REUTERS | Ilya Naymushin

Developments in construction law in 2008: an update from RPC

I attended a breakfast briefing given by members of RPC‘s construction team yesterday.  In the current economic climate of downturn and uncertainty, they looked at a number of “hot topics”.

Retention and project bank accounts. These are intended to safeguard project funds when employers or contractors become insolvent, but how often are parties using them?

Case law confirms that where the parties have agreed to a provision requiring the employer to set up a retention bank account, the contractor can ask the employer to set up the account and that it is reasonable for the employer to do this within 2-3 weeks of the request (the parties were using the JCT standard form of building contract, with contractors design portion supplement, 1998).

However, in practice the majority of employers will amend the contract to remove this obligation (see clause 4.18.3 of the 2005 edition). In contrast, contractors will be keen to see the provision remain. If it does survive contract negotiations, the contractor should request the retention bank account is set up as soon as possible and ensure it is named in the account. The money – which is the contractor’s money – is then held in trust.

Project bank accounts are enjoying something of a renaissance at the moment, particularly in the public sector.  PPC 2000 (republished in May 2008) has integrated project bank accounts and NEC3 has published a new Z clause. JCT contracts do not currently deal with project bank accounts, although this is under review, and the JCT is likely to issue amendments as a bolt-on.

Advocates of project bank accounts talk of the economic advantages of these accounts:

  • Protection from the insolvency of the contractor for sub-contractors and the employer.
  • Ability of the employer to effectively make direct payments to sub-contractors.
  • Other economic advantages, such as the speed with which the supply chain and sub-contractors can be paid.

Understandably, there is concern that the bank holding the account will go bust; a thought that would have been quite improbable until recent times. While it is arguable this is a disadvantage of such accounts, the reality is that construction companies are far more vulnerable than banks are after their recent government bailout. Construction News reported this week that 1,600 firms have gone under this year. With this in mind, perhaps it is time for the industry to reconsider its views on these types of account.

Take-or-pay provisions.  Common in the energy sector and in supply contracts (such as for construction materials), these provisions ensure the buyer pays for a certain amount of product, even if it doesn’t want the product anymore. This provides certainty to the seller, but the parties need to take care when drafting these provisions to ensure there is no right for the buyer to later challenge the provision on the basis that the provision is a penalty. To do this, the parties must avoid linking the trigger for “take-or-pay” to a breach of contract, an argument used by the buyer in a case earlier this year. For more information on take-or-pay in the context of the energy sector, see our Practice note.

Letters of intent. Letters of intent are commonly used on projects between developers and contractors, to allow work to start before all the details of the contract have been agreed.  The following list should act as a reminder to those who regularly use letters of intent that, as a minimum, they should:

  • Contain a defined scope.
  • Include a cap on liability.
  • Detail the issues still outstanding.
  • Address CDM and copyright.
  • Should only be issued and renewed by appropriate people in an organisation.
  • Have an expiry date.

For more information, see our Practice note.

Adjudication. A quick round-up of recent cases on:

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