The Construction Industry for Negotiating Parties - Research Paper Example

SECTION A: CONSTRUCTION LAW LEGAL PROBLEM Question A) Advice to CCL regarding the legal status of letter of intent and right to payment. Letters ofintent are commonly utilised in the construction industry to cover pre-existing negotiations however difficulties arise when formal contracts are not entered into and work has been carried out by one party in reliance on the letter of intent1. This often becomes contentious and it is common in the construction industry for negotiating parties to rely on letters of intent to address long term delivery requirements and materials purchase orders2. However, ambiguity as to the contractual status of such letters of intent lends itself to dispute regarding liabilities and obligations, which is pertinent to CCL’s legal position particularly with regard to enforcement of payment obligations. The leading decision in this area is British Steel Corporation v Cleveland Bridge & Engineering Co Limited3where it was held that that where work was undertaken pursuant to a letter of intent, in most cases it would not matter whether the formal contract was concluded. If the parties had acted on the letter of intent, then payments claim would due on a quantum meruit basis under restitution4. However, the inherent difficulty with a letter of intent is where a party is seeking to claim damages for breach of contract and it is argued that no contract is entered into. Accordingly, the issue of whether a contract is in existence is vital. Moreover, if there is no contract, it begs the question as to what sums the CCL is entitled to under quantum meruit principles. In British Steel, it was held that the letter of intent covered pre-contractual negotiations and as no terms had actually been agreed, there was no binding contract. Therefore, the extent to which a contractor can rely on the letter of intent to enforce their rights will inherently be dependent on what terms are agreed to in the letter of intent itself. In the British Steel case for example, it was evident that issues pertaining to price, delivery dates and the applicable terms and conditions had not been agreed. As such, the Court concluded that there was simply an obligation upon Cleveland to pay a reasonable sum for such work as had been done pursuant to its request contained in the letter of intent on a quantum meruit basis. The general rule as highlighted in Turriff Construction Limited v Regalia Knitting Mills5 is that a letter of intent will be of no contractual effect and that a letter of intent is “no more than an expression in writing of a party’s intention to enter into a contract at a future date. Save in exceptional circumstances, it can have no binding effect”6. Additionally, in Courtney and Fairbarn Limited v Tolani Bros Hotels7, it was held that in the absence of agreement upon such a fundamental matter as price, it was impossible to say that a contract had been formed. The parties had only reached the stage of negotiation, which could not form the basis of a contract. If we apply this rationale to the current scenario; the letter of intent merely included evidence of ODA’s intention to enter into a formal contract with CCL and the fundamental terms of the proposed contract were not included. Therefore, in line with the Courtney decision on grounds that the law “does not recognise a contract to enter into a contract”8. Nevertheless, outside the parameters of quantum meruit and restitution, there has been a gradual development of decisions supporting contractual or extra contractual obligations under letters of intent9. A prime example is Mitsui Babcock v John Brown10, which involved a contract for the construction of a power station. However, in this case, the principal terms had been agreed whereas CCL and ODA had merely discussed some of the terms. Accordingly, the extent to which a contractor can rely on a letter of intent to enforce contractual obligations will ultimately depend on the terms specified in the letter of intent, which requires a case by case approach. Indeed, in Monk Construction Limited v Norwich Union Life Assurance Society11 in reviewing the authorities and in particular the decision in the British Steel case, Neil LJ specifically referred to contract law obligations under letters of intent and held that a letter of intent should incorporate all the relevant terms in order to be contractually binding: “there may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other”.12 Nevertheless, the general presumption will be against a formal contract and in Monk, it was further determined that if no subsequent contract is entered into, then performance is not referable to any contract and as such, the law requires the party who made the request to pay a reasonable sum for work13. Ultimately it will depend on the facts; for example in Trollope and Colls Limited v Atomic Power Constructions Limited14 it was held that as the parties had from the outset contemplated entering into a formal agreement then the agreement could govern the period of performance prior to execution under the letter of intent. Therefore the contractual status of letters of intent is clearly an uncertain area of law and often depends on the facts of the case and the courts have been reluctant to provide definitive guidance due to the inherent variances of commercial negotiations. For example, in AC Controls v British Broadcasting Corporation15 it was determined that “in construing and giving effect to the language of the letter of intent, it is necessary to take into account the factual background out of which the letter of intent arose16”. For example, in Bryen & Langley v Boston17 as the letter of intent itself did not expressly incorporate the terms of the JCT form, it was held that the adjudication provisions were not binding. Alternatively, in Mowlem Plc v Stena Line Ports Ltd18, the work had been completed in accordance