Summary

Lexology Getting the Deal Through has published its thirteenth edition of Construction – an international survey of legal issues faced by the construction and development industries. Senior Associate, Kimberly Roberts contributed the below UK chapter which answers a common set of questions, the answers of which offer specific guidance to contractors, developers and financiers in the UK.

Foreign pursuit of the local market

1. If a foreign designer or contractor wanted to set up an operation to pursue the local market, what are the key concerns they should consider before taking such a step?

Key concerns include

  • Can the business secure the right approvals to operate unhindered in the UK both from the authorities in the UK and its home jurisdiction?
  • Does the business require licences or consent to operate in the UK? (See question 2.)
  • How will the business be structured? Will it have a UK presence? Business structures vary in terms of tax treatment, record and accounting requirements, management and the ability to raise money.
  • Is the business planning to employ people in the UK? If so, there will be various regulatory implications including tax, insurance and health and safety.
  • What are the tax liabilities (consider both UK and home jurisdiction)?

Regulation and Compliance

Licensing procedures

2. Must foreign designers and contractors be licensed locally to work and, if so, what are the consequences of working without a licence?

Foreign designers and contractors must have the right to work in the UK and must ensure that anyone that they employ also has this right. However, unlike other jurisdictions, there are no specific licences required for foreign designers and contractors to operate in the UK.

Competition

3. Do local laws provide any advantage to domestic contractors in competition with foreign contractors?

No. There is no domestic competition legislation that would operate to hinder contractors in the private projects market.

In relation to public procurement, the domestic legislation in the UK is derived from EU Directives that seek to ensure that domestic contractors in EU countries do not have any advantage in their home country. The Public Contracts Regulations 2015 and the Utilities Contract Regulations 2016 are the key statutory instruments and require public bodies and utilities (when carrying out their regulated activities) to first advertise all works, supply and service contracts above certain monetary thresholds in the Official Journal of the European Union. Thereafter they must manage the tender process in accordance with prescribed rules set out within the Regulations. They must also adhere to the general principles of equal treatment, non-discrimination and transparency when running any tender procedure.

There are no plans for this to change once the UK leaves the European Union and this domestic legislation is to be restated with only minor practical amendments.

Competition protections

4. What legal protections exist to ensure fair and open competition to secure contracts with public entities, and to prevent bid rigging or other anticompetitive behaviour?

As noted in question 3, the Public Contracts Regulations 2015 set out detailed rules regarding how public bodies must undertake procurement processes for public contracts above the monetary thresholds (see www.trackerintelligence.com/resources/procurement-news/new-eu-public-procurement-thresholds-available/). The public body may choose to comply with one of five procedures when evaluating potential tenders. The procedures vary according to the value and complexity of the contract.

Each procedure is designed to ensure the equal treatment of all tenderers but also provide tenderers that believe they have been discriminated against a statutory right to challenge the public body’s decision to award to another tenderer. The time periods in which tenderers must bring their challenge are very short, the standard period being 30 days from the date of the claimant’s knowledge of the potential breach. This balances the need of government to function efficiently with the right of economic operators to remedy and to deter anticompetitive behaviour. If a tenderer successfully challenges the award of a contract the court may award that tenderer damages, prevent the contract being signed or render the contract ineffective if already signed.

Public bodies also have the ability to exclude from any procurement process any tenderer that it believes has colluded with other tenderers or entertained any other form of anticompetitive behaviour.

Bribery

5. If a contractor has illegally obtained the award of a contract, for example by bribery, will the contract be enforceable? Are bribe-givers and bribe-takers prosecuted and, if so, what are the penalties they face? Are facilitation payments allowable under local law?

Where a contractor has illegally obtained an award of a contract through the acceptance or offering of a bribe, a director of a company with knowledge of the bribe is likely to be in breach of their fiduciary duty and the contract may therefore be capable of rescission. It is also common practice for contracts to contain a clause that provides for the parties to terminate in the event that anti-bribery and corruption laws are breached.

A bribe can be a ‘financial or other advantage’ and therefore corporate hospitality, gifts, offers of employment or work placements and charitable and political donations may also fall within this definition.

Further, where a party knowingly enters into an illegal contract, it may not be able to enforce it on the basis of the legal principle that prohibits a claimant pursing remedy where the action may be founded on an illegal act.

Details of the relevant penalties are set out below, with a brief summary of the legislation governing bribery in the UK.

Relevant legislation and offences

The Bribery Act 2010 (BA) is the primary source of legislation in the UK governing the offences of bribery and corruption.

Offences under the BA including active bribery (bribing another person - section 1); passive bribery (accepting a bribe - section 2); bribing a foreign public official (section 6); and failure to prevent bribery on behalf of a commercial organisation (section 7).

The section 7 offence extends to persons associated with the commercial organisation, which the BA defines as any person who ‘performs services’ for or on behalf of the organisation. This could capture an employee, agent, contractor, supplier, subsidiary or joint-venture partner. There is a full defence to section 7 if an organisation can demonstrate that it had ‘adequate procedures’ in place to prevent the act of bribery occurring.

Penalties

Individuals guilty of an offence under the BA are liable to a maximum of 10 years’ imprisonment, an unlimited fine or both. The court may also make a confiscation order where appropriate.

Companies guilty of an offence under the BA are also liable to an unlimited fine and a confiscation order where appropriate. A company convicted of a criminal offence under sections 1, 2 or 6 will face mandatory debarment from public contracts across the European Union and discretionary debarment if convicted for a section 7 offence. Directors may also be subject to disqualification.

