Construction Insurance Conference

4 February 2016
Construction Law Conference 2016

Francis Ho, Head of Construction
francis.ho@olswang.com | +44 20 7067 3505 | @fkyh
Construction Law Conference 2016 4 February 2016
Developments in Construction Insurance

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Current Trends
constructiveblog.comConstruction Law Conference 2016: Developments in Construction Insurance3
• Building Information Modelling
• Integrated Project Insurance
• Inherent Defects Insurance (Latent Defects Insurance)

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Building Information Modelling
• 3D digital representation of a facility or building
• Information on physical and functional aspects
• Data shared and manipulated between project participants
• Government deadline of April 2016 for adoption of Level 2 BIM

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BIM: 4 Levels of Maturity
• Level 0: No BIM (e.g. 2D drawings)
• Level 1: Partial BIM (e.g. some CAD, some 2D drawings)
• Level 2: Federated BIM model (but separate 3D models from each participant)
• Level 3: True BIM; single model

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BIM and Professional Indemnity Insurance
• Building magazine/Zurich Insurance BIM and insurance survey in 2013
• 43% of contractors believe BIM will lead to increased PII premiums
• 87% of insurers believed BIM made no difference but 8% reluctant to insure
• What about Level 3?
• Potential issues
• Who is liable for what?
• Who owns the intellectual property in data?
• Is application of design being extended?
• Cyber liability
• Should premiums reduce?

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Integrated Project Insurance
• 2011 Government Construction Strategy
• Latham (1994) and Egan (1998)
• Moving away from “blame game” and towards better integration
• IPI covers losses for whole project not liabilities

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Integrated Project Insurance
• Replaces PI, CAR, Public and Latent Defects (possibly also consequential loss and
late completion)
• For every £5 spent on costs, £1 spent by insurers (Griffiths & Armour)
• Excess shared by project team members under pain-share
• Cost fixed at 2.5% of construction cost
• Covers all team (including supply chains)

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Integrated Project Insurance – Different measures of success
• Performance is measured against agreed success criteria
• Creates roles of Independent Facilitator, Technical Independent Risk Assuror and
Financial Independent Facilitator
• Project board takes control of project. Client sits on project board
• Target cost and project solution are insured and insurer has recourse to TIRA and
FIRA
• An end to collateral warranties and third party rights

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Integrated Project Insurance – Thoughts
• Alliancing model
• Insurer becomes active project participant
• Insurer covenant is critical
• Project team has to be competitively appointed
• Beware of exclusions

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Integrated Project Insurance – Thoughts
• Savings on duplicated insurance cover
• First trial project commenced April 2015 (Dudley College (Centre for Advanced
Building Technologies))
• Private sector has adopted wait and see approach
• Viable for projects within £10m to £25m range but larger projects may be suited in
future
• Only solution to insuring BIM Level 3

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Inherent Defects Insurance
• What does an IHD policy cover?
• Latent Defects Act 1980:
“defects that are not immediately apparent and which cannot be discovered by a
reasonable inspection of the property”
• On top of buildings insurance
• What is it procured?
• Purchaser expectation
• Tenant expectation
• Problems/concerns with collateral warranty/third party rights package

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• Cover up to a specified level of indemnity
• Are they available retrospectively?
• Take effect 12 months after practical completion
• Insurers will wish to be able to subrogate against construction team

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Advantages and disadvantages
IHD Collateral Warranties/Third Party
Rights
No fault Need to prove loss
Endure 10/12 years 6 or 12 year duration
Freely assignable to successors Limited assignments
Insurer offers stronger covenant Contractor covenant less certain
Extent of cover narrow Broader protection offered
Premiums can be high Costs are well-known
Policy excess applies No deductibles

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• Must remember to treat as an insurance policy
• Is there increased demand for IHD insurance?
• Is it just laziness or is there a genuine need for IHD on projects?

Ben Worthington, Senior Associate
ben.worthington@olswang.com | +44 20 7067 3541 | @disputes_lawyer
Payment in Construction Contracts

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Payment regime – the basic principles
constructiveblog.comConstruction Law Conference 2016: Payment in Construction Contracts17
• The employer must pay the notified sum
• The notified sum is the sum stated in the payment notice
• The payment notice can be given by (or on behalf of) the employer or by the contractor
• If the employer is required to give a payment notice and doesn’t, the notified sum is that
stated in the contractor’s payment application
• If the employer wants to pay less than the notified sum, it can issue a pay less notice
• Right to adjudication

