issue: spring 2012
building blocks
hot topics
JCT design and build
contract 2011: payment
Bribery Act 2010
– a service provider’s
perspective
NEC: ironing out
a few wrinkles
a victory for business
common sense
www.mills-reeve.com
editor
hello
welcome to the
spring 2012 edition
of Building Blocks
contents
03 Hot topics
Alison Garrett
01223 222207
alison.garrett@mills-reeve.com
editorial
Topical issues including increases in
public procurement thresholds and
a new definitions section.
04 JCT Design and Build
Contract 2011: payment
The basic payment regime, the
main changes from the 2005 contract
and possible amendments to the
standard form.
05 Bribery Act 2010
– a service provider’s
perspective
Jonathan Sturman of May Gurney
gives his perspective on the
Bribery Act
06 NEC: Ironing out
a few wrinkles
Some NEC ambiguities
08 A victory for business
common sense
An analysis of the recent case of
Rainy Sky SA & others v Kookmin
Bank
Welcome to the Spring 2012 edition of
Building Blocks.
In this edition, our guest author Jonathan
Sturman of May Gurney comments on
the impact on May Gurney of the
Bribery Act, nine months after it came
into force.
We also continue with our series on the
JCT 2011 Design and Build edition. We
look at payment, which in the light of
the changes to the Construction Act
has changed substantially from the
2005 version.
Hot Topics provides its usual titbits of
legal news in the construction industry.
For those involved in the public sector,
there is a reminder of the increase in the
UK thresholds, which came into effect
on 1 January 2012. We have also
introduced a definitions section. In each
future edition of Building Blocks, there
will be a definition of a word or phrase
commonly used within the construction
industry. If you want to keep up-to-theminute with legal news then why not
sign up to the Construction team’s blog
www.practical.completion.co.uk
We will be running the following one
hour free seminars over the next few
months.
Insurance Provisions in Cambridge
19 April and in London 21 June;
Introduction to Construction Law in
London on 14 June; and
Ten Tricky Issues in Birmingham
9 May, London 16 May, Norwich
23 May and Cambridge 30 May.
Seminars are held at 8.00 for 8.30 in
Birmingham, Cambridge and Norwich
and at 16.00 for 16.30 in London.
If you are interested in attending any
of these seminars, please email Rachel
Snow at rachel.snow@mills-reeve.com.
We are pleased to announce there were
a number of correct answers to the
Christmas related word in our festive
crossword. The winner of the New Year
Hamper was Clive Woodford of Ridge
and Partners.
And finally, after 40 years at Mills &
Reeve and 33 years as partner Ed
Callaghan, partner, in the construction
team in Cambridge will be hanging up
his hard hat on the 31 May 2012. We
wish Ed all the very best in his retirement.
03
author
author
author
Stuart Pemble
0121 456 8335
stuart.pemble@mills-reeve.com
Gary Rushworth
01223 222238
gary.rushworth@mills-reeve.com
Alison Garrett
01223 222207
alison.garrett@mills-reeve.com
hot topics
Public Procurement Thresholds
– increase from 1 January 2012
The increased thresholds apply for
award procedures under the Public
Contracts Regulations 2006, the
Utilities Contracts Regulations 2006
and the Defence and Security Public
Contracts Regulations 2011.
The UK thresholds from 1 January
2012 are:
Supply/Service contracts awarded
by central government £113,057
Supply/Service contracts awarded by
other contracting authorities £173,934
Works contracts £4,348,350
Sub-contractors not required to
progress works regularly and
diligently
The courts have refused to imply a term
into a contract that a sub-contractor must
progress works regularly and diligently.
