Construction Law: Letters of Intent, Insolvency, Tort Law PDF

Letter of Intent: A letter of intent is a document that can utilised to start works on site before the finalised contract has been signed off. A letter of intent is created and utilised as a document to show there is an intent on finalising the contract and shouldn’t be used as means for the entiret...

Letter of Intent: A letter of intent is a document that can utilised to start works on site before the finalised contract has been signed off. A letter of intent is created and utilised as a document to show there is an intent on finalising the contract and shouldn’t be used as means for the entirety of a project to be built upon. A letter of intent can be used in several ways, it can be used to:  Kick start the design of a project while incurring costs.  Used to procure materials in advance, especially those with long lead times.  It can be used as a basis to start some construction works. Letters of intent are predominantly used to help save time and commence works before the contract terms have been agreed and finalised. Additionally, it can be used if there is to be anticipated disagreements with the main contract terms and therefore works can be commenced via a letter of intent while these terms are being agreed. However Letters of intent are typically avoided for a number of many reasons: 1. Lack of liability clarity and risk allocation within the document. Therefore each party is bound by what is stated within the letter. 2. Lack of clarity to the parties rights and obligations; is the letter of intent a separate interim contract? are the terms and conditions clear? Has any parts of the main contract been incorporated into the document? Or is clearly an expression without being enforced by law? 3. What scope of works are permitted during the course of the letter of intent? 4. Is there a expenditure limit? (typically there is) 5. Or is there a expiry date of which the letter of intent becomes obsolete and all works of the contractor must be compensated? 6. If the terms of the main contract aren’t agreed by the expiry of full expenditure cap, does the letter of intent receive a variation or extension and if so, how will this impact the clarity and liability of the document? 7. Letters of intent may rarely declare or denote any dispute resolution process, making the legal side of the document challenging for those who wish to resolve issues with contesting the parties. Letters of intent can be very difficult to decipher in court cases to, as some letters of intent use specific wording to make the document appear binding when it isn’t. An example of a letter of intent is one created by the ‘Letter of Law Society’. A letter of intent typically contains:  Employer & contractors addressee’s  Scope of works that are permitted to be undertaken  Site conditions/ location  All tender documents relevant & applicable at the time of submission of tender.  Client, consultant and contractor stated  Insurance & liability’s  Expiry date  Maximum expenditure  Pricing and terms of payments  Progress reporting method  Pre-conditions Insolvency Insolvency is a companies or an individuals inability to pay their debts which can lead to severe consequences for both the debtor and the creditor who is unable to pay. The reason why insolvency within the constructions industry is typically caused by cashflow issues, disputes, increasing costs and decrease in profitability. Insolvency can lead to many different consequences such as:  Bankruptcy  Liquidation  ‘Winded-Up’ (Cease business & clear debts via a liquidator)  Dissolved  Works brought to a stand still  Financial loss  Termination on site  Programme delays Ultimately the company needs to decide whether they want to: A) Save the business B) End the business Processes after insolvency are, Winding up – Collection of debts owed to the company and the money is therefore used to pay off the creditors. Administration – A administrator has the power to save the company via putting the best interests of the creditors, or to control the sale of assets. Appointment of receivers – A person who is appointed to collect & preserve the property and items of value to help give assurance to the assets and maintain their value. Mitigation methods for insolvency include, provisions such as retention and bonds being in place to lessen the affects or even resolve the insolvency. In order to prevent termination on site, the contract agreement may have a ‘step-in’ right where banks and other funders may be able to take over the right of the employer so the works may continue on site which in turn reduces delays. Its important to note if you become insolvent, you don’t necessarily become bankrupt and liquidated. What should be done if you become insolvent? 