United Kingdom: Construction (2nd edition)

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This country-specific Q&A provides an overview to construction laws and regulations that may occur in United Kingdom.

This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction-2nd-edition/

  1. Is your jurisdiction a common law or civil law jurisdiction?

    England and Wales is a common law jurisdiction in which statutes are enacted by Parliament and then clarified by judgments of the higher courts, which are followed by the lower courts using the system of precedent. The law of England and Wales is often referred to as English law. (Scotland and Northern Ireland have their own court systems and laws, which are outside the scope of these answers.)

  2. What are the key statutory obligations relevant to construction and engineering projects?

    The most significant legislation is the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”), also known as “the Construction Act”. The Act prescribes an interim payment mechanism (see answer to question 14) and provides a right to refer any contractual dispute to adjudication (to be determined in 28 to 42 days) for most UK construction projects (with certain exceptions). It also provides that a party that has not been paid may suspend work until it is paid. The intention of these measures was to increase cash flow in the construction industry. Parties may not contract out of these obligations.

    The Supply of Goods and Services Act 1982 and the Consumer Rights Act 2015 contain obligations on parties providing goods and services that goods must be fit for purpose and services must be carried out with reasonable skill and care. Since construction services combine goods and services, a contractor is thought to owe an obligation to construct a building that is fit for purpose. However, a consultant providing professional services only, must provide these with reasonable skill and care. Parties may vary these obligations by contract.

    Specific to residential premises, the Defective Premises Act 1972 provides that all work must be carried out in a workmanlike manner to ensure that all dwellings are fit for habitation.

  3. Are there any specific requirements that parties should be aware of in relation to: (a) health and safety; (b) environmental issues; (c) planning; (d) employment; and (e) anti-corruption and bribery.

    1. Health and safety

    The Health and Safety at Work Act 1974 sets out the basic health and safety duties of a company, its directors, managers and employees. Extensive obligations are imposed on employers, and individual director and company officers can be held criminally responsible for health and safety offences. Under the Corporate Manslaughter and Corporate Homicide Act 2007 companies can be convicted of corporate manslaughter.

    The Construction (Design and Management) Regulations 2015 affect most construction projects in the UK. Their main purpose is to ensure that the employer appoints competent consultants and contractors, and a Principal Designer, although duties are imposed on all the main participants.

    2. Environmental

    There is a trend towards increasingly stringent environmental controls, largely through the adoption of EU legislation. The main environmental law regimes address contaminated land, water pollution, nuisance, permitted emissions, waste, asbestos, the EU Emissions Trading Scheme, various energy efficiency measures and protection of biodiversity, habitats and wildlife.

    BREEAM is the Building Research Establishment’s Environmental Assessment Method, which sets best practice standards for the environmental performance of buildings through design, specification, construction and operation. Although not compulsory, many developers, local planning authorities and government projects may require BREEAM certification (or equivalent) for new or refurbished buildings.

    3. Planning

    Any “development” of land under the Town and Country Planning Act 1990 (including a change in use) requires planning permission.

    Applications must be submitted to the local planning authority or the Secretary of State. An application must be decided within 8, 13 or 16 weeks depending on the nature of the development and whether an environmental impact assessment is required. If granted, planning permission may be subject to certain conditions, obligations or a “community infrastructure levy”.

    If planning permission is refused, the applicant has the right of appeal to the Secretary of State. A grant of planning permission cannot be appealed, but a defective decision can be challenged by way of judicial review within six weeks of the decision.

    Planning applications for “nationally significant infrastructure projects” are examined by the Planning Inspectorate, which provides a recommendation to the Secretary of State as to whether a development consent order (DCO) should be granted. Certain developments have their own hybrid Act of Parliament, such as the Crossrail Act 2008.

    4. Employment

    Subcontracting is rife throughout the construction industry. Subcontractors are generally accepted to be independent contractors rather than employees, so contractors will not have vicarious liability for the negligence of a subcontractor where it carries out the work for which it was engaged, unless, exceptionally, it can be shown that there was a relationship analogous to employment.

    Where there is a service provision change or a transfer of all or part of an undertaking, for example where a developer changes contractor, brings the work in-house or outsources various works and services, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) may apply. Employees automatically transfer across into the employment of the transferee, there are obligations to inform and consult with representatives, and employees have enhanced protection against dismissal.

    The Modern Slavery Act 2015 requires large commercial organisations that operate in the UK and have a turnover of £36 million to prepare an annual statement setting out what steps have been taken to ensure that their business and supply chain are free from slavery and human trafficking.

