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September 2011

Introduction

Welcome to the September edition of Construction review. In this edition we review a case on the rights of subsequent purchasers to sue the original builder, comment on the HSE's plans to scrutinise more closely the health and safety records of clients and smaller contractors and report on the costs management pilot scheme that will commence in the Technology and Construction Court on 1 October. We also provide further materials on the changes to the Housing Grants, Construction and Regeneration Act 1996, which also comes into effect on 1 October.

Contacts

If you have any queries regarding the matters raised in this e-bulletin please contact:

Guy Lane Peter Stockill Partner Associate [email protected] [email protected]

Contents

Complex structure theory and the Latent Damage Act 1986 HSE to investigate smaller contractors New costs regime for construction cases Housing Grants, Construction and Regeneration Act 1996: are you prepared? Questions and answers on changes to the Housing Grants, Construction and Regeneration Act 1996 (‘HGCRA’)

Complex structure theory and the Latent Damage Act 1986

Whether a subsequent purchaser can sue the original builder in the tort of negligence for defects in a building was considered in Broster & Ors v (1) Galliard Docklands Limited and (2) East London Construction Limited [2011] EWHC 1722 (TCC).

Galliard Docklands Limited (GDL) appointed East London Construction Limited (ECL) to design and construct a terrace of six town houses with a common roof at Old Bellgate Wharf in London. GDL sold the properties to the claimants.

In 2005 there was a storm, which caused the roof of the terrace to be lifted up one metre. The roof settled back down on to the property walls, causing substantial damage to the houses. The roof lifted as it did due to the failure by ECL to strap the roof joists to the walls of the individual properties. Repairs were carried out in 2007, with the NHBC bearing half of the remedial costs.

The claimants sought to recover the balance of the remedial costs from GDL and ECL. The court was asked to consider as a preliminary issue whether the claim against ECL could be maintained

1 in law. There was no direct contractual relationship between the claimants and ECL so they brought their claim in the tort of negligence. The claimants also sought to rely on section 3 of the Latent Damage Act 1986 as giving them a separate cause of action. ECL applied to strike out the claim.

The claim in tort

In order to succeed, it was necessary for the claimants to prove that ECL owed them a duty of care, that the duty was breached and this caused a loss to them.

The duty in tort is not to cause foreseeable direct physical damage or economic loss consequent thereon. There is no duty of care to avoid causing economic loss independent of physical damage, unless the damage is reasonably foreseeable and the relationship between the parties is sufficiently proximate and it is otherwise fair, just and reasonable to impose the duty.

A party cannot recover for the damage to the product which is the result of the negligence (ie, the ‘thing itself’), as this is ‘pure economic loss’. However, damages can be recovered for damage caused to ‘other property’. It became necessary for the claimants to show what that ‘other property’ was. They argued that the building was not the defective product, but that the roof was the ‘thing itself’ for which no recovery could be made for its replacement, but that the damage to the houses was damage to ‘other property’, for which recovery could be made. By seeking to separate out different elements of the building (albeit it a row of terraced houses), they were seeking to apply what is known as the ‘complex structure theory’. An example frequently referred to is where a defective boiler (the ‘thing itself’) causes damage to the house in which it is installed (the ‘other property’).

Akenhead J rejected the claimants’ argument and held that the structure needed to be considered as a whole. He warned that parties need to avoid any artificiality in practically considering the structure. The fact that the structure was a row of terraced houses did not make a difference, as the building was built as a single building. Nor did it matter that houses had different owners. However, he held that a claim for damage caused to any furniture within the units would have been come within the exception as damage to ‘other property’. However, no claim for damage to furniture had been made.

The Latent Damage Act 1986

The claimants also relied upon section 3 of the Latent Damage Act 1986, which gives rise to a fresh cause of action in negligence to a person acquiring an interest in a property after the date on which the original cause of action accrued, but before the material facts of the damage became known to them.

The judge held that the Act did not provide any better cause of action to the claimants because it only applied to claims in negligence and the same issues arose as dealt with above i.e. the claim was one for pure economic loss (the cost of strapping down the roof or the reduction in the capital value of the property), which was not recoverable. Further, the cause of action acquired by the claimants was not the same as that acquired by GDL, which it would have to have been for the Act to apply.