1) Ensure your accounts are up to date 2) No outstanding payments 3) No overpayments 4) No underpayments If the contractor becomes insolvent, the employer will:  Secure  Stop all payments  Protect the work which is competed  Meet with professional advisers   Contact the administrator  Inform bond holders  Obtain insurance if necessary  Contact key subcontractors and suppliers  Record all costs of dealing with the insolvency This consequently lead to the appointment of a new contractor which will cost time and money. Construction Act (Adjudication) Adjudication is an alternative dispute resolution designed to help resolve disputes cheaply and efficiently by using a court to identify the rights of the parties at the particular moment by analysing what were, in law, the rights and wrongs of their actions when they occur. Adjudication is a summary of non- judicial dispute resolution process that leads to a decision by an independent person that is binding upon the parties (unless stated otherwise upon an agreement) but can be challenged via litigation, arbitration or by agreement. Adjudication includes the following methods of resolving disputes:  Negotiation  Mediation  Conciliation  Mini Trial  Expert determination But doesn’t include for:  Litigation  Arbitration Within section 108 of the 1996 housing grants construction and regeneration act, they made it mandatory that there is a right to adjudication which is incorporated within the contract. If it wasn’t stated within a contract it would be incorporated by default. This section allowed for: 1) A party to give notice at any time of his intention to refer to a dispute to adjudication. 2) Provide a timetable of which a adjudicator will be appointed and referral of all disputes will go towards him within 7 days of notice. 3) The adjudicator will reach a decision within 28 days of referral (or longer as per the terms of a contract). 4) Allows the adjudicator to extend the time period if requested and accepted by the party of whom the dispute was referred from (up to 14 days). 5) Adjudicator to act impartially 6) Adjudicator has the power to take initiative and ascertain the facts and the law. An example of when adjudication may be used is: If a Contractor has applied for a sum of money from the Client, however the client reviews and believes that the requested sum is an inaccurate representation of the value of works completed to date, they may open up to adjudication to help come to a decision on how to resolve the money discrepancy. Usually, the Client would offer a different value for the works, and the contractor would either except or challenge the value. In order to ensure cashflow for the project and minimise delays, the following methods can be used to help arrive at a value of which both parties can agree upon: Negotiation – A representative from both parties will meet to discuss the level of works completed, value of the works and how the value was calculated. During this negotiation process there will be constructive conversations where the parties may agree on a value for works, which will achieve a quick resolution that is also cost effective and cheap. Should this not achieve an agreed value, mediation may be the next choice of dispute resolution. Within JCT 2024, they made negotiation a mandatory process within the terms of their contracts in order to achieve Mediation – The process for mediation is the selection of a mediator, which will represent a neutral third party member who doesn’t work within the interest of either party. This mediator, within this example would undertake their own evaluation of the works and help achieve a negotiated term for both parties. This can later on become binding within a settlement if agreed by both parties, and hence within the example provided, the negotiated value for payment would be due. Conciliation – Similar to Mediation, the conciliator will express their provisional review based upon the merits of the case. The conciliator will act as a mediator, however if a settlement isn’t achieved, the conciliator will provide a recommendation for next steps, which in some cases can be binding. Mini Trial – As the name suggests, each party will be given the opportunity to represent their case, along with facts, evidence, measurement, approach with calculations and their determined value for the works. Each case would be done in front of a tribunal of third party experts and advocates that are neutral to both parties. This process is inexpensive and can help reach a negotiated settlement for the payment within the example given. Expert Determination – Utilising the example a specialist will be decided between the two parties (Contractor and client) who will evaluate the works and using their expertise, value and price the works done to date accurately and give a settlement value that both parties can agree upon. Should neither party agree on the value given by the specialist the parties can then further go into arbitration and litigation, however this comes with time delays and more expensive proceedings in comparison to adjudication. Should laws affecting adjudication or dispute resolution during the course of a project, usually the project will take on the legal framework as of the time of signing the contract. However this isn’t always the case as some contract may have a ‘change in law’ clause that will then lead to the contract conforming to the new laws which may affect the contract. Fluctuations Fluctuations cause a range of problems within a construction project. They can cause unexpected costs, delays and cost uncertainty for projects that have long durations. To combat these issues, in construction contracts, the employer and contractor may agree to have fluctuation provision, which are clauses that allow for adjustments in pricing. In essence fluctuations can cause correct tender prices today to be inaccurate tomorrow. Fluctuations are usually caused by:  Inflation – The measurement of how much a good or services value has changed, typically over the time span of a year. This is calculated via the use of comparing a previous value for works to currant works e.g. one from last year to the new updated value this year. The government sets a target inflation of 2% per year.  