Sector - Finance & Legislation
A year of developments in construction, and what 2019 may hold
Things never stand still in the construction industry and so, as expected, we saw a lot of change in 2018 from the point of view of legal and industry changes and other developments.
In this article, Simon Lewis, Partner, and Hannah Gardiner, Solicitor, at law firm Womble Bond Dickinson take a look at some of those changes and developments and also highlight a few things that we can expect in 2019.
The major legislative changes arising from GDPR, which came into force on 25 May, saw businesses, including those in the construction industry, reviewing and changing the way they approached communications and data protection. The eye-watering maximum financial penalty for non-compliance with GDPR is up to €20M or 4% of global turnover (whichever is higher), and so GDPR became increasingly high profile in the run up to May 2018. The May 2018 deadline has now passed, but businesses should continue to regularly review whether they are still in compliance, particularly with information and guidance on GDPR still emerging.
One case has changed the face of adjudication, following which we expect to see fewer “smash and grab” adjudications. These kinds of adjudications are started where one party claims against another for payment of the full amount it says is owed (even though the true value of the amount payable may be lower) on the basis that the other party has failed to give a valid payment or pay less notice on time or correctly (ie. in accordance with the contract between the parties).
In that case, of S&T (UK) Limited v Grove Developments Limited  EWCA Civ 2448, the Court of Appeal concluded that that an employer who has failed to serve both a payment notice and a pay less notice can nevertheless commence an adjudication to have the true value of an application assessed and to reclaim any sum which has been overpaid – a significant departure from previous cases. Essentially, this has confirmed the availability to employers of true value adjudications even if they have failed to issue a timely payment or a valid pay less notice.
Another case, North Midland Building Ltd v Cyden Homes Ltd  EWCA Civ 1744, provoked much discussion as to whether the prevention principle (the principle that a party cannot enforce a contractual obligation on another party, where the party enforcing that obligation has itself prevented the other party from performing) should take precedence over freedom to agree contract terms, in circumstances where parties had agreed on the allocation of the risk of concurrent delay.
In this case, the Court of Appeal made it clear that parties are free to allocate concurrent delay risk in their contracts, regardless of the prevention principle, and it may be that we see more discussion around this in contract negotiations in the future.
Carillion’s insolvency and its after effects
Shortly into 2018, the Official Receiver was appointed liquidator of a number of Carillion Group companies. The knock on effects were considerable, with several other construction companies either struggling or following Carillion’s example, due to non-payment by Carillion or loss of Carillion projects. There was also significant cost to the taxpayer as Carillion was involved in a number of government projects at the time and the government has had to cover redundancy payments through the Redundancy Payments Office. The failure of Carillion to pay its sub-contractors has added fuel to discussions on whether payment is being passed down the construction chain properly and promptly and whether the practice of withholding retentions (ie keeping money back under the terms of a construction contract), although industry standard, should be reviewed and reformed. The Government has also announced proposals to require its outsourcers to provide living wills in the future.
The Grenfell Tower tragedy of 14 June 2017, resulting in the loss of 72 lives, continued to loom large in the UK’s collective consciousness throughout 2018. The Government swiftly announced a public Inquiry, with terms of references set in August 2017. Since then, the Inquiry has released over 18,000 pages of material and numerous expert reports.
The construction industry paid particularly close attention to Dame Judith Hackitt’s final report of 17 May 2018, which concluded that the current building safety regulatory framework, including the regulations which apply to the specification and testing of construction products, is “not fit for purpose”.
In June 2018, in response to this report and to public pressure, the Government announced its intention to “ban the use of combustible materials on the external walls of high-rise residential buildings, subject to consultation”. The consultation took place and the ban on combustibles was announced in November 2018 and came into effect on 21 December 2018. Going forward, the construction industry will now have to change how it deals with cladding (and other combustible materials) and how potential issues on existing buildings are addressed.
During his Budget speech in October 2018 the Chancellor, Philip Hammond, said: “I have never signed off a PFI contract as Chancellor and I can confirm today that I never will”. He went on to say that the Government has now abolished the use of PFI and PF2 for future projects. The Government will not however take back control of existing PFI contracts but will instead allow these to run their course and establish a centre of excellence “to actively manage these contracts in taxpayers’ interests starting in the health sector”.
However, while no new PFI contracts will be signed, the lifespan of existing PFI contracts is long and we expect we will hear more about these as the time comes for handback of these projects to the Government. And going forward, what will replace PFI?