    5. Anti-corruption and bribery

    The Bribery Act 2010 captures offences committed by anyone inside the UK. For people or companies with “a close connection with the UK”, the Act extends to the same offences committed outside of the UK.

    The four main offences are bribing another person, being bribed, bribery of a foreign public official, and failure of a commercial organisation to prevent bribery. Where the Act is breached, the consequences can include potentially unlimited fines, up to ten years’ imprisonment, and debarment from competing for public contracts.

  4. What permits, licences and/or other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?

    Parties typically need planning permission; Building Regulations compliance; approval from an inspector appointed under the Building Regulations; and, if required, environmental permits. Further licences and permits may be required if works will affect public areas, such as roads.

    Public bodies (and those exercising public functions, such as utilities) must follow EU public procurement directives and principles.

    There are various penalties for breach or failure to comply with permissions and licences, including removal or alteration of any work for contravention of any regulation or other provision of the Building Act 1984. Sanctions for breaches of planning control include criminal prosecution punishable by fine and requiring land to be restored to the condition it was in before the unauthorised development occurred.

  5. Is tort law or a law of extra-contractual obligations recognised in your jurisdiction?

    The law of tort is recognised in England and Wales. Most construction claims are contractual claims, but tortious claims are typically relevant to construction projects in the context of alternative claims for negligence.

    It is common to make a claim against a construction professional in contract and alternatively in tort. Claims in tort can benefit from extended limitation periods. However, one disadvantage of a claim in tort is that if the claimant does not have a direct contractual relationship with the wrongdoer it cannot generally recover damages for the repair of defective buildings, since this is considered to be pure economic loss (see answer to question 20.)

  6. Who are the typical parties involved in a construction and engineering project?

    The parties will vary depending on the nature, size and complexity of a project. Every project will have an employer (sometimes referred to as the “client” or “owner”) for whom the works are being carried out and a contractor. Contractors typically subcontract parts (and sometimes all) of the works to various specialist subcontractors. Either the employer or the contractor may procure materials, plant and equipment from upstream suppliers.

  7. What are the most popular methods of procurement?

    The three most common methods of procurement are the traditional method, design and build, and construction management.

    Under the traditional method, the employer engages a design team to design the project, and then the project is put out to tender. The main contractor enters into a contract with the employer to complete the project, following the instructions of the employer’s design team which acts as an agent of the employer.

    Design and build is an increasingly popular procurement method because it offers the employer single point responsibility . The employer engages a consultant to produce an outline design, which is then put out to tender. The design and build contractor who successfully bids for the works engages its own designers (or more commonly novates the original designers) to complete the design and then builds the project.

    Less common, and only for use by sophisticated employers, is the construction management method whereby the employer enters into (i) a contract with a construction manager and (ii) a large number of contracts directly with the various trade contractors. The employer must take the risk of trade contractor default or insolvency and manage the interface between the trade contractors.

  8. What are the most popular standard forms of contract? Do parties commonly amend these standard forms?

    The most commonly used forms of contract for large, complex projects in the UK are undoubtedly the JCT Standard Forms and the NEC4 suite of contracts.

    JCT is typically used by developers for commercial and residential schemes, while NEC4 is more suited to civil engineering, infrastructure and public sector projects.

    FIDIC is not as popular in the UK as it is in some jurisdictions (largely because it is seen as international, rather than UK specific), but it is still sometimes used for complex engineering projects.

    For process plants, the IChemE form of contract is generally used. The MF suite of contracts is often utilised when the works entail the supply and installation of a specific piece of electrical or mechanical plant.

    On large, complex projects, the standard forms of contract are usually subject to extensive amendment by the parties.

  9. Are there any restrictions or legislative regimes affecting procurement?

    Public procurement has to date been governed by the EU procurement rules, which were implemented into English law by the Public Contracts Regulations 2015, the Utilities Contracts Regulations 2016 and the Concession Contracts Regulations 2016. These regulations were intended to open up competition throughout the EU and to ensure that contracts were awarded fairly and transparently without national bias.

    If the rules apply, the contract must be advertised in the Official Journal of the European Union and tendered using one of five available procedures. The process can take between 6 weeks to 18 months.

    In preparation for Britain’s exit from the EU the Public Procurement (Amendment etc) (EU Exit) Regulations 2019 (SI 2019/560) were published on 15 March 2019. These Regulations, which are expected to replace the EU procurement rules on almost identical terms, are likely to come into force on the date of exit, which is currently uncertain. However it has always been the position of the UK government that the procurement regulations will be retained post-exit, at least for the foreseeable future.