Interest rates  Alteration of the sum of materials and works. Historically prices were stable enough that fluctuation provisions were often deleted, however this changed during 2021 when a series of conditions (Brexit & Covid-19)caused the construction market to be the worst it has been since 2007- 2009. Material prices rose exponentially, with steel prices being 77.4% more & timber prices being 80% more within the first half of the year. Additionally labour costs rose by 6.7% over the first half of 2021. The delay caused by covid also lead to a raise in prices. However it was worse during 2022, when the Construction leadership Councils Construction Product Availability statement stated: ‘ forecasted energy & price inflation expected to rise between 7 – 10%’ If inflation ever skyrockets to high, beyond the 2% government target, prices and forecasts become unpredictable, which would make budgets harder to set and cause higher cost uncertainty among all those who work within the construction industry. This ultimately benefits the contractor if provisions are in place to adjust costs, while the employer or client will have to pay more for the same service and works. If inflation is too low, Employers and clients may expect to have reduced expenditure, however contractors may not be able to thrive in low inflation environments causing supply chain issues. It is believed if the targeted 2% target inflation is achieved, there will be room for growth and prices will remain predictable. In most cases, the contractor holds the risk of inflationary increases in costs unless, provisions are in place. Though the contractor can loose money from inflation, they can also benefit from price fluctuations even if no provisions are in place, however this only happens if deflation occurs. Fluctuation clauses will enable the contractor to be entitled to be compensated for some or all additional costs as a result of price increases. The higher and more volatile the inflation, the more money that the contractor will be able to incur via the use of fluctuation clauses. To calculate the increase in costs, one of two methods can be utilised:   Index based formulas.  Published list of market prices. Two examples of provisions in place for construction contracts are NEC with secondary option X (requires to be selected) & JCT Contract Particulars, Fluctuation Options: NEC – States that if included, all cost contain a amount of price adjustment provision to it which is calculated based off of the change of price of work done to date since last assessment, multiplied by the price adjustment factor and the amount included within the previous price adjustment within the previous amount due. It also has provisions in place to include for the fluctuations for Compensation events. JCT – JCT has a selections of options in order to place fluctuation provisions in place, which include options A to C with the option for no fluctuation provisions in place: A) Contribution, Levy & Tax fluctuations – Least comprehensible, only covering fluctuations in insurance, apprenticeship levy etc. B) Labour & Materials cost & tax fluctuations – If labour and materials costs increase due to inflation, the contractor will be able to claim money back on those items, however this isn’t fully comprehensible, leaving plant, Subcontract rates and preliminaries out of the area of fluctuations. C) Formula Adjustments – more comprehensive covering costs and fluctuations of all items of which are affected. A formula is used to adjust rates to compensate for fluctuations. Tort Law A tort is a civil wrong that was caused by the negligence of another which resulted in the individual harm or suffering, usually tried in a court in front of a judge. The law of tort states that the compensation for the civil wrong isn’t to compensate someone but to rather bring the affected individual to a state of which they were in before the accident. In essence in tort law, a body of rights, obligations and remedies are set in court to provide relief for the affected persons who have suffered from the wrongful acts. For a tort to be done, The law of tort exceeds that of a construction contract and can affect those within contractual relationships and those who are third parties that would foreseeably be affected by the acts of another. A party who is connected via contract may wish to claim via both contract law and tort law in order to have a higher chance of the claims being successful. For a Tort to be used a:  A wrongful act must be committed  The wrongful act must give rise to legal or actual damages  The wrongful act must be so that they are able give rise to a legal remedy in the form of an action for damages. To ensure protection against Tort acts, a construction contract should be well detailed with clear liability clauses and insurance requirement stated for all parties involved within the construction contract. The following insurances help support parties who may be affected by a Tort act:  Public Liability – Cover injuries and damages caused to third parties or their properties, usually caused by negligence.  