English construction

law developments
An international perspective

Spring 2011
 Contents
Introduction 3

International activities
Jivraj v Hashwani: The future of English Arbitration 4
Endeavours clauses 6
The applicability of liquidated damages provisions post-termination 8
Concurrent causes of delay in the assessment of extensions of time 10
Consequential and Indirect Loss Exclusions 12
Performance bonds: on demand or conditional? 14
The application of time bars in construction contracts 16
Letters of intent and failure to agree formal terms of contract 18

UK activities
The Bribery Act 2010 20
Changes to the Housing Grants, Construction and Regeneration Act 1996 22

Our Construction team 23

2 | English construction law developments: An international perspective

Introduction

Welcome to the Spring 2011 edition of our international update on English construction law
developments. The aim of this update is to highlight legal developments relevant to those
organisations involved in English law construction projects outside the United Kingdom. We have
also included a small section in the present edition dealing with significant legal changes affecting
international organisations with operations in the United Kingdom. We hope you find the update of
use. We publish our updates on a regular basis to help keep you informed – any feedback on this
edition would be gratefully received and will assist us in improving subsequent editions.

Our best wishes for a profitable and successful 2011. We look forward to working together as the
year progresses and keeping on the right side of this year’s developments.

Victoria Peckett
Partner
T +44 (0)20 7367 2544
E victoria.peckett@cms-cmck.com

The effects of the global recession continue to make themselves felt, including in the disputes
affecting projects around the world. The developments we have identified reflect many
traditional battlegrounds: how time bar clauses deny entitlements that are otherwise due,
liquidated damages and bond calls. One recurrent theme, more than ever, is cash - getting it and
not giving it away. It is hard not to view other changes in the same light, with the postponed
Bribery Act requiring investment in anti-bribery measures by those who operate in the UK, if they
are to avoid becoming a high profile test case. Good faith dealings are also at a premium; too
expensive perhaps for English law to afford a general doctrine. This fuels both “all reasonable
endeavours” and similar clauses as well as “contract/no contract” cases. While the latter category
gave us our first construction law judgment from our new Supreme Court (which is already 18
months old), the key remains not to be one of the parties.

Perhaps the real common thread through these developments is not just money, but the price of
uncertainty. In that vein, the Jivraj case casts a shadow over arbitration clauses and arbitrations
with an English law connection, which may not be lifted for a while yet (especially if it is referred
to the European Court of Justice).

We hope that what follows forewarns and forearms you in uncertain times - without the expense.

Rupert Choat
Partner
T +44 (0)20 7367 3573
E rupert.choat@cms-cmck.com

3
Jivraj v Hashwani:
The future of English Arbitration

A decision of the English Court of Appeal in the middle of last year has raised significant
questions over the future of English arbitrations. The decision makes the selection of
arbitrators on the basis of nationality, race or religion contrary to English discrimination
laws. Both the LCIA and the ICC include nationality provisions within their arbitration rules
and arbitration clauses adopting those rules may now potentially be invalid in England.

A joint venture agreement between Mr Jivraj and Mr Hashwani provided that disputes between
them should be determined by three arbitrators “of the Ismaili community and holders of high
office within the community”. Mr Hashwani sought to appoint a non-Ismaili arbitrator, provoking
objection by Mr Jivraj and a judicial challenge to the validity of their arbitration clause.

Prior to the Court of Appeal’s decision it had been thought that arbitrators did not fall within the
ambit of English discrimination legislation, primarily because of their self-employed and
independent status. The Court of Appeal, however, adopted a broad reading of the legislation,
applying it to any person employed under a contract to do work personally. Arbitrators are
therefore caught.

English discrimination law provides an exception where discrimination flows from a genuine
occupational requirement. Under the recently enacted Equality Act 2010, such discrimination
must be “an occupational requirement” and must be “a proportionate means of achieving a
legitimate aim”. In Jivraj, the Court of Appeal found that such exclusions were insufficient to
excuse discrimination based upon religion or nationality where the jurisdiction of the arbitrator
was limited to reaching a decision in accordance with the law. The court noted that the position
could be different where the arbitration agreement permitted an arbitrator to have regard to
broader considerations of justice and fairness. Such broader notions could be said to be
legitimately affected by one’s nationality or religion, but not – according to the Court of Appeal
– the application of the law per se.

On this basis, the Court of Appeal struck down the entirety of the arbitration clause agreed by
Mr Hashwani. The requirement for an Ismaili arbitrator was unable to be severed, because it was
clearly a matter of some importance to the parties and, without it, the clause would have been
substantially different from that which had been agreed.

The case has a potentially wide-ranging effect. For example, article 6 of the LCIA arbitration rules
provides that “where the parties are of different nationalities, a sole arbitrator or chairman of the
Arbitral Tribunal shall not have the same nationality as any party …”. This provision is likely to fall
foul of the Equality Act 2010 on the basis of the Court of Appeal’s decision. Potentially therefore,
if severance is not permitted, and the parties have not allowed their tribunal to have regard to
broader considerations of justice and fairness, any arbitration clause adopting the LCIA rules may
be invalid in England.

Complex situations may arise where the seat and law of the arbitration do not correspond. For
example, whilst the above position applies to English law arbitrations held in England, it is
uncertain whether it applies to foreign law arbitrations held in England or English law arbitrations
held elsewhere. For the time being, both of these scenarios are at risk.

