Construction law: building works

The boom in construction, particularly in London, Manchester and other hotspots, helped lead the UK out of the recession and is keeping construction lawyers busy – advising on contracts and resolving disputes.

The seasonally adjusted Markit/CIPS construction purchasing managers index (PMI) in April marked three years of sustained output growth across the sector. But the figures showed the slowest expansion of business activity since mid-2013. The industry may be experiencing a blip due to economic and political uncertainty (including over Brexit), or it may be on the cusp of a significant slowdown.

Commercial building was the strongest performing category, although the latest upturn was the slowest since July 2013. Residential construction growth rebounded slightly from March’s 38-month low, and civil engineering activity was at its most sluggish so far in 2016.

Tim Moore, senior economist at Markit, commented: ‘Stalling new order volumes… are already weighing on staff hiring and input buying across the construction sector… softer growth forecasts for the UK economy alongside uncertainty ahead of the EU referendum appear to have provided reasons for clients to delay major spending decisions.’

This is supported by trade association Builders’ Conference data showing that only five contractors managed to book more than £100m of new work last month. Builders’ Conference chief executive Neil Edwards told The Construction Index that he was more worried about the fall in contract awards than the fall in new tenders. ‘Throughout 2015 the industry was averaging between 750 and 1,000 new tenders each month. In 2016, that total has fallen to around 650,’ he said. ‘Worse still is the value of those tenders, which has fallen from around £4bn per month to around £2.5bn per month.’

Although staffing levels and job creation continued to increase, some construction firms adopted cautious hiring policies in response to softer demand. This contributed to a rise in sub-contractor usage.

The legal landscape

While there may be trouble ahead for the UK construction industry, construction lawyers are keeping busy. Transactional work involves advising on complex contracts, business and other risk (construction is a relatively dangerous industry), as well as responsibilities and liabilities arising from Building Information Modelling (now required for UK government projects). Contentious work involves disputes between developers, suppliers and contractors over payments, defects and delays.

Marcus Harling, a partner at Burges Salmon, points to the continued strength of high-end residential schemes in London, notwithstanding a slowdown in project starts and delays to some schemes, notably the withdrawal in April of joint venture CI-One Construction from the One Nine Elms project in London after a year of negotiations. ‘Contractors want to work with employers on projects that are going to happen within a reasonable time frame,’ he says, noting that bidding for large contracts requires significant upfront investment.

The government’s focus on infrastructure is reflected in projects like the Thames Tideway. Burges Salmon advises across the spectrum of mainstream development, infrastructure, energy and nuclear. ‘We see different contracting methods, investors and ways of making a margin,’ says Harling, citing large retail schemes, residential projects and infrastructure schemes, including advising London Underground on the Metropolitan Line extension.

Paul O’Kane, a partner at DWF, reports a similar focus on big infrastructure schemes, including Manchester’s Metro extension as well as hotel and residential schemes and energy projects. He agrees that London gets the lion’s share of infrastructure spend.

On the disputes side, construction law is in the news following developments in a long-running damages case brought by workers who claimed to have been blacklisted by large construction firms via a vetting scheme which illegally held details of 3,200 construction workers. The Information Commissioner’s Office closed down the scheme in 2009, but it had been used by construction companies to check prospective workers’ trade union and other activities. Although construction companies denied the blacklisting charge, they accepted that the site infringed workers’ rights and breached data protection rules.

On 9 May it was announced that trade unions Unite, GMB and UCATT had reached separate settlements with construction companies. The GMB said that total compensation was about £75m for 771 claimants, with legal costs estimated at £25m. Some blacklisted workers have been awarded damages ranging from £25,000 to £200,000.

The level of compensation underlines the importance of reputation, recommendation and repeat business in an industry which requires bringing together numerous specialist materials and skills.

More disputes, faster

Construction disputes are not counter-cyclical. Shoosmiths partner Stephen Belshaw, who represents developers, investors and property companies, says: ‘Five years ago there was less work and contractors were concerned about getting cash into their business. Now there is more activity contractors are prepared to dig in and secure their money. Most of our cases involve sub-contractors’ claims against main contractors or vice versa. You don’t find too many contractors claiming against main employers, as they want to retain them as a valuable source of work. Obviously, more activity will produce more disputes.’

Another factor is the 12-year limitation period. Adrian Bell, construction disputes partner at CMS, explains: ‘During the recession, contractors didn’t have the resources to pursue claims, but as contracts reach the end of their limitation period they have to choose between exercising their rights or losing them. As large projects near completion, there are more disputes around delays and defects, as well as employment and contractual issues.’

Increased market activity has created a skills and resource gap. Since contractors agreed pricing for long-running projects in 2011 and 2012 when the market was keen, the supply chain has moved and it is now impossible for them to deliver at their original price. Because their skills and resources are in short supply, specialist sub-contractors are highly profitable – they are in demand and can name their price.

