REALWorld Law

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

In the UK, the use of standard form building contracts goes back more than one hundred years. Initial collaboration between the Royal Institute of British Architects (RIBA) and the then federation of construction employers led to the first standard form building contract. These bodies subsequently formed the Joint Contracts Tribunal (JCT) which is now the main UK body that produces standard form contracts, guidance notes and other documentation for use in the construction industry.

The main rival to the JCT family of contracts is the New Engineering Contract (NEC) and its suite of Engineering and Construction Contracts (ECC) which has been endorsed by the UK Government and is now being used more in government contracting.

The main professional bodies that govern the activities of construction consultants also produce contracts for the appointment of their members to provide design and/or consultancy services:

• Royal Institute of British Architects (RIBA) – architects
• Institution of Civil Engineers (ICE) – civil engineers
• Institution of Mechanical Engineers (IMechE) – mechanical engineers
• Institution of Engineering and Technology (IET) – electrical engineers
• Association for Consultancy and Engineering (ACE) – all types of engineer involved in building projects
• Institution of Chemical Engineers (IChemE) – chemical and process engineers and material scientists
• Royal Institute of Chartered Surveyors (RICS) – quantity surveyors
• Association for Project Safety (APS) – health and safety consultants

International forms of contract (such as FIDIC) are rarely used in the UK.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The main parties involved in a construction project are:

Employer/client

This is the party procuring the work (typically, a land owner or land developer). In relation to building contracts, this entity is usually referred to as the ‘employer’. In relation to the contracts of appointment of the professional consultants, this party is commonly referred to as the ‘client’.

Contractor

A main building contractor is engaged by the employer to carry out and complete the works. This contractor will usually, in turn, engage subcontractors to carry out and complete separate parts of the works. Contactors may also take responsibility for the design of all or part of the works they are to execute depending on the procurement method and/or contract used. The main contractor will usually assume the Principal Contractor role, which involves managing health and safety risks under the CDM Regulations 2015 and ensuring compliance with building regulations under the Building Regulations 2010.

Professional team

The team of professional consultants appointed can be broken down into two categories, the principal consultants being as follows:

Funder

This is the term used to describe the banks and other institutions and parties (for example, government or charitable organizations in the case of urban regeneration, infrastructure and cultural/sports projects) who provide finance to the employer towards the development (and require security in return). Depending on the size of the project, there might be a single bank or a syndicate of banks.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

In so-called ‘traditional’ procurement, the building contractor is responsible for the construction of the works, but not for its design. In design and build (D&B) procurement, the building contractor also takes on responsibility for design of the works. The design consultants are appointed by the employer in the usual way, even before the building contractor is selected; when the employer enters into the D&B building contract, the design consultants’ appointments are simultaneously transferred across (or ‘novated’) to the building contractor and this places sole design responsibility for design (as well as workmanship) on the contractor and gives him control of the design process.

Force majeure is not an English law concept and a party that is unable to perform its obligations because of an unforeseeable event outside its control would have to rely on the English doctrine of frustration in order to avoid liability for non-performance of the agreement.

Unlike most industry forms, the JCT standard building contracts do contain a force majeure clause allowing the contractor additional time to complete the works. A force majeure clause should be construed with close attention to the words that precede or follow it and with due regard to the nature and general terms of the contract. The JCT force majeure clause has a restricted meaning because matters such as war, strikes, fire, weather and government action are expressly dealt with elsewhere in the contract.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

PPPs in the UK have to be considered in the context of the historical Private Finance Initiative, or PFI as it was known.

The PFI was born in the early 1990s; government procurement was changed so that it no longer involved simply the construction of a building, but also the design, construction, financing and subsequent operation of the asset – often for terms of between 20 and 30 years. Subsequent governments developed more comprehensive policies which led to the model being used across a range of sectors including healthcare, education, transport, defence and waste.

