Andrew Doolan Best Building in Scotland Award 2019
Pictured: The Macallan Distillery Experience, Speyside Photo credit: Mark Power @ Magnum Photos for The Macallan
Issue 1: January 2020
Glasgow | Edinburgh | Dundee
Welcome to the first edition of MacRoberts' Construction Newsletter in which we take a look at the latest developments across the construction industry and how your business may be affected. Retention payments have long been a hot topic for the sector, and the Scottish Government's announcement of an industry-wide consulation on the use of cash retentions in construction has been largely welcomed by businesses operating within the industry. In this issue, Specialist Engineering Contractors' Group CEO Rudi Klein looks at who will win the race to protect cash retentions Scotland or England? Following indications in a recent report that the "human cost" of faulty electrical work is around 120m per year, we are pleased to hear the latest from SELECT Managing Director Alan Wilson on the campaign to make it illegal for anyone who is unqualified to call themselves an electrician in Scotland. We also look at the latest legal developments, including Lord Doherty's landmark decision in relation to severance in Scottish adjudications, and the Appeal Court's ruling on the use of "milestone" payments in contracts, which provides some useful guidance for contractors. We hope you enjoy reading this newsletter, and we welcome any feedback or suggestions from you on topics to cover in the future. Please do not hesitate to get in touch with our team with any comments you may have. With very best wishes, MacRoberts' Construction Team
In this issue:
1. Landmark decision on severance in Scottish adjudications 2. Let's get retentions done 3. MacRoberts sponsors SELECT Awards 2019 4. SELECT leads crusade for regulation of electricians 5. RIAS Andrew Doolan Best Building in Scotland Award 2019 6. Domestic reverse charge: Putting an end to missing trader VAT fraud? 7. Reviewing the situation: Appeal Court leaves no milestone unturned
Landmark decision on severance in Scottish adjudications
On 8th November 2019, Lord Doherty issued a landmark adjudication decision in Dickie & Moore Limited v The Trustees of the Lauren McLeish Discretionary Trust. It is the decision we have all been waiting for, as it reveals the correct approach in Scotland on whether some parts of an adjudicator's decision will be enforced where the adjudicator had jurisdiction to decide some of the matters referred to him but is also found not to have had jurisdiction to decide other matters he purported to decide.
Background In an earlier decision on 12th September 2019, Lord Doherty issued a robust decision rejecting a number of grounds upon which the Respondents contended that the adjudicator's decision against them ought not to be enforced. While the majority of the Respondents' arguments were rejected by the Court, they were successful in arguing that the matters of extension of time and loss and expense which the adjudicator decided had not been validly referred to adjudication because there had been no proper crystallised dispute on those matters at the time of referral of the dispute to adjudication. At the end of his first decision, however, the Judge left the door open to hear arguments on severance, the process under which the Court may, in certain circumstances, be prepared to sever and enforce some elements of an adjudicator's decision while refusing to enforce others.
The arguments The Respondents argued, in essence, that a single dispute had been referred to adjudication. The adjudicator had not had jurisdiction to determine that single dispute because part of it had not crystallised. The logical consequence was that the single dispute had not crystallised and the adjudicator had not had jurisdiction to determine any of it. Further, on a proper construction of the contract between them, the parties had contracted to be bound by "the decision" of the adjudicator. They had not agreed to be bound by part of the decision where the adjudicator had lacked jurisdiction in relation to part of it. This was an adjudication under the Scheme for Construction Contracts (Scotland) Regulations 1998. An adjudication under the Scheme anticipated only one decision. Accordingly, the adjudicator's decision should be reduced in its entirety and no part of it enforced by the Court. The Respondents also argued that there were no parts of the adjudicator's decision where it could be said that it was clear and obvious that the reasoning had been untainted by the adjudicator's decision on extension of time and related loss and expense. The Respondents argued that parts of the decision suggested that there may be some link between the sum awarded for work done and the extension of time and loss and expense the adjudicator awarded.