Anti-money laundering offences

In addition to compliance with the BA, foreign contractors operating in the UK will also need to comply with the Proceeds of Crime Act 2002 (POCA 2002) and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

POCA 2002 creates a number of criminal offences applying to both individuals and companies relating to money laundering including concealing, disguising or converting criminal property; entering into or becoming concerned in an arrangement that facilitates the acquisition, retention, use or control of criminal property; and, acquiring, using or possessing the proceeds of crime. To be guilty of these offences an individual or company must know or suspect that the funds are the proceeds of conduct, which is a criminal offence in the UK. An individual found guilty of an offence is liable to up to 14 years’ imprisonment and an unlimited fine. Directors of companies convicted of an offence may also face disqualification.

The Money Laundering Regulations apply to businesses operating within the ‘regulated’ sector, which encompasses businesses regulated by the Financial Conduct Authority, such as banks, investment firms, insurance companies, and law and accountancy firms, and to the provision of tax advice. These businesses must comply with a number of regulations in an attempt to prevent exposure to possible money laundering including conducting a money laundering and terrorist financing risk assessment and implementing policies and internal controls to mitigate those risks, providing anti-money laundering (AML) training to staff, conducting appropriate client due diligence on all clients and ensuring appropriate record-keeping in relation to AML compliance.

The Inland Revenue may impose financial penalties on businesses or individuals that do not comply with the Money Laundering Regulations, the maximum financial penalty being an unlimited fine. In serious cases, the business or individuals involved may face prosecution and up to two years’ imprisonment.

Under POCA 2002, firms carrying out ‘regulated sector’ work may also commit a criminal offence if they fail to report knowledge, suspicion or a reasonable suspicion that another person is engaged in money laundering. Firms operating in the regulated sector must appoint a nominated officer to receive internal suspicion reports. A individual found guilty of a failure to disclose offence is liable to up to five years’ imprisonment and a fine.

Reporting bribery

6. Under local law, must employees of the project team members report suspicion or knowledge of bribery of government employees and, if so, what are the penalties for failure to report?

There is no express requirement in the BA for individuals to report instances of bribery and corruption - internally within their organisations or to other organisations (absent specific legal or regulatory obligations). However, it is likely that a suitable reporting mechanism will form part of the adequate procedures to provide a defence to section 7 offences (see question 5).

Reporting clauses in employment contracts and/or employee handbooks, escalation procedures and effective whistle-blowing procedures are demonstrable efforts of organisations to combat the risk of bribery and corruption taking place and to promote transparency.

Implementation of these mechanisms allows organisations to identify instances of bribery, which is an important factor given that the ability to self-report may be key to an organisation securing a deferred prosecution agreement (DPA) with the Serious Fraud Office. A DPA will provide the organisation with the opportunity to avoid a prosecution if it complies with certain conditions.

See question 5 in relation to AML reporting requirements.

Political contributions

7. Is the making of political contributions part of doing business? If so, are there laws that restrict the ability of contractors or design professionals to work for public agencies because of their financial support for political candidates or parties?

There are no laws that expressly restrict the ability of contractors or design professionals to work for public agencies because of their financial support for political candidates or parties. More generally, the BA does not prohibit political contributions. However, Ministry of Justice guidance (www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf) does identify these contributions as a transaction type giving rise to higher risks. Therefore, depending on the circumstances, the making of political contributions can constitute an offence under the BA (see question 5) where it provides an advantage to that person and is given with either the intention of inducing that person to perform a relevant function improperly or the knowledge that acceptance of the advantage would itself constitute the improper performance.

The contribution may be financial but it may also be in the form of a gift, in-kind support or other non-monetary benefit.

Compliance

8. Is a construction manager or other construction professional acting as a public entity’s representative or agent on a project (and its employees) subject to the same anti-corruption and compliance as government employees?

Under the BA, both the offering of and acceptance of a bribe constitute an offence (see question 5). Consequently the acceptance of ‘things of value’ will constitute an offence regardless of the capacity in which an individual acts. While there is no differentiation in the law applicable to individuals, those acting as an agent or representative of a public entity should be aware that they may be working in an environment of increased risk owing to the perceived authority associated with the capacity in which they act.

It is also likely that any contract engaging a construction manager or other construction professional will contain clauses requiring compliance with anti-bribery and corruption laws and place obligations on the parties in relation to conflicts of interest. Individuals should therefore familiarise themselves with all engagement documentation.

Other international legal considerations

9. Are there any other important legal issues that may present obstacles to a foreign contractor attempting to do business in your jurisdiction?

The responses given in this chapter are only intended to provide some examples of the types of legal issues a foreign contractor may encounter when considering undertaking business in the UK. Appropriate UK and home jurisdiction advice that is specific to the contractor’s unique circumstances should always be sought.

Construction contracts

10. What standard contract forms are used for construction and design? Must the language of the contract be the local language? Are there restrictions on choice of law and the venue for dispute resolution?

Standard forms

A number of standard form contracts have been created in an attempt to provide standardisation and as a means of addressing the risks and issues that may arise on a construction project. For the most part these will cover the same key issues, including obligations to carry out and make payment for the works; provisions relating to design development; the obtaining of approvals and consent; time for completion, delays and extensions of time; variations; insurance; price adjustments for changes in law, inflation, etc; commissioning, completion and handover; and the rectification of defects after completion.