4 | English construction law developments: An international perspective

The position may not be as acute in other European countries. In France, for example, there is no
equivalent of the Equality Act 2010 outlawing discrimination solely on the grounds of nationality.
French discrimination law stops at discrimination on grounds of religion or belief, following
closely the EU Directive 2000/78. Such laws are unlikely to pose much difficulty to large
commercial litigants, who rarely agree to appoint arbitrators based upon religion or belief.

Postscript
Leave to appeal has been granted by the Supreme Court and a hearing date has now been set for
6 and 7 April 2011. The ICC and LCIA have also been given permission to intervene in the
hearing. Depending on the Supreme Court’s decision, the relevance of EU law may provoke a
further appeal to the European Court of Justice.

For the time being, parties should exercise care in the agreement of arbitration clauses. They
might, for example, seek to amend the ICC or LCIA rules or prescribe their own selection criteria
without reference to nationality, religion or belief. Opportunities may also exist, depending on
the outcome of the Supreme Court’s decision, for previously unsuccessful litigants to revisit
awards made on the basis of arbitration clauses which might now be found invalid under Jivraj.

Reference: Jivraj v Hashwani [2010] EWCA Civ 712

5
Endeavours clauses

A recent decision of the English High Court in the litigation concerning the
Chelsea Barracks development in London has clarified one aspect of the
age-old debate over the meaning of endeavours clauses: is there any
difference between clauses requiring “best endeavours” and those
requiring “all reasonable endeavours”?

Endeavours clauses raise three main issues in practice

— What is the standard of “endeavour” required? Does “best endeavours” refer to every means
available, or only those which are reasonable?

— What if there is more than one endeavour available which meets the standard? Should they
all be pursued, or only one?

— Do such clauses require endeavours to be pursued even though they conflict with one’s own
commercial interests?

The answer to the first issue is largely clear: the endeavours required are to be reasonable, even in the
case of “best endeavours” clauses. One is not required to “move heaven and earth”. What will be
reasonable in any given case depends on all the circumstances, including the nature of the contract
and businesses involved and the financial position of the company upon which the obligation rests.

Given this position, one might well ask whether there is any difference between “reasonable
endeavours” and “best endeavours”. This question was considered in Rhodia International
Holdings Ltd v Huntsman International, where the difference was held to lie in the number of
endeavours required to be pursued. “Reasonable endeavours” required only one of a number of
reasonable endeavours to be pursued, whereas “best endeavours” required all reasonable
endeavours to be pursued. In this context, the court noted that: “it may well be that an
obligation to use all reasonable endeavours equates with using best endeavours”.

Is there any difference between an “all reasonable endeavours” clause and a “best endeavours”
clause?

Both require reasonable endeavours and both require that all of the reasonable endeavours
available be pursued. According to the recent Chelsea Barracks decision (CPC Group v Qatari Diar
REIC), the difference may lie in the extent to which each clause requires the sacrifice of one’s own
commercial interests.

A “best endeavours” clause generally requires the subordination of one’s own commercial
interests to the pursuit of the required endeavours. This does not mean that one can be driven to
ruin. The endeavours themselves must be reasonable, bearing in mind the circumstances of the
contract and the financial position of the company concerned. What the subordination of one’s
own commercial interests means is that those endeavours which are reasonable must be pursued
even though they may run contrary to one’s own business strategy or direction.

A good example of a “best endeavours” clause requiring the sub-ordination of commercial

interests is Terrell v Mabie Tood. That case concerned a licence agreement for the sale of a
patented fountain pen. The licence agreement required the licensee to use its “best endeavours”
to promote the pen. The pen subsequently became unfashionable and the licensee argued,
unsuccessfully, that in those circumstances, it was not required to sacrifice its own commercial
interests in the promotion of the pen.

6 | English construction law developments: An international perspective

In the Chelsea Barracks case, the claimant attempted to combine this position with regard to
“best endeavours” clauses with the finding in Rhodia International that “all reasonable
endeavours” may be equated with “best endeavours”. The court rejected the argument, finding
that, “the obligation to use ‘all reasonable endeavours’ does not always require the obligor to
sacrifice his commercial interests.”

The answer to the third question raised above is therefore an unhelpful, “perhaps”.

It seems likely that endeavours clauses will continue to feature in future litigation. Such clauses
are useful precisely because their exact meaning is hard to define in the abstract. Parties are often
able to agree that reasonable endeavours should be pursued, whilst being unable to agree what
those reasonable endeavours might be in any given situation. The broad principles outlined above
can assist in resolving such disputes, although they will never eliminate the need for a close
examination of the particular circumstances in individual cases.

One way for parties to increase the certainty of endeavours clauses, whilst maintaining much of
their flexibility, is to specifically address the issues referred to above in the clauses themselves. For
example, the formulation, “all reasonable but commercially prudent endeavours”, would be one
of way of making clear that commercial interests need not be sacrificed in the making of
reasonable endeavours.

References: Terrell v Mabie Todd & Co [1952] 2 T.L.R. 574; Rhodia International Holdings Ltd v
Huntsman International LLC [2007] EWHC 292 (Comm); CPC Group Ltd v Qatari Diar Real Estate
[2010] EWHC 1535 (Ch).

7
The applicability of liquidated damages
provisions post-termination

A great many construction contracts will contain clauses imposing liquidated damages
for delay. Under English law, such clauses will also be taken to impose a limit on the
contractor’s liability for delay or, as is sometimes said, be the employer’s sole remedy for
delay. Two cases decided in 2010 have considered how such provisions are to apply after
termination of the contract by the employer.

