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Construct.Law Summer 2020 Construct.Law Construct.Law Winter 2020 www.charlesrussellspeechlys.com 1 Construct.Law SummerWinter 2020 Winter 2020 Construct.Law Contents Introduction Modular construction: Addressing deposit payments Welcome to the latest edition of Construct.Law. Our winter edition in building contracts focuses on topical legal issues affecting the construction, engineering Page. 4 and projects sector at the end of a uniquely challenging year. Articles Andrew Keeley address a wide ranging selection of topics across the lifecycle of a Partner (Editor) ‘Fixing’ the final date project, from modular construction to termination. There is the usual Construction for payment under construction contracts round up of adjudication cases, including some significant decisions Page. 6 regarding enforcement by insolvent companies. We also continue our T: +44 (0)14 8325 2581 essential law series on variations. [email protected] Omitting works from an NEC contract: Valuation under the contractual mechanism We hope you enjoy reading this edition of Construct.Law. Please do Page. 8 get in touch if you would like to discuss any of the issues covered by Construct.Law or if there are any topics which you would like us to cover Common issues with termination of in future editions. construction contracts Page. 10 Routine Maintenance or Major Repair? The meaning of ‘design life’ obligations Page. 12 TCC stays proceedings where smash and grab decision remained unpaid Page. 14 An uphill battle? Adjudication enforcement by an insolvent company Page. 16 Home owner warranty claims: when does the clock start ticking? Page.18 First known case to order enforcement of an adjudicator’s decision in favour of a company in administration Page. 20 Essential law: Variations - Part three Page. 22 Essential law: Variations - Part four Page. 24 Contributors & about the construction engineering & projects group Page. 26 2 www.charlesrussellspeechlys.com www.charlesrussellspeechlys.com 3 Construct.Law Winter 2020 Winter 2020 Construct.Law Vesting certificates Modular construction: its own right but for present purposes it is sufficient to note that, in the event that Advance payment bonds and step-in the contractor becomes insolvent, the rights are primarily designed to manage addressing deposit payments employer could not recover the advance the risk of the main contractor becoming payment under a performance bond until insolvent. However, what about the risk in building contracts the works had been completed and its that the modular manufacturer becomes overall losses ascertained. On-demand insolvent? This is primarily the risk of the Modular construction has become increasingly popular in recent bonds tend to be expensive (and, in some main contractor who would remain under cases, contractors are simply unable a contractual obligation to the employer to years. Once synonymous with ‘pre-fab’ houses and concrete tower to provide them) but they should allow deliver the modular elements of the project blocks, the potential cost, programme and quality benefits mean it an immediate pay out if the contractor notwithstanding the insolvency of the is now seen as a potential solution to the existing housing crisis becomes insolvent with any advance modular manufacturer. payment outstanding. Christopher Busaileh, Senior Associate, Construction, Engineering & Projects Ideally, and as with an employer, the main The other drawback from the contractor’s contractor would obtain an advance perspective is that if they provided an payment bond from the modular advance payment bond to the employer manufacturer to mitigate this risk where up- without getting a back to back bond front payments are required. However, the from the modular manufacturer, they main contractor (and the employer) might would be taking the risk of the modular also consider obtaining vesting certificates manufacturer’s insolvency. They would over off-site components or their have to source an alternative modular constituent parts. Vesting certificates can manufacturer without being entitled to make clear that ownership has passed, that further payment from the employer. the offsite items are adequately insured, are set apart and identifiable as the property Step-in provisions of the main contractor or employer. A more cost-effective solution could be to Importantly they give the main contractor include a contractual mechanism to allow or employer a right to access the modular Modular construction does, however, give those materials are delivered to site. payments for the modular manufacturing the employer to step in to the contractor’s manufacturer’s premises to retrieve these rise to a number of potential legal issues. before the relevant items are delivered agreement with the modular manufacturer items should the modular manufacturer In this article we will consider one such There may be exceptions to this where to site. However, this potentially means in the event the contractor becomes become insolvent or not deliver the items issue concerning payment protection for payment can be made prior to delivery the employer would take the risk of the insolvent. The easiest way to achieve this to site as required. the employer. if certain conditions are met. These contractor becoming insolvent before the would be to include step-in provisions in a conditions often include the relevant items items are finished and delivered to site. collateral warranty between the modular Vesting certificates are only possible if there The problem being identified in the building contract, manufacturer and the employer. Such is something that has been manufactured Often the modular manufacturer is a sub- proof that ownership in the item has vested Advance Payment Bond provisions would stipulate that, in the that can then “vest” in the main contractor contractor/ supplier to the main contractor. in the contractor being provided, that it is Perhaps the safest option for the employer event the contractor becomes insolvent, and/or the employer. Further, they are only This is particularly the case where only insured and that it is set aside and labelled at is to have any upfront payment secured by the employer would have the option of useful where those parts could be used by specific elements of the building (for the off-site premises. an on-demand bond. Advance payments ‘stepping in’ to the contractor’s position a replacement modular manufacturer. In example, bathroom pods in a hotel) are can be made to cover the payments under its agreement with the modular that sense, they are only an effective form constructed off-site as opposed to the The problem here is that these conditions required by the modular manufacturer. The manufacturer. of protection from the point when useable entire development. The nature of off-site cannot be satisfied where an item is yet advance payment is re-paid by deductions components have been manufactured. manufacture means that factory slots need to be manufactured or is in the process from subsequent payments due to the The risk for the employer is that, when to be reserved, often months in advance of being manufactured. Therefore, the contractor. For example, the payments stepping in, he takes on all existing and typically a modular manufacturer will contractor has no right to recover these that would be due when the off-site items liabilities of the contractor to the modular Conclusion require a deposit payment before a slot is payment from the employer unless it has a are delivered to site. The monies would be manufacturer. If, despite the employer Ultimately, the solution to this issue will depend on the circumstances of the parties reserved. The modular manufacturer will specific entitlement to an advance payment secured by a bond so that the employer can paying the contactor for sums due to the and the amount of the payments required before the relevant items are delivered then usually require further payments to be under the building contract. recover its advance payment in the event modular sub-contractor, this has not been to site. In some cases an employer may be willing to take on the risk of contractor made during the manufacturing process that the contractor becomes insolvent passed on to the modular manufacturer, insolvency and make the payments. In other circumstances, the value of those and before the items are ready for delivery Possible Solutions before the entire sum has been repaid. the employer would effectively have to pay payments and the wider project is such that an advance payment bond is justified. to site. The contractor could use its own cash twice. That said, this risk could be mitigated What parties should ensure in any project involving modular construction is that the reserves to fund the payments to the The main drawback is one of cost. by having robust payment provisions in the payments required by the modular manufacturer are discussed at tender stage and The problem is that such payments are modular manufacturer. However, if the Depending on the extent of the advance main contract where the contractor would an appropriate payment arrangement agreed. The last thing either party wants is not adequately covered in the payment project requires a substantial amount of payment required, a bond may be need to provide proof of payment to the to get to a point where a factory slot needs to be reserved in order to keep to the provisions in standard form building modular manufacturing this is unlikely to be prohibitively expensive. For the employer to supplier before
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