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Failure to serve payment and pay less notices
(1) ISG Construction Ltd v Seevic College (2014)
• If E fails to serve any valid notices, it must be taken to be agreeing the value stated in the
application
• contractor becomes entitled to the amount stated in the interim application irrespective of the
true value of the work actually carried out
• E cannot start a second adjudication on the same interim payment application
(2) Galliford Try Building Ltd v Estura Ltd (2015)
• E cannot bring a second adjudication to determine the value of the work at the valuation date
of the interim application in question
• But there was nothing to prevent the E challenging the value of the work on the next
application

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Interim applications and overpayment
• Many contracts do not allow for a negative valuation - an overpaid contractor cannot be
compelled to repay money to the employer on the next valuation date
• If E fails to serve a valid notice it may be able to adjust for any overpayment in the next
payment cycle
• BUT whether this will work depends upon the timing and amount of the application
• E may have to wait until the final account stage then issue proceedings to recover any
overpayment
• It might be possible to challenge the contractor’s application
• In summary, serve the notices !!!

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Final accounts - Harding t/a MJ Harding Contractors v Paice
(Court of Appeal) (2015)
• Failure to serve valid pay less notice did not mean E was deemed to have agreed the value
of C’s termination account
• E was entitled to adjudicate in order to determine the correct value of Harding’s claims and
their counterclaims in the termination account
• ISG v Seevic and Galliford Try v Estura do not apply to final accounts

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What constitutes a valid application for payment?
(1) The Timing of the Application
Leeds City Council v Waco UK Ltd (2015):
• Applications had to made on the dates set out in the contract but parties had established
through conduct of CA that applications made 3 – 4 days late would be processed
• Applications could not be made early – they must "state the financial position as at that date"
(i.e. at the date stated in the contract)
• E had certified and paid one application that had been made early - that was a one-off / no
waiver
• As the application was made earlier than the valuation date, the application was invalid

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(2) It must be sufficiently clear that the document is an application for payment
Caledonian Modular Ltd v Mar City Developments Ltd (2015)
• C made interim applications in the same format at the end of each month
• On 13 February it issued a “final account application summary” and supporting documents during final account
negotiations
• No pay less notice served against these documents – adjudicator considered the documents constituted a payment
application and awarded C £1.5m
Held:
• C’s interim application was invalid because the documents did not identify themselves as a new application for payment
• Further, it was made two weeks early – a valid interim application was made at the end of January, and no further
application could be made until 28 February
• C’s interim application “... must be clear that it is what it purports to be so that the parties know what to do about it and
when.”

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(3) The application must be free from ambiguity
Henia Investments v Beck Interiors Limited (2015)
• The IA issue number and valuation date indicated that it related to April, but it was served too late for the
April due date
• Court considered that it was not a valid application in respect of the May date - E could not reasonably
have understood the application to relate to the April due date (as it was too late) or the May due date
(as it was early and only referred to April )
• “the document relied upon as an Interim Application… must be in substance, form and intent an Interim
Application stating the sum considered by the Contractor as due at the relevant due date and it must be
free from ambiguity.”
Severfield (UK) Ltd v Duro Felguera UK Ltd (2015)
A valid application for payment must:
• Set out the total sum said to be due
• Set out the basis on which that sum has been calculated
• Be clear and free from ambiguity

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Taking control of the payment process
• Do not get caught out by lack of notices !!!
• Consider contract term that allows any overpayment on an interim payment to be repayable
on the next valuation (negative valuation)
• Consider making payment due date the same date each month and synchronize payment
due dates across all projects
• Do not allow contractor to submit interim applications later than the dates specified in the
contract
• Make sure notices are clear, unambiguous and timely

Louise Forbes, Associate
louise.forbes@olswang.com | +44 20 7067 3632 | @forbes_louise
Case Law Update

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Cavendish Square Holding BV v El Makdessi and ParkingEye
Ltd v Beavis [2015]
constructiveblog.comConstruction Law Conference 2016: Case Law Update26
• Liquidated damages are a pre-determined sum which become payable by a party in
the event of a specified breach of contract (for example a delay to the completion
date)
• The innocent party need not establish any loss or damage, only that the
circumstances triggering payment has occurred
• Parties on the receiving end of claims for liquidated damages may look at ways of
avoiding them, usually by claiming that the provision is a penalty clause (English
law will not enforce penalty clauses)

| Construction Law Conference 2016: Case Law Update27
The position before Cavendish in relation to penalty clauses
• Based on a tangle of case law and has evolved over time
• Is the sum payable a genuine pre-estimate of the innocent party’s loss as a result of
the specified breach? (Dunlop)
• If yes, it’s not a penalty clause
• Or is the sum extravagant and unconscionable when compared to the greatest loss
that the innocent party could suffer as a result of the breach?
• If yes, it’s an unenforceable penalty clause
• However, courts do not want to interfere with the parties’ freedom to contract on
whatever terms they choose, so they have in recent years adopted a more
commercial approach
constructiveblog.com