  10. Do parties typically engage consultants? What forms are used?

    The employer often engages an external project manager to manage the project and administer the contract (though sometimes the latter role is taken on by the architect) and a firm of cost consultants (known as “quantity surveyors”) to value the works.

    A project will also typically have a design team, likely consisting of an architect, various engineers (e.g. structural, mechanical, electrical, process) and, if relevant, an interior designer. On larger projects, specialist consultants may also feature, with expertise in environmental, geotechnical, IT, or other matters.

    The contractor will have people in equivalent roles, though typically in-house.

    Standard forms of professional appointment are produced by ACE, RIBA and RICS. However, for major projects, most clients use bespoke appointments.

  11. Is subcontracting permitted?

    Yes. It is common for the main contractor to subcontract the majority of its obligations to third parties. Generally, the main contractor will remain liable to the employer under the main contract for any default arising from subcontractors’ performance. However, the main contractor is not vicariously liable in tort for the performance of its subcontractors. The employer is generally not entitled to sue a subcontractor unless it has a claim in tort or a direct third party right (see question 20).

  12. How are projects typically financed?

    Commercial and residential developments are typically financed by a combination of debt and equity finance, with lending secured against the property and sometimes shares in the borrower, supported by a guarantee and step-in rights.

    Large infrastructure or industrial projects may be financed via "non-recourse" or "limited recourse" finance, whereby the employer is a special purpose vehicle with limited assets and a high debt to equity ratio, and the lenders' principal recourse is to project cash-flows rather than assets of the project or of equity investors. In addition to repaying debt, project revenues are used to pay for operation and maintenance and provide a return to the borrower and investors. This form of finance limits the exposure to risk of the employer and its shareholders. It was the finance method generally used for the UK government’s programme of Private Finance Initiative (PFI) projects, which enabled the delivery by the private sector of numerous public services and facilities during the 1990s and 2000s, but fell out of political favour and was formally abolished by the Chancellor of the Exchequer in the 2018 Budget.

  13. What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?

    On-demand performance bonds are relatively rare. The majority of UK performance bonds are default bonds (which require the employer to establish a breach of contract by the contractor and resulting loss before a call can be made). These are typically issued by specialist security companies, rather than banks.

    Employers often require contractors to provide performance bonds. These typically expire either at practical completion or after the end of the defect rectification period (usually 12 months after practical completion).

    Parent company guarantees are commonly required as an alternative to performance bonds, although their effectiveness will depend on the profitability, stability and reputation of the parent company.

    Retention bonds are an increasingly popular alternative to the traditional approach of withholding a cash retention from interim payment, given their beneficial impact on contractor cash flow.

    When the employer agrees to make an advance payment to the contractor (e.g. to cover the acquisition of raw materials or to obtain manufacturing slots), it will often request an advance payment bond.
    Since retention and advance payment bonds are a substitute for cash, they are usually provided by banks.

    Defects liability bonds are less common, but required under certain forms of contract (e.g. IET MF/1).

  14. Is there any specific legislation relating to payment in the industry?

    The HGCRA 1996 prescribes a detailed interim payment mechanism to which nearly all UK construction contracts must conform. The Act envisages that the contractor will submit an interim payment application showing the amount it consider due at the “due date”; the employer (or contract administrator) must submit a payment notice recording “the sum due”; and then the employer must submit a “pay less notice” if it intends to pay less than the amount stated in the payment notice. The sum due must be paid on or before the “final date for payment”, and if not paid, can be recovered by way of adjudication Minor errors in the contents or timing of a notice may invalidate it and such errors often cannot be remedied until the next interim payment cycle.

  15. Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?

    Pay-when-paid clauses are prohibited by the HGCRA, except in cases of insolvency of the payer “up the line”, in which case they are permitted.

  16. Do your contracts contain retention provisions and, if so, how do they operate?

    Yes. Construction contracts commonly provide for a proportion (usually 3% for large projects and 5% for smaller projects) of the contract sum to be withheld by the paying party until the works are practically complete. On practical completion, half of the retention is paid to the contractor, with the remaining half released at the end of the defect rectification period (subject to any deductions for defective works).

    However, given the deleterious effect of this practice on the cash flow of subcontractors and suppliers, and the unfairness that can result if employers and main contractors become insolvent, the industry is pressing for retentions to be abolished, or alternatively, to be replaced with a retention bond (see question 13) or held in a separate bank account.

  17. Do contracts commonly contain liquidated delay damages provisions and are these upheld by the courts?

    Contracts very commonly prescribe the rate of delay damages.

