes to an end. The big risk here is that, if a party tries to terminate when there has ot been a repudiatory breach, that party will itself have repudiated the contract. That is not a good position to be in, as it entitles the innocent party to compensation putting it in the same position as if the contract had been properly performed – potentially a significant sum.
Common law also allows contracts to be terminated by frustration in circumstances where further performance is impossible, illegal or radically different from what the parties
contemplated. This is a very high bar. Forexample, whatever you think about Brexit, Brexit is not a 'frustrating' event in contractual terms! Alongside the common law rights, most construction contracts contain express clauses allowing termination in certain circumstances, either for breach of contract (e.g. failure to proceed regularly and diligently with the works; failure to make payments) or for convenience (because a party no longer wishes to proceed, perhaps because the project cannot secure funding). Where the breach can be remedied – for example, defective works – the contract will often allow a period of time to rectify the breach before the right to terminate arises. A party should carefully ensure that termination rights have in fact arisen before seeking to exercise them – otherwise that party may itself be in breach.
The contract will generally provide that the contractor is entitled to some compensation when the works are terminated for convenience or for employer default e.g. payment for work done to date, costs reasonably incurred in expectation of completing the works, costs of demobilisation and removal of equipment, or profits that would otherwise have been made. When terminated for contractor default, the contract will often provide for the employer to be compensated for its additional costs to complete the works, ssuming that the employer elects to do so.
In the run-up to possible cancellation, the parties should be alert to dispute avoidance strategies and take practical steps such as:
- Continue to comply with contractual obligations – if a contractor faced with possible cancellation stops work, this may itself be a repudiatory breach;
- Make sure that you continue to give proper notifications under the contract, for example of variations;
- Take particular care in relation to the storage and management of documents – which may in due course become evidence (this is especially the case with contracts that require active project management, such as the NEC suite);
- Pay close attention to what you say in project correspondence, and use the protection of 'legal privilege' if you can; and
- If you are going to terminate, make sure that you follow the contractual procedures to the letter.
After cancellation, numerous practical steps will be needed, including for example: assignment/novation of subcontracts; handover of manuals and documentation about the status of the works; managing issues as to title to materials, plant and equipment; dealing with site security and so on. There may well be arguments between the parties about the validity of the termination, and about liability for and amount of any compensation. You can put yourself in the strongest possible position by carefully planning and implementing a strong dispute management strategy.
Suddenly, it's all about procurement
How public infrastructure contracts are awarded, and how public money can be channelled to the private sector, have become hot topics over the last 12 months. The new Conservative government has promised to switch the spending taps back on to deliver more investment in public infrastructure. All of these contracts need to be procured. Equally, businesses in trouble across the UK have increasingly been turning to the government for financial support. The EU state aid regime is often seen as the barrier to such state intervention. From being mportant (but, perhaps, niche) areas of legal practice, politicians are focussing on reform to public procurement rules as being one of the key advantages of Brexit. "Buying British" has become a buzzword, but not one which is consistent with EU single market membership.
What are the facts behind the fiction? Firstly, the public procurement and state aid regimes do have their origins in European Union law. The EU's single market aims to harmonise the approach to public procurement and state aid regulation to ensure that there is no national reference when awarding high value contracts or investing large sums of public funding into industry. Procurement law, in particular, has been heavily influenced bythe UK when the most recent directives were agreed. It is not clear, of course, what changes the new government could look to make to the procurement regime in the UK (and even less, what the EU will agree to in any free trade agreement), but our suggestions for areas to consider are:
- Potential for alternative dispute resolution in procurement? 2019 has seen a continuing increase in the number of public procurement disputes across all sectors, including health, waste and energy. The high value of such claims and the need for High Court litigation with very short limitation periods make this an expensive route of last resort. There is scope – regardless of Brexit– for the UK to introduce a lower level forum (akin to an employment tribunal) to deal with procurement claims. This is the case in many other EU countries
- One set of rules for all types of procurement? There are currently 5 sets of procurement rules in the UK covering public sector, utilities, concession contracts, defence procurement and the remedies regime. Any change could see consolidation into one set of rules with optional rovisions depending on the subject matter of the contract
- Maintain consistency with World Trade Organisation (WTO) Government Procurement Agreement (GPA). The UK has applied to the WTO to become a signatory of the GPA in its own right because, after Brexit, the EU's place on the GPA ceases to apply to the UK. The GPA sets out less detailed provisions than the EU regime, but many of the principles are the same – particularly, in relation to equal treatment obligations. Any replacement procurement regime in the UK would need to at least comply with the GPA principles. In practice, however, it seems likely that the EU would require continued compliance with the EU-wide procurement regime, depending on how close a relationship the UK wishes to have with the EU in the future.
Whatever happens in the Brexit process, the current public procurement regime will be maintained in the short term. With the current Withdrawal Agreement, the Public Contracts Regulations 2015 will continue to apply until at least the end of the transition period (December 2020). In a subsequent "no deal" context – a hard withdrawal from all of the institutions of the EU – the European Union (Withdrawal) Act 2018 will ensure that the legislation continues until such time as it is amended. The main practical change would be that UK tenders would be submitted to the new "Find a Tender" portal, rather than the Official Journal of the European Union. As with much around Brexit, it is too early to be sure of what the changes could be, and when they could arise. But for many infrastructure projects planned by any new UK Government, the current rules will apply.
How the construction industry is reacting to climate change
The world's climate is changing rapidly. Leading scientists, most nation states, their politicians and many corporations agree that climate change is the biggest threat to humanity. Global infrastructure resilience, economic development, food security, trade flows, and human health all stand to deteriorate under current projects and this will have a profound impact on businesses. The UK government has committed to reduce greenhouse gas emissions to zero by 2050. EU and UK regulators have emphasised that the physical transition and liability risks from climate change and their associated impacts are becoming an increasing area of focus.
The construction industry is responding to climate change in various ways, including sustainable building design and operation and green construction practices on site. Modern methods of construction, such as off-site manufacturing (OSM), have a key role to play in this. OSM has the potential to:
- Reduce waste materials, over-ordering and contingent ordering thereby reducing CO2 emissions from the manufacture of such materials;
- Reduce on-site labour and materials and associated CO2 emissions from the transportation of personnel and materials to site;
- Lead to more energy efficient buildings through precision manufacturing and reduced defects in construction; and
- – Reduce emissions from cement through the use of precast concrete and alternative materials.
It is clear that modern methods of construction and OSM have the potential to help the industry tackle its impact on the climate. It is imperative for construction businesses to adapt their business models to manage their exposure to the risks that climate change legislation may cause.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.