During the course of proceedings, the
contractor, Mulalley argued that there
was an implied term in its contract
with Leander, its sub-contractor, that
Leander would progress the works
regularly and diligently. This was based
on an express provision in the contract
that allowed Mulalley to terminate the
contract if works were not progressed
in that manner.
a sum which a contractor agrees to
pay to an employer in the event that,
due to the contractor’s default, the
works are delayed beyond the agreed
date for completion. The agreed
amount of LDs is usually inserted into
the contract as an express amount
payable for a particular period of time
(such as a week or part of that period),
for which the contractor is in delay. The
amount must be a genuine pre-estimate
of loss on the employer’s part (and
evidence explaining the calculation
helps here). In very rare cases, they
may be deemed a penalty and
therefore void and unenforceable.
Correction
Delivering a deed
The law can often be quirky. A recent
example relates to the requirement that,
in order for a document to be a deed, it
has to be 'delivered'. It used to involve
each party handing over an executed
copy to the other. That, however, is not
how things happen in the 21st century.
A recent case – Bibby Financial Services
v Magson – provides some helpful
guidance. Signing and dating a deed
is not enough. The parties must show
that they intend to be bound by it, either
through actions or words that illustrate
sufficiently a commitment to fulfill the
obligations in the deed. One simple
solution is to include wording to the
effect that the document is executed
as a deed and was delivered when first
dated. That didn't happen in Bibby and
the court decided that the document
was not a valid deed.
The court said that the express provision
allowing Mulalley to terminate the
contract if the works were not completed
regularly and diligently highlighted that
the parties had considered the point,
and agreed that there should not be
a separate, positive, obligation on
Leander.
The parties had made the decision to
make termination the remedy for delay.
The court also pointed out that there
were already a number of express and
implied terms that gave Mulalley
sufficient control over Leander, such as
Leander’s obligation to co-operate and
comply with Mulalley’s instructions.
Definitions
This edition’s definition is liquidated
damages (LDs).These are liquidated
(and ascertained) damages. This is
In the Winter 2011 edition of Building
Blocks, Hot Topics mentioned that
IMechE alongside the Institute of
Engineering and Technology (“IET”)
had made amendments to reflect the
changes to the Construction Act (“the
Act”) by publishing Revision 5 to Model
Form MF, which is accompanied by
a commentary. Revision 5 was in fact
published before the changes to the
Act and did not make amendments to
reflect the changes. However, an
amendment to Model Form MF1 has
been issued by the IET to reflect the
changes. It is called “Amendments to
the Model Form of General Conditions
of Contract MF/1(revision 5) resulting
from The Local Democracy, Economic
Development and Construction Act
2009”. The changes are published on
the IET Model Forms web site for free
download by users.
04
author
author
Stuart Thompson
01223 222354
stuart.thompson@mills-reeve.com
Alexandra Price
01223 222513
alexandra.price@mills-reeve.com
JCT design and build
contract 2011: payment
In this article we explore the basic
payment regime under the JCT DB 2011,
and highlight the key changes from the
JCT Design and Build Contract 2005.
We then consider common amendments
to the standard form.
Basic Payment Regime
The basic JCT DB 2011 payment regime
is as follows:
The contractor makes an application
for payment setting out the sum he
considers due to him on, or before
the due date for payment agreed
between the parties. If the contractor
makes the application after the agreed
due date, then the due date is
postponed to the day the employer
receives the application for payment.
The employer considers the
application and issues a Payment
Notice not later than five days after the
due date. The Payment Notice sets
out the sum the employer “considers
to be due at the due date … and the
basis on which that sum has been
calculated”. This is the employer’s
first opportunity to object to the
contractor’s application for payment.
If the employer fails to serve the
Payment Notice within these
timescales, the contractor’s application
for payment becomes the Payment
Notice.
The employer must pay the amount
set out in the Payment Notice before
the final date for payment unless it
serves a Pay Less Notice. The final
date for payment of an interim
application is 14 days after the due
date. The final date for payment of
the last payment is one month after
the later of the end of the Rectification
Period, the date of the last Notice of
Completion of Making Good, or the
submission of the final statement.
The Pay Less Notice is the employer’s
second opportunity to object to the
contractor’s application for payment.