The decision After a careful consideration of all the relevant authorities, the Judge refused to follow the approach in certain early cases and agreed with the approach taken on severance in the more recent cases from England and Wales. The Judge considered that something which may be a "dispute" in terms of the Scheme and which may be referred to an adjudicator as such, may on analysis fall to be treated as more than one dispute when it comes to determining whether severance is possible. One dispute could comprise a number of elements. In this case the claim set out in the Notice of Adjudication included a claim for extension of time and loss and expense which had not crystallised. The adjudicator was entitled to adjudicate on the parts of the dispute which had crystallised. He was not entitled to adjudicate on the parts which had not crystallised, but he had done so, mistakenly. His decision on the dispute which had crystallised should be enforced insofar as it is clear it is not tainted by his decision and reasoning concerning parts which had not crystallised as part of the dispute. The Judge disagreed with some earlier authorities. He considered that the preferable interpretation of the relevant paragraph of the Scheme was that the "decision" which binds parties is the decision in its entirety where all of it is a valid decision, or such part of it as was valid and severable where part of the decision is affected by invalidity. The Judge considered that interpretation is more in keeping with, and serves better to advance, the policy aims of the payment and adjudication provisions in the 1996 Act and the Scheme produced under it (as amended).
Landmark decision on severance in Scottish adjudications (contd.)
The rationale underlying the general principle that severance will not be available in a single dispute adjudication is that in such cases it may be more difficult to show that the reasoning in the invalid part of the decision had no impact on the other parts of the decision. If it is possible, however, to show that there was no such impact then the valid part may safely be severed and enforced. The Judge was not prepared to see a situation develop where it might be more difficult to sever awards in appropriate cases in Scotland than it is in similar cases south of the border. The practical effect of the Judge's decision was that after deducting the monies awarded which were relevant to extension of time and loss and expense, the Court was prepared to enforce the remainder of the decision which meant a substantial payment was due to the Contractor.
What are the implications of this case?
An interesting aspect of this case was that a Final Certificate had been issued reflecting the Respondents' view of the lesser amount they considered was due to the Claimant. As the Judge indicated, it was common ground between the parties that a further adjudication would not be possible if the award was reduced because there would not have been a valid reference to adjudication within 60 days of the Final Certificate with the result that the Certificate would have the finality provided for by the Contract Conditions. This may have been very much to the forefront of the Judge's mind in reaching the decision that he did. That said, however, the Judge refused to follow some older authority which appeared to indicate that severance would not be permissible where one dispute had been referred to adjudication. Accordingly, his decision is reached on reasoned legal principles, not due to any sympathy for the Claimant because of the Final Certificate position.
While it may be argued by some that different considerations could come in to play in the more common cases which deal with interim payments and there is an ability to refer the dispute after all aspects of it have crystallised, it is considered that the approach of the learned Judge has much to commend it, not least because it clearly and more readily achieves the aims of the payment and adjudication provisions of the 1996 Act and the Scheme (as amended).
Meet the Author Neil Kelly is Head of MacRoberts' Construction team.
It remains to be seen whether the Respondents will seek to appeal this decision and the Judge's earlier decision on the Respondents' other arguments against enforcement. Watch this space!
Let's get retentions done!
Rudi Klein, CEO of the Specialist Engineering Contractors' Group, considers who will win the race to protect cash retentions Scotland or England?
In spite of Westminster's commitment to addressing the retentions issue, and support from across the industry to protect the monies, progress has been diverted by Brexit. And this is where the Scottish Government (SG) can steal a march on London.
In October 2017, the Business Department in London published a consultation on retentions together with research into the practice carried out by Pye Tait. The research was focused on England, and it revealed that, over a three-year period, 229 million (at 2016 prices) of retention monies was lost as a result of upstream insolvencies. Two years later, firms have lost another 152 million worth of retention monies (not taking into account the, yet to be announced, huge retention losses following the Carillion collapse)!
The campaign to address the issue has not been helped by some of the large UK contractors believing that retentions will be "magicked away" by some ill-defined voluntary roadmap that will go nowhere. The only realistic solution is a statutory retention scheme in which the monies are protected in trust.