It has traditionally been thought that the exercise of a contractual right to terminate would, in
ordinary circumstances, bring to an end the accrual of liquidated damages. That appeared to be
position adopted by the House of Lords in British Glanzstoff Manufacturing Co v General
Accident Fire and Life Assurance Corp. The House approved the decision of the Scottish Court of
Session, which held that a clause allowing an employer to terminate and take over the works was
“obviously incompatible” with the continued operation of a liquidated damages clause. It was
said that liquidated damages clauses “apply and…apply only to a case where the works are
finished by the original contractor”. Termination therefore brought to an end the accrual of
liquidated damages and the employer was left to prove its actual losses for any delay occurring
post-termination.

This position has now been placed in doubt by a TCC decision last year in Hall v Van Der Heiden.
The Court in Van Der Heiden did not refer to British Glanzstoff and emphasised instead the fact
that ceasing to apply liquidated damages after termination would, on the face of it, appear to
reward a contractor for its own delay. By this means a contractor could delay performance with a
view to procuring the employer’s termination of the contract so that liquidated damages would
cease to apply and the employer be required to prove its actual losses for delay occurring
post-termination. Mr Justice Coulson concluded that such an interpretation, “would not be a
commonsense interpretation of this (or any) construction contract.” It remains to be seen how
these remarks can be reconciled with British Glanzstoff, which as a decision of the House of Lords
(now Supreme Court) should in principle be binding on all lower courts.

A similar question arises with regard to the limit imposed by liquidated damages clauses. Such clauses
often impose an aggregate cap on the amount of damages or delay days recoverable, and even
without such an aggregate cap, daily or weekly sums for liquidated damages will themselves amount
to the employer’s exclusive remedy for delay. Should, then, such limits continue to apply after
termination? If liquidated damages themselves continue to apply, as in Van Der Heiden, it seems
relatively clear that their limiting effects will also remain applicable. However, where liquidated
damages cease to accrue, as in British Glanzstoff, the position has to date been uncertain.

A recent TCC decision has addressed this issue directly. In Shaw v MFP Foundations and Pilings
Ltd [2010], Edwards-Stuart J held that a liquidated damages clause ceased to limit liability for
delay once the contract had been terminated, in that case for repudiation at common law:

“…after the date of termination the parties are no longer required to perform their primary
obligations under the contract and so the contractor’s obligation to complete by the completion
date no longer remains and the provision for liquidated damages therefore becomes irrelevant. In
its place arises an obligation to pay damages for the employer’s losses resulting from the breach
of contract, including damages for any loss resulting from any further delay…”

8 | English construction law developments: An international perspective

This decision provides helpful clarification. In balancing the advantages and disadvantages of
termination, it will often be important for an employer to know how its rights to delay damages
will be affected. An employer may, for example, be encouraged to terminate if its actual damages
for delay are considerably higher than the agreed amount of liquidated damages. In those
circumstances, Shaw v MFP suggests that an employer will be able to recover the full amount of
its delay damages from the date of termination.

Reference: British Glanzstoff Manufacturing Co v General Accident Fire and Life Assurance Corp
(1912) SC 591; [1913] AC 143; Hall v Van Der Heiden [2010] EWHC 586; Shaw v MFP Foundations
and Pilings Ltd [2010] EWHC 1839

9
Concurrent causes of delay in the assessment
of extensions of time

A Scottish appellate court judgment delivered in mid-2010 has revived uncertainty

surrounding the assessment of delay claims under English law. We consider the
impact of the decision and some initial reactions in England below.

If a contractor completes its works after the contractual completion date it will often be liable to
compensate the employer, usually for liquidated damages. The contractor avoids this liability
insofar as the completion date is extended by an extension of time (EOT). In the first instance the
employer or a certifier may award an EOT. Failing that, a third party or parties may award an EOT
as part of a dispute resolution process. In addition to an EOT, the contractor may also seek
financial compensation arising from the overrun insofar as it is not liable for it, such as its costs
for its prolonged involvement with the works.

A difficulty arises when the completion of works is delayed by, say, two events both of which in
isolation would have caused delay. One of the events may be something for which the contractor
bears the risk, such as a labour shortage (a “contractor risk event”). The other event may be
something for which its employer bears the risk, for instance, extra work (an “employer risk event”).

This situation is called “concurrent delay” although a better phrase is “competing causes of
delay”. The starting point for assessing the EOT and how much financial compensation each
party is due is invariably the contract’s terms (the parties largely having free rein to agree when
EOTs are due).

In 2010, a Scottish appellate court gave judgment in the long running City Inn litigation. The case
concerned the assessment of EOTs under a JCT (Joint Contracts Tribunal) style contract. Much of
the case law in this area relates to JCT-style contracts and different results may occur under
different contracts. JCT contracts are used in about 79% of UK contracts by volume and about
62% by value. The judgment affirms the much-criticised first instance decision of 2007.

The majority of the three-person appellate court in City Inn supported the following approach in
assessing EOTs:

— If a dominant cause can be identified as the cause of some particular delay in the completion
of the works, effect will be given to that by leaving out of consideration any cause or causes
which are not material. Depending on whether or not the dominant cause is an employer risk
event, the claim for EOT will or will not succeed. Whether something was a dominant cause is
essentially an issue of fact.

— Where two causes are operative, one being an event at the contractor’s risk and the other
some event for which the contractor is not responsible, and neither of which could be
described as the dominant cause, the claim for EOT will not necessarily fail. It will be open to
the decision-maker approaching the issue in a fair and reasonable way, to apportion the delay
in the completion of the works occasioned thereby as between the employer risk event and
the other event.

— In apportioning, two factors are important: the degree of culpability involved in each of the competing
causes of delay and their relative causative potency (the latter usually being most relevant).

