HENRY HATHAWAY asks when it comes to off-site construction or manufacturing, when does construction, in fact, commence on a project, and how does this affect the rights of the parties, including issues such as but not limited to payment, title and/or risk and vesting rights?
It is impossible to read any construction journal or paper without seeing some degree of mention of off-site or modular construction techniques or processes. There have been many papers and articles published in respect of the use and potential benefits of off-site construction methods and especially when issues such as the housing crisis appear to be more pronounced.
As to whether there are any novel aspects to this process, the question as to whether the parties to an agreement have applied their respective minds to the contract remains to be seen, and, even if the units produced are not wholly modular in effect, the very concept of substantial units of construction arriving at a project in a near complete state does continue to evolve. While there is a continuing trend in respect of the degree of off-site construction, the same principled approach ought to be applied.
The question then is this, when did construction, in fact, commence on the works, and how does this affect the rights of the parties, including issues such as but not limited to payment, title and/or risk and vesting rights?
The primary purpose of an agreement
The primary purpose of an agreement is to have sufficient clarity on the terms expressly or implicitly to be applied and to ascertain what the parties intended.
The question in this article is whether or not the standard forms of contract or the law have evolved to keep pace with the development of the industry. Off-site construction and modular units can be complex, and where there is complexity, there is a greater degree of risk that a dispute may arise. Examples of complexity may arise from design or process or the degree of integration and tolerances required.
What do “construction operations” actually cover?
The issue perhaps can become even more identified when, for example, there is a payment dispute even where no works potentially have been carried out on site. Certainly, in the UK, there has been extensive case law in relation to the fact-sensitive nature of what “construction operations” do entail or cover.
It is an established position that in order for the Construction Act 2013 to bite, there must be construction operations and what the current authorities in the UK tell us is that this can be a fact-specific question.
This became a distinct issue in the case of CIMC Limited (formerly Verbus Systems Limited v Bennett (Construction) Limited, where the Judge found at the first instance that the Act did apply to the whole contract, this was despite the fact that fabrication of the modular units was undertaken in China to a degree of substantial completion.
Conversely, a well-known case was required to examine in detail whether or not the delivery and placing of concrete by a supplier could be captured under the heading of installation. Further, in Savoye and Savoye Limited v Spicers Limited  EWHC 4195, a central issue arose as to whether or not a system constructed had the required fixity to the land to consider whether it was, in fact, to form part of the land and therefore would be caught by the Act. In this case, there were repeated rounds of submissions, attendance to the site by the Judge and further oral evidence. This case in itself illustrates the type of legal costs that can be incurred over what became a discrete but necessary issue to resolve on a fact-sensitive basis.
In Cleveland Bridge (UK) Limited v Whessoe-Volker Stevin Joint Venture  EWHC 1076 (TCC), a dispute arose over the final account, and at an enforcement, the Judge was required to determine (a) whether the work carried out consisted of construction operations under S105(1), (equivalent and relatable to Section 1 CCA 2013 and whether any of the work was excluded and (b) if the works did consist of construction operations and also excluded operations, was the decision of the Adjudicator enforceable or severable. These are all issues concerning elements where there was a degree of off-site production, manufacture and design. The key point here is that clear drafting and or incorporation of express terms are required in terms of payments where a degree of off-site manufacturing is to occur. Inadvertently, a party may lose its rights in terms of payment or not consider whether its works are caught by the relevant legislation, especially when there are clear exceptions to what are considered construction operations as defined by the Construction Contracts Act 2013.
The primary and salutary lesson in this instance is to ensure that for any works that the parties have agreed to carry out, whether on-site or off-site, including design and manufacture, there is a specific agreement in place, whether based on a standard form or recorded as a bespoke agreement. Parties must also ensure that it is drafted to encompass the necessary provisions of the Act if they later seek to rely upon it. As off-site construction grows, it is relevant that the agreements reflect this process and not fall foul or incur expensive legal costs in having a discrete point resolved.
Where do the parties stand in relation to title and risk?
From the employing party’s perspective, it must consider that it will be required to make payments in respect of any off-site manufactured elements, those elements at the time not being on the end site, let alone being attached to the land.
Certain questions arise from this, such as what and how are the payments to be made and to what extent, given that responsibility may be an unresolved position or in an environment where insolvencies can be regular. Clearly, the position of title and risk is to be analysed and expressly set out as to who retains title and when does it pass and, if this is resolved, then how is the risk to be also allocated. This is a common position where a supplier will retain title but seek to pass risk immediately or as soon as practicable, and there is little coincidence of both happening at the same time. Damage prior to delivery or in transit then becomes a ground for dispute.
Off-site material bonds and insurance
Clear detailing within vesting certificates should clearly set out the nature of ownership of off-site materials and ought to consider and make certain what the nature of the insurance will be and that such terms adequately address the process. This, of course, will also introduce the potential of off-site material bonds and whilst the appropriateness of such a bond will depend on the circumstances and costs associated.
Where many forms of standard form contracts are employed, there will, in most cases, be a series of amendments. What is now critical in an environment of development and change is whether or not either bespoke documents or amendments to the standard forms indeed actually have been updated or recognise the realities of changes that are in existence. This forces the drafter to consider the whole process and interrelationships that exist, including cooperation and coordination and careful consideration of the effects of not drafting to encompass the entire process as the reality now provides.
Henry Hathaway is a solicitor who practises in Ireland, England and Wales and specialises in construction law. He is a qualified civil engineer and spent 12 years working in the industry. He advises on contract formation and provides practical advice when entering construction contracts, and regularly provides training and seminar days to companies to assist knowledge and application in order to assist them in avoiding disputes in construction. If you require further information in relation to contract formation or would like to discuss training and development in this area, contact firstname.lastname@example.org
This is one in a series of articles by Henry Hathaway for Irish Construction News, Click Here to read other articles
Disclaimer: This content is provided for information purposes only and does not constitute legal advice. It is provided to present information to the broader construction industry and provide awareness. Independent legal advice should always be sought prior to application, and no solicitor/client relationship is formed, and no duty of care nor liability arises from any of the contents of this article.