This now seems to be the view of the SG, which has published a consultation document (CD) on the practice of retentions, including research carried out by Pye Tait. The research revealed some interesting comparisons between Scotland and England:
81% of clients using retentions
compared to 65%
In Scotland, almost
the proportion of clients are using retention monies as part of their general
As in England, most tier 1 contractors use their subcontractors' retentions as working capital or as part of their general
The proportion of contract value lost due to insolvency
greater than that in England
The CD suggests that the SG is inclined to support the recommendation in Pye Tait's report that retention monies must, by statute, be held in a separate retention deposit scheme (akin to tenants' deposit schemes). It is vitally important that everybody responding to the CD backs this recommendation. There isn't another solution that will be as effective in safeguarding the monies for small firms in Scotland. If the monies cannot be used and abused, it is highly likely that the demand for cash retentions will significantly decrease over the years. The consultation closes on 25 March 2020. Rudi drafted the Construction (Retention Deposit Schemes Bill) which was laid in the House of Commons by Peter Aldous MP in January 2018.
SELECT Awards 2019
MacRoberts was delighted to sponsor the award for Best Delivery of Customer Service at the 2019 SELECT Awards on 11th October 2019. The Awards, which have taken place annually since 2014, recognise individuals across Scotland and beyond, rewarding innovation and the highest standards in the construction industry. MacRoberts' Head of Construction, Neil Kelly, presented the award which was won by Ayrshire-based Electrical Solutions Network. Congratulations to them and well done to all of the winners and finalists on the evening.
SELECT leads campaign for regulation of electricians
At present, anyone can claim to be an electrician and carry out electrical work in Scotland, putting consumers at risk. That's why, over the past few years, SELECT has been pressing the Scottish Government to introduce protection of title. Such a move would mean that only those who hold industry-recognised qualifications would be able to call themselves an electrician. As well as press and radio appearances, SELECT has taken its campaign to Holyrood, hosting exhibitions and meeting politicians face-to-face. The result can be seen on its online Wall of Support, which shows cross-party backing from MSPs and MPs and other industry groups. The issue is now progressing through the Scottish Parliament and a Member's Bill is being prepared for discussion. The Scottish Government has also pledged to publish a consultation on the regulation of electricians as part of its 2019-20 Programme for Government. SELECT is the trade association for the electrotechnical industry in Scotland. To find out more, visit www.select.org.uk.
Meet the Author Alan Wilson is Managing Director of SELECT.
RIAS Andrew Doolan Best Building in Scotland Award 2019
Congratulations to The Macallan Distillery Experience (pictured on the front page) which has won the 2019 RIAS Andrew Doolan Best Building in Scotland Award. Seven buildings were shortlisted for the Doolan, with the panel looking for projects which showed innovation and design excellence, irrespective of size or type. Other key considerations were detailing, accessibility, environmental issues and technical skill. The 140 million Macallan Distillery and Visitor Experience was designed by Rogers Stirk Harbour + Partners to deliver a unique brand home at their historic site in Speyside. The contemporary distillery showcases the production processes and welcomes visitors while remaining sensitive to the beautiful surrounding countryside. The award was presented at a ceremony at the National Museum of Scotland in Edinburgh on 4th October. Others on the shortlist were:
V&A Dundee (Kengo Kuma & Associates with PiM.studio) Collective on Calton Hill, Edinburgh (Malcolm Fraser
Architects) Mackintosh at the Willow, Glasgow (Simpson & Brown)
Scottish National Blood Transfusion Service at The Jack Copland Centre, Edinburgh (Reiach and Hall Architects)
The Black House, Skye (Dualchas Architects) Tollcross Housing Association Offices, Glasgow (Elder
and Cannon Architects)
MacRoberts was delighted to be a donor to the construction of the V&A Dundee (pictured above)
Domestic reverse charge: Putting an end to missing trader VAT fraud?