This is an important appellate judgment on assessing EOTs under construction contracts and it will
have significant persuasive force in England and Wales. There are signs that English law may already
favour an apportionment approach when assessing a contractor’s compensation for delay (or “loss
and/or expense” as it is referred to under JCT contracts) following the Scottish decision in John
Doyle Construction Ltd v Laing Management (Scotland) Ltd (see London Underground Ltd v Citylink

10 | English construction law developments: An international perspective

Telecommunications Ltd). However, City Inn is by no means the final word on concurrent delay. One
judge delivered a minority judgment, which detracts from the majority’s opinion, and a key English
judgment was not apparently cited. There has also been a subsequent decision of the English High
Court in December last year which, although not citing City Inn, reached a position similar to the
minority judgment (De Beers UK Ltd v Atos Origin It Services UK Ltd). The recently published 12th
edition of Hudson’s Building and Engineering Contracts also adopts this view.

In fact, the authorities provide many ways for deciding if the employer risk event in the scenario
given above (i.e. labour shortage and extra work) gives rise to an EOT under JCT-style contracts
and potentially many other construction contracts too:
— If it occurred first.
— Insofar as it is fair and reasonable.
— If it has at least equal causative potency.
— If it is the “dominant” cause.
— If it is the dominant cause or, failing that, as a matter of apportionment i.e. the approach
adopted in City Inn mentioned above.
— If the relevant event, looked at in isolation (i.e. ignoring the contractor risk event), would have
caused delay.

Wildly varying EOTs may result from these approaches. Take a situation where an employer risk
event occurs/impacts after a contractor risk event which had already delayed completion by six
weeks. The employer risk event, looked at in isolation, would have delayed completion by six
weeks. Under approach (1) the EOT would be nil. Under approach (5), assuming neither event is
dominant, the EOT may be apportioned somewhere between nil and six weeks. Under approach
(6), the EOT is six weeks.

It had been hoped that City Inn would proceed to the Supreme Court where authoritative
guidance could be given. It is now understood, however, that appeal proceedings have been
settled. Uncertainty surrounding claims for concurrent delay under English construction law is
therefore set to continue for some time to come.

References: John Doyle Construction Ltd v Laing Management (Scotland) Ltd [2004] BLR 295;
London Underground Ltd v Citylink Telecommunications Ltd [2007] BLR 391; City Inn Ltd v
Shepherd Construction Ltd [2010] CSIH 68; De Beers UK Ltd v Atos Origin It Services UK Ltd
[2010] EWHC 3276 (TCC).

11
Consequential and indirect loss exclusions

Many construction contracts seek to exclude liability for “consequential and indirect
losses”. These words have acquired a specific legal meaning, which will only very rarely be
departed from. Often, however, such exclusions also include other descriptors such as “loss
of profit” or “economic loss” and the court is then asked to decide whether those other
descriptors expand the fixed category of “consequential and indirect losses” or whether
they merely describe examples within that category. A Commercial Court decision last year
has provided some useful clarity as to how such questions are to be approached.

Several decisions of the English Court of Appeal have established that contractual exclusions for
“consequential and indirect losses” will be limited to losses which fall within what as known as the
“second limb” of Hadley v Baxendale. Hadley v Baxendale is an old and well known decision in
English law establishing a fundamental division between two types of recoverable losses for breach
of contract:
— Damages that may fairly and reasonably be considered as arising naturally, i.e. according to
the usual course of things, from a breach of contract. For example, if the breach involved the
destruction of a power-plant, both the cost of rebuilding and the loss of power production
suffered during rebuilding would fall within this first category. These are “direct losses”.

— Any other damages which may reasonably be supposed to have been in the contemplation of
both parties at the time they made the contract. This category depends upon additional facts
being known to both parties. In the example of the factory just given, it may be that loss of
production during the period of rebuilding caused the loss of a particularly lucrative long
term contract. The loss of such a contract would not be recoverable unless both parties knew
that the contract might be lost in the event of such a breach. These are “indirect losses”.

Exclusions for “consequential and indirect losses” exclude only those losses falling within the
second category described above. In the case of the factory, therefore, such an exclusion would not
affect any claim for loss of production suffered during the period the factory was unavailable. Such
an interpretation has been criticised as one which the average businessman would not expect.
However, the rule is very well established and in British Sugar plc v NEI Power Projects, the Court of
Appeal commented that reasonable businessmen using such language must be taken to be aware
of the distinction.

Additional questions arise where parties agree to qualify or supplement these words with other
expressions such as “loss of profit” or “economic losses”. For example, in BHP Petroleum Ltd v
British Steel plc the clause in question excluded “loss of production, loss of profits, loss of
business or any other indirect losses or consequential damages”. The references to loss of
production and loss of profit were held not to be confined by the subsequent reference to
indirect and consequential losses. Accordingly, ordinary loss of profit/production falling within the
first category mentioned above had been successfully excluded.

Falling on the other side of the line is a decision by the Commercial Court last year in Markerstudy
Insurance Co v Endsleigh Insurance Services. The clause there sought to exclude “any indirect or
consequential loss (including but not limited to loss of goodwill, loss of business, loss of
anticipated profits or savings and all other pure economic loss)”. The court held that the
parenthetical references to loss of profit and economic loss did not expand the initial reference to
indirect or consequential losses. Accordingly, loss of profit/production falling within the first
category mentioned above was not excluded.