It must be served not later than 5 days
before the final date for payment. It
must set out “both the sum that the
employer considers to be due at the
date the notice is given and the
basis on which that sum has been
calculated”.
If the employer fails to pay the
contractor the amount set out in the
Payment Notice (as amended by any
Pay Less notice) by the final date for
payment, the contractor has the right
to suspend all or part of its works until
such payment is made.
Interest is payable on late payments
at 5 per cent above the base rate of
the Bank of England.
"The employer must pay
the amount set out in the
Payment Notice before
the final date for payment
unless it serves a Pay
Less Notice."
Main changes from the 2005
contract
The payment provisions of the JCT DB
2011 account for most of the changes
from the 2005 version. These changes
reflect the amendments to the payment
obligations in the Housing Grants,
Construction and Regeneration Act
1996, which came into force in October
2011. For those of you who are familiar
with the JCT 2005 forms, the new 2011
design and build payment process may
not at first glance appear overly different
to the previous regime. However, the
devil is in the detail.
For example, a “Pay Less Notice” has
replaced the “Withholding Notice”.
The requirements of the two notices
are different:
The Withholding Notice under JCT DB
2005 had to set out “any amount
proposed to be withheld or deducted
from the amount due, the ground or
grounds for such withholding or
deduction and the amount of
withholding or deduction attributable
to each ground”.
A Pay Less Notice must set out
“both the sum that the employer
considers to be due at the date the
Notice is given, and the basis on
which that sum has been calculated”.
The employer must now explain how
he calculated what he is paying,
rather than what he intends not to
pay. Commentators have also
05
suggested that explaining the “basis”
of a decision may require a greater
level of detail than the “grounds”
previously required.
It is currently unclear how the courts
will choose to treat these differences,
and whether judges will expect more
detail in Pay Less notices than they
would have accepted for a Withholding
Notice. Until the courts hear the first
case on this issue, the employer
should look to comply to the letter with
the information required for the Pay
Less notice as set out in their contract.
Where the contract does not specify,
the employer should comply with the
wording of the Act.
Where the employer has failed to make
payment by the final date for payment,
the contractor now has the right to
choose between suspending the whole
of the performance of its works or part
only. The right to partially suspend
performance could be useful for
contractors, where a full suspension
of its performance would be too
commercially damaging for a contractor
to want to adopt that stance.
Possible amendments to the
standard form
As is common with standard form
contracts, parties may wish to make
changes to the standard wording.
Another area of concern
for employers is the
application for payment
becoming the Payment
Notice. The contract can
be altered to avoid this...
The new payment process is now more
complex. The employer may need more
time to process payments, as a 14-day
turnaround time in the contract is not
generous. The employer may therefore
wish to extend the period between the
application and the due date, by 14 or
28 days.
Another area of concern for employers
is the application for payment becoming
the Payment Notice. The contract can
be altered to avoid this, by requiring the
contractor to serve a separate notice
called a Default Payment Notice instead
of relying on its application for payment.
This alerts the employer that it has failed
to serve the Payment Notice and that it
may need to serve a Pay Less Notice.
The interest rate for late payments is
also often changed from 5 per cent
over base rate to, say, 2 per cent over
base rate. Given the current low savings
and borrowing rates, 5 per cent over
base rate is often felt to be punitive;
rather than putting the payee in the
position it would have been in had the
payment been on time.
In the next edition we will be looking at
the obligations under the JCT DB 2011
at practical completion.
06
author
author
Jonathan Sturman
Assistant Company Secretary
May Gurney Integrated Services plc
Katherine Souter
01223 222580
katherine.souter@mills-reeve.com
Bribery Act 2010
– a service provider’s
perspective
On 1 April 2012 the Bribery Act 2010 (the
Act) will have been in force for 9 months.
May Gurney Integrated Services plc
had to say.
The Act applies to any entity that carries
on a business in the UK and applies
whether acts or omissions take place in
the UK or anywhere else in the world.