Missing trader VAT fraud, where VAT is charged to a customer but not remitted to HM Revenue & Customs, has been a thorn in HMRC's side for a number of years. HMRC's latest effort to stop this mischief is the introduction of a domestic reverse charge on construction services. HMRC anticipates that the introduction of the new rules will stop fraud worth around 100m per annum. The new domestic reverse charge rules were meant to come into play in October 2019 but, following lobbying by a number of construction and tax professional bodies, the introduction was delayed until 1st October 2020. It is unlikely that the implementation date will be delayed again, so construction businesses need to start thinking now about how best to deal with the new rules. The effect of the introduction of a domestic reverse charge on construction services is to change who is responsible for reporting and paying VAT relating to construction services. Under the new rules,the obligation to account for VAT will move from the supplier to the customer who receives supplies of construction services. The rules will apply to certain standard and reducedrated supplies of construction services made to a UK VAT registered person who receives the supply as part of the operation of their own construction business. The reverse charge rules will not apply to supplies made to a non-UK VAT registered business, or where the recipient of the supply is an "end user". An "end user" is a person who uses the construction services for themselves and does not make an onward supply of construction services. An example of an end user would be a restaurant owner who instructs renovation works, or a property investor who lets out the property. In general, any supply the payment for which falls within the Construction Industry Scheme ("CIS") will be subject to the VAT new reverse charge rules.
Those operating in the construction sector, or receiving supplies under construction contracts, are advised to start thinking now about how the new rules will affect any sales or purchases made by the business. The first stage of that process is to determine whether the rules will apply to any existing contracts. A client under a contract that is currently subject to the CIS will need to review the contract and inform the contractor whether the reverse charge applies. If the contractor receives confirmation from the client that the reverse charge is to apply to services under the contract, then the contractor still needs to issue an invoice to the client, but that invoice will state that the reverse charge applies to the supply and that it is the client's obligation to account for the VAT to HM Revenue & Customers. Construction businesses also need to consider whether their current accounting system is capable of dealing with the new reverse charge procedures. Businesses also need to consider whether the new rules could have an adverse impact on the cash-flow position of the business due to the fact that the contractors/subcontractors will no longer receive payments of VAT. Finally, a key point in ensuring that the rules are dealt with correctly is to make sure that those who deal with the accounting and finance functions within the business and who will have to deal with the changes, are aware of what is happening and make certain that they are aware of how the changes will affect the business.
Meet the Author
MacRoberts would be very pleased to help your business better understand the proposed changes. Please contact Ainsley MacLaren for assistance.
Reviewing the situation: Appeal Court leaves no milestone unturned
Bennett (Construction) Ltd ("Bennett") recently appealed against a Court decision holding it liable to make three interim "milestone" payments to its subcontractor CIMC MBS Ltd ("CIMC") in relation to prefabricated bedroom units in a London hotel.
Background Bennett, acting as a contractor, engaged CIMC as a subcontractor to build 78 prefabricated bedroom units (the "Units") in China, for a London hotel for around 2m. The Subcontract contained five milestone payments, in place of the standard time period mechanism. Milestones 1 and 5 did not require a "sign-off" as they were payable upon execution of the Subcontract and completion of the Subcontract works. Milestones 2, 3 and 4 all required sign-off, with 2 and 3 relating to the prototype room and snagging items in China, and 4 relating to the Units once they had been delivered to the site.
A dispute meant that there was no "sign-off" of Milestones 2 and 3 for the prototype or completed Units. The Main Contract was eventually terminated following the liquidation of the developer, Key Homes. Following the termination, an adjudicator found in favour of Bennett in relation to a dispute regarding the milestone payments. CIMC then took this dispute to Court, with the Court finding that milestones 2 and 3 did not comply with the statutory requirements for payment as prescribed by the Housing Grants, Construction and Regeneration Act 1996 (the "1996 Act").
The Court at first instance took the view that:
1. Milestones 2 and 3 required to be physically signed-off, based on the underlying premise that the clients could refuse to sign even if the units had reached a stage of completion;
2. The criterion to be applied to any sign-off was itself uncertain and vague, because of the use of the "clients representative" in the Subcontract; and
3. The mechanism was inadequate because no payment date for each milestone was set out in the Subcontract.
The Court determined that it could not alter milestones 2 and 3 alone, and instead incorporated paragraphs 2, 4 and 5 of Part II of the Scheme for Construction Contracts (the "Scheme") to wholly replace milestones 2-5. As a result, Bennett was held liable to make payments by reference to the value of CIMC's work. Bennett appealed this decision.