12 | English construction law developments: An international perspective

Set out below are a selection of exclusion clauses found in common standard forms, together
with an indication of their likely effect based on the above cases:

Contract Wording Effect

FIDIC “…loss of use of any Works, loss of profit, loss Loss of profit/production not recoverable,
of any contract or for any indirect or whether direct or indirect.
consequential loss or damage…”

Orgalime “…loss of production, loss of profit and other Loss of profit/production not recoverable,
indirect loss…” whether direct or indirect (applying BHP v British
Steel).

JCT None Loss of profit/production fully recoverable,

whether direct or indirect.

NEC “…indirect or consequential loss …” Direct loss of profit/production still recoverable.

Conclusion
The Markerstudy case shows that it is important to take care when considering exclusions for
indirect and consequential loss. The addition of words such as “loss of profit” or “economic loss”
may not necessarily widen such clauses beyond the historically narrow reading given to them by
the English courts.

Reference: Hadley v Baxendale (1854) 9 Exch 341; British Sugar plc v NEI Power Projects (1997) 87
BLR 42; BHP Petroleum Ltd v British Steel plc [1999] 2 All ER (Comm) 544; Markerstudy Insurance
Co v Endsleigh Insurance Services [2010] EWHC 281.

13
Performance bonds: on demand or conditional?

A English High Court decision last year suggests that the courts will require clear and
unambiguous words to establish that a performance bond or guarantee was intended to
be payable on demand, as opposed to on the default of a contractor.

A familiar feature of the construction industry internationally is the performance bond (that is, a
form of security, generally procured by a contractor for an employer, consisting of an undertaking
by a “bondsman” or “surety” to pay the employer in specified circumstances). There are two main
categories of performance bond - “conditional” and “on demand” - which differ as follows:
— Under an “on demand” bond the bondsman (ordinarily a bank) is required to pay whenever
the employer demands payment, irrespective of whether or not the contractor is in default
under the underlying construction contract. Under English law, a bondsman can only refuse
to make payment on a regular demand for payment if the demand is made fraudulently.
Although “on demand” bonds are rarely provided for UK-domestic projects, they are used
widely in international projects.

— Under a “conditional” bond the bondsman is only required to pay out if the contractor is in
default under the underlying construction contract. “Conditional” bonds are a common
feature of construction works undertaken within the UK, in which circumstances the
bondsman will often be the parent company of the contractor.

Given the obscure wording of many bonds, there has in the past been some difficulty working out
under English law whether a bond is “on demand” or “conditional”. Historically, English law used a
complex set of rules drawn from banking law to decide whether or not a bond was “on demand”.
Fortunately, in recent years English law has increasingly said that principles drawn from the banking
cases are of only limited applicability in performance bond cases involving the construction industry
- these cases often turn on very different facts and the drafters of the agreements will often be
unfamiliar with the more technical aspects of banking law. English law stresses that given the
onerous nature of the bondsman’s obligation under an “on demand” bond, clear words are needed
to show that the parties intended a bond to be “on demand” rather than “conditional”.

Vossloh
In 2010, this modern trend was evidenced by an English High Court judgment in Vossloh
Aktiengesellschaft v Alpha Trains (UK) Ltd. The claimant was the parent company of a group of
companies that manufactured locomotive rolling stock. One of the claimant’s subsidiaries
contracted to supply the defendant with a number of locomotives. The claimant provided a parent
company guarantee in favour of the defendant, which guaranteed the performance of the
contracted works. The defendant subsequently alleged that the locomotives were faulty and made
a call on the guarantee.

At the time of the call the defendant had neither established in court the liability of the claimant’s
subsidiary nor shown that it had expended any money in repairing the locomotives. It followed,
therefore, that the only way that the defendant could make a call on the guarantee was if it
showed that the guarantee was similar to an “on demand” bond, rather than a “conditional”
bond. The guarantee stated that if the claimant’s subsidiary did not make payment to the
defendant against a secured obligation when the same was said to be due, the claimant would be
obliged to pay such sums as were said to be due “on demand”, and that all sums payable under
the guarantee were to be payable “on demand”.

14 | English construction law developments: An international perspective

Despite the use of the words “on demand”, the High Court held that a proper reading of the guarantee showed it to be a
“conditional” bond, and that accordingly the defendant had first to establish the liability of the claimant’s subsidiary in the
sums claimed before it could make a valid call on the guarantee.

Vossloh has the following implications:

— It confirms that English law will generally only find that there is an “on demand” bond where it is clear on a proper
interpretation of the document as a whole that the parties intended the liability of the bondsman to exist separately
from the underlying liability of the contractor. The use of the words “on demand” will not in every case suggest that a
bond is in fact “on demand” in nature, if it is clear that on a proper construction of the bond the parties intended it to
be “conditional”. A bond may provide that if certain conditions are fulfilled (for example, the contractor being in default)
then the bondsman will make payment “on demand”. In such a case the bond is not truly “on demand” because of the
preconditions to any call on it.

— The wording of a bond or guarantee should clearly express the parties’ intentions. It was implicit in Vossloh that if the
guarantee in question were found to be of an “on demand” nature, the call on it would have to be honoured, even
though liability and quantum remained to be established.

— Internationally, performance bonds usually specify the law governing the bond (if not also which courts will have
jurisdiction over any disputes concerning it). The usual choice is the law (and home jurisdiction) of the bondsman as that
is the natural place for any court-based challenges to a call on the bond to be made. The scope for challenging calls
varies between jurisdictions. Furthermore it may be even if, say, English law is chosen as governing a bond – if a call is
challenged on the bond in the courts of another country, mandatory or procedural rules of that country may impact on
how the courts decide whether to enjoin the bondsman from paying or not.