Individuals convicted of an offence face
a prison sentence of up to ten years, in
addition to unlimited fines. Businesses
can also be penalised with unlimited
fines and excluded from the right to
tender for public contracts.
One of May Gurney’s four core values is
to act honestly and do the right thing. As
such, the objectives and provisions of the
Act accord with the values May Gurney
applies in all its business dealings, and
is reflected in the policies and procedures
already in place. The Board of Directors
was committed to reinforcing the
requirement for the highest standards
of conduct through the formal adoption
of the Act’s provisions.
So far there has been one successful
prosecution under the Act which resulted
in a former magistrates' court clerk being
sentenced to three years imprisonment.
The offence, accepting £500 in exchange
for omitting to record a traffic offence,
was committed under section 2.
The most recent bribery case to hit the
headlines (regarding alleged bribes
received by MOD staff in Northern
Ireland, in relation to the provision and
maintenance of buildings and
equipment) was investigated over a 10
year period and is being prosecuted
under the Prevention of Corruption Act
1906. This is because the Bribery Act
2010 does not have retrospective effect
and applies only to acts committed after
it came into force.
So what practical difference has the Act
made to the day to day lives of those
working in the support services industry?
This is what Jonathan Sturman,
Assistant Company Secretary at
Given the size of the company and the
variety of our operations, a risk based
assessment was undertaken and
around six hundred and fifty employees
were identified as key to implementation;
including those with local management
responsibility and specific teams such
as procurement and plant hire.
The company’s existing Code of Conduct
was revised to formally reflect the
provisions of the new Act including
tiered authorisation levels for giving and
receiving gifts or hospitality. All identified
employees received the new Code from
the Chairman and Chief Executive,
emphasising the Board’s commitment to
total compliance, but also acknowledging
that no written policy is a substitute for
the proper application of common sense
and an individual’s personal integrity to
do the right thing. These employees
were required to formally confirm they
would comply with the Code and tasked
with cascading the general principles of
the Act to their teams.
In addition to this, the implementation
project included:
training sessions for key areas;
suppliers and sub contractors
receiving targeted communications;
template contracting documentation
revised to reflect express compliance;
the Company’s website and intranet
having dedicated areas on the Act.
We found that any initial concerns that
the Act was a “(disproportionate)
hammer to crack a nut”, disappeared
once the actual Code was put into place.
It was recognised that the requirements
were actually sensible business practice,
and that were was no material impact on
day to day operations. As many of our
clients are public sector and already
subject to their own stringent restrictions
on the giving and receiving of hospitality,
we have found little change in how we
interact with them.
May Gurney is a support services
company helping clients in the
public and regulated sectors
deliver sustainable improvements
to front-line services for 24 million
people across the UK. They ensure
that road, utility, rail and waterway
networks and public buildings
are well maintained and that
household refuse is collected,
managed and recycled. To do this
they have over 6,000 employees
and an annual turnover in excess
of £570 million.
07
author
Katherine Souter
01223 222580
katherine.souter@mills-reeve.com
NEC: ironing out
a few wrinkles
As a solicitor I aim to draft contracts
without any ambiguity. Where an
ambiguity arises in a complex multimillion pound construction contract it
often ends up in front of a TCC judge.
The courts can deal with ambiguity by
using the “contra proferentem rule”,
resolving the ambiguities in favour
of the party who did not propose the
contract term (although, see Paul
Slinger's article on Rainy Sky SA and
others v Kookmin Bank, page 8). In
the context of using NEC3, the employer
could end up having the terms construed
against him. Great news if you are
a contractor? Well, actually, probably not
because getting to court is an expensive
and time consuming process that
probably both parties would rather avoid.
Many lawyers would say that the ECC
is ambiguous, including The Hon Mr
Justice Edwards–Stuart :
“I have to confess that the task of
construing the provisions of this form of
contract is not made any easier by the
widespread use of the present tense in
its operative provisions. No doubt this
approach to drafting has its adherents
within the industry, but speaking for
myself and from the point of view of
a lawyer, it seems to me to represent
a triumph of form over substance.”