Therefore the judge held that the claims had no realistic prospect of success.

Comment

This case is a further illustration of the court’s reluctance to allow the complex structure theory to be invoked to create a duty in tort where the contractual arrangements for the project do not impose such obligations and where the application of the theory would create artificialities. Nevertheless, it is clear that the theory may be applied in appropriate cases.

2 In the course of the judgment, Akenhead J referred to Robinson v P E Jones (Contractors) Ltd [2011 EWCA Civ 9 [click here) in which the Court of Appeal held that while a construction professional would ordinarily owe a duty of care in tort to protect his/her client from pure economic loss, a contractor would not ordinarily do so. This may be important for a number of reasons, especially if the limitation period for a claim in contract has expired. Akenhead J sensibly acknowledged that, at least in respect of its design activities, a design and build contractor would be in a similar position to a professional.

Elizabeth Parker Trainee solicitor

HSE to investigate smaller contractors

Nearly one in seven deaths on construction sites is related to smaller firms.

Although the fatal workplace incidents record of the UK construction industry compares well with other countries, the fatal incident rate still remains over four times the average in comparison with all other UK industries. Construction remains the largest contributor to worker fatalities for any sector.

Figures show that the larger construction companies have shown a steady improvement over the last decade, unfortunately the same cannot be said of small contractors. A decade ago 30% of deaths on site could be traced back to companies with less than 10 employees. In 2010, this figure rose to 65%. The Health & Safety Executive (HSE) has identified there is a need to find new ways to help small contractors understand and meet their obligations in a proportionate way.

Changes to health and safety regulations

Over the last decade there have been improvements in health and safety regulations and this includes the incorporation of the Construction Design and Management Regulations 1994 and the Construction Health, Safety and Welfare Regulations 1996 into one set of regulations, namely the Construction Design Management Regulations 2007 (CDM). The revised regulations were intended to make it easier for those involved in construction projects to comply with their health and safety duties.

The CDM regulations apply to most common building, civil engineering and engineering construction work, the regulations now ensure small construction jobs are covered, even if there are only a couple of workers on-site for a few days.

The specific changes to the regulations included a new duty on designers to ensure that their designs met the necessary health and safety regulations. In addition a client was no longer able to appoint an agent to take their legal duties.

Under the CDM regulations those who are involved in site work have responsibilities to check working conditions are safe before work begins. They also need to ensure that the proposed work is not going to put others at risk, requiring planning and organisation.

The regulations were aimed at improving the overall management and co-ordination of health, safety and welfare throughout all stages of a construction project with a view to reducing the large number of serious and fatal accidents in construction.

Latest figures

3 Unfortunately the latest (provisional) figures from the HSE show that the number of construction deaths rose to 50 last year, up from 41 the year before. This is despite falling workloads during the recession and there is now mounting concern that the industry safety record is starting to slide in the downturn.

As part of the HSE's ongoing evaluation of the Construction (Design and Management) Regulations 2007, the health and safety records of smaller construction firms will be scrutinised, since statistics suggest that it is the smaller firms, and the smaller projects (especially refurbishment) that account for around 60-70 per cent of the fatalities in construction.

The HSE Chief Construction Inspector, Phil White has advised that, ‘the majority of deaths continue to be on small construction sites. Big construction companies have shown steady improvements over the last decade and we want to see smaller firms take a similar lead. This is not about money, it's about mindset - planning jobs properly, thinking before you act and taking basic steps to protect yourself and your friends.’

The HSE has encouraged the industry to ‘help itself’, asking major contractors to help smaller companies outside its immediate supply chain. Realistically and in the current economic climate this is unlikely since many large contractors have many other difficult issues to deal with.

In light of Mr White's comments there appears to be a real call for small construction companies, to step up to the challenge of keeping the workplace safe for their employees and help to reduce the rising number of UK construction fatalities. It is likely that these companies may need to approach specialist risk management companies for assistance in their bid to reduce workplace fatalities.