Reference: Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch).

15
The application of time bars in construction
contracts

Many construction contracts, such as the FIDIC forms, contain clauses that bar claims that
are not made on time. A recent decision of the English TCC confirms that such clauses
must be adhered to, if contractors or subcontractors are to avoid prejudicing otherwise
valid claims.

The English courts have traditionally shown themselves to be supportive of enforcing time bar clauses
if they are not strictly complied with. They see the commercial benefit of them. For instance, in
Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No. 2), Jackson J (now Jackson LJ)
noted the benefit of clauses that lay down certain preconditions to extension of time claims. He said:
“Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose;
such notice enables matters to be investigated while they are still current. Furthermore, such notice
sometimes gives the employer the opportunity to withdraw instructions when the financial
consequences become apparent”.

One English court has said that “the words in a time-bar provision must be given their ordinary and
natural meaning” (Waterfront Shipping Company Ltd v Trafigura AG). As such it seems they do not
require particularly clear words to be effective.

A further judgment in 2010 has confirmed this approach. In WW Gear Construction Ltd v McGee
Group Ltd, the contract required the contractor’s claims for loss and/or expense to be made in a
specified form within a specified time. The contract also contained notice requirements for claims for
an extension of time. While the contract said that these notices were “conditions precedent” to the
contractor’s entitlement it did not go further and say that if the contractor failed to comply it lost its
right to claim under the contract (as, for example, do the FIDIC Red, Yellow and Silver Books in the
1999 suite).

The court had no difficulty in enforcing the time bar clause, applying the basic rules of interpretation.
It court held that where a contract contains time-bar provisions which state that a contractor must
submit claims for loss and expense or extension of time in a prescribed format within a certain period
of time, then such provisions will be applied strictly where it is clear from the words used in the
contract that the parties intended them to be applied strictly. If a contractor fails to comply with the
requirements of such provisions then he will be unable to claim payment in excess of the contract
sum. The court commented that the two-month time barring provision in question was “not an
unduly onerous provision” (although this may have been influenced by the fact that the contractor
might still pursue its claims under the general law, outside of the contract).

It is notable that in WW Gear an adjudicator had already decided the point before the court and
found that the relevant time-barring provision was “devoid of meaning” and of no effect. This is
indicative of the approach to time-barring provisions of tribunals other than the courts (such as

16 | English construction law developments: An international perspective

arbitrators or adjudicators) when also applying English law. It seems that some tribunals seek ways
around applying time-bar provisions strictly. This has not escaped the attention of the courts (for
example, in Waterfront Shipping Company Ltd v Trafigura AG), although there are also judgments
which seem to show courts straining to use concepts such as waiver in order to overcome what they
perceive would otherwise be the unjust and extreme consequences of time-bar provisions (for
example, City Inn v Shepherd Construction).

Contractors and other parties required to comply with time bar provisions, where English law
applies, should not rely upon such favourable treatment – if they wish to preserve their rights. If
the contract says that an entitlement is dependant on notice being given within a certain time
frame and in a certain format then the prudent claiming party should comply with those
requirements.

Concerns about time bar provisions are, of course, best addressed when contracts are negotiated
and drafted. Insofar as time bar provisions are adopted, contractors should make sure that they
comply with the exact requirements, in terms of time for notification, format and effective service.
This is vital given that time bar provisions are a common feature of many standard form contracts. In
particular, contractors should not assume that general references to delay and loss/expense during
the course of the works are sufficient to satisfy time bar provisions.

Set out below are a selection of time bars found in common standard forms:

Contract Wording

FIDIC “If the Contractor fails to give notice of a claim within such period of 28 days, the Time for
Conditions of Completion shall not be extended, the Contractor shall not be entitled to additional payment, and
Contract (1999) the Employer shall be discharged from all liability in connection with the claim.”

FIDIC Red Book “…the Contractor shall keep such contemporary records as may reasonably be necessary to
4th Edition support any claim he may subsequently wish to make.…
If the Contractor fails to comply…his entitlement to payment in respect thereof shall not exceed such
amount as the Engineer or any arbitrator…considers to be verified by contemporary records …”

MF/1 “…within 30 days of the said circumstances arising the Contractor shall…give to the Engineer
notice of his intention to make a claim and shall state the reasons by virtue of which he considers
that he is entitled thereto…
…the Purchaser shall not be liable to make payment in respect of any claim for an additional
payment unless the Contractor has complied with the requirements of this clause.”

Orgalime “The Purchaser shall forfeit his right to liquidated damages if he has not lodged a claim in writing
for such damages within six months after the time when delivery should have taken place.”
“The Purchaser shall without undue delay notify the Supplier in writing of any defect which
appears. If the Purchaser fails to notify the Supplier in writing of a defect within the time limits set
forth in the first paragraph of this Clause, he loses his right to have the defect remedied.”

NEC “If the Contractor does not notify a compensation event within either weeks of becoming aware
of the event, he is not entitled to a chance in the Prices, the Completion Date or a Key Date unless
the Project Manager should have notified the event to the Contractor but did not.”

Conclusion
Provisions such as those set out above are intended to take away valuable rights from contractors in
the event that timely notices are not given. English law will uphold such provisions, subject only to
questions of waiver or estoppel, which depend upon the individual circumstances of any given case.

References: Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No. 2) [2007] EWHC
447 (TCC); Waterfront Shipping Company Ltd v Trafigura AG [2007] EWHC 2482 (Comm); WW Gear
Construction Ltd v McGee Group Ltd [2010] EWHC 1460 (TCC); City Inn v Shepherd Construction at
first instance, [2001] ScotHC 54, and on appeal, [2010] CSIH 68.