What happened in Cavendish?
• Mr Makdessi agreed to sell to Cavendish a controlling stake in the holding company
of a marketing communications group in the Middle East
• The agreement stated that if he was in breach of certain restrictive covenants
against competing activities, Mr Makdessi would not be entitled to receive the final
two instalments of the price paid by Cavendish
• He would also be required to sell his shares to Cavendish at a price excluding the
value of the goodwill of the business
• Here, monetary compensation was not the only legitimate interest which Cavendish
might have in the performance of the obligations under the agreement
• It was therefore more important that the courts looked at the commercial context of
the deal rather than whether the sum payable was a genuine pre-estimate of the
innocent party’s loss

The new test
• The Court decided not to modify the current law surrounding penalties, but rather to
better codify the test
• A clause will be a penalty where it imposes a detriment on the guilty party “out of all
proportion to any legitimate interest of the innocent party” in the enforcement of the
specific obligation
• How this will apply in practice:
• The courts will still consider whether the sum payable is exorbitant or
unconscionable, but this will be considered in the context of a party’s legitimate
interest in the proper performance of the contract (i.e. they will take a
‘commercial view’)
• Whether this will impact on standard delay liquidated damages in construction
contracts remains to be seen – but it may make challenging a liquidated
damages provision on the grounds that it’s a penalty even harder

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Bloomberg LP v Sandberg and Others [2015]
• Bloomberg entered into an agreement for lease at 15 Finsbury Square
• They received collateral warranties from various contractors in relation to works
carried out at the Property including from Sandberg, Buro Happold and from
Malling Pre-cast Limited
• In 2001, two cladding tiles fell from the building. Investigative works were carried
out, a condition survey was produced and Malling carried out remedial works to the
cladding. On 8 July 2013 a soffit cladding tile fell to the pavement from the seventh
floor of the Property
• Sandberg and Buro Happold had carried out certain investigative works and
provided the condition survey during 2001 and 2002

| constructiveblog.comConstruction Law Conference 2016: Case Law Update31
• The warranty in favour of Bloomberg from Malling contained the following limitation
clause (clause 6):
“Notwithstanding the date hereof no proceedings shall be commenced
against the Contractor after the expiry of twelve years from the date of issue
of the last written statement by the Client that practical completion of the
Project has been achieved under the Contract.”
• The ‘last written statement by the Client that practical completion of the project had
been achieved’ was given on 29 August 2000
• Bloomberg out of time under the Malling warranty to bring a claim directly against
Malling. They instead issued claim forms against Sandberg and Buro Happold
• Sandberg brought a claim against Malling for a contribution from Malling pursuant
to the Civil Liability (Contribution) Act 1978 (the “Act”)

• Clause 1 of the Act provides:
“(1) Subject to the following provisions of this section, any person liable in
respect of any damage suffered by another person may recover contribution
from any other person liable in respect of the same damage (whether jointly
with him or otherwise).
. . .
(3) A person shall be liable to make contribution by virtue of subsection (1)
above notwithstanding that he has ceased to be liable in respect of the
damage in question since the time when the damage occurred, unless he
ceased to be liable by virtue of the expiry of a period of limitation or
prescription which extinguished the right on which the claim against him in
respect of the damage was based.”
• Malling resisted relying on the clause 6 wording, arguing that the words “no
proceedings shall be commenced against the Contractor” was meant to be
construed to mean that “no proceedings” included proceedings by any other party

• Mr Justice Fraser noted that the words used in the clause were clear. There was no
ambiguity. “No proceedings” in the context of a warranty between Bloomberg and
Malling, could only mean proceedings by Bloomberg
• He noted that the overall effect of Malling’s arguments would be that parties could
effectively “contract out” of the operation of the Act, an act that had been put in
place by Parliament to benefit other third parties
Relevance
• Not a surprising result, but clarifies the impact of limitation clauses within
appointments and collateral warranties
• Enforced principles to be adopted in the process of contractual construction stated
in Arnold v Britton [2015] UKSC 36 – although commercial common sense and
surrounding circumstances may be relied upon as aids to construction, they should
not undervalue the importance of the language of the provision itself
• The exercise of interpreting a provision involves identifying what the parties meant
through the eyes of a reasonable reader