Whilst the CDM regulations are being evaluated, the Head of the HSE Construction Policy Unit, Anthony Lees, does not believe there would be 'significant changes' made to the existing regime, although they acknowledge there are still some smaller construction firms that are not following the rules. The HSE confirmed that there must be an increase in on-site monitoring in order to prevent these continuing breaches from occurring. However since the government recently announced the HSE's budget will be cut in the coming years, it is difficult to envisage how this will be carried out.

Atiyah Malik Partner

For information, please visit www.construction-manager.co.uk

New costs regime for construction cases

The costs management pilot scheme conducted in Birmingham has been extended to the Technology and Construction and Mercantile courts in London and unlike the Birmingham pilot, is mandatory. What does it mean for those involved in litigated construction claims?

The pilot will run from 1 October 2011 to 30 September 2012 and apply to all proceedings where the first case management conference is heard on or after 1 October 2011.

At present parties are required to file estimates of costs for the first case management conference, but the quality and level of detail included within such estimates varies considerably. Often they receive no attention at the hearing. Under the pilot scheme, a more detailed costs budget must be filed in a standard format providing details of the time to be spent by each person working on the case by reference to certain key activities. The court will then decide whether to make a costs management order (CMO) or not. It is expected that it will be usual for a CMO to be made. If one is made, it will serve as a costs budget and a party who wishes to revise it will have to obtain the court’s permission. Activities to be included in this cost budget will include: pre-

4 action work, pleadings, disclosure, preparation of witness statements, expert reports, trial preparations, settlement negotiations and trial. Details of likely disbursements will also have to be provided such as mediator’s fees, experts’ and counsels’ fees and identifiable contingencies (eg, such as an application for specific disclosure).

The judge will have the power to make a CMO at any subsequent hearing in the matter. The judge may also order attendance at a subsequent cost management hearing (possibly by telephone) in order to monitor expenditure.

Updated budgets will have to be filed before subsequent case management hearings if a party wishes to revise the existing budget.

The effect of a CMO appears to be similar to that of a cost capping order in that when assessing costs at the end of the proceedings, the court will have regard to the last approved budget and will not depart from it unless it is satisfied that there is good reason to do so.

A party will be able to apply to the court if it believes that another party is behaving oppressively in seeking to cause them to spend money disproportionately.

Comment

There is no doubt that a greater control of costs is needed, but there are a number of important questions that remain to be answered about CMOs, even after the Birmingham pilot:

. Will parties use the cost budget as a tactical weapon to put commercial pressure on a financially weaker party?

. How will the courts reconcile widely differing views as to likely costs?

. What effect will the new ability to make an application in the event of oppressive behaviour or excessive costs have on the conduct of the litigating parties?

. Where a CMO is not made, will a party still be held to their cost budget? The new Practice Direction does not shed any light on what would happen to cost management where there is not a CMO.

. Since judicial training in costs management is not mandatory, can parties be sure of a consistent approach?

Notwithstanding these unanswered questions, the court’s attempts to control costs and the sadly, not uncommon, instances of parties incurring disproportionate costs should be cautiously welcomed. However, estimating costs can be very difficult and CMOs have the potential to penalise successful parties who are overly optimistic in their estimates of costs. For fear of such a penalty, it is likely that parties will tend to overestimate in their initial costs estimates.

Joanna Dalton Trainee solicitor

Housing Grants, Construction and Regeneration Act 1996: are you prepared?

An engineer client recently asked whether the amendments to the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) which are expected to take effect on 1 October 2011, will make any difference to him. The answer is: yes.

5 The changes affect the statutory payment, suspension and adjudication provisions and apply to all construction contracts (as defined by HGCRA) entered into from 1 October 2011 in England and Wales and 1 November in Scotland. Existing contracts will continue to be governed by the old regime.

Click here to read the full article.

Peter Stockill Associate

Questions and answers on changes to the Housing Grants, Construction and Regeneration Act 1996 (HGCRA)

On 8 and 15 September 2011 BLM held seminars on the amendments to HGCRA. Some of the questions raised are considered in this article.

1. What do we call the new Act?

HGCRA is variously referred to either by that acronym, as ‘the Construction Act’ or as ‘the Housing Grants Act’. The Local Democracy, Economic Development and Construction Act 2009 makes amendments to HGCRA so it is appropriate to continue to refer to, for example, HGCRA (as amended). Alternatively, references to ‘the 1996 Act’ and ‘the 2009 Act’ may become common.