Other noteworthy developments
2018 was a year of weather extremes. Early in the year, the country was covered in hail, snow and ice due to the Beast From The East in March, impacting upon projects throughout the UK. And then, just a few months later, temperatures reached near record highs of 33.3C, posing a significant risk to the health of construction workers.
In the world of BIM, 2018 saw the Winfield Rock Report prepared by May Winfield and Sarah Rock for the UK BIM Alliance, subtitled “Overcoming the Legal and Contractual Barriers of BIM”. The Report was based upon an online survey together with a number of interviews with BIM experts, lawyers and clients; one of its most striking findings was that every interviewee provided a different definition of BIM Level 2.
In another development for BIM, the second edition of the CIC BIM protocol was published in April 2018. It is intended to reflect current practices and standards and to be a more flexible document to use alongside different contractual arrangements. We anticipate that it will contribute towards the growing standardisation of BIM legal and contractual documentation.
Mental health continues to be an area where we are seeing greater awareness year on year (not only in the construction industry, but across the board). However, it is still a major concern for the construction industry, as male site workers in construction are three times more likely to commit suicide than the average UK male. On a more positive note, we are seeing more and more industry discussion about mental health, in publications and on social media, and we expect that momentum to continue.
In July 2018, the Government announced that it planned to launch an independent review of the Modern Slavery Act 2015. This is particularly relevant to the construction industry as the CIOB’s May 2018 report “Construction and the Modern Slavery Act: Tackling Exploitation in the UK” found that that “globally, an estimated 16 million people were in forced labour within the private sector in 2016. Construction ranks second only to domestic work for prevalence of this abuse, at 18% and 24% respectively”. So, with the Government’s independent review underway and with construction known to be an industry in which modern slavery is a particular issue, we may well see more developments around modern slavery in the construction industry in the year ahead.
What to look out for in 2019
In addition to the areas that we have already commented on above, hot topics for 2019 will include:
Obviously, Brexit is high profile. For those in the construction industry who tender for work and services based in EU countries or who advertise work to and request services from businesses in EU countries, this is a particular concern – and we looked at the Government’s guidance note entitled “Accessing public sector contracts if there’s no Brexit deal” here.
The Government has followed up on this by laying before Parliament on 13 December 2018 a draft set of Regulations to cover changes which will need to be made to the existing procurement Regulations (Public Contracts Regulations 2015, as well as those on utilities and concession contracts) on exit day in the event of a no-deal Brexit. The effect of the draft Regulations would be in essence to maintain the status quo in terms in the UK procurement regime, with some ‘tidying-up’ to reflect the exit from the EU. However, there is no certainty as to whether the draft Regulations will ever come into force, if the UK leaves with a deal, or what further changes may be made to the final version.
Disclosure Pilot Scheme
As of 1 January 2019, a new mandatory Disclosure Pilot Scheme (DPS) is in operation, for a period of two years, in the Business and Property Courts, which includes the Technology and Construction Court, subject to limited exceptions. The purpose of the DPS is bring about wholesale change in the approach to disclosure of documents by parties and courts and the litigation culture generally. The DPS requires a greater focus on the key ‘Issues for Disclosure’ rather than every issue pleaded and on the cooperation and engagement of the parties. It is also intended to encourage greater use of technology and greater oversight and case management by the judiciary. The DPS introduces five new ‘Disclosure Models’ to encourage a move away from standard disclosure as the default, as well as a new concept of ‘Initial Disclosure’.
Alternative Dispute Resolution (ADR)
In December 2018, a working group of the Civil Justice Council published its ADR and Civil Justice Final Report, which makes recommendations about ADR following the working group’s review of the ways in which ADR is currently positioned within the civil justice system in England and Wales. Whilst it will take time for the report to be reviewed, discussed and actioned, the suggested move towards a “presumption” that ADR should be attempted together with the costs consequences for failure to mediate could mean that more claims will be diverted away from judicial determination, and that we shall see more emphasis on other forms of alternative dispute resolution (not just mediation) in 2019.
The ongoing development of the international BIM standard ISO 19650 will help to drive BIM more securely into the construction process. We will be tracking the ISO as it progresses and also keeping an eye on developments in the Digital Built Britain project, of which BIM forms a significant part.
2018 saw a number of standard form construction contracts being published by industry bodies, like RIBA’s professional services contracts and building contracts, NEC4’s alliance contract, and ICC’s design and construct contract and target cost contracts.
In 2019, keep an eye out for FIDIC’s Emerald Book, RIC’s new consultant appointment forms (which they ran a consultation on in 2018), and the NEC’s new public sector Z clauses to complement their NEC4 suite.
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