17
Letters of intent and failure to agree formal
terms of contract

In the UK construction industry letters of intent (LOIs) are often issued prior to final
agreement over contract terms, so that the contractor may commence work
immediately. LOIs usually limit the employer’s liability for the works to be carried out
under them, either by reference to time, value or scope of works. Cases sometimes arise,
however, where parties continue to work beyond the limits of an LOI without
concluding negotiations over contract terms. The court must then determine whether
any contract has come into existence apart from the LOI. In 2010, such a case went all
the way to the highest court in the land.

RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG

In RTS the employer wanted the contractor to design and install two production lines in its
factory. So that work could begin quickly, the contractor began work pursuant to an LOI, which
was stated to expire on a certain date. Unusually the LOI did not refer to the value of the work to
be carried out during that period but only referred to the contract price for the entire works (of
£1.7m). The LOI envisaged that a full contract would be based on a specified standard form
amended by the employer and signed before the LOI expired.

The contractor progressed the works, while the parties negotiated the contract. About six weeks
after the LOI expired, the parties had reached agreement on all points – but they still did not sign
a full contract. The contractor went on to complete the work but the employer claimed that the
contractor’s works were defective. The contractor, who had been paid only 70% of the agreed
price, claimed the unpaid sum – while the employer counterclaimed for £3m. The dispute
focussed on whether, after the LOI expired, the parties had entered into a contract and, if so,
whether the contract was subject to some or all of the terms of specified standard form prepared
by the employer (which included limits on the contractor’s liability).

There were four possible outcomes, although the first option – a continuing contract based upon
the LOI – was dropped given that on its terms it had clearly expired. Thus, when the case reached
the second appellate level the Supreme Court faced three options:

— No contract at all, as held by the Court of Appeal. The Supreme Court rejected this possibility
given the following: (1) the parties had agreed the price for the entire works; and (2) after the LOI
expired the parties had agreed to vary the order of installation of the two production lines and
neither party had suggested this was not a contractual variation.

— A contract existed but did not include the terms of the specified standard form amended by the
employer. This was the judge’s conclusion at first instance. The Supreme Court did not favour
this possibility either. It did not make commercial sense that the work was carried out on some
but not all of the terms that the parties had agreed after the LOI expired.

— A contract existed including the terms of the specified standard form amended by the employer.
In favouring this outcome the Supreme Court concluded that the only reasonable inference was
that the parties had waived a term in the standard form stating that the full contract would “not
become effective until each party has executed a counterpart and exchanged it with the other”.
Such “subject to contract” terms are frequently used to prevent contracts being concluded
unless and until the parties sign a formal contract. The terms provide an important protection to
parties.

18 | English construction law developments: An international perspective

The parties’ waiver was not express, but was implied by the parties continued performance
despite no executed contract. Again the Court felt that any other conclusion made no commercial
sense. Otherwise the contractor could have refused to carry out the works pending the contract
being executed.

The Supreme Court observed that “the moral of the story is to agree first and to start work
later”. Of course this is not always possible.

The case provides a number of lessons to parties contracting under English law:

— A “contract” executed by the parties may not be an enforceable contract if, say, essential terms
(judged objectively, not subjectively) are not agreed or are expressly left to be agreed.

— Without a “contract” executed by the parties (with all essential terms agreed) if and when a
dispute arises there may be protracted arguments on whether the parties’ correspondence gives
rise to a contract. RTS shows how hard it can be to predict if there is a contract and, if so, what
its terms are (with each of the three courts hearing the case arriving at different answers).

— Conversely, an agreement that no contract will be concluded until a contract is executed, may be
waived. RTS suggests this may happen quite frequently if all that is required is the parties’
continued performance despite no executed contract. To avoid such a result clearer “subject to
contract” clauses can be expected to emerge. Parties relying upon such a clause may also wish
to be clear in their dealings that they are not waiving it.

— Finally, for completeness, it should be said that if a contract does not exist, all is not necessarily
lost. For instance, a contractor may still be paid a reasonable amount for the work it has carried
out. However, without a contract there is no basis for a party claiming for its lost expectations.
For example, a party will generally not recover for the consequences of work not being carried
out on time or at all. Neither will a party be able to claim any specific limitation of its liability.

Reference: RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production)
[2010] UKSC 14.

19
The Bribery Act 2010

The new Bribery Act received Royal Assent on 8 April 2010. The offences it creates are
presently scheduled to come into force three months after publication of official
guidance as to the application of the Act. This guidance was due to be issued by the end
of January 2011 and is now expected imminently. The Act has international reach and
will therefore be important even for contractors who do not regard themselves as from
the UK but who have operations within the UK.

The Bribery Act replaces the existing law in the UK, which was a confusing mix of offences
developed over many years. The aim of the Act is to modernise, simplify and clarify the laws of
bribery into a single statute. In addition, the Act is intended to address the increasingly
sophisticated and cross-border use of bribery, making prosecution more effective and meeting
commitments under international treaties.

The Act creates the following offences:

— Promising, offering or giving, or requesting, agreeing to receive or accepting an advantage
(financial or otherwise), in circumstances involving the improper performance of a “relevant
function or activity”. “Relevant function or activity” means a public or business activity,
which a reasonable person in the UK would expect to be performed in good faith, impartially,
or in a particular way by virtue of the fact that the person performing it is in a position of
trust; “improper performance” means breach of that expectation. These General Offences
will capture public and private sector bribery and in some cases will include bribery
committed outside of the UK.