    Such clauses tend to be upheld by the courts provided that they are clear, certain and they do not constitute a penalty (i.e. they do not impose a detriment which is out of all proportion to any legitimate interest of the innocent party in enforcing its obligations under the contract). In practice, it is very difficult to show that liquidated damages provisions negotiated between two well-advised commercial parties constitute a penalty.

    Occasionally, liquidated damages may not be enforced as a result of uncertainty, for example where partial possession or sectional completion has taken place and the contract does not adequately apportion damages.

  18. Are the parties able to exclude or limit liability?

    Generally parties to a contract are free to exclude or limit their liability as they see fit, save that it is not possible to exclude liability in negligence for death or personal injury, or fraud. Where both parties are sophisticated commercial enterprises, the courts will typically give full effect to limitation clauses. This is subject to the application of the Unfair Contract Terms Act 1977, which provides that when a business contracts on its standard terms, any exclusions or limitations must be reasonable.

  19. Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

    Freedom of contract is upheld and there are very few restrictions on the parties’ rights to terminate. Contracts commonly provide for numerous grounds for termination, including the right to terminate for convenience. In addition, there is a common law right to terminate if the other party commits a repudiatory breach of contract, i.e. a breach so severe that it demonstrates an intention of the party in breach not to be bound by the terms of the contract.

    Force majeure is not a concept recognised in English law. The contract must provide expressly for termination for force majeure, including a clear definition of the categories of event that will constitute force majeure and its consequences. Although there is a related concept in English law, frustration, parties should beware of relying on it in place of a clear force majeure clause as it is rarely held to have occurred.

  20. What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

    The doctrine of privity of contract means that a party who is not a party to a contract cannot take advantage of any rights under that contract. In addition, as per the answer to question 5, rights of third parties to claim in tort are limited as it is generally not possible to recover pure economic loss without a contractual relationship. As a result purchasers, funders and tenants enter into separate contracts with contractors called collateral warranties.

    As an alternative to collateral warranties, since the introduction of the Contracts (Rights of Third Parties) Act 1999, non-parties have the ability to enforce specific rights under the contract. These rights are generally set out in a schedule to the main contract.

  21. Do contracts typically contain strict provisions governing notification of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?

    English contracts differ on this point. Where time bar provisions are clearly expressed, the English courts will recognise them as conditions precedent to claims, even if the consequences are draconian.

    For example, the NEC standard forms provide that notice of a claim for additional time and money must be made within 8 weeks of becoming aware of the event. The FIDIC provisions on notices are considered to be conditions precedent.

    The JCT provisions on notices of extensions of time claims are not considered to be conditions precedent to bringing claims, but in any event, the contract administrator has a duty to reach a decision on the appropriate extension of time that is fair and reasonable.

  22. What insurances are the parties required to hold? And how long for?

    The types of insurance most often required are:

    • All risks insurance covering physical damage to the works and site materials is typically maintained by the contractor for a new building until practical completion, and by the employer for refurbishments and some major projects;
    • Public liability insurance (covering defects in design) is typically required from consultants and design and build contractors, and must be renewed for the duration of their liability;
    • Professional indemnity insurance must be maintained throughout the insured professional’s period of liability;
    • Employers' liability insurance is maintained throughout the period of employment: this is the only insurance required by statute.

    On some PPP projects, particularly those creating an income generating asset, additional insurances such as delayed start-up (DSU), and advanced loss of profit (ALOP) insurance may be required. These respond when the income stream is delayed or affected by a shut-down. These are maintained during the life of the works.

    Most contractors are covered for all of their projects by annual insurance policies.

  23. How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?

    Construction disputes are typically resolved by adjudication. This is a 28-day procedure, with the emphasis on obtaining a speedy decision in order to aid the parties’ cash flow. The decision of an adjudicator is temporarily binding, until the dispute is finally resolved by court proceedings, arbitration, or by agreement. In reality adjudicators’ decisions, despite being reached very quickly, often become binding by default as it is uncommon for either party to refer the dispute to final determination.

    The industry has its own specialist court, the Technology and Construction Court, which is a division of the Business and Property Courts. Disputes referred to court are usually heard within 12 months.

    Arbitration is less commonly provided for in domestic projects but is still commonly found in international projects. Institutional rules commonly referred to are ICC and LCIA.

    Other methods used include mediation and (less commonly) expert determination.

  24. How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?

    The English courts are extremely supportive of arbitration: the Arbitration Act 1996 is designed to support arbitration, and no distinction is made between domestic and international arbitration.

    There are limited grounds of appeal. Although there is a right to appeal on a point of law, that right is often deleted from contracts.

