Projects & Construction - UK & Europe
The French Supreme Court, the Cour de Cassation, has recently handed down a very important judgment for construction law practitioners (Civ. 3ème, 14 December 2022, n° 21-21.305). This judgment, which relates to the starting point of the limitation period applicable to recourses between contractors on a same construction project, is a reversal of the Supreme court’s previous jurisprudence on this specific matter, and is generally welcomed as a good news for contractors, and more generally, various stakeholders on construction projects.
In the present case, the Employer, a social housing public entity (‘OPH’), hired a Designer (‘ATE’) on a restructuring and rehabilitation project. ATE sub-contracted part of its design works to another designer (‘Arcade’).
After the works were taken over by the OPH in 2008, various defects appeared on the building. As is usually the case in similar situations, OPH requested the appointment of a technical expert by the Administrative Court to determine the causes of the defects and the parties whose works were involved in the defects. To that purpose, OPH initiated before the said court a summary proceeding (‘assignation en référé’) for that sole purpose, on 13 September 2011.
The expert issued his report on 30 June 2014, and on this basis, OPH filed a claim on the merits against various contractors, including ATE and its insurer, on 28 November 2014. Both the first instance administrative Court and the administrative appeal Court found the contractors, among which ATE, liable for the defects and ordered them to pay damages to OPH.
Since ATE considered that the defects were the result of its own sub-contractor works, ATE and its insurer filed a recourse against Arcade and its insurer, for the purpose of obtaining full reimbursement of the monies paid to OPH. This proceeding was initiated on 6 March 2018.
One of the preliminary arguments raised by Arcade and its insurer was that ATE’s action was time-barred. Both litigants relied on the Supreme Court’s traditional case law, which was still applicable then, according to which the recourse of a contractor against another contractor or its subcontractor must be initiated within a 5-year period from the day on which it became aware or should have become aware of facts allowing exercise of such action. And typically, the Supreme Court ruled that a summary proceeding initiated in order to appoint a technical expert was to be construed as the starting point of the 5-year limitation period in that the contractor’s liability was addressed in such a proceeding (Civ. 3ème, 16 January 2020, n°18-25915).
The Court of appeal of Paris, confirming a judgment from the first instance civil Court, applied this jurisprudence and ruled that ATE was time-barred because its recourse against its subcontractor was filed more than 5 years after the summary proceeding initiated by OPH. Indeed, ATE and its insurer initiated a proceeding on the merits seeking damages against Arcade and its insurer on 6 March 2018, where they should have done so before 1 December 2016, according to the appeal judges.
Whilst the judgment from the Court of appeal Paris was not a surprise in light of the Supreme Court’s own jurisprudence, many commentators and practitioners have expressed a concern that this case law was somehow unfair in that it resulted in the multiplication of preventive recourses by contractors against other contractors or their subcontractors. Indeed, these ‘preventive’ recourses were somehow a necessity in light of the then applicable case law: Employer’s claims against contractors are to be initiated within 10 years after taking-over of the works (i.e. decennial liability), while recourses between contractors are enclosed within a much shorter 5-year period. A contractor could therefore be in the very uncomfortable situation of not being the subject of a claim on the merits by the employer, and at the same time, being at the end of the limitation period to act against the contractor/subcontractor liable for the defects. The only solution for contractors to preserve their action against the liable party was to file “preventive” recourses, which however significantly increased delays, legal expenses, and courts backlog.
ATE and its insurer elevated the matter before the Supreme Court which, in its judgment of 14 December 2022, operated a legal U-turn on the matter.
Indeed, the Court ruled that the 5-year limitation period only starts when a claim on damages has been made against the contractor. In other words, a summary proceeding to appoint a technical expert can no longer be considered as the starting point of the 5-year limitation period. The only exception, says the Supreme Court, is when the request for appointment of an expert is coupled with a request to obtain payment of a provisional sum, because in this case, the contractor who is being sued is necessarily aware that its liability is potentially at stake.