Domestically, one of the more commonly used standard form contracts is the Joint Contracts Tribunal (JCT) suite of contracts. The JCT suite includes the design-and-build contract, standard form (traditional procurement), intermediate form and minor works contract together with suites for construction management and management contracting options. These standard forms are also often amended to reflect project-specific requirements and the agreed risk profiles of the parties. In addition, the NEC3 and now NEC4 suite of contracts are continuing to grow in popularity, particularly in the public sector.

Factors such as the nature, value and complexity of the project, the procurement model and the client’s drivers and desired outcomes will inform the choice of contract on a project.

There are a range of standard form professional appointments used by consultants: the Royal Institute of British Architects Agreements 2010, the Royal Institution of Chartered Surveyors Forms of Appointments, the NEC Professional Services Contract and the Association of Consulting Engineers Agreements. However, clients often prefer to use bespoke appointments to capture project-specific requirements and to ensure a degree of consistency across the project team.

Language

There is no legal requirement for English to be the language of the contract, but generally English is used.

Choice of law

The parties to a contract are free to select the governing law and venue for dispute resolution. If a contract does not state the governing law the contract will be subject to the application of Rome I (Regulation (EC) No. 593/2008).

Payment methods

11. How are contractors, subcontractors, vendors and workers typically paid and is there a standard frequency for payments?

Contractors, subcontractors, vendors and workers are normally paid electronically. Frequency of payment will depend on the individual contract but typically payment is normally made on a monthly or milestone basis.

Frequency of payment will also depend on whether the work being carried out falls within the ambit of the Housing Grants Construction and Regeneration Act 1996 (the Construction Act).

If a contract is a ‘construction contract’ as defined by the Construction Act, and if the work is over 45 days in duration (or the parties agree that it will be over this duration), then the contract payments must be made on a periodic basis. In other words, the parties cannot agree that one lump sum will be paid for the entire construction project. Apart from this proviso, the parties are free to agree the amounts of payment, the intervals between payments or the circumstances in which the payment is due.

If the contract fails to comply with the Construction Act then the Scheme for Construction Contracts (the Scheme) sets out a fall-back payment regime. If a contract’s payment regime does not comply with the Construction Act then the provisions that do not comply will be void and the relevant Scheme provisions will be implied in their place. If the Scheme payment regime applies, payment must be made every 28 days during the project and the final payment will be due 30 days after completion of the work or the making of a claim by the payee (whichever is later).

Contractual matrix of international projects

12. What is the typical contractual matrix for a major project in your jurisdiction in terms of the contractual relationships among the various construction project participants?

The main options typically seen in construction projects are described below. However, these should not be considered as mutually exclusive and often a hybrid or tailored solution will be adopted for complex projects.

Traditional (design, bid, build)

The developer engages a team of consultants to design and specify the works in detail, and separately appoints the contractor (commonly following a competitive tender process) to construct the works as designed for a lump-sum price. This option allows the developer to retain control over the quality of design, but it is a slow (sequential) process and may not be suitable where rapid delivery is critical. It can also lead to problems of coordination between team members and issues of split responsibility for late completion or defects.

Design and build

The developer produces outline requirements only and engages a contractor to design and construct a facility that meets those requirements. Otherwise known as turnkey construction or, especially in an international context, engineering, procurement and construction (EPC). This route is potentially faster (as it allows overlapping of design and construction) and imposes ‘single point’ liability on the contractor, thus avoiding issues of coordination and split responsibility. However, in return, the developer may lose some elements of control over design quality, as the contractor can be motivated to deliver the cheapest solution that meets the brief. It can also be expensive to make changes to the developer’s requirements during construction.

Construction management

In an engineering or international context, construction management is often known as EPCm. Under this route, the developer enters into separate package contracts with each trade contractor, and engages construction management on a fee basis as part of its consultant team. Construction management does not assume contractual responsibility for delivery of the works, but helps to manage the process and provides advice in areas such as programming, cost planning, buildability and packaging of work. While construction management offers advantages in terms of speed and flexibility, it does not provide initial cost certainty and the developer retains the risk of default or insolvency by trade contractors. As a result, it is generally suitable only for developers with significant resources, expertise and buying power.

PPP and PFI

13. Is there a formal statutory and regulatory framework for PPP and PFI contracts?

While there is no formal or statutory regulatory framework for the PPP or PFI (now PF2) forms of contracting, HM Treasury does oversee the PPP/PF2 framework by providing key policy, guidance and advice. However, the government announced in October 2018 that the PF2 form of contracting would no longer be used as it was ‘inflexible and overly complex’ and that the Office for Budget Responsibility believed the schemes to be a ‘source of significant fiscal risk to government’. Existing contracts under the PFI and PF2 system are to be honoured but no new contracts will be signed.

Joint ventures

14. Are all members of consortia jointly liable for the entire project or may they allocate liability and responsibility among them?

The liability of the consortia members will depend upon how they have allocated liability and responsibility among themselves as part of their commercial arrangement. However, it is often the preference of the contracting authority that all parties to the consortia are jointly and severally liable.

Tort claims and indemnity

15. Do local laws permit a contracting party to be indemnified against all acts, errors and omissions arising from the work of the other party, even when the first party is negligent?

Although local laws permit indemnities, the reality is that they are very rarely used in English contracts. Where they are used they tend to be limited to circumstances of damage to or theft of third-party property, and in such cases are linked to breach of contract or negligence. See question 17 on insurance.

Certain losses cannot be indemnified, for example, losses caused by fraud, crimes or deliberate acts.

