Construction law - an update

1. The Tender Process – Beware of the Pitfalls

Introduction

•Reminder of the law governing a typical private sector tender
•Risk of claims for wasted tender costs and loss of profit
•Potential claims: contractor v employer, subcontractor v contractor, employer v architect
•Tips to avoid claims
•Excludes public sector (whole different ball game)

Breaches of the public sector tender process often find their way into the courts, with private sector tenders causing fewer problems. However, that doesn't mean that anything goes when it comes to private sector tenders and how these are conducted. A typical set of tender documents and the common law do set out some 'rules of the game' and it's a breach of these rules that can trigger a claim. An aggrieved contractor might claim not only for his tender costs but potentially his loss of profit on a job. In principle an aggrieved subcontractor could also sue a main contractor on a job on the same grounds. The professional team don't escape either - in one case an employer sought to sue his architect for advising him that the way the tender process was being conducted was in breach of the rules (exposing the employer to a claim).

 The Rules of the Game

•Two sources: (1) the general law (2) the tender documents themselves
•Key cases: Blackpool and Flyde Aero Club v Blackpool Borough Council (1990), J&A Developments v Edina (2006).
•Tender documents themselves – JCT Practice Note Tendering 2012, NBS Guide to Tendering

When it comes to private sector tenders the 'rules of the game' come from two sources - the common law and the tender documents themselves. Both rely on there being a tender contract - a contract that governs how the tender will be conducted. This is totally separate to a contract for the actual work itself which may or may not be entered into at the end of a tender process.

When it comes to common law the Blackpool case (and a number of others) recognise that an implied contract can exist at tender stage. The precise terms of that contract will vary. They may include an obligation to treat a tenderer fairly (for example, by at least considering a compliant tender that is submitted in time). In this case the courts said the tender simply could not be ignored.

Any breach of an implied contract can give rise to damages in the usual way. There's no need to look at the common law position in detail because of the way that typical tender documents are written. It's often the tender documents themselves that cause the most problems as they contain express terms and so a disgruntled contractor does not need to clear the hurdle of showing there's an implied contract governing the tender process.

•“TENDERING PROCEDURE
General: in accordance with the principles of: JCT Practice Note Tendering 2012”
•“ACCEPTANCE OF TENDER
Acceptance: No guarantee is offered that any tender will be recommended for acceptance or be accepted, or that reasons for non-acceptance will be given”
•“Costs: No liability is accepted for any cost incurred in the preparation of any tender”

What are the rules in a tender document governing the tender?  This slide shows extracts from a number of tender issue prelims and extracts from the JCT Practice note. These are often cut and pasted from one tender document to another without much thought in what they say and rarely will the parties give much consideration to them. When did you last look at the JCT Practice Note, for example? But it's these provisions that the courts have said form some of the 'rules of the game'. General theme of JCT Practice Note is a sense of 'fair play. It recognises that submitting a tender can incur significant times and costs for a main contractor.

Even if you cannot identify a particular clause that has been breached this does not mean you are on safe ground if you depart significantly from the intent that the process should be fair.

•“Where criteria have been established, the Employer must abide by them… “to do otherwise would leave the Employer and his advisers open to challenge by unsuccessful tenderers” (JCT, para 59)
•“Good practice demands that a contractor’s tendered prices should not be altered without justification” (JCT, para 61)

Note in particular the last point in this slide - the sort of justification that JCT has in mind is a change in specification. In other words, prices can be reduced but only in return for a lower spec. If the employer doesn't want to change his spec but simply wants to pay less, this may not amount to a justified change in the tender price. The problems these provisions can cause is best illustrated by the Northern Irish case of J&A developments - though a case in Northern Ireland, English courts may well follow it.

J&A Developments v (1) Edina Manufacturing and (2) ADP Architects (2006)

J&A (contractor), Edina (employer), ADP (employer’s architect)
•“Contractor’s price should not be altered without justification”
•“NIJCC strongly deplores any practice which seeks to reduce any tender arbitrarily where the tender has been submitted in free competition …or to reduce tenders other than the lowest to a figure below the lowest.
•Tender process very tight (only 10% between the highest and lowest bids on contract sum of approximately £1.1m).

J&A were a contractor on project for a new workshop, Edina the employer and ADP the employer's architect was effectively running the tender process. Preliminaries mentioned a code of practice very similar to the JCT one mentioned earlier. This contained wording to the effect that "the NIJCC strongly deplores any practice that seeks to reduce any tender arbitrarily where the tender has been submitted in free competition or to reduce tenders other than the lowest tender to a figure below the lowest". This was a tight tender with tenders coming in around 10% of each other on a contract worth approximately £1m.

Employer called in the 3 lowest tenderers and asked for a further discount. J&A refused and were not awarded the contract
•J&A sued and won wasted tender costs (£6500) and loss of profit (£128,000)
•Edina then sued the architect and lost.