This new jurisprudence has been widely welcomed as being beneficial to the entire construction community, and will put an end to the practice of “preventive recourses” which was a major source of concern for practitioners as well as insurers.
Next generation EU funds and their use in Construction projects in Spain.
The Next Generation EU Funds are the European Union's response to the Covid-19 crisis, in an initiative that aims to provide economic support to EU Members through credits for a total value of €750 billion, to be distributed between 2021 and 2026.
The main purposes of these European funds are the following:
- To promote the so-called green economy.
- To modernize the country's productive fabric, as well as the public administration.
- To increase productivity and the potential growth of the economy.
- Minimize social and gender gaps.
- Increase the capacity to generate quality jobs.
To coordinate the distribution of these funds, Spain has drawn up the PRTR or Recovery, Transformation and Resilience Plan (Plan de Recuperación, Transformación y Resiliencia), which will receive an investment from the Next Generation EU Funds of €140 billion (a figure that marks a milestone in the history of the country, since it is the largest of all those that have been contemplated so far in a public investment).
The second most important item of the European Next Generation EU funds is the rehabilitation of buildings, housing and urban regeneration. Of the €140 billion referred to above that Spain will receive throughout the 2021-2026 period, €6.820 billion will go to rehabilitation programs for the regeneration and urban renewal of neighborhoods or areas delimited according to their income level; energy rehabilitation of existing buildings for housing and other uses, through actions of energy saving and efficiency and incorporation of renewable energies; regeneration and demographic challenge, aimed at public and private projects in municipalities and towns of less than 5,000 inhabitants for the regeneration and energy efficiency of buildings, the generation and consumption of renewable energies and to ensure the development of electric mobility; the rehabilitation of public buildings; and the construction of social rental housing in energy efficient buildings to substantially increase the supply of affordable rental housing.
On the one hand, the rehabilitation actions for which the subsidies are intended, both at neighborhood and building level, are those that manage to reduce the consumption of non-renewable primary energy by at least 30%, and in some areas a reduction in the overall annual energy demand for heating and cooling must also be achieved, between 25% and 35%, depending on the climate zone (C, D, or E) as set out in the CTE (Technical Building Code or Código Técnico de la Edificación). The subsidies range between 40% and 80% of the cost depending on the energy savings achieved, where isolation becomes very important. At the neighborhood level, an increase in the subsidy of up to 15% more is foreseen for urbanization, redevelopment or improvement of the environment, and at both neighborhood and building level, up to an additional €1,000 per dwelling or €12,000 per building is foreseen for the removal of elements such as asbestos.
On the other hand, the Program for the construction of social rental housing in energy-efficient buildings (Programa de ayuda a la construcción de viviendas en alquiler social en edificios energéticamente eficientes) is endowed with €1 billion to be transferred to the Autonomous Regions between 2022 and 2023 (only €500 million left in 2023) in proportion to the number of homes in each region and provides for the construction of 20,000 homes by the end of June 2026, for social rental or at affordable prices that meet energy efficiency criteria.
The aid is aimed at new housing or the refurbishment of buildings with other uses for housing that meet the energy efficiency conditions contained in the Plan, which basically involves a 20% reduction in the consumption of non-renewable primary energy in relation to that established in the Basic Document on Energy Saving (Documento Básico de Ahorro Energético)of the Technical Building Code, which is practically nil.
The constructions, which will have to be executed on publicly owned land, may be financed entirely by public developers, directly by the Autonomous Regions, with the possibility of using instrumental entities dependent on them, or by means of public-private collaboration formulas, which optimize the use of public funds, with a call for tenders for the constitution of concessions of ownership, surface rights or similar businesses.
The promoters of public housing may obtain a subsidy proportional to the useful surface of each dwelling, up to a maximum of €700 per square meter and with a maximum of €50,000 per dwelling.