with terms under a letter of intent, which expressly limited Mowlem’s entitlement to payment to a maximum of £10 million. As a result, the Court refused to imply a term for excess payment on quantum meruit principles. The British Steel case further leaves open what constitutes a reasonable sum for work carried out where the work has not been quantified. A quantum meruit claim may be based in contract or restitution and a contractual quantum meruit will be applicable even if the contract is applicable to the situation, which is pertinent to payment recovery under letters of intent19. In considering recovery of “reasonable remuneration” for works completed in Serk Controls Ltd v Drake & Scull Engineering Ltd20 Judge Hicks argued that “a quantum meruit claim may, however arise in a wide variety of circumstances21”. However, if the contract or letter of intent specifically governs payment, quantum meruit basis recovery is not available as affirmed in the Mowlem case. The rationale in the British Steel for recovery is rooted in the fact that the presence of the letter of intent negates an enforceable contract. Indeed, many quantum meruit claims involve letters of intent or limited exchanges between parties each followed by commencement of works. Nevertheless, in order for there to be a valid enforceable contract, all terms must be agreed and letters of intent to contract in the future fail on grounds of intention and terms being agreed, which prevents the letter from being contractually binding as highlighted in the Turriff decision. Additionally, in the Mowlem case it was held that simply carrying out work is not sufficient as it must be agreed to and encouraged. Therefore, in order for a contract to arise in the letter of intent, the letter itself must contain the necessary terms as highlighted in the Monk case. However, in British Steel Corporation, the distinction was that whilst there may be no enforceable contract; if the letter of intent indicates a request to carry out work for payment if the work is carried out, this creates a right of recovery on a quantum meruit basis. Accordingly, in the current scenario as the letter of intent referred to intention to enter into contractual relations and did not stipulate terms and conditions as to performance and payment, it is highly likely that the letter of intent falls within the British Steel Corporation principles. As such, there will be no contract as such, however as CCL has commenced work and has arguably been encouraged to do so in reliance that they will get payment for such works completed, they will have a separate right to claim reasonable remuneration on a quantum meruit basis. Question B) In considering the risks and insurance requirements for this project from the ODA perspective, it is evident that the project is a public/private sector partnership as such, Ramsey and Telford comment that “under the PFI structure, compliance monitoring of the capital works is effectively and in theory self policing in the sense that the public sector can to a large extent rely on the private sector financiers to deploy rigorous compliance monitoring functions.”22 The central concern for ODA as the financier is in protecting the capital repayment plus interest element and to ensure that the insurance covers both the risks posed by the legal obligations and contractor service provision by CCL. For example, Ramsey and Telford highlights that in PFI construction contracts: “as capital payments are made, the incentive on the private sector to ensure compliance reduces, while the need for such mechanisms as certification, inspection, and opening up of defective work grows”23. Therefore, ODA needs to ensure that the payment provisions under the contract with CCL and the insurance provisions cover this risk. On this basis, it is submitted that risk allocation is imperative and that “the extra cost of private sector capital can only be justified if the private sector bears certain risks inherent in the project”24 . The fundamental risk in the PFI structure is the delivery of the completed project on time and to the requisite standard. As such, it is argued and recommended that the risk allocation should preferably be borne by the CCL contractor in the contract and their insurance provisions as part of the contractual obligations25. In addition to the performance and completion related risks of the CCL contract, the construction project will require insurance considerations and protection in respect of the following risks in particular: 1) Design risk. The ODA should provide details of the requirements for the services in the output specification and ensure that the CCL proposal complies with the design solution26. Moreover, payment should be conditional on CCL compliance with the output specification with provisions for price reductions and compensation plans for non compliance with service expectations. As such, the onus should be placed on CCL to comply with design risk within the contract27; 2) Planning Risk; 3) Service commencement risk; 4) Cost consequences for compensation events such as delays; 5) Force Majeure; 6) Health and Safety compliance costs of complying with Building Regulations; 7) Compliance with the Managing Health and Safety Risks in construction Code of Practice 2007; and 7) Environmental legislation compliance28. Accordingly, with regard to insurance provisions, as highlighted above it is preferable for the ODA contract to impose the onus for the risks associated with the construction project to be placed on CCL, along with a requirement for CCL to secure and obtain copies of insurance for this risk as part of an indemnity in the contract29. Additionally, there should be standard public liability policy cover for personal injury or damage to property regarding pollution or contamination as result of legislative obligations30. Additionally, as a public authority, the ODA is likely to have an annual policy but should require CCL as a matter of good practice to take out construction all risks insurance for the contract work itself in joint names, along with professional indemnity insurance31. Moreover, design and build contractors are expected to carry professional indemnity insurance alongside CAR insurance in any event because of designer’s liability32. Bibliography John Adriaanse (2004). Construction Contract Law: The Essentials. Palgrave Macmillan. J Murdoch., (2000). Construction Contracts: Law and Management. 