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MW High Tech Projects UK Ltd v Haase Environmental
Consulting GmbH [2015]
• In June 2010 MW High Tech, the contractor, was awarded an engineer, procure
and construct contract to build a waste to energy plant
• HEC was engaged by the Contractor as a process engineering design consultant
• Clause 5.9.1 of the appointment required HEC to use “all the reasonable skill, care
and diligence to be expected of properly qualified and competent design
professional experienced in the design of works similar in size, scope, nature and
complexity to the Process Technology.”
• The appointment also required HEC to design the works in accordance with the
EPC output specification and the delivery plan (the “Requirements”)

• After the contractor and HEC had entered into the formal appointment, HEC had
developed the design to include features not present in the basic design. The
contractor alleged that the new features were not required by the Requirements,
but had caused the contractor to incur increased costs
• As the additional features would not be treated as variations under the contract, the
contractor could not recover those additional costs from the employer. The
contractor accordingly claimed the additional costs from HEC
• An adjudication found in HEC’s favour and so the contractor brought the issue to
the TCC
• The Court held that on a proper construction of the appointment, the requirement to
comply with the Requirements was “subject to the Consultant's overriding
obligation to exercise reasonable skill and care as more particularly provided in
clause 5.9.1.”
• Further the Court concluded that “[i]n the hierarchy of the principal obligations, the
obligation to exercise reasonable skill and care is paramount.”

• The Judge, however, found that as a matter of proper contractual construction, the
obligation to comply with the EPC Requirements could be read as an independent
obligation alongside the over-riding obligation to take reasonable skill and care
• The only qualification to the strict requirement to comply with the EPC
Requirements would be if it would be negligent for HEC to design in accordance
with a certain part of the latter they would not be obliged to comply with that part of
the EPC Requirements
• This follows an earlier ruling in Costain v Haswell & Partners Ltd [2009] which
related to an appointment which had a skill and care obligation and an obligation
for the works designed under the appointment to meet the requirements set out in
the specification
Relevance?
• A “reasonable skill and care” qualification may serve to increase the consultant’s
liability rather than reducing it since compliance with a strict obligation could put the
consultant in breach of its skill and care obligation

• By the same token, a non-negligent breach of the specifications could still
constitute a breach
• In order to be sure that an appointment does not impose “fitness for purpose” and
other strict obligations which may not be backed by PI insurance, it is crucial to
ensure that any “strict” obligations in the appointment are expressly qualified by
wording such as “The Consultant shall exercise the standard of skill and care
required by clause [ ] to see that...”

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Caterpillar Motoren GmbH & Co KG v Mutual Benefits
Assurance Company [2015]
• An on-demand bond is a primary obligation that takes the form of an undertaking
from the bondsman to pay a sum of money to the employer without reference to the
liability of the contractor
• As such, it tends to include phrases such as “on-demand”, payment “without proof
or conditions”, and payment upon “first written demand”, all of which are indicative
of on-demand bonds
• Payment guarantees, on the other hand, are secondary obligations in which the
bondsman’s liability to pay the employer is contingent upon a breach by the
contractor of the underlying construction contract (in other words they act as a form
of insurance)
• If the employer cannot establish a breach by the contractor then the bondsman has
no liability to pay. Payment guarantees may mention the words “guarantee” and
“lawful claims” or include other wording that is suggestive of a secondary obligation

Wuhan Gouyu Logistics Group C Ltd and another v Emporiki Bank of Greece SA
[2013]
Presumption that a bond is an on-demand bond where:
i. It relates to an underlying transaction between parties in different jurisdictions;
ii. It is issued by a bank;
iii. It contains an undertaking to pay “on demand”; and
iv. It does not contain clauses excluding or limiting the defences that are available
to a guarantor

The Facts of the case
• Caterpillar entered into two sub-contracts for the provision of construction services
in relation to two power plants. Each sub-contract (which was in materially identical
terms) required the sub-contractor to procure an advance payment bond (“APB”)
and a performance bond (“PB”) in favour of Caterpillar.
• The APBs were described as instruments that guaranteed the due performance by
the sub-contractor for an advance payment made by Caterpillar to the sub-
contractor
• The PBs were described as instruments that guaranteed the due performance of all
work by the sub-contractor.
• Disputes subsequently arose between Caterpillar and the sub-contractor and
Caterpillar demanded the return of advance payments and also a sum in respect of
liquidated damages