These dwellings may only be used for social rental for at least 50 years, for habitual and permanent residence. Maximum rents will be set and the beneficiaries will have to comply with criteria of minimum income level, age, situation and composition of the family unit and other social criteria.
For all these reasons, the Next Generation EU funds represent the largest known investment to date in the construction sector and it will contribute to economic progress in a sustainable, efficient way, improving the habitability conditions of dwellings and buildings.
ESG criteria and their consequences in the contracting chain and/or public tender in Spain.
In the area of public procurement, ESG criteria refer to the environmental, social and corporate governance factors that are taken into account when investing in, or awarding a contract, to a company.
Historically, institutional investors have considered corporate governance aspects to be relevant when investing in banks, tightening the requirements of transparency, truthfulness and good practices and establishing codes of conduct and compliance mechanisms. In recent years, and especially since the beginning of the Covid-19 pandemic, the interest in climate and social issues has progressively increased, making it a benchmark for responsible investment regardless of the sector.
The Construction Sector has also been affected by this new trend. And public contracting has become, due to the Europe 2020 Strategy, adopted by the European Council in June 2010, a useful tool for attaining the Sustainable Development Goals and also for achieving the 2030 Agenda, as it forces companies to improve their environmental, social and good governance practices and thus promotes the country´s development. The economic motivation is evident: in Spain public contracting represents around 12% of the GDP and around 22% of the public spending.
Traditionally, when launching a tender for the award of a public contract, only economic and quality criteria were taken into account: the company that undertook the commitment to execute the work according to the set-out conditions of time and form, for the lowest price, was awarded the contract. However, the inclusion of ESG criteria in public procurement has advanced rapidly in recent years and, as a result, companies that want to be awarded contracts will have to include sustainability, social and corporate governance practices.
Environmental factors include minimizing the environmental impact of construction or rehabilitation works, reducing greenhouse gas emissions and implementing plans to achieve a circular economy model.
Among the most relevant social factors are those that lead to an improvement in the quality of life of workers (flexible working hours and work-life balance), those aimed at achieving equal opportunities (hiring people with disabilities and groups at risk of social exclusion), the end of poverty and gender equality (elimination of the glass ceiling and equal pay and positions).
Corporate governance factors include measures such as boosting SMEs, prohibition of awarding contracts to companies operating in tax havens and guiding principles such as decent work and economic growth, peace, justice and strong institutions and partnerships to achieve the goals.
In this regard, the Green Public Procurement Plan (Plan de Contratación Pública Ecológica), approved by Agreement of the Spanish Council of Ministers on December 7, 2018, responds to the need to incorporate green criteria in public procurement. It includes a series of general environmental criteria for contracting, of a voluntary nature, which may be incorporated into contracting specifications as selection criteria, award criteria, technical specifications and special execution conditions, that is, throughout the entire public procurement process.
Among others, its objectives are to promote the acquisition of goods, works and services by the public administration with the least environmental impact, to serve as an instrument to promote the Spanish Circular Economy Strategy (Estrategia Española de Economía Circular) and to promote environmental clauses in public procurement, among others.
In conclusion, the incorporation of ESG criteria in the specifications and conditions of public procurement processes contributes to the growth of the Spanish economy in a sustainable and inclusive manner in compliance with the 2030 Sustainable Development Strategy.
What happened …
In the industry
It’s fair to say that, as in many parts of the globe, 2022 was in many respects a challenging year in England. Following the pandemic, we started the year hopeful of a period of stability and recovery in the markets with the worst of the pandemic behind us - but the year had more in store for us, bringing the impacts of a war, three Prime Ministers and the loss of a great monarch, not to mention high inflation, strikes, high interest rates, resource shortages – the list goes on …These challenges sought to continue and add to uncertainty in our construction sector.
One of the biggest industry challenges last year was contract price uncertainty due to critical materials shortages and prices increases, as well as increased labour costs thanks to Brexit and its contribution to a shortage of skilled operatives. The industry is still battling with answer to the question as to how to balance the wants and needs of developers and lenders on the one hand and contractors on the other when it comes to price certainty.