In 2011, as part of its general spending review, the last UK Government began to streamline the PFI; the new approach being taken was  generally referred to as ‘PF2’. PF2 was introduced to address concerns that the PFI did not deliver value for money, was inflexible, lacked transparency, provided excessive gains for private sector equity providers, and took too long to reach financial close. Despite these concerns, it was acknowledged that aspects of the existing PFI approach worked well, such as delivering innovation and offering a reasonable level of risk allocation. Whilst the reforms were significant, many of the existing PFI principles were retained.

In the October 2018 Budget, the government announced that it would no longer be using PF2 for new projects, but would continue to work on improving the value of existing PFI contracts.  It also confirmed that it would continue to support private investment in infrastructure via other established tools, such as Contracts for Difference, the Regulated Asset Base Model and the UK Guarantee Scheme.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

There are three main factors in a typical construction contract which provide for an alteration to the price. They are:

1. Instructed variations to the works
2. Other events which should they occur, and for which the Contractor is not responsible, would cause him to incur loss and/or expense
3. Fluctuations

Whilst it is theoretically possible to draft a construction contract where the price is fixed (by omitting the three factors just mentioned), the commercial reality is that both the employer and the building contractor will want to have some flexibility built into the contract; the employer will usually want to have the right to instruct variations and the contractor will certainly want the right to claim for losses suffered and expenses incurred for which it is not blameworthy. In essence, what parties usually mean when they talk about a ‘fixed price contract’ is a lump sum contract where the contractor’s entitlement to additional money is limited, for example there are no fluctuation provisions and/or the events which would usually entitle the Contractor to recompense for loss and/or expense are restricted. Parties may often refer to a ‘guaranteed maximum price’ contract which, again, is unlikely ever to truly mean this – employer changes and/or other possible occurrences will be excluded from the guaranteed maximum price figure.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

All contractors must take out employer’s liability insurance which covers loss, damage, injury or disease caused to an employee of the company. Failure to do so is a criminal offence.

Contractors must also take out public liability insurance if members of the general public or customers visit the contractor’s premises or the contractor attends theirs. The contractor is then covered if injury to person or damage to property is caused by the contractor or his company.

Although not a compulsory insurance, professional indemnity insurance (PI) covers negligence and is almost always taken out by those contractors that perform design work. All professional consultants who design and/or give professional advice are required to maintain PI. Building contracts and consultants’ appointments usually impose a requirement on the contractor/consultant to maintain PI insurance.

Contractors also take out contractor’s all risk cover (CAR) that insures the construction works that are being undertaken. The contractor may also take out product liability insurance that covers risks caused by any product supplied, such as bricks or lifts.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

In relation to the construction activities comprised within a development project, the funder will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the funder. The documents to be assigned to the funder include the construction contract itself, the guarantee to the employer of the building contractor’s obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance bond from a third party surety to the employer. Performance bonds can be either ‘on demand’ in nature (meaning that before the surety would release bond monies on written demand from the employer) or ‘on default’ in nature (meaning that, broadly, a court judgement or adjudicator’s decision would be required to be presented by the employer before the surety would release bond monies).

Bonds and guarantees form part of the standard security package. If the contractor breaches the construction contract, the performance bond will usually entitle the employer to payment of an amount up to about 10% of the contract sum for the underlying building contract. The guarantee of the contractor’s obligations is given by a superior company within its corporate group but these guarantees often contain some type of limitation clause or financial cap limiting the guarantor’s liability.

Funders will also require collateral warranty agreements from the building contractor, the key professional consultants and subcontractors with design responsibility giving them direct rights for poor performance. In addition, they will require contractual step-in rights in the main contractor’s collateral warranty agreement in their favour (which is sometimes termed a ‘direct agreement’), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.