3rd Edition Spon Press Ramsey, V., & Thomas Telford Limited. (2007) Construction Law Handbook. Thomas Telford Tettenborn, A. M. (2002). The Law of Restitution in England and Ireland Routledge SECTION B: Critically analyse and compare the recommendations of the 2009 Rita Donaghy report to the government on health and construction industry titled one death too many against current health and safety regulations in the UK construction industry Rita Donaghy’s report to the Secretary of State for Work and Pensions “One Death is Too Many” undertook an inquiry into causality in construction related fatal accidents33. The inquiry was instructed on 4 December 2008 in response to the Secretary of State’s observations of the “unacceptable level of fatalities in the construction industry” and in undertaking the investigation, Donaghy adopted a lateral approach in consulting with diverse stakeholders such as trade unions, industry and campaign groups. The focus of this section is to critically evaluate the recommendations of the Donaghy report with regard to health and safety compliance in the UK construction industry. To this end, I shall analyse the central recommendations of the report and address the industry reaction to the reports indictment of the UK construction industry. It is submitted at the outset that whilst the recommendations of Donaghy’s report have been welcomed by government rhetoric and pre-existing safety campaigners within the construction industry; Donaghy has criticised the lack of action on the government’s part in implementing the recommendations. In essence, the crux of Donaghy’s report is to provide an indictment of the lack of effective regulation of fatalities in the construction industry and press for a cohesive regulatory system, which ensures safety compliance at all levels of the hierarchy within the construction industry. For example, in a recent discussion of the Donaghy report at the construction sector British Safety Council Conference, it was asserted that in 2008/9 alone there were 53 fatalities in the construction industry and “3million working days were lost due to workplace injury and work related ill health”34 Additionally, the conference highlighted that “whilst the number of fatalities had fallen steadily since the 1980s’ there remains much cause for concern”35. If we consider this in context of the recommendations in Donaghy’s report; in undertaking the report, Donaghy comments that “the work of the Health and Safety Executive is vitally important in ensuring compliance and culture change …. However, the HSE cannot succeed in eliminating fatalities without the support of the population as a whole and the Government”36. As such, Donaghy argues that health and safety is a social issue as well as legal issue and that this highlights a central flaw in the current regulatory system. To this end, Donaghy suggests that the fundamental flaw in the regulatory system is the bureaucracy with regard to pre-contract qualification procedures, which continue to provide an impediment to health and safety improvements and co-ordination between the Health and Safety Executive and the construction industry37. Moreover, Donaghy comments that there are discrepancies within the industry and as such, she recommends extending the Building Regulations so that health and safety processes should be included when considering building control applications or building warrants38. In further supporting this argument Donaghy comments that “where construction companies have taken the lead in safety management it is clear that fatalities are reduced”39. In reiterating the need to ensure the effective co-operation and management between various elements of the construction industry hierarchy, Donaghy posits that the “The industry should renew its efforts to establish genuine consultative frameworks to encourage greater worker participation. Only with good leadership and worker participation combined can a safety culture become established. The responsibility for safety already lies clearly with the contractor and this responsibility needs to be further clarified in order to raise standards and assist the courts when considering alleged breaches of health and safety”40. Donaghy’s report is consistent in reinforcing this point and arguing that the lack of internal training and co-ordination between various facets of the construction industry has contributed to the poor reporting rates of construction related fatalities. This in turn correlates to the poor prosecution rate. As such, Donaghy’s report argues that there should be increased guidelines given to the courts to address duties of directors within the construction industry. However, Donaghy’s recommendations go further in highlighting the need for safety compliance participation at ground level and to this end, a pivotal recommendation of the 2009 report is the extension of the Gangmasters Licensing Regulations to the construction industry41. Donaghy further supports this proposition by referring to the findings of her consultations with the trade unions, which suggested the role of Worker Safety Advisors going forward. To this end, Donaghy’s report comments that: “the positive role that trade unions can play in health and safety is not fully appreciated by the construction industry and more should be done particularly by larger companies, to encourage joint working with the unions.42” Moreover, in ensuring a more comprehensive