Construction contracts often have phased completion schedules that include penalties for late delivery – and they work on fixed budgets. Developers cannot afford to alienate the specialist suppliers and contractors upon whom they rely. As Harling observes, only a small proportion of the price of the completed building ends up with the main contractor; something like 80% of the value is in the supply chain.

Reputation risks include health and safety, and future financial and contractual arrangements. Investors, suppliers and contractors may not wish to work with a firm that is continually in dispute over payments. This supports the popularity of alternative dispute resolution (ADR) methods and the short adjudication process established under the Housing Act (see box, p14).

Louise Shiels, a partner at Brodies in Edinburgh who advises on major contracts and tenders for infrastructure and energy projects, as well as commercial developments, deals with the majority of disputes for her clients through adjudication and early neutral evaluation. Cases rarely go to court, she says: ‘It is not just about expense. Court cases take up senior people’s time, and reputational issues can cause considerable cost to the business. A quick decision allows everyone to get on with the project.’

Adjudication

The short adjudication process, a 28-day dispute resolution mechanism which is unique to the construction industry, enables projects to continue while day-to-day disputes (generally involving payment claims and time extensions) are resolved without additional delay. This enables contractors to unlock payments without having to wait for a court judgment or arbitration award.

Adjudication has grown up. ‘When organisations identify high-quality adjudicators, as the Technology and Construction Solicitors’ Association (TeCSA) has, the wider market had confidence in the process,’ Harling explains. ‘Although adjudication can be an aggressive, quick-fire process, it is also used to determine quite complex issues.’ He estimates that about 75% of construction disputes that Burges Salmon handles are dealt with by adjudication, with the balance split between arbitration and litigation in the Technology and Construction Court.

At Shoosmiths, Belshaw believes that the decision on whether to take a case to adjudication or court depends on the complexity of the case, the documentation involved and the amount in dispute: ‘If a case involves professional negligence, I would take it to court where there is greater likelihood of getting a sensible decision.’ However, adjudicators tend to take a more commercial approach and find something for the claimant: ‘Adjudication can therefore provide a temporary quick fix, and preserve working relationships.’

Cost and uncertainty can be deterrents. Sarah Duncan, a construction solicitor at Ashtons Legal, comments that smaller sub-contractors struggle with adjudications because there is a lot to pay upfront and parties must bear their own costs in referring and responding to a dispute. Adjudicators have no power to award costs unless this is in the original contract. Furthermore, adjudications do not always produce a final decision. Duncan prefers court procedures which include pre-action meetings, as these can lead to settlement.

Courts and procedure

The pre-action protocol for construction disputes enables parties to court cases to share information at an early stage in the process and to manage costs. It can also lead to settlement. In a TeCSA-commissioned survey of private practice lawyers, in-house counsel and others, 95% of respondents thought it was a good idea, in stark contrast to what some in the judiciary (notably Jackson LJ in his review of civil litigation costs) feel about it. There are suspicions that the bar does not like it because it helps to cut down construction work for barristers. Barristers have no involvement in the pre-action protocol; they only get involved once the case gets to court.

High employee turnover and widespread subcontracting (due to the project-based nature of the construction industry), together with the 12-year limitation period, mean that if cases do get to court, e-disclosure is a major challenge. This is partly because construction companies often store documents on project servers rather than centrally, and even if they have updated their systems a case could involve documents that were created up to 12 years ago.

Similar issues arise with tracking down witnesses and convincing them to help with a case involving a previous employer. These considerations may also be factors in the popularity of ADR and adjudication.

Bell at CMS explains that the Technology and Construction Court has a good reputation and quality judges with solid backgrounds in construction and engineering disputes. The TCC is part of the High Court and most of the judges are former QCs from the leading chambers – notably Atkin and Keating. ‘The TCC feels the competition of arbitration and looks for ways to deal with cases in a flexible, accommodating and professional way,’ Bell says. ‘However, the advantage of arbitration is that it is private and you get to choose your arbitrator, whereas if you go to court, a judge is assigned to your case.’

Corporate perspective

Developers and suppliers tend to take a commercial approach to legal matters, bringing in external counsel where expertise is needed to supplement the in-house team.

Jeremy Mutter, general counsel, construction, at Carillion plc, explains that Carillion relies on multiple ongoing relationships. Two-thirds of its business involves central government, local government or a government quango. ‘A significant amount of Carillion’s legal spend goes on working out our rights and entitlements at the outset of a project,’ Mutter says. ‘Construction is quite adversarial; people don’t want to pay us what we’re entitled to and contractors want to charge more than we want to pay.’ Construction contracts tend to be quite complex and involved; hence Carillion handles contract negotiation in-house.

