UK: Construction: Looking to the Past ...and Looking to the Future...

Last Updated: 5 January 1999
Looking to the Past ......
...... and Looking to the Future

By Tony Blackler

Looking to the Past ......

1998 will undoubtedly be remembered as the year when parliament passed legislation to regulate payment procedures in the construction industry and gave everybody the right to invoke a new dispute resolution procedure called "adjudication". The consequences of this statutory intrusion into the standard industry contracts have yet to be evaluated, but the Construction Act must rank as one of the most dramatic attacks upon freedom of contract between commercial parties that any industry has yet seen in this country.

The other landmark legal event was the decision of the House of Lords in Beaufort Developments -v- Gilbert Ash in which the House overturned a decision of the Court of Appeal which had radically affected the way in which litigation and arbitration had been practised here for over a decade. It was held that the courts did indeed have the right to open up, review or set aside architects' or engineers' certificates in construction contracts just like an arbitrator who had been given specific powers to that effect in an arbitration clause. This is an extremely significant decision because lawyers who delete arbitration clauses in contracts can now safely advise their clients that the courts will be able to hear the merits of the parties' case and in effect act like an arbitrator.

In the latest version of JCT 80 a "litigation clause" was introduced as an alternative to an arbitration clause, and we forecast that arbitration clauses are likely to be progressively discarded in the future as a result. The court is the more obvious forum of choice where there is the possibility that a plaintiff may need to sue more than one party at the same time, and where those parties may themselves want to introduce others into the proceedings for a contribution. Such procedures cannot yet be satisfactorily achieved in arbitration.

Special mention should be made of the House of Lords' decision in Kleinwort Benson -v- Lincoln City Council which has (so far) received very little press attention. (We put that right in this edition of Construction Press). This case decided that a party could successfully sue for return of monies paid by it to another under a mistake of law, as well as where monies were paid under a mistake of fact.

Banks which had loaned monies to local authorities under interest rate swap arrangements which were prevalent in the 80s claimed to recover their money after it had been decided by the courts that the arrangements were ultra vires (beyond the powers) of the local authorities. The claims succeeded.

Although nothing to do with the construction industry, the case may well encourage a spate of claims for the return of sums paid which were thought to be owing at the time but which the paying party now realises were not in fact due.

A little known case heard by Mr. Justice Dyson in October (Moores -v- Yakeley) held that a term in an architect's appointment which limited the architect's liability to a sum calculated by reference to his professional insurance cover was a valid clause for the purposes of the Unfair Contract Terms Act. This is the first decision of its kind on such a clause and will encourage indemnity insurers and their insureds to negotiate such limitations in their appointments. In the absence of any statutory capping of liability (which seems unlikely) this is probably the most that can be achieved for the professional team.

Perhaps the most extraordinary case of the year was Strachan -v- Henshaw in the Court of Appeal where the court had to interpret the difficult terms of the mechanical and engineering standard form of contract (MF/1). A complicated exemption clause in the contract purported to deny both parties any right to claim damages for breach of any of the contract's provisions, unless such provision expressly stated that a sanction should be attached to that breach. The court thus introduced the possibility that any contract, provided it is clearly drafted, may deny the innocent party a financial remedy if the other party is in breach. Draftsmen will be quick to seize upon this decision as a precedent for all kinds of curious contractual arrangements.

The Official Referees courts have now been renamed with the fashionable title - "Technology and Construction Court" - and the judges are now to be addressed as "my Lord" instead of "your Honour". Whether this cosmetic change will satisfy the aspirations of these hard working members of the judiciary remains to be seen.

...... and Looking to the Future

With one year to go (or is it two?) not only those of us who still have no invitation to a Millennium party are running out of time. With an unsettled economic outlook, the construction industry is facing both continuing change in its clients' demands and increased competition from abroad. Those who don't adapt will not survive.

Life is not getting any easier.

The legal profession is similarly in a state of flux, with major changes on the way designed to speed up the litigation process, and lawyers now able to work under "conditional fee" arrangements for all types of disputes.

A major development in the evolution of construction law will come about when parliament passes the new Contracts (Rights of Third Parties) Bill which is presently on its way through the House and is likely to become law before the Easter recess. This piece of legislation is designed to give effect to a recommendation of the Law Commission made in 1996 which advised the government that the rule of privity of contract (as previously understood in this country) should be abolished. Henceforth it will be possible for contracting parties to write provisions into their contracts giving third parties the right to enforce its terms.

It is thought that this may do away with the need for collateral warranties since provisions equivalent to those contained in our current forms of collateral warranty can be introduced into the professional appointments and the building contracts in such a way that all future funds, purchasers and tenants, can take advantage of them directly - and without the need to rely upon contracts of their own.

Quite whether this will operate as foreseen is yet to be sorted out. What one can say for certain is that the process of negotiating what we now call "collateral warranties" will be accelerated into the primary documents so that transaction costs may not be minimised but the legal paperwork will almost certainly be different.

We at Macfarlanes will be hosting a seminar on this vital topic as soon as the shape of the new legislation becomes clear.

Surely we can all unite in one aspiration for 1999 - that there be no more reports on the state of the construction industry in this country! We are still learning to distinguish between the wheat and the chaff served up originally by Latham in 1994 and latterly by Egan during the course of last year.

Whatever your role in the industry, Macfarlanes' Construction Group wish you prosperity and a full order book for 1999. During the year ahead we will, through Construction Press, help you to keep abreast of new developments in the law that relate to your daily activities.

This article was first published in Marcfarlanes' Construction Press March 1999 issue.

Macfarlanes' Construction Press is intended to provide general information about developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

If you would like further information or specific advice, please contact Tony Blackler.

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