The NEC3 suite is drafted in the present
tense (an attempt to make the document
clearer and less legalistic), which can
cause difficulty in deciding whether
a provision is descriptive or prescriptive
as lawyers usually say “shall” when an
obligation is mandatory and “may” when
it is discretionary. Core Clause 10.1
of the ECC deals with this point by
saying that the parties “act as stated in
this Contract”.
Lawyers sometimes attempt to deal with
the ambiguities we come across with
Z clauses. One area that could be
addressed with a Z clause is the
definition of what constitutes a contract
document. The NEC3 suite does not
contain a definition of “this contract”.
In defining it you simply make clear
which documents the parties intend to
have contractual effect. For example:
“The contract comprises the core
clauses, main option clause, dispute
resolution clause, secondary option
clauses, additional conditions of contract,
the Schedule of Amendments attached,
the Contract Data (parts 1 and 2), the
Works Information, the Activity Schedule
[or Bill of Quantities], the Accepted
Programme and any other documents
included as contract documents
which are attached and initialled by
the parties …”
Once you have a list of documents that
make up the contract – how do they sit
with each other? Core Clause 20.1 of
the ECC states that “The Contractor
Provides the Works in accordance with
the Works Information.”, so it looks
like the intention is that the Works
Information takes precedence over other
documents which are not expressly dealt
with elsewhere. It’s not always that
clear. Take the following examples:
In Option B, does the bill of quantities
take precedence over the Works
Information? Clause 60.6 says that
project manager can correct a mistake
in the bill of quantities if it is due to
ambiguities or inconsistencies. Such
action will be a compensation event.
When the compensation event is
assessed the Contractor is assumed
to have taken the bill of quantities
as correct. So it seems that the bill
of quantities comes above the
Works Information. NEC's Works
Information Guidance disagrees.
In Option A Clause 54.3 allows
the Project Manager to reject
a Contractor’s revision to the Activity
Schedule if it does not comply with
the Accepted Programme. This
looks like the Accepted Programme
therefore takes precedence above
the Activity Schedule.
Are you confused yet? There are many
other examples of where it requires
a fair amount of digging and delving
to fully understand how the various
contract documents relate to one
another. The most straightforward
solution to avoid a headache is to use
a Z clause: “The order of precedence
of contract documents is …”.
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March 2012
author
Paul Slinger
0121 456 8385
paul.slinger@mills-reeve.com
a victory for
business
common sense
In late 2011 the Supreme Court gave
judgment in a case concerning the
interpretation of a contract, where there
was ambiguity in the choice of words
used. This situation arises surprisingly
often, despite being easily avoidable
through proper contract drafting.
If a clause can only have one particular
meaning, then that will be its effect,
irrespective of how strange the outcome
might be. The question of interpretation
does not arise. When interpretation is
necessary however, the Supreme Court
has confirmed that the commercial
results of the possible interpretations
can be assessed. The outcome is
likely to favour that which is the most
commercially logical and therefore
makes the most business common
sense. The conclusion in relation to
one of the arguments advanced was
that it would lead to a “surprising and
uncommercial result”, and the party
relying on that interpretation was unable
to provide any commercial reasoning
behind adopting it. Accordingly, that
interpretation was rejected.
The case is not a radical departure,
but it does distance the courts’ current
approach to contract interpretation yet
further from the increasingly archaic
strict and technical legal principles
relating to the construction of contracts.
While important concepts are succinctly
summarised in the case, individual
facts and words remain absolutely key.
Significant risk still remains when there
is more than one possible meaning, as
evidenced by the fact that the Supreme
Court overturned the Court of Appeal’s
decision that had gone the other way.
It is still best to get the choice of words
right before the contract is entered into.
Rainy Sky SA and others v Kookmin
Bank