Liability to third parties

16. Where a contractor constructs a building that will be sold or leased to a third party, does the contractor bear any potential responsibility to the third party? May the third party pursue a claim against the contractor despite the lack of contractual privity? 

Under English law, only parties to a contract may bring a claim under it. As a result, third parties with an interest in a building project cannot point to a breach of the building contract and use it as the basis for an action against the contractor, in respect of defects in the building. They must find other legal basis on which to bring a claim.

Collateral warranties and third-party rights are the two key vehicles that have been developed to provide third parties with a legal basis to make a claim for breach of a contract to which they are not a party.

A collateral warranty is simply a contract that is ‘collateral’ to the primary contract between a supplier and an employer under which the supplier acknowledges that it owes the same duties to the third party as it owes to the employer. Though the concept of collateral warranties is very simple, they have been a contentious subject from the outset. Suppliers (and their insurers) objected to extending rights to third parties, thus creating a potential legal liability that would not otherwise exist.

Partly in a bid to address these problems, the Contracts (Rights of Third Parties) Act 1999 was introduced. This Act creates an exception to the privity of contract rule, by allowing identified third parties to bring a claim under the primary contract against a supplier that is responsible for a defect. The third party must be specified in the primary contract (either by name or class) as someone who is to obtain the benefit of the Act. The third party’s right to claim will be no greater than, and will be subject to the same defences as, a claim brought by the employer against the supplier.

The alternative is for the third party to pursue a claim in tort, most likely the tort of negligence. However, there is only a very limited ability to claim in tort in instances of defects to a building and often only in exceptional circumstances.

Insurance

17. To what extent do available insurance products afford a contractor coverage for: damage to the property of third parties; injury to workers or third parties; delay damages; and damages due to environmental hazards. Does the local law limit contractors’ liability for damages?

Insurance

Types of insurance commonly required on a construction project include:

  • All-risks insurance (covering against physical loss or damage to the work executed and site materials and against the reasonable cost of removal and disposal of debris, shoring and propping of the works that results from the physical loss or damage). This is typically maintained by the contractor for a new building until practical completion, and by the employer for refurbishments and on some major projects.
  • Public liability insurance (covering liability for death or personal injury to third parties (other than the insured’s own employees) and liability for damage to property belonging to third parties). This is typically required from consultants and design and build contractors, and must be renewed for the duration of their liability.
  • Professional indemnity insurance (covering claims made against the insured professional arising from the conduct of the insured’s professional activities and duties). This is normally taken out by any professional providing design services and must be maintained throughout the insured professional’s period of liability.
  • Employers’ liability insurance (covering an employer against claims from its employees for death, injury or disease arising out of their employment). This is maintained by the employer throughout the period of employment and is the only insurance required by statute (Employer’s Liability (Compulsory Insurance) Act 1969). Unless it is exempt from this Act, a party must maintain insurance cover of not less than £5 million for each occurrence.
  • Non-negligent insurance (covering liability that the employer may incur or sustain as a result of injury or damage to neighbouring property caused by collapse, subsidence, heave, vibration, weakening or removal of support or lowering of groundwater, arising out of the course or because of the works). The contractor typically maintains this insurance in its and the employer’s name.
  • Product liability insurance (covering liability for injury to people or damage to property, arising out of products supplied by a business). This is typically taken out by manufacturers and contractors.
  • Latent defects insurance (also known as decennial insurance, which protects the building owner or occupier from material fault or damage to the building). This is usually taken out when a building is constructed or altered and will typically last 10 years from the completion of those works. To call on the policy the building owner or occupier does not have to prove fault. Policies tend to cover structural defects or defects in the building envelope but will only cover other defects (such as in mechanical and electrical systems or plant) where specifically added to a policy.
  • Delay in start-up insurance (DSU) typically covers a scenario where there has been physical loss or damage that delays the start of the income stream that would have arisen from a completed project. DSU is similar in nature to business interruption insurance, which applies where a building is complete and operational but then a fault arises that interrupts the income stream.
  • Insurance against liquidated damages is not generally available in the UK insurance market.
  • Various environmental insurance products are available that afford coverage for losses such as historical contamination, loss from contamination caused by ongoing operations, loss arising from cost overruns during remediation, loss arising from contractors operating on third-party sites, and pollution and environmental liabilities arising from the business activities.
Limitation of liability

There are no statutory or legal provisions that impose mandatory limits on a contractor’s liability. However, it is open to the parties, subject to the constraints of the Unfair Contract Terms Act 1977, to agree limitations on liability.

Labour and Closure of Operations

Labour requirements

18. Are there any laws requiring a minimum amount of local labour to be employed on a particular construction project?

No. However, it is common for local authorities, when considering the grant of planning permission for a project, to include as a condition to planning consent that a certain percentage of local labour is employed on the project.

Local labour law

19. If a contractor directly hires local labour (at any level) for a project, are there any legal obligations towards the employees that cannot be terminated upon completion of the employment?

The contractor’s legal obligations are likely to be twofold.

The employee is likely to have a contractual right (subject to a statutory minimum) to receive notice of termination of employment and a failure by the contractor to honour that notice period is likely to lead to a breach of contract or wrongful dismissal claim.

The employee will have statutory rights. These could include:

  • the right not to be unfairly dismissed (if the employee has a minimum of two years’ continuous service);
  • the right to statutory redundancy pay (again, if the employee has a minimum of two years’ continuous service) and enhanced contractual redundancy pay (if applicable); and
  • the right to bring a discrimination or whistle-blowing claim (irrespective of the employee’s length of service), or both. These rights also apply to workers who are not employees.

