UK: UK Construction Contracts Round-Up

Our round-up of news about new contracts and contract issues in the UK construction industry.

If you would like more information on any of the topics below, please contact one of the team listed under Key contacts.

Update on new standard form contracts

  • NEC4 Alliance Contract offers much deeper collaboration between parties
  • The NEC 4: Alliance Contract is now available and aimed at major projects or programmes of work. Distinguishable from other contracts in the NEC4 suite by virtue of being multi-party with an integrated risk and reward model, it nevertheless is recognisable as and adopts the same principles as other NEC4 contracts. Heralded as a "true alliance arrangement in which the client and all key members of the supply chain, called 'Partners' in the ALC are engaged under a single contract", it gives alliance members an equal voice while imposing the obligation "to act in a spirit of mutual trust and cooperation". An introduction to the ALC can be found on the NEC4 site here.

    We wrote more broadly on alliancing in April 2017 following the Institute of Civil Engineers' Infrastructure Client Group's guidance on implementing alliancing using NEC3 contracts. You can read that article here: " Constructing a team".

  • New RICS form of consultant appointments
  • Since the Royal Institute of Chartered Surveyors (RICS) issued its current forms of appointment, there have been several changes in the law. For example, amendments were made to the Housing Grants, Construction and Regeneration Act 1996 in 2011 and the Contract (Design and Management) Regulations were updated in 2015. Updated versions of the forms of consultant appointment were issued in draft and comments sought from interested parties in the industry. This consultation closed in June and the final forms (for English and Welsh legal systems) are expected to be published later this year. The format will stay largely the same with:

    • a Standard appointment document for use on construction projects of any size of value; and
    • a Short form for construction projects considered more straightforward or those of more modest value; and
    • a new appointment Short form for Designated Services intended for use with more specialist services.

    Versions suitable for the Scottish and Northern Irish legal systems will follow in later editions. (Source: RICS)

  • City of London Law Society issue model agreement of escrow for use with construction agreements
  • Following the Carillion collapse, the ongoing focus on the industry's payment practices and growing discomfort at the industry's widespread use of retentions, parties agreeing to carry out construction works are increasingly concerned to protect their payment stream.

    Depending on the commercial background, some parties choose to create an escrow account. An employer agrees to pay all or part of the contract sum (or just the second half of the retention payment) into the escrow account enabling the contractor to draw down from that fund if the employer defaults on payment due under the contract. In June 2018, the City of London Law Society (CLLS) issued a model form of agreement of escrow for use with construction agreements. As the CLLS explain in their Note on Escrow Agreements, the escrow "is typically used where the employer is a single purpose vehicle (SPV) established specifically for the project in question, is an overseas entity or individual or otherwise is unable to demonstrate creditworthiness and an established trading record".

    Setting up an escrow arrangement involves a supplement agreement between the employer and the contractor and a tripartite escrow agreement between the parties and the escrow agent.

    It's fair to say that escrow arrangements are not all that common as they "tie up funds that would otherwise be available to the employer for use in its business". The parties' commercial goals, the employer's financial means and the existence of other [more] suitable forms of security (such as bank or parent company guarantees) will therefore be crucial factors in deciding whether escrow is appropriate. Both the CLLS note and the escrow agreement can be found on the CLLS site here.

Retentions: an update on the Aldous bill

The second reading of the Construction (Retention Deposit Schemes) Bill has been put back, (again), to October 2018. Referred to as the Aldous Bill, after Peter Aldous, the MP who launched the bill back in January 2018, the bill will enable retention money to be secured and ring-fenced in a retention deposit scheme for timely release under the contract terms.

You can read more about the background to the bill and what Mr Aldous hopes to achieve in our article " Aldous Bill" sets out proposed new legislation to protect retentions".

VAT changes ahead for those receiving a supply of construction services

The government intends to introduce a statutory scheme to tackle the risk of direct tax fraud in the construction industry.

HM Revenue and Customs (HMRC) has issued draft legislation for a VAT reverse charge for construction services to reduce such tax fraud and evasion. In essence, those receiving a supply of construction services (if they are a taxable person) will become liable to pay the VAT due on the supply rather than those providing the service (with no minimum threshold).

Paragraph 2.1 of the Explanatory Memorandum states: "A reverse charge prevents supplies of goods and services from being exploited by those engaged in a type of VAT fraud called 'missing trader fraud'. This instrument imposes a reverse charge, with effect from 1st October 2019, on standard and reduced rate supplies of construction services made by construction businesses to other contractors in the construction industry".

"Missing trader fraud" occurs when the VAT charged by the supplier of construction services is collected but not paid to HMRC – and retained by the recipient.

On the basis of the current draft, parties should consider taking the following practical measures ahead of the proposed implementation date of 1 October 2019:

  • becoming familiar with the provisions of the order – and its exceptions. For example, "the legislation will not apply to specified supplies made to customers who are consumers, or to those that use specified supplies to make other supplies, such as those selling new houses";
  • the effect of the changes on your business' cash flow; and
  • preparing for the changes in advance by updating your payments systems to ensure compliance.

The government has already consulted on the draft legislation. The final version of the order (which will be made under powers in section 55A of the VAT Act 1994) and related guidance is expected in Autumn 2018.

(Source: gov.uk website.)

Are "no oral modification" clauses enforceable?

"Contracts frequently provide that they may not be amended, unless in writing and signed by both parties. But how does that fit with the principle of freedom of contract and the idea that parties should be able to make (or unmake) whatever bargain they wish?"

So wrote our commercial contracts colleague, Douglas Blythe, in his review of the Supreme Court decision in Rock Advertising Limited v. MBW Business Exchange Centres Limited [2018] UKSC 24. You can read his full article here.

In Rock, in summary, the contract contained a "no oral modification" (NOM) clause that stated: "All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect". Rock was in arrears under the licence and proposed a revised payment schedule. The parties agreed to this revision orally. The subsequent dispute eventually reached the Supreme Court which held the NOM clause was legally effective. The parties' oral agreement to vary the payment terms was therefore invalid.

As Douglas makes clear, many contracts require compliance with certain formalities before a variation will be valid. Contracting parties must check their contracts and follow these requirements every time they agree to vary the terms. Following Rock, courts are more likely to insist on compliance with such provisions.

Construction contracts are varied regularly which makes this issue particularly crucial where the parties have agreed a "NOM" clause. At the start of a project, check who has authority to sign contracts and agree variations. Ensure they understand that any variations must be recorded in writing. If the other party agrees a variation during a call or meeting, follow up immediately with an email or letter setting out the agreement and ask the other party to confirm in writing.

UK procurement highlights

For an update on recent procurement news, read our " UK Procurement highlights" which includes:

  • Transparency and the importance of being able to provide reasons for rejection
  • New ICE guide on procurement, commercial and contracting key principles
  • Public Private Partnerships (PPP) – the new paradigm for Chinese companies funding African infrastructure projects?

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