This ‘direct agreement’ has the following effect:

• It creates the step-in rights.
• It limits the ability of the main building contractor to terminate the corresponding construction contract during the step-in period.
• It limits the financial obligations of the funders to the main building contractor during the step-in period.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Methods of payment vary according to the works. The four main types of payment are:

1. Lump sum: A pre-agreed sum that the contractor/consultant/subcontractor will be paid to carry out either a stage or the whole of the works that are required under the contract (subject to various provisions, including variations for which the contractor may receive additional monies).
2. Measurement: The work is measured and valued according to a schedule or formula.
3. Prime cost: Payment is made for the costs of the labour and materials used.
4. Cost plus: Payment is by prime cost plus an added percentage for profit.

Payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre-agreed specific milestones or stages).

The Housing Grants, Construction and Regeneration Act 1996 introduced a more certain system for payment. This was aimed at facilitating cash flow throughout the course of the contract. It requires every construction contract to provide an adequate mechanism for determining what payments become due, when they become due and a final date for payment. It also introduced the concept of ‘payment notices’ and ‘pay less notices’. The party making payment ( the employer) is required to issue payment notices. These must state the amount it intends to pay. If the paying party fails to isuse a payment notice, the party receiving payment (the contractor or consultant) may issues its own payment notice. This will usually take the form of a contractual application for payment. If the paying party wishes to pay less than the sum notified in the payment notice, it must issue a pay less notice setting out the sum the payer considers to be due on the date the notice is served (which can be zero), and the basis on which the sum is calculated.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Construction contracts require the works to be completed by a specified date. Instead of the employer bringing a claim for general damages (compensation) for late completion of the works by the building contractor, it is standard for the contractor to be required to pay what are termed ‘liquidated and ascertained damages’ (LADs) or, more simply, ‘liquidated damages’ (LDs).

LADs are damages that are fixed and the quantum is agreed by the parties in advance. A typical clause requires the building contractor to pay or allow the employer to deduct LADs at a rate per day or week of delay in the completion of the works. The rate is usually set out in an appendix to the construction contract.

Contractual provisions for the payment of such sums are common in building contracts and favoured because:

• in some situations, it can be difficult and costly to ascertain the actual loss suffered by the employer;
• LADs avoid the employer having to prove his loss by claiming general damages and avoid arguments over remoteness of damages;
• the contractor is often keen to fix the level of his liability to the employer for late completion; and
• LADs provisions save the courts’ time.

It is important to note that, (1) if included in a contract, LADs will be the only remedy for delay available to the employer, and (2) in order to be enforceable, LADs must represent a genuine pre-estimate of the loss likely to be caused to the employer by the contractor’s failure to complete on time. If they are not a genuine pre-estimate, then they may amount in law to a penalty unless there is a commercial justification for the level of damages used – penalties are unenforceable under English law.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Contractual mechanisms for dealing with variations to the works vary depending on why the variation is requested:

• Employer-led changes: Under most standard form contracts, the employer has the right to request variations to the works, for which the building contractor is entitled to additional time and money. The building contractor is also entitled to raise reasonable objections to material changes
• Contractor-driven changes: Where variations are necessary due to the building contractor’s error, delay or default, the contractor is not usually entitled to additional time or money under the contract. He is also liable for any delays caused to the project by these variations, and where the variation means that the work has not been carried out in accordance with the contract

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

UK construction contracts commonly refer to completion of the works as ‘Practical Completion’. By this point in time, the works must be complete ‘for all practical purposes’ so as to enable beneficial occupation; they may be practically complete even if there are latent defects, but a certificate should not be issued if there are any patent defects.

Practical Completion is usually achieved to the satisfaction of a third party certifier such as the architect or employer’s agent (in design and build procurement) who has the discretion to certify Practical Completion where minor non-material items are incomplete.

Practical Completion is not defined in JCT construction contracts and should be left to the discretion of the third party certifier but industry standard form building contracts are often amended to state that certain requirements must first be satisfied before the works may be certified as practically complete.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

In England and Wales, limitation periods are imposed by statute, primarily the Limitation Act 1980. There are different limitation periods for different types of cause of action. For example, the limitation period is six years for a normal contract claim, but 12 years if the contract was created by deed (this is a special way of executing a contract and most building contracts are executed in this way).