Labour and human rights

20. What laws apply to the treatment of foreign construction workers and what rights do they have? What are the local law consequences for failure to follow those laws?A failure by the contractor to follow applicable laws may lead to a risk of claims in the court or employment tribunal. Health and safety-related matters carry the risk of criminal sanctions. Claims for wrongful dismissal, unfair dismissal, discrimination or whistle-blowing may give rise to an award of damages or compensation. This is generally limited to the individual’s loss of earnings and subject to an obligation on the individual to mitigate their loss. However, there are some awards that are penal in their nature.

The fact that a construction worker is foreign will be immaterial. On the assumption that the worker has the legal right to work in the UK, he or she will have the same rights as a UK construction worker. This includes, for example, the right to a receive minimum wage and holiday pay, the right to health and safety and discrimination protection, a limit on the maximum number of working hours per week and parental rights. In addition, if the worker is an employee, he or she will also have the right not to be unfairly dismissed (after attaining a minimum of two years’ continuous service).

A failure by the contractor to follow applicable laws may lead to a risk of claims in the court or employment tribunal. Health and safety-related matters carry the risk of criminal sanctions. Claims for wrongful dismissal, unfair dismissal, discrimination or whistle-blowing may give rise to an award of damages or compensation. This is generally limited to the individual’s loss of earnings and subject to an obligation on the individual to mitigate their loss. However, there are some awards that are penal in their nature.

Close of operations

21. If a foreign contractor that has been legally operating decides to close its operations, what are the legal obstacles to closing up and leaving?

When a foreign contractor decides to close its operations, its options will depend on whether it proposes to settle all debts and then close in a solvent manner or whether it proposes to leave debts outstanding and to enter a form of insolvent liquidation.

Assuming that the intention will be to settle all debts before leaving the jurisdiction, the foreign contractor should ensure that the following steps are taken:

  • notices of termination are given to employees and the necessary redundancy payments made (see question 19);
  • to the extent that there is any potential remaining or future liability under contracts, those contracts are either terminated, settled or the liability released with the agreement of the contractual counterparty;
  • all outstanding amounts owing, such as invoices, taxes and debts (to suppliers, banks and advisers in respect of national insurance and pay as you earn, and otherwise) are paid and communications made to stakeholders (including HM Revenue and Customs) that the company will shortly cease to trade; and
  • final accounts are drawn up and all assets distributed to shareholders (subject to there being sufficient distributable profits for a distribution to be made).

 

Once those steps are taken, and the company has ceased trading, there are two options available to the company. The first option is to wait for three months before proceeding with a paper application for the company to be struck off the register (following which it shall eventually be dissolved from the register). The second option, provided that the directors sign a statutory declaration that the company is solvent and anticipates being so for no less than 12 months, is immediately placing the company the into a members’ voluntary liquidation with a liquidator appointed to deal with the distribution of assets to shareholders before the company is dissolved from the register.

If the company is insolvent, and no further support from the shareholder or parent company is available for a solvent exit, then the likely route is to place the company into a creditors’ voluntary liquidation. This sees a liquidator appointed to collect assets and to distribute those assets to creditors in a statutory order of priority. As well as the potential reputational consequences, liquidators have duties and wide-ranging powers to investigate prior transactions and the conduct of directors in an insolvent liquidation.

Payment

Payment rights

22. How may a contractor secure the right to payment of its costs and fees from an owner? May the contractor place liens on the property?

Securing payment

The contract between the contractor and the owner should set out how the contractor will be paid.

If the contract falls within the ambit of the Construction Act then it must contain a payment regime that follows the Act’s prescribed interim payment mechanism, to which nearly all UK construction contracts must conform.

The payment regime sets out a procedure for each interim period, as follows. Shortly after each ‘due date’ (the date at which the works must be valued), the party seeking payment must serve a payment application setting out the amount it considers it is entitled to for that period. At a prescribed period after that, the paying party must serve a payment notice in which it states the sum due at the due date. Thereafter, the paying party must serve a ‘pay less notice’ in which it sets out any sums it is intending to deduct from the sum due. The sum due (adjusted as set out in the pay less notice) must be paid on or before the final date for payment; if not, the party seeking payment can recover it in an adjudication. Regardless of the reasons for non-payment, the adjudicator will order the paying party to make payment and if the party refuses to pay, the courts will enforce the adjudicator’s decision.

If there are concerns as to the employer’s ability to pay the contractor, the latter may require a form of payment security to be provided. For example, (i) the employer may place money into an escrow account to be released to the contractor if the employer fails to make payment when due, (ii) an advance payment bond may be agreed, whereby the employer pay monies in advance to be drawn down at agreed points in the project, or (iii) a guarantee provided by a suitable guarantor, possibly a parent company of the employer entity.

Liens

A contractor is unable to place liens on the property unless it has received a court order that entitles it to do so. However, the parties to a contract may utilise retention of title clause in relation to off-site goods and materials.

‘Pay if paid’ and ‘pay when paid’

23. Does local law prohibit construction contracts from containing terms that make a subcontractor’s right to payment contingent on the general contractor’s receipt of payment from the owner, thereby causing the subcontractor to bear the risk of the owner’s non-payment or late payment?

The Construction Act prohibits pay-when-paid and paid-if-paid clauses except in the event of the insolvency of a party higher in the chain, for example, if the employer becomes insolvent.

