CHARLES RUSSELL

STEPHEN ROCKHILL

Stephen joined Charles Russell in 2001 and qualified as a solicitor in 2003. He specialises in construction, both contentious and non contentious. Stephen advises on a range of issues including advice on forms of contract, and modifications to standard contract forms. He also provides live project advice. He acts for both commercial and private clients.

Prior to qualifying as a lawyer with Charles Russell, he worked in the construction industry in Canada and the UK for 25 years. Stephen is a Chartered Engineer with an MSc in Construction Law and Arbitration. According to Chambers UK 2012, Stephen is credited with a "profound understanding of the construction industry".


James Thomlinson: Stephen, you work with a wide range of lenders and investors in the market place. We can confirm that it is difficult to obtain loans for construction projects at present – where do the key bottlenecks lie from your perspective?

Stephen Rockhill: Thanks James. I think Baden-Powell summed it up when he set the motto for the Boy Scouts Association - Be Prepared! I am often asked to carry out a due diligence exercise on a project where the borrower has set the project up with the whole professional team in place and is often in a position where they intend to enter into the building contract. Often the documentation that we are asked to review is incomplete or in an unacceptable form. This wastes a lot of time. Lenders and investors are naturally cautious and want to make sure that risk is properly managed within the construction project. If the project is set up properly the lender and/or investor will be able to make a decision quickly on whether the construction risks are being properly managed.

JT: So what do you believe are the key risks that the lenders/investors will be looking to see properly managed?

SR: Turning first to the professionals, that is the architect, the engineer, quantity surveyor etc. The borrower should not take on face value the recommendations of the professional team to use industry standard appointments. This was commented upon by Professor Ian Duncan-Wallace, an eminent QC who was, up until his death a few years ago, involved in construction law for many years. He edited the influential book "Hudson's Building and Engineering Contracts". Professor Wallace said:

 

"Above all, owners should take expert legal specialist advice at a very early stage of any project with a view to choosing their most appropriate contracting arrangements - at the same time, indeed as their first construction professional advisers are in the process of being selected for the project - and should adopt a suitably sceptical attitude to the siren voices which they will meet on all sides of the table seeking to persuade them and to inappropriate arrangements and forms of contract."

 

Often the services contained in the standard forms of appointment do not marry up fully and there can be gaps in the services that are to be provided. I detail a few examples that need careful consideration:

  1. All the appointments should be executed as a deed - this means that the liability of the consultant will generally be 12 years from practical completion and not 6 years if the appointment is executed under hand.
  2. There must be an obligation to provide warranties with appropriate step-in rights in favour of the lender/investors. There must be a clearly defined and adequate standard of skill and care required.
  3. There must be an obligation not to specify prohibited materials.
  4. There must be a copyright licence in favour of the employer.
  5. There must be a requirement to maintain professional indemnity insurance cover for 12 years.
  6. The appointment should be assignable to the investor/lender.
  7. Most important of all, there should be no net contribution provisions or other unacceptable limitations of liability. This applies particularly when standard industry forms are used.
  8. The professional should be required to provide collateral warranties in an acceptable form in favour of the lender/investor.

JT: Doesn't the British Property Federation produce its own standard warranties? Can these be used?

SR: James, the BPF has published forms of construction collateral warranties for many years but has stopped printing its current forms and says it has no plans for a new edition. Even if they were still available there are still issues with the warranties and in particular the inclusion of net contribution clauses and limitations on liability. Even if they do re-introduce the warranties, it is important to check that these provisions are still not in place.

JT: I appreciate that that's fine for the professionals, but how about the contractor?

SR: Well James, similar issues arise with the contractor. Again I turn to Professor Duncan-Wallace where in 1999 he stated:

 

"In my own view, there is currently no standard form available in the building of civil engineering industries which affords adequate protection for the legitimate interests of client owners and indeed many of their current provisions are so directly inimical to that interest, and in so many ways, that any professional adviser, whether lawyer, architect or engineer, who permits a client to make use of them without substantial and radical amendment, or at the very least calling attention to the dangers of doing so, must in my view risk the charge of professional negligence."

 

The borrower is confronted with a dazzling array of various standard forms of contract but in choosing them he must proceed with caution. The borrower may be confronted with advice from a project manager or a quantity surveyor who suggests using the industry standard forms without amendment as "they have been produced by an industry standard body and the contractor fully understands the contracts". I detail below some of the points that the borrower needs to be looking to in the building contract as follows:

  1. As with the professional appointments, the building contract must be executed as a deed.
  2. There must be an obligation to provide warranties in an acceptable form with appropriate step-in rights in favour of the lender/investor.
  3. It is important that specialist subcontractors provide warranties in the appropriate form with step-in rights in favour of the bank. Often this step is forgotten with reliance being placed totally on the contractor. Often a contractor will not have any design responsibility for certain parts of the work but his subcontractors may.
  4. There must be an obligation not to use or specify prohibitive materials.
  5. There must be a copyright licence in favour of the employer.
  6. The necessary insurances including professional indemnity insurance must be in place. Professional indemnity insurance must be in place for 12 years following completion.
  7. The contract must be capable of charge/assignment to the lender without the contractor's consent. The standard forms of contract do not permit assignment without the contractor's permission. Later on during the project this is unlikely to be given.
  8. It is important the lender has at least 28 days' notice for the contractor exercises any rights of termination. There must also be an entitlement for the lender to step-in during this period.
  9. It is important that the bank has the right to terminate the contract and to step-in and take control of the project if there has been a material breach by the borrow under the facility agreement.

JT: We've looked at the appointments and the building contract. What other crucial issues do you feel should be addressed by the borrower?

SR: Yes, particularly with new build projects, environmental/geotechnical/remediation works are particularly important. Often investigations will be carried out at an early stage and it is important that the reports are addressed not only to be borrower but to the lender also. The lender may not be known at this stage so it must be a requirement of the geoconsultant's appointment that the report can be addressed to the lender. Where remediation work is required, again, warranties will be required in favour of the lender. The lender will be seeking proper professional appointments covering the points I detail above.

JT: Often the drawing down of money will be set by various milestones during the project. One of these important milestones can often be practical completion. However I am told that the standard UK forms of building contract do not contain a definition of practical completion. Is this so?

SR: Yes, I'm afraid it is. Often agreements will be drafted on the basis that certain events will occur once practical completion has been certified by the building contract administrator. People are not aware that there isno definition of practical completion. So when is it complete? As part of our standard modifications to building contracts we always include a definition of practical completion so that the contract administrator is under no doubt whether or not he should certify practical completion. Often developers carrying out work for the first time will be unaware of all of these points so it is important that at the very beginning of the project they use the checklist to ensure the correct documentation is in place.

JT: Sorry Stephen, but isn't this just a "make work" scheme for lawyers?

SR: No, not at all! I want to reduce the client's legal spend! The main reason high legal costs are incurred is because borrowers haven't thought about the practical points I detail above. If all the correct documents are in place you will hear very little from me and the legal costs will be commensurately lower.