Wherever possible, Mutter endeavours to avoid formal disputes. ‘Settlement is the saviour of a business relationship,’ he says. But he is not keen on adjudication either: ‘We do not like a third party telling us the answer. And you never know what the adjudicator will decide. Our experience is that adjudication doesn’t always go the way you would like – or expect.’

Carillion therefore consults external counsel on disagreements before they become disputes. ‘If necessary, we use alternative dispute resolution because it gives us more control,’ Mutter explains. ‘We are a trading organisation and we need to make financial decisions. We endeavour to avoid court procedures that prevent us from getting our cash quickly.’

Because Carillion is resourced for business as usual, it also requires external counsel for demanding one-off instructions such as creating joint ventures for its big, complex projects and making sure they work properly. Mutter has developed ‘a legal network, rather than a panel’.

Although Carillion refreshes its network every three years, it has been working with the same firms for 13 years – Pinsent Masons, RPC, Clyde & Co and MacRoberts in Scotland. ‘We need our lawyers to understand our business and we get them to work together and tailor their advice so that our message is consistent. We have templates for how we want to receive knowhow, budgets and planning. In this way our operational people across the business can understand and act on our legal documents,’ Mutter explains. ‘We are a challenging client, but working for us is rewarding because we undertake big complex projects that raise complicated, interesting legal issues.’

Lucinda Robinson, commercial solicitor at Hanson UK, takes a similarly commercial approach. Hanson supplies heavy building materials, purchases construction services for its 350 sites and operates two contracting divisions and a subsidiary brickwork and cladding company, Irvine-Whitlock. An in-house team of just three lawyers handles all the contractual and dispute work for the £1.4bn turnover firm. As demand for Hanson’s products and services has increased it has invested in bigger projects, which create additional legal work.

Hanson has fixed-fee arrangements with external firms for headline contract reviews, and for creating and reviewing contract templates. Robinson says: ‘Because we have so many contracts, we have worked with one of our panel firms to draft a matrix of template contracts. They also help the procurement team negotiate and finalise contracts.’

Hanson also instructs external firms to handle big commercial disputes. Personal injury claims are handled by Hanson’s insurers; smaller claims are handled in-house. Robinson believes that adjudications have their place, but as they often do not provide a final answer, they are too time-intensive for Hanson’s small legal team. ‘We try to resolve issues commercially,’ she says. ‘Most of our regular suppliers provide specialist materials and services that we need and we can’t afford to fall out with them over a small dispute.’ Hanson takes a similar approach to its law firms, having longstanding relationships with Pinsent Masons and Gowling WLG among others. ‘They understand our business and are involved in ongoing legal work on our longer projects,’ she explains.

Robinson highlights issues to watch: the potential impact of Brexit on the economy and foreign investment; regulatory changes – in construction law and generally; and health and safety. ‘Construction is a high-risk industry and we invest a lot in making sure our business is as safe as possible,’ she says.

DWF’s Kane comments: ‘Construction is a practical industry and developers and contractors are looking for practical commercial advice. Cost is a big feature, advising on risk and consequences. A remarkable amount of work is repeat business. Payment issues are still high-profile; however adjudications and other ADR mean that most disputes are resolved quickly.’

Harling at Burges Salmon agrees: ‘Construction lawyers don’t get appointed because of their knowledge of construction law. Clients are looking for market intelligence and the ability to guide [them] through project risk. The role of the lawyer has changed in the past five years. We are brought in much earlier and are generally much closer to the clients’ businesses.’ Local knowledge has become less important as projects increasingly have international investors and stakeholders.

Burges Salmon senior associate Catherine Gilbert adds that the same is true for the dispute side: ‘As construction has moved away from long-running disputes in the technology and construction court to ADR and adjudication, the lawyer’s role has become more advisory. Our clients want ongoing trouble-shooting rather than getting a disputes lawyer in at the last minute.’ It’s about working with project managers to formalise the deal and then monitoring progress. ‘It is a symbiotic relationship,’ Harling adds.

This is a good time to be a construction lawyer – private finance initiatives and infrastructure projects continue apace. Contracts and claims arising out of commercial and residential development projects will require legal advice and representation as they near completion and for many years afterwards. However, construction lawyers require specialist skills, knowledge and experience.

The business environment in construction law mirrors the industry: the ongoing volume of legal work means there is a skills shortage. Construction lawyers are in demand, particularly at the more junior level, because no one was qualifying into construction during the recession. Now most construction teams are looking to expand to deal with new and repeat instructions in a market that, notwithstanding the slowdown, promises to be fruitful for several years. It looks like the next challenge for law firms might be the war for talented construction lawyers.

Joanna Goodman is a freelance journalist