The arguments CIMC claimed that the sign-off requirement did not comply with s.110 of the 1996 Act, which requires that "an adequate mechanism for determining what payments become due under the contract and when" is provided for. In their view Bennett could deliberately refuse to sign off the works to avoid making payment. Milestones 2 and 3 requiring sign off did not comply with the Act and had to be replaced by the Scheme provisions. Bennett contended that the relevant "sign-off" was simply the date on which the identified stage of the work was achieved in accordance with the Subcontract requirements, and on that basis provided an adequate mechanism was provided in respect of milestones 2 and 3 in satisfaction of the Act. There was no need to incorporate the terms of the Scheme.
Reviewing the situation: Appeal Court leaves no milestone unturned (contd.)
The decision on appeal The Court of Appeal found in favour of Bennetts, having determined two key issues arising from the original decision:
Did the payment regime requiring a "sign-off" of a particular stage of work comply with s.110 (a) of the Act? The Court of Appeal took a different approach to the "sign off" provisions than the court at first instance. Taking the Subcontract as a whole, the parties intended that each milestone would be paid on completion of the relevant stage. If an actual sign-off were required, the Subcontract should have mentioned the required production of a certificate or otherwise signed document. The Court of Appeal found that undue formality was incorporated into the original decision, as a failure to sign-off relevant documentation was not a valid reason to avoid paying CIMC for the completed Units. The use of "client representatives" did not detract from the only relevant criterion - if the Subcontract specification was objectively achieved, then the works were capable of being signedoff and milestones 2 and 3 became payable regardless of signing. Lastly, this case did not involve specific time-period payments and the payment dates are clear with regard to when payments should occur, with sums payable when completion was achieved. The Court of Appeal reversed the original decision and found that the contract did include an adequate mechanism for payment.
Did the payment mechanism enforced by the 1996 Act in its place "save" the bargain which the parties made? The original decision applied paragraphs 2-4 of the Scheme and replaced the existing milestone payments in full. The Court of Appeal considered the wording of the Scheme namely: "if or to the extent that a contract does not contain [adequate mechanisms for payment] the relevant provisions of the Scheme...apply". It determined that paragraphs 2-4 of the Scheme could not apply in this case, as the agreed milestones were based solely on the completion of a stage of works. In the Court of Appeal's view only paragraph 7 of the Scheme could apply where the mechanism is considered inadequate due to the absence of payment dates. The incorporation of paragraph 7 of the Scheme would resolve the issues with milestones 2 and 3, without replacement of the entire payment provisions and leaves milestones 1, 4 and 5 unaffected.
Commentary The Court of Appeal has clarified the underlying purpose of the 1996 Act, which is to provide a minimum standard to achieve regular cash flow and certainty of payment. The 1996 Act is not intended to replace whole parts of contractual agreements, where doing so results in radically changed parameters and an entirely different payment regime that unfairly tips the scales of risk borne from one party to another. Only where payment provisions are entirely deficient, would such replacement occur. The Court of Appeal determined that the correct option was to take the route that caused the "least violence to the agreement between the parties", and demonstrates that Courts will attempt to maintain the parties' original agreement, where possible. Parties to construction contracts can therefore take solace in the fact that milestone payments have been found to comply with the 1996 Act. However, when using such provisions, one should take care that the wording is clear, especially where "sign off" is a requirement.
Meet the Author David Wilson is a Partner within MacRoberts' Construction team.
Save the Date!
Keeping you up-to-date with the latest legal developments in the industry, we would be delighted if you would join us for our Construction Seminars this spring, taking place in Glasgow on Tuesday 10th March and Edinburgh on Thursday 12th March. For full details of these events and to register your place, please click here or contact us at [email protected]
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