In a contract claim, the limitation period will run from the date when the contract was breached. It will be necessary, at the outset of any new claim, to determine whether or not the limitation period has expired. If it has, the claim will be ‘statute-barred’ and the claimant may be prevented from bringing a claim against the alleged wrongdoer. If a claim is brought out of time, the defendant will be able to plead the defence of limitation and the claimant will have the burden of proving that the cause of action arose within the relevant statutory period.

The Building Safety Act 2022 (BSA 2022) has introduced an amendment to the Limitation Act 1980 extending the limitation period for claims under the Defective Premises Act 1972 (DPA 1972) as follows:

• 15 years prospectively for claims under sections 1 and 2A of the DPA 1972 ie claims arising after the BSA 2022 came into force.
• 30 years retrospectively for claims under section 1 only, being claims that accrued before the BSA 2022 came into force.

Prior to these amendments, claims under section 1 of the DPA 1972 had a limitation period of six years.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

With regard to the liability of the land developer procuring the works to the end-users of the building, it is often the case that the development agreement will limit his liability for the design and construction of the works to a stipulated period (usually ending on the expiry of the defects liability period under the building contract for the development, but depending upon the developer, the nature of the project and the stage in the economic cycle, sometimes for considerably longer than this period) after completion of the works – except either for claims that have been issued or where the intention to make a claim in respect of accrued and identified rights of action has been notified to the developer before the expiry of the period.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

In a typical development project, there is no contractual relationship between the parties employed in connection with the design and construction of the development (the architect, engineers, other consultants, main building contractor and subcontractors) and the end-users of the completed building. Under English law, pure economic loss – which includes the costs of remedying defects in a building, as well as loss of profits, loss of income, damage to stock and so on – is not recoverable where there is no contract between parties. For this reason, it is common and standard for end-users to require the main construction parties to provide them with separate collateral warranty agreements or ‘third-party rights’. Industry standard forms of these collateral warranties contain exclusion and limitation clauses which restrict the damages which end-users can recover. In large developments, these limitations are often unacceptable to end-users.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The construction process produces a built environment which has potentially adverse implications for future owners and occupiers. There are serious consequences for these parties, who have no control over the design and construction of their buildings, if the original building team gets it wrong.

Under English law, pure economic loss – which includes the costs of remedying defects in a building, as well as loss of profits, loss of income, damage to stock and so on – is not recoverable where there is no contract between parties. Accordingly, in England and Wales, the common method of affording third parties protection is through what are known as ‘collateral warranty agreements’.

A collateral warranty is an agreement which is related to another primary contract (the main building contract, sub-contract or consultant’s appointment). It is entered into by the person engaged or appointed under the primary contract (ie the main building contractor, subcontractor or consultant) in favour of a third party beneficiary who is not a party to the primary contract but who has an interest in the construction project – namely, a funder, purchaser or tenant. These collateral warranties are also often referred to as ‘duty of care deeds’.

An alternative approach to third-party rights (and one which is gaining popularity) is to use the Contracts (Rights of Third Parties) Act 1999. This Act enables a person who is not a party to a contract to enforce the terms of that contract if it expressly provides that he may do so, or purports to confer a benefit upon him. Accordingly, it is now possible, in building contracts and consultancy agreements, to confer benefits upon third parties who, traditionally, would have sought collateral warranties. The most common way to do this is to set out the benefits – or rights – to be conferred on the third party beneficiaries which are specified as applying to third parties in a third-party rights schedule.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

In civil cases, litigation is commenced by a ‘claimant’ against a ‘defendant’. Claims of lesser value will start in a local or regional court known as the ‘County Court’. More substantial civil claims are heard in the ‘High Court’ which is based in London but has 10 other regional centres across England and Wales. The High Court consists of a number of divisions; one of them, the ‘Queen’s Bench Division’, includes the Business and Property Court. It is home to the specialized ‘Technology and Construction Court’ (TCC) which deals principally with technology and construction disputes. Decisions of the TCC can be appealed to the Court of Appeal (Civil Division). The ultimate court of appeal in the UK is the Supreme Court.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The courts of England and Wales are supportive of private arbitration as an acceptable alternative to litigation. The Arbitration Act 1996 resulted from extensive consultation with both arbitration users and practitioners and introduced an improved regime for arbitration under English law. For the first time, the powers and duties of the tribunal, the court and the parties themselves were made clear in a single document.

