Construction & Engineering Legal Update

 In this edition we highlight the following items of interest:

• Bribery Act 2010: Ministry of Justice consultation on draft guidance
• Liquidated damages: High Court holds that a "commercially justifiable" clause was not a penalty and was enforceable
• Revisions to the Technology and Construction Court Guide
• Electronic disclosure of documents in litigation - new Practice Direction
• Consolidated Building Regulations to come into force on 1 October
• New agreement to improve health and safety on construction sites
• International Chamber of Commerce (ICC) issues revised Incoterms

As noted in our May 2010 Update, the Bribery Act 2010 ("the Act") had received Royal Assent, although it was not then known when the Act was to come into force.  The Act is currently due to come into force in April 2011. The Act consolidates previous bribery laws, and creates a new criminal offence which will be of concern to many: "Failure of commercial organisations to prevent bribery". 

It is a defence for the organisation to prove that it had in place "adequate procedures" to prevent associated persons from undertaking such conduct.

Section 9 of the Act requires the Secretary of State to publish guidance about procedures that relevant commercial organisations can put in place to prevent persons associated with them from bribing.

The Ministry of Justice has now published its consultation on guidance. The Government proposes guidance formulated around six general principles, designed to be of general applicability across all sectors and for all types and size of business. It is not intended to be prescriptive or standard setting, or impose any direct obligation on business.   The six principles are risk assessment, top level commitment, due diligence, "clear, practical and accessible policies and procedures", effective implementation, and monitoring and review.

The deadline for responses to the consultation is 8 November 2010.  Details of the questions raised and how to respond can be found in the Consultation Document.

Liquidated damages: High Court holds that a "commercially justifiable" clause was not a penalty and was enforceable

A liquidated damages clause which is a genuine pre-estimate of loss will be enforceable by the courts.  A clause (even if it described as a liquidated damages clause in a contract) which is simply intended to deter a party from breaching a contract is a penalty clause and is not enforceable.

Whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. Comparison of the amount that would be payable on a breach with the loss that might be sustained if breach occurred will often assist in determining if the clause is a penalty. However, this does not mean that if the comparison between the amount payable on breach and the loss that might be sustained on breach discloses a discrepancy, it follows that the clause is a penalty. The courts have indicated in the past that a particular clause might be not be either a genuine pre-estimate of loss nor a penalty but it could be commercially justifiable provided that its dominant purpose was not to deter the other party from breach.

In the recent case of Azimut-Benetti Spa (Benetti Division) v Darrell Marcus Healey, in an application for summary judgment, the High Court had to consider whether a liquidated damages clause in a contract for the construction of a luxury yacht was a penalty.  The court did not need to hear detailed evidence on whether the relevant clause reflected a genuine pre-estimate of loss, and decided the issue by reference to the question of whether the clause was commercially justifiable.

By a Yacht Construction Contract dated 25 September 2008, the claimant agreed to construct, and an Isle of Man special purpose company called Shoreacres Ltd (wholly owned by the defendant) agreed to purchase and take delivery of, a white 60 metre luxury yacht. The price was €38 million payable in instalments. The scheduled delivery date was 30 November 2011. The defendant gave his personal guarantee also dated 25 September 2008. The defendant resisted a claim for summary judgment under the guarantee on the basis that the liquidated damages clause upon which the claimant sued in the contract with Shoreacres was a penalty, so that there was no liability on which the guarantee could fasten.  Clause 16.3 of the contract provided:

"16.3 Upon lawful termination of this Contract by the Builder it will be entitled to retain out of the payments made by the Buyer and/or recover from the Buyer an amount equal to 20% of the Contract Price by way of liquidated damages as compensation for its estimated losses (including agreed loss of profit) and subject to that retention the Builder will promptly return the balance of sums received from the Buyer together with the Buyer's Supplies if not yet installed in the Yacht."

The defendant claimed that the liquidated damages clause was not a genuine pre-estimate of the loss that the claimant would suffer on breach of the contract, but an unenforceable penalty intended to discourage Shoreacres from breaching its terms.

In deciding that clause 16.3 was not a penalty and enforceable, the court took account of the provisions of the clause as a whole, the fact that the parties were represented by solicitors and evidence that the commercial reasons for such a clause had previously been explained to the defendant's lawyers and agents (even though this had been in connection with a different contract with which the defendant was not involved). The commercial reasons had been explained as follows:

"... the Buyer needs to understand that this clause provides, not just compensation for the Builder, but also an immediate refund of the rest of the Buyer's money.

The alternative, should the current clause be unacceptable, is to revert to the more conventional model whereby the Builder completes and sells Yacht to someone else; realises its actual loss; and then accounts back to the Buyer for any excess remaining. In this scenario the Builder will retain the Buyer's instalments for a very long time, particularly if there has to be an arbitration."