and consistent framework for regulation and safety awareness within the construction industry, Donaghy exposes the outdated system in highlighting the various groups impacted by safety in construction that are not adequately covered by pre-existing health and safety measures. For example, Donaghy suggests that in expanding the safety compliance obligations at ground level, this will enable the safety campaigns to open up and target particularly affected groups such as vulnerable adults, migrants and 55-60 age group43. To this end, Donaghy’s report openly welcomes the role of the Construction Skills Certification scheme as being imperative as part of the strategic approach to the construction industry and to encourage construction skills and reduce the dropout rates. In reiterating this point, Donaghy comments that: “Construction workers, as individuals should consider the impact on their families of unsafe working practices and should accept responsibility for their own safety so far as they are able. If employees joined a trade union their families are more likely to receive support.44” Accordingly, in working to achieve increased cohesion in construction safety compliance, Donaghy suggests that there should be standard agreed benchmarks for pre-qualification of sub contractors in the approval process45. Moreover, Donaghy presses the point that there should be more co-operation as the lack of reporting of accidents and argues that “if we had a higher proportion of reporting serious accidences, it might help us to achieve a more accurate picture about fatalities”46. In reinforcing the gravity of non-reporting and the reality of fatalities in the industry, Donaghy’s 2009 report refers to the disproportionately low rate of non accident prosecutions and suggests a review of the HSE communications strategy about fatal accidents to ensure a more co-ordinated response, along with a reformed procedure for accident investigation and lead times for prosecutions47. The central recommendations of the Donaghy report have been met with a generally positive reaction from parts of the industry and Government. For example, the Construction Safety Campaign report published in November 2009 refers to the Donaghy report and calls for the government to implement action. Speaking at the AGM of the Construction Safety Campaign, Donaghy refers to her report and argues “why isn’t a construction fatality on the front pages of every newspaper? Why is it socially acceptable for 50-70 people a year to die at work when the construction industry has achieved so much for our economy?”48 However, whilst the industry appears to have welcomed the recommendations, there appears to be a gap between the recommendations and practical implementation by meaningful governmental action. For example, National Secretary of the Construction Safety Campaign speaking at the AGM said “while we very much welcome the recent drop in construction deaths, but even these deaths should not have taken place. All construction deaths are totally preventable. For construction workers and the families of those killed we also say: “one death is too many”. We don’t want any further delay in implementing Rita Donaghy’s report”49. Additionally, the Blacklisted Support Group pressed the need for a healthier and safer construction industry to blacklist certain members50. As a result of a growing dissatisfaction with the government commitment to taking meaningful action, the Work and Pensions secretary Yvette Cooper went to meet trade bodies and lobby groups to discuss the implementation of the recommendations particularly in light of concerns that the government response has been slow51. The above analysis demonstrates that notwithstanding the current legislative framework for addressing safety in the construction industry, there appears to be a significant inconsistency between various facets of the hierarchy within the industry to ensure adequate safety compliance protection. This in turn has resulted in a discrepancy between the rate of reporting fatalities and actual prosecutions in relation to the percentage of fatalities and cost to the industry for construction related accidents. Accordingly, it is submitted that the recommendations in Donaghy’s 2009 are clearly welcome in acknowledging the various stakeholders impacted by safety within the construction industry and to this end, the Donaghy feels that the Gangmasters recommendation is pivotal “the thing is you need changes at the top, which is why there needs to be positive director’s duties and a full time government minister”52. However, the important part of the Gangmasters’ proposal is the fact it addresses the ground level responsibility, which is instrumental to every day protection within the construction industry. This addresses what Donaghy terms the “white van man” syndrome. Notwithstanding the recommendations of the 2009 report, Government action has been slow and ultimately the efficacy of any reform is dependent on effective action, which remains elusive. Bibliography Beatson, J. (1991). The Use and Abuse of Unjust Enrichment. Oxford University Press Chitty (2007)., Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. M. Hackett., & Ian Robinson., (2002) Pre-contract Practice and Contract Administration for Building. Blackwell Publishing. Jill Poole (2006) Contract Law. 8th Edition Oxford University Press G H. Treitel., (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell. John Uff (2005). Construction Law. 9th Edition Sweet & Maxwell. Website Sources ADF Online: Key Figures Debate the State of Health and Safety in the Construction Industry. 20 November 2009 retrieved at www.adfonline.eu accessed November 2009. Rita Donaghy’s report to the Secretary of State for Work and Pensions “One Death is Too Many (2009) Retrieved at www.official-documents.gov.uk/document/cm76/7657/7657.pdf accessed November 2009. www.labournet.net/ukunion accessed November 2009. Read More