The employer asked all of the lowest three tenderers to change their prices but without any corresponding change in specification. In effect the employer held a form of dutch auction, playing the contractors off against each other in order to reduce the prices. J&A refused to reduce their price, another tendered reduced their price by about £25,000 and were awarded the contract. J&A were most certain to have won the job had the employer played by the rules, so sued for wasted tender costs and loss of profit.

The judge said the code was binding on the employer because of its inclusion in the tender documents. It stipulated that arbitrary reductions in price were deplorable and the judge held that the employer's conduct breached this provision. The contractor was awarded damages for his wasted tender costs, and his loss of profit which was in the region of £130,000 without having carried out any work on site. The employer then tried to sue his architect for failing to warn him of the risks of how the tender process was being conducted. Though the court held the architect was not liable you can imagine that the claim came as a bit of a shock to the architect. All those involved in the tender process should bear this in mind.

Tips

•Remember that a ‘tender contract’ may apply
•Breach of that contract can trigger a right to damages so consider very carefully what the terms of that contract are.

Employers:
•Review ‘cut and pasted’ prelims and tender rules. Do you know what they say? Do you want them to say something different?

The more ‘ruthless’ your tender process, the more likely you are to require very clear wording in the tender documents allowing this. Tenderers can then decide whether or not to bid in full knowledge of how the process is going to be conducted.

Things that can be learnt from the case? Much, in particular:

Assume that a tender contract applies to the process. This may be implied (as in the Blackpool case) or be because of the way the tender documents are written. More likely on larger projects that adopt the JCT code or similar codes that govern the provisions of larger tenders.

Secondly, consider very carefully what the terms of that contract are, treat this as you would any other contract. A breach can trigger damages in the usual way.

Employers should seek to review prelims and tender documents very carefully - do you know what they say? Do you want to conduct your tender differently?  If so, you need to say so.

How ruthless do you want to be in the tender process? If you want to hold a dutch auction then consider the J&A case and how clear the wording needs to be in those tender documents. At least this way the contractors know the rules of the game from the outset and decide whether or not they want to take part in that game.

Contractors:
•Consider how subcontract tenders are run. What are the rules of that game? Are you conducting the subcontract procedure in the same way as a typical main contract tender?
Professional Team:
•Is the employer relying on your advice as to how the tender process is run?
•Advise the employer of potential liability if the tender process departs from the rule of the game set out in the tender documents.


From a contractor's point of view, having had a rough time in bidding for the main contract consider how subcontract packages are run. In many cases the process can be pretty informal and a set of drawings are issued to the two or three subcontractors with a price requested back on a specified date. Then what? Is the process like the J&A case? If you send the main contract prelims in the subcontract documents do you incorporate that JCT practice note by the back door?

The development of suitable terms and conditions will mean that others are able to

From the professional team's point of view, is the employer savvy enough to know the rules or is he or she relying on you to guide them through the process? Where do you stop advising of potential pitfalls? Consider too professional conduct rules, does your process depart significantly from industry-accepted rules of 'fair play'? Contractors often expect the professional team to bring in an element of impartiality to the process (as they do during the administration of the process itself). How would contractors react if the professional team refused to get involved in the negotiation once the initial tenders have been received back? There are certain conduct rules that govern the concept of not bringing the industry into disrepute itself. Those may bite if a member of RIBA or RICS etc.

Finally, consider professional conduct rules (RIBA, RICS etc). Should you be involved in the process that departs significantly from the rules of the game? Would involvement in the likes of a Dutch auction bring the profession into disrepute?

In summary, it's fair to say that claims in the private sector for abuse of the tender process are rare, though perhaps this is reflective of the buoyant construction market over the last few years? Inevitably there will come a downturn at some point. Perhaps this is the time to dust off the tender documents  and make sure you know precisely what the 'rules of the game are'.

2. Brexit and the legal environment for construction

  • Briefly highlight commercial implications for UK Construction Industry

•Potential legal and contractual implications for UK Construction Industry:
•Public Procurement Regulations
•Change in Law provisions

•Potential Opportunities

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Commercial Implications for UK Construction Industry

Immediate impact included projects being put on hold or abandoned
•Since initial impact, it has largely been “business as usual” – but Article 50 has yet to be invoked
•Potential long term implications may include:
•a shortage of skilled labour
•Contractor’s margins squeezed as input costs (material costs & labour costs) rise
•fall in demand – growing competition among Contractors for work?

In the immediate aftermath of this year's historic referendum vote, we saw a slowdown in certain sectors, in particular in the commercial property sector as some projects were (and some, indeed, still are) put on hold as investment decisions were put on hold until there is a better clarity on the UK's relationship with the European Union. Unfortunately some projects weer abandoned altogether. Following this initial reaction no real impact has been felt and for many it's been 'business as usual' though nobody is under any illusion that this state of affairs can carry on indefinitely and into the long-term without further action.

The medium-term effect of Brexit will only be seen once the current legacy projects have been completed and, more importantly, once Article 50 has been invoked.