Contracting with government entities

24. Can a government agency assert sovereign immunity as a defence to a contractor’s claim for payment?

Sovereign immunity cannot be asserted by an English government agency as a defence for non-payment of a contractor. Where the State Immunity Act 1978 applies, agencies of other governments will attract immunity if they are acting ‘in the exercise of sovereign authority’; however, immunity may not be asserted where the government agency is distinct from the executive function of the state in question. Where there is any doubt, contracting parties may seek warranties to the effect that the agency is not acting in a sovereign capacity or a waiver of immunity, or both.

Statutory payment protection

25. Where major projects have been interrupted or cancelled, do the local laws provide any protection for unpaid contractors who have performed work?

Projects are interrupted and cancelled for many reasons and, therefore, the extent to which English law will provide protection to an unpaid contractor will depend upon:

  • what has happened;
  • what the contract says; and
  • what protections the contractor has put in place to mitigate the effects of the event (eg, a parent company guarantee, project bank account or escrow account).

Construction contracts normally contain provisions that deal with project interruptions and cancellations (see question 26). For example, in the event of employer insolvency under the JCT Design and Build contract 2016, the contractor’s obligations to carry out and complete the works will be suspended. The contractor can then choose whether to terminate the contract by serving notice in accordance with the contract.

If the contract does not make provision for project interruption or cancellation, or if the parties did not enter into a contract, the contractor will need to rely on the common law principle of quantum meruit (‘as much as he deserves’) and recover a reasonable sum for the services it has provided.

Even if the contractor has the right to claim payment from the employer, if the employer is insolvent the contractor will need to get in line with the other creditors that are due payment. Therefore, a contractor may not be paid in full for the work it has carried out if the project is cancelled owing to the commencement of insolvency proceedings. This is why at the outset of the project the contractor should check the solvency of the employer and consider putting in place the measures outlined above to afford it some protection in the event of project interruption or cancellation.

Force Majeure

Force majeure and acts of God

26. Under local law are contractors excused from performing contractual obligations owing to events beyond their control?

Where there is no express provision in a contract dealing with such events, the parties may seek to rely on the common law doctrine of frustration. Frustration will only apply in very limited circumstances, namely where an event occurs that renders it physically or commercially impossible for the contract to be fulfilled, or has converted the obligation to perform into something drastically different from that undertaken at the point the contract was entered into.

Given the difficulty in enforcing this doctrine, parties will often incorporate a force majeure clause into their agreements. The term force majeure has no legal meaning under English law and so parties may define it as they see fit. A number of industry standard contracts set out the circumstances and the consequences of events that are outside the reasonable control of a party. For example, the JCT uses the concept of relevant events and relevant matters to identify events that could lead to the contractor being granted an extension of time or addition to the contract sum, or both. Unlike the common law remedy, contractual mechanisms rarely allow a contractor to be excused from performing all its contractual obligations, opting instead for relief from certain sanctions or hardships, such as relief from delay damages or additions to the contract sum.

Disputes

Courts and tribunals

27. Are there any specialised tribunals that are dedicated to resolving construction disputes?

The Technology and Construction Court (TCC) is a specialist court that is part of the business and property courts of England and Wales. The TCC deals mainly with construction, engineering and technology disputes. It is located in the Rolls Building London with other regional centres in Bristol, Birmingham, Liverpool, Leeds and Manchester. TCC claims for more than £250,000 are brought in the business and property courts, while those below £250,000 are brought in the county court, unless the case concerns one of the identified exceptions (cases involving adjudications or public procurement, injunctions, Part 8 claims, cases with an international element, etc).

Appeals from decisions of the TCC are heard by the Court of Appeal and ultimately the Supreme Court, which is the final court of appeal in the UK for all civil cases.

TCC practice and procedure are dealt with in Part 60 of the Civil Procedure Rules and its associated practice direction. This should be read in conjunction with the TCC Court Guide, which provides practical guidance for those litigating in the TCC.

Dispute review boards

28. Are dispute review boards (DRBs) used? Are their decisions treated as mandatory, advisory, final or interim?

Generally, the standard forms used in the UK construction industry do not provide for DRBs. This is because of the prevalence of statutory adjudication.

Whether or not DRB decisions are final and binding, or are non-binding recommendations, depends on the particular contract and DRB used.

Mediation

29. Has the practice of voluntary participation in professionally organised mediation gained acceptance and, if so, how prevalent is the practice and where are the mediators coming from? If not, why not?

Mediation has gained wide acceptance in England and Wales as an appropriate and efficient means by which construction disputes can be resolved.

Under the Civil Procedure Rules, all parties to litigation have an obligation to consider whether some form of alternative dispute resolution (ADR) might enable them to settle the matter without court proceedings. As the court may now consider cost penalties against a party that unreasonably refuses to mediate, the practice of mediation has increased.

A survey carried out by the TCC showed that 91 per cent of mediations occurred as a result of the parties’ own initiative and not as a result of an indication by the court.

The vast majority of mediators tend to be legally qualified in construction disputes. There is no state requirement that mediators undertake some form of training prior to appointment; however, it is common practice for mediators to obtain accreditation by one of the commercial mediation training schemes.

Confidentiality in mediation

30. Are statements made in mediation confidential?

Mediation proceedings are confidential both between the parties and between the parties and the mediator. The court also held that it will generally uphold the confidentiality of the mediation unless in the interests of justice it is necessary for evidence to be given of the confidential matters.