    There is a procedure in place for swift enforcement of arbitral awards, but in practice the need to apply to the court to enforce is rare.

  25. Are there any limitation periods for commencing disputes in your jurisdiction?

    Yes. The Limitation Act 1980 specifies that for an action arising in contract, the limitation period starts at the date of breach and runs for 6 years for a simple contract and 12 years for a deed. Contracts in the industry are usually signed as deeds to take advantage of this extended period. The date of breach is typically taken as the date of practical completion for contractors.

    For actions arising in tort, the limitation period is 6 years and runs from the date of damage. However, special rules arise in relation to latent damage (i.e. where the damage is not known to the parties at the date it occurs). In those circumstances, the tortious limitation period may be extended to three years from the date that the damage was (or ought to have been) discovered. This is subject to a longstop date of 15 years from the date of the negligent act.

    Different provisions apply to personal injury claims.

  26. How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?

    Many disputes involve multiple parties, given the preponderance of complex contractual frameworks, overlaps in design responsibility and difficulties establishing causation (for example, a defect might be caused by poor design or workmanship).

    The English courts have wide case management powers to join parties and consolidate disputes. However, the costs of multi-party litigation can be prohibitive.

    Moreover, since the most common method of dispute resolution in the industry is adjudication, most formal disputes are between two parties. This is because of the short time frames involved, which leave little scope for consolidation or joinder. It is possible to have two adjudications, one between the subcontractor and main contractor, and one between employer and main contractor, held at the same time as and before the same adjudicator.

    Where two parties are liable for the same damage, they are held to be jointly and severally liable to the claimant, and one claim a contribution from the other under the Civil Liability (Contribution) Act 1978.

    Net contribution clauses are sometimes adopted in collateral warranties from consultants, and where used they are upheld by the courts.

  27. What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?

    The UK faces a challenging macroeconomic climate, with low levels of growth and productivity, with the British construction industry contracting for the first time since the Brexit vote over 2 years ago.. This has contributed to further insolvencies in the construction industry, most notably Interserve being put into administration in February 2019 just 13 months after the collapse of following Carillion, whose insolvency caused major problems for a number of government projects, facilities management contracts, and subcontractors in its supply chain.

    The consequences of Brexit on the industry are still something of an unknown, but the continued uncertainty over the UK’s exit date and terms of any Brexit deal are impacting growth, particularly in the London market. The risk remains that it could contribute to labour shortages, higher material costs and reduced foreign investment in infrastructure. Much will depend on the UK’s trading relationship with the EU post-Brexit but in the meantime there are reports of companies stockpiling key materials and already suffering from an inability to recruit skilled labour.

    Having said that, the fall in sterling has (in the short term at least) made the UK an increasingly attractive foreign investment opportunity.

    There are opportunities for investment in emerging sectors like renewable energy and for efficiencies arising out of the use of new technologies and more collaborative ways of working.

  28. What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?

    Currently infrastructure projects are attracting the most investment. In transport, despite the significant delays in the delivery of Crossrail, there remains a pipeline of major projects including Crossrail 2, the High Speed 2 rail link between London and the West Midlands, and a programme of major road improvements (with regional transport projects supported by government programmes such as the Northern Powerhouse and the Transforming Cities Fund).

    In power while we are seeing increasing investment in renewable energy and in nuclear with Hinkley Point C proceeding, the UK’s new build nuclear programme has suffered a setback with the failure of the UK government to reach agreements with contractors for the construction of the Moorside, Wylfa and Oldbury plants. However the government is due to publish a new approach to financing these schemes in Q3, 2019.

    In housing the government has set an optimistic target for housebuilders to build 220,000 new homes a year and has announced it is on target, using its £5.5bn housing investment fund. Government investment via the National Infrastructure and Construction Pipeline is expected to be £600bn over the next 10 years ( with half coming from the private sector), with a focus on electricity generation, digital infrastructure, airports, waste and water.

    London’s commercial property market remains strong, attracting investment from overseas investors and serviced office providers.

    Despite this, due to the challenges identified above, industry confidence and growth remains sluggish.

  29. How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?

    Given the predicted increase in housebuilding, offsite modular building and robotics are set to increase, enabled by improvements in 3D printing technology.

    We are increasingly seeing the introduction of smart cities and smart buildings, aided by the growing use of Building Information Modelling.

    Construction management software will increasingly be accessible via mobile devices which will improve the standard of record keeping on sites. Drones will increasingly be used for surveying, particularly in dangerous or previously inaccessible sites. Automated vehicles will lead to efficiencies.