— A specific offence of promising, offering or giving an advantage (financial or otherwise) to a

foreign public official (FPO) of a country or territory outside of the UK with the intention of
influencing the official in his capacity as such and obtaining business or a business advantage
(FPO Offence). This behaviour will only not constitute an offence if the FPO is permitted or
required by the written law of his own jurisdiction to be so influenced. Custom or tolerance,
however, will not be sufficient.

— The new Corporate Offence of failing to prevent bribery. This is the most important
innovation in the Act. Under the Corporate Offence, a corporate can be penalised if to help it
an associate commits a General or FPO Offence anywhere in the world, even if the corporate
was unaware of its associate’s actions. An “associate” is someone who performs services for
the corporate and so includes employees, agents, subsidiaries, joint venture partners, etc. It is
a defence for the corporate to show that it had “adequate procedures” in place to prevent
bribery on its behalf. As mentioned above, the UK government is to provide guidance on
what constitutes “adequate procedures” but it remains hard to be too specific, as they will
vary according to a business’ size, sector and places of operation. For bigger organisations
operating in high-risk places (such as many African countries) or high-risk industries (such as
construction), far more will be expected.

20 | English construction law developments: An international perspective

Facilitation payments
Payments to low-level officials to ensure performance of a non-discretionary function (such as granting a visa
where there is no discretion to refuse) are illegal. However, prosecutors will maintain their discretion whether it is
in the public interest to prosecute. This is one respect in which the UK Act is more severe than that US Foreign
Corrupt Practices Act.

Corporate hospitality.
Government has suggested that prosecutors will only exercise their discretion to prosecute corporate hospitality
(where it is technically an offence under the Act) where it is “excessive or unreasonable”. This is particularly
worrying, as in some cases offences can be committed without the wrongdoer even realising that what he was
doing was illegal.

Only corporates or partnerships that are created in the UK or carry on business or “part of a business” here can
be liable under the Act. However, as mentioned, the Act applies to acts of bribery outside the UK and also to acts
of bribery carried out by “associates”. Accordingly, the offence of negligently failing to prevent bribery will apply
to acts of bribery committed abroad by associates of businesses incorporated or carried on in the UK.

Therefore, to take two examples, a company incorporated outside the UK that has a branch office in the UK may
be guilty of an offence under the Act if: (1) say, a joint venture partner commits, outside of the UK, a General or
FPO Offence – and it does not have “adequate procedures” in place (a Corporate Offence); or (2) the company
gives, say, corporate hospitality to officials in its own country with the intention of influencing the official in his
capacity as such and obtaining business or a business advantage, as tolerated by local custom but not a written
law (an FPO Offence).

The penalties under the Act are severe. There is a maximum penalty of 10 years’ imprisonment and/or an
unlimited fine for individuals. Companies face an unlimited fine. Furthermore they face automatic and perpetual
debarment from tendering for EU public contracts.

The US Foreign Corrupt Practices Act has had – and continues to have – a significant effect on US and non-US
companies alike. The UK’s Bribery Act looks set to have a similar impact (but with a greater onus on
organisations).

21
Changes to the Housing Grants,
Construction and Regeneration Act 1996

The UK’s most significant effort in recent times to improve payment practices in the UK
construction industry was the Housing Grants, Construction and Regeneration Act 1996, Part II
(“the Construction Act”). It is also a significant exception to freedom of contract specific to
construction contracts (as defined - there are arbitrary exceptions).

The introduction of a statutory right to a 28-day adjudication process has broadly speaking
achieved the Act’s aim of speeding up the resolution of construction disputes. Adjudication
compares favourably with court or arbitration proceedings and such evidence as there is suggests
its users tend to prefer it. It helps that parties often accept what is only a temporarily binding
outcome as conclusive, without having their dispute reheard in court or arbitration.

There is, though, precious little evidence as to whether the Act has achieved its other chief aim of
improving cash flow in the industry - which it sought to do by:

— introducing the right to installment, stage or periodic payments

— requiring an adequate mechanism for determining what will become due and when

— requiring the payer to give the payee early communication of what is to be paid

— providing that the payer may not withhold monies unless it has given a notice stating the
amount it intends to withhold from the sum due and the grounds for doing so

— providing that the payee may suspend performance when the amount due is not paid by the
final date for payment

— banning contractual terms which make payment dependent upon the payer being paid.

If construction contracts fail to comply with the adjudication and payment requirements of the
Construction Act, default rules are implied – from The Scheme for Construction Contracts.

In November 2009 changes were enacted to the Construction Act which are expected to come
into force in April 2011. The changes will only apply to construction contracts entered into on or
after a day yet to be identified. They will not apply to contracts already concluded or contracts
entered into before that day.

In summary the changes will do the following:

— Extend the Construction Act to cover contracts that are not made wholly in writing.

— Tighten up the payment rules, with the result that all payment practices and standard forms will
need overhauling.

— Seek to ban two devices by which the Construction Act has been evaded. However, many other
devices are left in place.

22 | English construction law developments: An international perspective

Our Construction team

Sarah-Jane Archdale Julian Bailey

Solicitor Solicitor
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Adrian Bell Rupert Choat

Solicitor Partner
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Karen Clarke Victoria Elsdon

Partner Solicitor
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Paula Garnett Peter Lampitt

Solicitor Solicitor
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Victoria Peckett Henry Sherman

Partner Partner
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David Snape Aidan Steensma

Legal Executive Solicitor
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Chelsea Walters Laura Wood

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