The court held that the clause was commercially justifiable.  It placed an obligation on the buyer, but it also placed an obligation on the builder, namely an obligation "promptly [to] return the balance of sums received from the Buyer together with the Buyer's supplies if not yet installed in the Yacht". The contract was a construction contract with scheduled delivery some three years after the contract date. Over that period of time, the price became payable by instalments. The purpose of the clause was to strike, or seek to strike, a balance between the interests of the parties should the builder lawfully terminate upon the buyer's breach.

To best reduce the risk of disputes over whether a clause is a penalty, parties to a contract should ideally continue to ensure that the liquidated damages amount is a genuine pre-estimate of loss, and that the calculations are recorded in correspondence between them.  If that cannot be done and "commercial justification" is to be relied on that justification should be recorded in writing between the parties, preferably within the body of the contract itself.

Revisions to the Technology and Construction Court Guide

Further, extensive, revision to the Technology and Construction Court Guide will came into effect on 1 October 2010. 

The revisions, which all specialist TCC practitioners will need to be aware of, cover topics such as starting a claim in the TCC, case management , hearings and applications, disclosure and evidence (including expert evidence), preparing for trials and the TCC's approach to alternative dispute resolution in the TCC.

Electronic disclosure of documents in litigation - new Practice Direction

A new Practice Direction was introduced on 1 October to regulate the approach practitioners should take when considering material relevant to a case which is stored electronically. In particular it aims to focus the parties on the sources of electronic material, the need to preserve electronic documents and give guidance to those with less experience of dealing which such issues. It will apply to cases that are, or are likely to be, allocated to the multi-track.

If the parties are unable to reach agreement in relation to electronic disclosure before the first case management conference the court will consider making an order that the parties complete and exchange all or part of an "Electronic Documents Questionnaire".  The person signing the Electronic Documents Questionnaire should attend the first case management conference and any subsequent hearing at which disclosure is likely to be considered.  Even if no such order is made, the Electronic Documents Questionnaire provides a useful basis for discussions with the client about the types and whereabouts of electronic documents the client has and which the opposing party may have.

Consolidated Building Regulations to come into force on 1 October

The new Building Regulations 2010 (2010/2214) consolidate the Building Regulations 2000 (SI 2000/2531).  The Building (Approved Inspectors etc) Regulations 2010 (SI 2010/2215) consolidate the Building (Approved Inspectors etc.) Regulations 2000 (SI 2000/2532). These are separate yet related pieces of secondary legislation. They are made under the powers from the Building Act 1984. The objective of both sets of Regulations is to ensure the health, safety, welfare and convenience of people in and around buildings, and water and energy efficiency of buildings. The legislation covers both the technical standards that need to be met and the procedures that need to be followed when building work is carried out. The regulations apply to the majority of new buildings, as well as to some alterations of existing buildings in England and Wales, and apply to domestic, commercial and industrial buildings.

Those carrying out building work need to comply with the regulations, and Building Control’s function is to ensure compliance. Building Control can be carried out either by the local authority or by an Approved Inspector. Both essentially carry out the same role but have different procedural aspects, hence the two separate sets of regulations.

In addition to consolidation, revisions have been made to the types of work that may be carried out by a registered installer under a self-certification scheme and to the list of bodies authorised to register installers.

New agreement to improve health and safety on construction sites

The Health and Safety Executive (HSE) has signed an agreement with the Building Control Alliance (BCA), in a bid to work more closely to improve health and safety standards in the construction industry.

The agreement sets out how HSE and building control professionals will cooperate to help and support each other, for example in providing health and safety advice to the construction industry, but clearly distinguishes their separate regulatory roles and responsibilities.

The BCA represents those Building Control professionals responsible for ensuring compliance with Building Regulations, whether in Local Authorities or the private sector, and the professional bodies that accredit them. Building Control professionals regularly visit sites and are in an excellent position to promote good health and safety practice to duty holders.

International Chamber of Commerce (ICC) issues revised Incoterms

The ICC has launched the latest revision of its internationally-recognized trade terms Incoterms 2010. The rules, used by companies in business transactions all over the world, will come into effect on 1 January 2011.

The Incoterms 2010 rules take into account developments in global trade since they were last revised in 2000. These include changes in cargo security, which has been at the forefront of the transportation agenda for many countries since 9/11, and the increased use of electronic communications in business transactions.  

Revisions have been made to ensure that the wording of the Incoterms rules reflects present-day trade practices. 

The number of rules has been reduced from 13 to 11 and two new rules have been created: Delivered at Terminal (DAT) and Delivered at Place (DAP). The latest version also features guidance notes at the beginning of each of the rules to help steer the user to the correct Incoterms rule.