Under the EU Mediation Directive (2008/52/EC), mediators should not be compelled to give evidence about information arising out of, or in connection with, a mediation unless overriding public policy considerations or enforcement of the settlement agreement make it necessary to do so.

Nevertheless, parties typically sign an agreement to mediate that incorporates a confidentiality clause, and the Civil Mediation Council Guidance Note dated July 2009 advises parties to continue to specify in their mediation agreements that the mediation proceedings are conducted on a ‘without prejudice’ basis, to make it clear that what is said during the mediation will be confidential, and not to restrict the circumstances in which a mediator cannot be compelled to give evidence in court.

Arbitration of private disputes

31. What is the prevailing attitude towards arbitration of construction disputes? Is it preferred over litigation in the local courts?

With the rise of adjudication and mediation, domestic arbitration is no longer as widely used as it once was in the construction industry in England and Wales.

Although arbitration is a private and confidential means of obtaining a binding decision in a construction dispute, many see it as a formal process that often takes longer than litigation in the TCC, and is often more expensive. In addition, it is more difficult to join multiple parties to an arbitration compared to other dispute resolution forums. Therefore, it is not generally preferred over litigation in the local courts.

However, arbitration is still extensively used for the resolution of international disputes, and the English courts are renowned for their supportive approach to enforcement of international arbitration agreements and awards. In England, Wales and Northern Ireland, arbitrations are regulated by the Arbitration Act 1996. In Scotland, arbitrations are governed by the Arbitration (Scotland) Act 2010.

Governing law and arbitration providers

32. If a foreign contractor wanted to pursue work and insisted by contract upon international arbitration as the dispute resolution mechanism, which of the customary international arbitration providers is preferred and why?

There is no preference as to international arbitration providers. Parties may either agree on a particular named arbitral institution and rules, or alternatively may prefer to conduct an ad hoc arbitration, pursuant to rules established by the parties or pursuant to the UNCITRAL Arbitration Rules, which were specifically formulated for use in ad hoc arbitration. Where institutional arbitration is chosen, the choice of arbitral institution may be influenced by the regional preference of the parties. For example, the International Chamber of Commerce (ICC) International Court of Arbitration and the London Court of International Arbitration tend to be popular with European parties, whereas the Hong Kong International Arbitration Centre and Singapore International Arbitration Centre tend to be popular with Asian parties.

Parties are free to agree on the substantive law that will be applied to determine the merits of a dispute (governing law). The choice of seat will determine the procedural law (not governing law) of the arbitration, which court will have supervisory and supportive powers in relation to the arbitration and where the award is made for the purposes of enforcement. The choice of seat is often (but not always) aligned with the choice of governing law.

Dispute resolution with government entities

33. May government agencies participate in private arbitration and be bound by the arbitrators’ award?

Yes.

Arbitral award

34. Is there any basis upon which an arbitral award issued by a foreign or international tribunal may be rejected by your local courts?

The UK is a party to the New York Convention of 1958 and the English courts will recognise and enforce an award rendered by a tribunal in the territory of another contracting state. The limited grounds in which recognition and enforcement of an award can be refused mirror the grounds set out in article V of the New York Convention as enacted in English law by section 103 of the Arbitration Act 1996. The main grounds are as follows:

  • a party to the arbitration agreement was under some incapacity;
  • the arbitration agreement was not valid;
  • a party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present its case;
  • the award deals with a dispute that does not fall within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration;
  • the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, with the law of the country where the arbitration took place;
  • the award has not become binding on the parties or has been set aside or suspended by a competent authority of the country in which it was made;
  • the award is in respect of a matter that is not capable of settlement by arbitration or it would be contrary to public policy to recognise or enforce the award; and
  • the award contains decisions on matters not submitted to arbitration.

Limitation periods

35. Are there any statutory limitation periods within which lawsuits must be commenced for construction work or design services and are there any statutory preconditions for commencing or maintaining such proceedings?

Yes, proceedings must be commenced within the statutory limitation periods, most of which are set out in the Limitation Act 1980. A claim for breach of contract must be brought within six years of the date on which the cause of action accrues, unless the contract is executed as a deed, in which case the relevant period is 12 years.

In general, where a contractor is liable to complete all of the works, the limitation period for defects runs from the date of practical completion of the works, and not from any earlier date when the defective work was carried out.

As for negligence claims in tort in respect of physical damage to property, the limitation period is ordinarily six years from the date the damage occurred. However, if the damage is discovered after six years, section 14A of the Limitation Act 1980, as amended by the Latent Damage Act 1986, extends the time period to three years from the date when the claimant had both the knowledge required for bringing the action and the right to bring such an action. There is a 15-year long-stop date from the date of the defendant’s negligent act.

Claims for personal injury or death must be made within three years of the cause of action or the date of knowledge of the injured person, whichever is later.

In relation to claims of fraud or concealment, section 32 of the Limitation Act provides that the limitation period does not start to run until the claimant could have reasonably discovered the fraud or concealment.

Other limitation periods may apply in respect of specific legislation. For example, when bringing a claim under the Defective Premises Act 1972, the claim must be brought within six years of completion of the dwelling. Alternatively, if specific works are carried out to rectify a defect, the limitation period in respect of this further work will run from the time it was completed.

Environmental Regulation

International environmental law

36. Is your jurisdiction party to the Stockholm Declaration of 1972? What are the local laws that provide for preservation of the environment and wildlife while advancing infrastructure and building projects?