2. Can my invoices stand as a payment notice so that in the absence of a payment notice from the payer, I do not need to serve a default notice?

Yes, provided that: (1) your contract permits or requires you, before the date on which the payer’s payment notice should have been given, to notify the payer (or a specified person) of the sum that you consider will become due and the basis on which that sum is calculated and (2) you have submitted an invoice that does those things and otherwise complies with your contract.

3. What are the requirements for a document to stand as a payee’s payment notice? Does it have to be labelled as such?

The question of whether something is a payment notice is one of substance not form. The notice must set out the amount the payee considers due and the basis on which that sum is calculated but need not be labelled as such, unless your contract requires it. Optimally, it should be crystal clear from the notice what it is and why it is being given. As noted above, there may be additional requirements imposed by your contract for the contents or substantiation required with a payment notice and these should be complied with.

4. What happens if my contract does not comply with the new Act?

If or to the extent that your contract does not comply with the payment provisions of HGCRA (as amended), the relevant provisions of the Scheme for Construction Contracts (as amended) will apply, although the Scheme (as amended) does not repeat all of the provisions of HGCRA so you will need to look at both HGCRA and the Scheme to see what will be implied into your contract.

If your contract does not include, in writing, the minimum requirements for a compliant adjudication procedure set out in section 108 of HGCRA (as amended), the adjudication provisions of the Scheme will apply in their entirety in place of the respective provisions

6 of your contract. These minimum requirements now include a slip rule. The Scheme does not specify a nominating body so any term in your contract that does so, may continue to apply.

5. What if I enter into a contract after 1 October that has retrospective effect in relation to the services provided pursuant to an arrangement entered into prior to that date?

Problems could arise where payments are outstanding and the provisions of the new contract/HGCRA (as amended) have not been complied with. It would be sensible for the parties to agree a provision to the effect that no claim will be made based upon the application of the new provisions to any payments that are already outstanding. If one party does not agree, that will at least highlight a problem and you can decide whether to decline to change the basis upon which you have been working.

6. Is a clause stating that the retention will only be released to a sub-contractor after a final certificate has been issued by the employer made effective by the prohibition on ‘pay when certified’ clauses?

Yes, this is a recognised consequence of this prohibition. One solution for main contractors may be to extend the period for the release of retention under sub-contracts.

7. Why is its suggested that the drafting of the prohibition on Tolent clauses has left scope for argument?

Section 108A of the Housing Grants, Construction and Regeneration Act 1996 (as amended) is as follows:

1 This section applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract.

2 The contractual provision referred to in sub-section (1) is ineffective unless:

a it is made in writing, is contained in the construction contract, and confers powers on the adjudicator to allocate his fees and expenses as between the parties; or

b it is made in writing after the giving of notice of intention to refer the dispute to adjudication.’

There is no doubt that the intention behind this provision is to prohibit clauses that allocate the parties' costs of an adjudication, but it seeks to exclude from the prohibition a clause giving the adjudicator power to allocate his fees and expenses as between the parties and any agreement reached after giving a notice of intention.

The difficulty is that sub-section (1) does not actually prohibit clauses pre-allocating the parties' costs; it merely describes them. One then has to look to sub-section (2) which states that such provisions will be ‘ineffective unless ...’ either (a) or (b) is satisfied. The concern that has been raised is that this may be construed so that, provided either (a) or (b) is satisfied, such a clause will be effective even if it also contains an additional provision pre-allocating the parties' costs.

An assurance was given in Parliament to the effect that clauses could not be drafted to achieve this end, but the fact remains that the section does not appear to achieve its own

7 end. BLM is certainly not alone in expressing these concerns. Other legal commentators and industry/professional bodies have done so, including the Adjudication Society, who lobbied the government not to bring section 108A into effect.

Of course it may well transpire that the TCC sets its face against an interpretation that does not achieve the intention of Parliament, but it is regrettable that the drafting of the legislation is not clearer when this point has been taken from the outset. There will no doubt be arguments over this until clarification is provided.

If you have any queries or comments on the amendments to HGCRA I would be pleased to hear from you.

Peter Stockill Associate

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