Employers Liability – Covers injuries and damages to those who work within the contract and onsite.  Professional Indemnity – Covers damages caused by poor design. Usually covering negligence in design & professional advice.  Contractors All Risk – Provides cover for accidental damages to works or materials. Should these insurances not be stated or any provisions within the contract state be put in place to prevent tortious acts, the party affected could therefore affect concurrent liability under both Tort Law & Contract Law. This is why it is so important to ensure your contract is well drafted and formed. Torts are usually caused by one of many factors:  Negligence  Nuisance  Trespass  Defective Works Negligence is one of the most leading causes of tort, being the disregard of duty of care to those of which may be affected by the actions of another. This is why its important to ensure the safety of others and prevent access to members of the public, especially in areas of high risk. The level of care should be that of a normal, sane person. There are only few exceptions to this being: 1) If a person is knowledgeable within the field and refuse to use their expertise and subsequently becomes harmed due to their own negligence. 2) If a person states they are skilled within an area but fails to demonstrate the necessary skills and care & subsequently becomes harmed because of their acts, they will be held negligent. 3) An example of a negligent tort could be that works are being done within a section 278 (works on active highways). A contractor has started doing excavator works on a footpath but forgot to set up site boundaries and prevent members of the public from walking into the actively working areas. Because of this, a member of the public fell into a excavated area and broke their leg. Due to the contractors negligence, they will be found guilty for not putting the necessary prevention measures in place and therefore must reimburse the injured individual and help remedy the situation to bring the individual to a state of which they were in before the accident. Nuisance is the tortious act that allows a party to claim based on an act that affects interferes their use and enjoyment of their land. An example of this would be noise nuisance, caused by construction works during night that prevent the locals to sleep. Trespass is the tortious act of prevention from entering/ exiting an area or, the act of encroaching onto another property. An example of a trespass act, would be the ignorance of poor boundary setting, resulting in the areas set up, impeding another parties land. To remedy a Tortious act, one of three actions are typically undertaken: 1) Damages – Compensation is given to the affected party to help return the affected party to the state of which they were in before the damages. 2) Injunction – Placing prevention measures in place to prevent repeated torts, usually falling under one of the following categories: a. Prohibitory Injunction – Stops someone from continuing a wrongful act. b. Mandatory Injunction – Forced to take action 3) Recovery Of Land – Used in cases of wrongful dispossession. Measuring the level of damage are done based upon, facts, circumstances and the proof of injured party. The level of damage then dictates the amount of compensation to bring the party to their original state before the tortious act which can fall under the following categories:  Actual expense and loss of earnings  Pain & Suffering  Nominal Damages  Damages to deter a party from a similar conduct. What can we do to help defend and strategies to mitigate this liability?  1) Ensure the contract is well drafted, with clear allocation of risks between contractor and owner. 2) Clear provisions in place for handing over works and the transfer of risks to owner once the contractors obligations are completed. 3) Provisions for indemnity by the Owner. 4) Obtain statutory clearances & compliance of applicable laws 5) Ensure adequate insurances are in place for the necessary works of all parties involved 6) Liability insurance protects the contractor against lawsuits and personnel loss. 7) Contractor should ensure that all subcontractors comply with the minimum insurance requirement, which is agreed with the client beforehand. If a Tortious act has been committed, a contractor should ensure they have clear records of activities and obtain Owners agreement to the records on regular basis. Tortious acts are tailored to facts and are based on challenging the basis of liability:  Causation (Prove conduct caused the damage)  Remoteness (Responsible for damage that should have been foreseen)  Intervening Acts or events (Did they comply?)