That said, the use of arbitration as the principal method of dispute resolution in relation to construction contracts has diminished since 1998. Two developments can be linked to this:

• The Housing Grants, Construction and Regeneration Act 1996 (which came into force in 1998) gave parties to construction contracts a statutory right to adjudication. In the two decades that have passed since adjudication was created, case law has evolved. This means that, generally, parties now have an understanding of how disputed adjudicators’ decisions will be treated by the courts. The Local Democracy, Economic Development and Construction Act 2009 came into force in 2011 and made some changes to the adjudication scheme, particularly to provide that this now covers written and oral contracts.
• The ‘Woolf Reforms’, which were implemented in 1999 followed a comprehensive review of the civil justice system in England and Wales. The findings of that review were that the system was too slow, too costly and too complex. As a result, legislation was made for the introduction of new rules of court which would secure that:
• The civil justice system would be accessible fair and efficient.
• The new rules would be both simple and simply expressed.

The new rules also introduced a new protocol to govern pre-action conduct and is specific to construction disputes. It aims to encourage an early and full exchange of information about the prospective claim, to enable parties to avoid litigation by agreeing a settlement of the claim (before the actual court proceedings are commenced) and, where litigation cannot be avoided, to support the efficient management of proceedings.

Last modified 22 Mar 2024

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The Housing Grants, Construction and Regeneration Act 1996 introduced, as a new option in the dispute resolution process, a procedure known as ‘adjudication’, designed to help parties obtain a speedy decision. Parties to construction contracts now have a statutory right to adjudication. Contracts may also make express provision for adjudication, but the terms must comply with the Act; if they do not, a statutory scheme will automatically apply.

The adjudicator must reach a decision within 28 days of the referral, but this period may be extended by up to 14 days with the consent of the referring party or indefinitely if both parties agree. This flexibility has allowed more complex disputes to be dealt with by adjudication which, otherwise, would have been referred to arbitration or litigation.

Mediation is a method of seeking compromise by referring a dispute to an independent third party who has expertise in the field of the dispute and skills at brokering a settlement. There are two main types; facilitative mediation (where the mediator effectively tries to facilitate a settlement between the parties, but without expressing any view on the merits) and evaluative mediation (where the mediator will give a non binding view as to the merits, the intention being that this view on the merits will engender settlement). In relation to construction disputes, mediation is generally a facilitative process.

In England and Wales, case law has made plain not only the higher rate of a successful outcome being achieved by mediation but also its established importance as a track to a just result running parallel with that of the court system. Both have a proper part to play in the administration of justice. The court has given its stamp of approval to mediation. The TCC also offers an Early Neutral Evaluation service, carried out by a TCC judge.

Expert determination plays a valuable role where the issue in dispute is narrow and specific eg a pure valuation dispute (where the answer can be determined by a chartered accountant, a quantity surveyor or some other such professional) or a dispute concerning whether a piece of equipment meets its performance criteria (where the answer can be determined solely by an appropriate technical expert). The expert does not act in a judicial capacity and there is no general obligation on an expert to apply the rules of natural justice (this should be contrasted with adjudication, arbitration and litigation where, unquestionably, rules of natural justice apply). Expert determination will generally be regarded as final and binding; the court will not interfere with an expert determination, even if it is plainly wrong (provided the expert has purported to answer the right question). It is, therefore, inappropriate as a general form of dispute resolution.

Last modified 22 Mar 2024