On the plus side the ONS data for October 2022 (published in December) tells us that construction output increased again with October being at above pre Covid levels and at the highest level since ONS records began in January 2010. New orders have increased, not just prices. The position does vary across sectors with growth being mainly attributable to new build and repairs in the housing sector.
Over the last few years we have had to adjust to unpredictability being the new norm, let’s hope we see greater stability and more opportunities in 2023!
In the Law
The Building Safety Act, receiving Royal Assent on 28 April, has been a hotly discussed topic. This Act, sited by some as one of the most significant pieces of legislation affecting the construction industry in recent decades, is a major change to the regulatory regime for the procurement, design, construction and management of buildings and will require a sea change in approach for the growing residential sector in particular. Not all parts of the Act are yet in force, with more to come this year, and some of the secondary legislation is yet to be published. Read more
In the Courts
It has also been a busy year in the Courts:
- The Third Edition of the Technology and Construction Court Guide was published in October. The Guide now embraces the technological world and contains new appendices dealing with Electronic Court Bundles, as well as a protocol for Remote and Hybrid Hearings.
- The King’s Bench Division Guide 2022 (8th Edition) was published in September.
the Disclosure Pilot Scheme, originally scheduled to run until 1 October 2022, became permanent (now incorporated as a Practice Direction in the Civil Procedure Rules (PD 57AD)).
2022 brought us some interesting case law that visited themes both old and new:
The Court of Appeal’s decision in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP found that collateral warranties can be construction contracts for the purpose of the Construction Act (and that disputes under them can be adjudicated under the Construction Act), provided that they contain promises which regulate (at least in part) the ongoing carrying out of construction operations. If they do, their date of execution is irrelevant. However, permission to appeal to the Supreme Court has been granted, so watch this space… Read more
Is good faith making a resurgence? In Optimares S.p.A v Qatar Airways Group Q.C.S.C the Court found that the exercise of a substantive right (in this case the right to terminate for convenience) was unfettered by the express duty of good faith clause. In Candey Limited v Bosheh the Court of Appeal provided clarity on when a duty of good faith is to be implied into a contract. Can the term be implied as a matter of fact? If not, is the contract in question “relational”? If so, a duty of good faith will be implied.
Orchard Plaza Management Company Ltd v Balfour Beatty Regional Construction Ltd gave us food for thought. Orchard Plaza - a management company - was the beneficiary of an assigned warranty (originally provided in favour of a funder). It claimed costs of repair from BB and BB argued those costs weren’t recoverable as they were too remote. The judge found that the losses were in the reasonable contemplation of the contractor when issuing the warranty and that the ‘no loss’ wording in the collateral warranty trumped any remoteness arguments.
2022 also gave us the first judgment, Martlet Homes Ltd v Mulalley & Co Ltd, following the Grenfell tragedy in a dispute relating to combustible cladding and who should bear costs of a replacement cladding scheme. It provides an insight into the TCC’s likely approach for future cladding disputes. The TCC ruled in favour of the Claimant, allowing recovery of damages for a replacement non-combustible external wall insulation system and waking watch costs. Read more
In our standard form contracts
FIDIC amended its Red, Yellow and Silver book contracts (all of which are updated versions of the 2017 editions) and we finally have a new contracts guide. The 2022 reprints have been made to incorporate previous errata, deal with new 2022 amendments and correct typos (also available as a separate downloadable document from FIDIC). With the amendments not being as substantial as some had expected, how far these new reprints will encourage users to move on from the 1999 editions remains to be seen.
NEC released its optional X29 Climate Change clause to support construction parties in promoting climate change and reducing carbon in projects. This reflects the fact that the construction industry has a key role to play in dealing with this issue. As always, the success of the clause will be underpinned by the detail which will need to be included in the scope documents in order to provide clarity.
As for JCT - it appears that the new JCT suite will now be issued early in 2024 rather than 2023.