In the long-term there are a number of potential issues for our industry - Firstly, the UK has, to a large extent, relied on migrant workers to fill its current skill shortage. Restrictions on immigration have potential to impact this. Though it's thought EU citizens already residing in the UK are likely to be able to stay, the future pipeline is likely to be significantly restricted. Shortages in skilled labour are likely to lead to higher labour costs. In addition, the weakening pound is adding to the price of materials. The problem of imposition of import duties and quotas by the EU which could also affect construction exports as well.

Not a great picture then - contractors may well see their margin squeezed as the cost of imports increases. Falling demand domestically may result in growing competition and perhaps, eventually, a fall in tender prices. In addition the UK will lose access to the European Investment Bank and the European Investment Fund which has invested in UK infrastructure projects over the years to the tune of billions of pounds. Any loss will be offset to some extent by savings made by the UK in not having to pay the EU membership but it's loss is still likely to be felt.

Legal & Contractual Implications

What will Brexit mean for UK public procurement?
•Whether changes are required/can be made to existing UK Regulations will depend on the type of relationship that UK negotiates with EU
•Full access to the Single Market:
•Becoming part of the European Economic Area (“EEA”) (“Norwegian Model”)
•Requires full compliance with all EU Legislation – but without any rights to negotiate or shape such legislation
•No procurement legislation amendments necessary or possible

CDM regulations and some energy performance requirements aside there is minimal EU construction-specific regulation. Public procurement rules, however, will impact on the construction industry...

One of the criticisms aimed at the EU was that its bureaucracy and relation to public procurement, it's over-regulation, resulting in additional delay and costs being incurred, and, on occasions it's lack of flexibility (especially in situations where a public body has a good reason to use a specific contract quickly but is unable to do so because of the rules). Following the vote some clients have said that they won't have to deal with the EU procurement 'nonsense' any more but that may not be entirely correct.

At the moment the UK is still part of the EU, and EU procurement rules still apply. They are enacted into UK law by the Public Contracts Regulation 2015 and the Utilities Contract Regulations 2016. These will still continue to formally apply in the UK even after the UK has formally left the EU unless there is a specific repeal of these laws by Parliament. Whether changes will be made to the existing UK procurement rules is dependent on the type of exit relationship that the UK negotiates with the EU.

The UK may opt to have full access to the EU internal single market, by becoming a member of the European Economic Area (EEA), sometimes referred to as the 'Norwegian model'.This approach would likely require compliance with all EU legislation but without the UK having any say in how this regulation is shaped as it would no longer be part of the EU. This would appear to be the worst of both worlds. Such membership will also likely require the free movement of labour. As this was one of the key battlegrounds in the Brexit campaign it is likely this option would, therefore, be unpalatable to many. This option would see no changes to the existing EU procurement legislation.

Forgoing access to the Single Market but remaining a party to WTO’s Agreement on Government Procurement (“GPA”):
•GPA is a multi-lateral agreement signed by WTO’s members allowing access to a Country’s public procurement market to foreign suppliers – which sets out rigorous rules on how procurement must be carried out
•Important as allows access to markets such as USA, and Japan, as well as the EU
•GPA narrower in scope than EU procurement legislation but in all material respects is substantially the same

The UK may forgo access to the single market and agree with the World Trade Organisation's agreement on government procurement (the GPA), assuming that the UK is a member of the WTO in its own right. Current UK membership of the WTO comes via the EU - so a specific membership would be needed going forward. The GPA is a multilateral agreement allowing access to each other's public procurement market by the home suppliers. It sets out rigorous rules around how procurement must be carried out. The agreement would allow UK businesses access to, amongst others to the USA, Japan and parts (but not all) of the EU markets. The GPA contains substantially the same key arrangements as the EU procurement legislation. The EU procurement directives are in themselves complaint with the GPA rules. While this approach would allow the UK some flexibility in reality minimum changes to the current procurement legislation would be necessary or likely to be made.

Replace or dispense with all procurement rules:
•New procurement philosophy – whether more or less relaxed
•Streamline the process but stay within the GPA parameters
•Degree of changes may be restricted by international trading agreements
•Given the need for “best value” and transparency in public projects, dispensing with all procurement rules is unlikely

A third option may see the UK developing a whole new procurement philosophy or taking the opportunity to streamline the current process, whilst potentially staying within the parameters of the Government Procurement Agreement. Radical changes may be restricted by the terms of any international trade agreement signed by the UK following Brexit. It is also very unlikely public procurement rules and legislation will be dispensed with altogether. Underlying principles of obtaining best value and maintaining transparency and accountability when spending public funds will continue to apply. Very little change is likely to the current procurement rules. Once the UK has left the EU any challenges under these rules will no longer be referable to the European Court and be dealt with instead by the UK courts who must then interpret our rules and regulations.

Contractors should consider the following contractual provisions:
  • Allocation of risk for changes in law occasioned by Brexit
  • Implications of increases in the cost of materials, shortage or unavailability of labour, and/or import duties

Potential Opportunities

  • Government schemes and incentives to plug the skills gap domestically
  • Encourage Contractors to directly employ and train their own skilled workforce
  • Greater opportunities for skilled labour from outside the EU
  • Cheaper sites as a result of investors taking money out of the UK property market