Stockholm Declaration of 1972

While UK delegates attended the United Nations Conference on the Human Environment in 1972 where the Stockholm Declaration of 1972 was agreed and adopted, the UK did not adopt the Stockholm Declaration as a treaty and it is not legally binding. However, the Declaration has influenced the creation of international norms and national law protecting the environment and wildlife by authorising states to act upon the basis of its principles.

Local laws

In the UK, the contaminated land regime under the Environmental Protection Act 1990 (the EPA 1990) helps ensure that developers take the necessary steps to clean up any contamination in the land when taking on a building project. This is often strengthened by planning permissions granted with conditions for the developer to make the necessary investigations, remediate any contamination discovered and submit reports to local authorities confirming that the land is clean of any contamination. The contaminated land regime under the EPA 1990 reflects principles 6 and 7 of the Stockholm Declaration, which relate to pollution control and call for an end to discharging toxic and other harmful substances into the environment.

In addition, the Wildlife and Countryside Act 1981 protects certain species and their habitats, ensuring that developers take steps to avoid harming these species and avoid disturbing their habitats during a project. This reflects principle 4 of the Stockholm Declaration, which puts responsibility on man to safeguard the heritage of wildlife and its habitat.

Local environmental responsibility

37. What duties and liability do local laws impose on developers and contractors for the creation of environmental hazards or violation of local environmental laws and regulations?

Criminal or civil sanctions can be imposed on developers and contractors depending on the nature of the violation.

For example, the contamination land regime imposes liability on the appropriate persons under the EPA 1990 to remediate the contamination on the land. Those served with remediation notices will be required to remediate the site and cover the reasonable costs of the remediation and clean-up works. Any non-compliance with a remediation notice is a strict liability offence that attracts criminal liability.

A violation under the Wildlife and Countryside Act 1981 attracts criminal liability and therefore risks fines or imprisonment. A potential or actual violation under this Act also confers powers on enforcement officers and police and wildlife inspectors to enter and inspect a site for evidence.

Other civil liabilities under environmental law include nuisance and negligence.

Cross-Border Issues

International treaties

38. Is your jurisdiction a signatory to any investment agreements for the protection of investments of a foreign entity in construction and infrastructure projects? If so, how does your model agreement define ‘investment’?

The UK is a signatory to over 100 bilateral investment treaties (BITs) for the protection of the investments of foreign entities. The UK is also a signatory to the Energy Charter Treaty, which is an international agreement that establishes a multilateral framework for cross-border cooperation in the energy industry. UK Treaties Online provides an official record of the UK’s treaty obligations under international law and is sourced by the Treaty Section of the Foreign and Commonwealth Office. The definition of ‘investment’ varies, depending on the particular agreement; however, UK BITs tend to cover a broad range of investments, including movable and immovable property, shares, debt instruments, intellectual property rights, goodwill, claims to money or performance under a contract and business concessions.

Tax treaties

39. Has your jurisdiction entered into double taxation treaties pursuant to which a contractor is prevented from being taxed in various jurisdictions?

The UK has one of the largest networks of double taxation treaties, which covers over 120 countries. Information regarding individual treaties can be found on the UK government website.

Currency controls

40. Are there currency controls that make it difficult or impossible to change operating funds or profits from one currency to another?

No, there are none at present.

Removal of revenues, profits and investment

41. Are there any controls or laws that restrict removal of revenues, profits or investments from your jurisdiction?

The main restriction on removal of profits from a company incorporated in England and Wales is that it must not pay out more in dividends than its available profits from current and previous financial years (known as distributable profits).

A director who authorises the payment of a dividend that contravenes the law may be in breach of his or her statutory and common law duties and may be personally liable to repay the company, even if the director is not a shareholder.

In addition, personal liability for directors of an English company is a possibility when insolvency is looming. For example, a person who has knowingly intended to defraud creditors (fraudulent trading) can be ordered by the court to make a personal contribution. Equally, directors of a company who have failed to minimise a potential loss to the company’s creditors when they knew, or ought to have known, that the company could not avoid an insolvent liquidation (wrongful trading) can be held personally liable and made to contribute cash to the company. The Insolvency Act 1986 provides a variety of mechanisms by which a liquidator or administrator can overturn past transactions, including dividends and distributions of assets, and claw back money or other assets to protect the interests of creditors.

Updates and trends

Emerging trends

42. Are there any emerging trends or hot topics in construction regulation in your jurisdiction?

Brexit

Brexit will undoubtedly have a major impact on the construction industry. It is impossible to say whether this will be positive in the long run because we do not know what form it will take or indeed when it will happen. This short-term uncertainty is negatively impacting the industry with reports of growth slowing and predictions of labour shortages, higher material costs and reduced foreign investment in infrastructure. Whether or not these predictions will hold true depends very much on the terms of the final deal (if any) between the UK and the EU post-Brexit.

Off-site construction

There is an increasing trend for including at least some aspects of ‘modular’ into development and other projects. It is open to debate whether this trend is driven by improvements in design and construction methods, or by market forces. In 2017, the Chancellor announced that five central government departments would adopt a presumption in favour of off-site construction. In November 2018, the government launched a consultation to understand how prepared the construction sector is to adapt to a new approach to building, to be adopted across government departments where it presents value for money. The consultation closed on 17 February 2019 and the results are awaited.


Reproduced with permission from Law Business Research Ltd. This article was first published in Lexology Getting the Deal Through – Construction 2020 (Published: July 2019). For further information please visit www.gettingthedealthrough.com.