The Decision
• The Court considered the terms of each bond
APBs
• “guarantees and undertakes to pay” “forthwith on demand” and “without reference
to” the contractor
• The word “guarantees” could be suggested to mean that the parties intended that
bondsman would only pay where the sub-contractor had failed to perform its
obligations, whereas the words “forthwith on demand” and “without reference to”
the contractor suggested bondsman’s liability was to pay the sum which was
demanded by Caterpillar
• Met the Wuhan requirements for an on-demand bond

PBs
• Ability to pay “lawful” claims which tended to suggest a payment guarantee over an
on-demand bond
• There was also an obligation upon bondsman to pay Caterpillar once Caterpillar
had declared that sub-contractor was in default, but bondsman was to pay
“unconditionally” “the amount of damages claimed by” Caterpillar, which was
inconsistent with the concept of lawful claims and payment guarantees
• The deciding factor, however, was that any demand was expressed as being
“conclusive” as regards the amount that was due from bondsman, which left no
doubt that the PBs were on-demand bonds as opposed to payment guarantees
Lessons
• Look beyond the name of the instrument
• Look at the language
• Apply the Wuhan test
• Draft clearly to avoid uncertainty

Ashley Hurst, Partner
ashley.hurst@olswang.com | +44 20 7067 3486
The Role of Lawyers in a Reputational
Crisis

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Hypothetical scenario
constructiveblog.comConstruction Law Conference 2016: The role of lawyers in a Reputational Crisis44
• Buildem High plc is a substantial player in the construction industry which has
publicly denounced blacklisting.
• An anonymous internet user "BuildemLow" has posted on an internet discussion
forum that a "whistleblower" has revealed "explosive documents" which apparently
show that "Buildem High engaged in blacklisting practices 4 years ago".
• The posting has been tweeted and is causing a stir on Twitter.
• The Mail on Sunday has called the press office asking for comment.
• A temporary employee called Jane, who left under a cloud several weeks ago, is
suspected of being responsible for the allegations. A review of her emails has
revealed that she sent an email from her work email account to her Hotmail
account with a copy of confidential internal report on blacklisting.
• The report concludes that "Whilst conversations about blacklisting clearly took
place at Buildem in September 2012, we are confident they were not acted upon."

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Issues
• How should Buildem deal with the Mail on Sunday?
• How should Buildem deal with "BuildemLow" and Twitter?
• What is the role of the legal team (internal and external) in the unfolding crisis?
• What can be done once the heat has died down to better prepare for the future?

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How should Buildem deal with the Mail on Sunday?
• The first call with a hostile journalist
• Do not respond "no comment"
• Take contact details
• Ascertain deadline
• The twin track approach (law/PR)
• Ask for further information and ascertain the underlying allegations (preferably in
writing)
• "Reynolds push back"
• Delay tactics
• On the record / off the record comments

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How should Buildem deal with "BuildemLow"?
• Take screen shots and analyse content
• Assess the extent of the damage (who has noticed and republished?)
• Cross-check against internal information/data
• Consider Norwich Pharmacal disclosure orders to identify BuildemLow
• Consider injunction against "persons unknown"
• Consider the impact of engaging (the "Streisand effect")

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How should Buildem High deal with Twitter?
• Assess extent of the damage
• Consider carefully whether to engage at all
• Timing is critical – the conversation will move on quickly
• Surgical removal if necessary
• Obtaining information from Twitter

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What is the role of the legal team in a crisis?
• Assessors of risk (insurance, litigation, regulatory scrutiny)
• Martials of the facts
• Work closely with communications and operations to ensure consistency with the
facts
• Project managers(calls, meetings, updates)
• Set communications protocols to protect confidentiality and privilege (e.g. assign
project name, encrypt documents, email restrictions)
• Instruct outside advisors (for privilege reasons)
• Auditors of steps taken

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What can be done to improve preparedness?
• Form a crisis team
• Brainstorm the types of crisis that might hit your company
• Draft a simple crisis plan which is accessible and can be easily updated
• Use checklists for specific subject matters (e.g. data breach) rather than
prescriptive "to do lists" and flow charts
• Practice using "war games" in different scenarios
• Know who to call internally and externally
• Ascertain your online footprint and key influencers

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Q&A
constructiveblog.comConstruction Law Conference 201651

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For more information please contact
Olswang:
Changing Business.
www.olswang.com
Francis Ho
+44 20 7067 3505
francis.ho@olswang.com
Brussels
+32 2 647 4772
London
+44 20 7067 3000
Madrid
+34 91 187 1920
Munich
+49 89 206 028 400
Singapore
+65 6720 8278
Paris
+33 17 091 8720
Thames Valley
+44 20 7071 7300

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