1.1 Introduction
Numerous books have been written on the subject of construction contracts. However, many of those are of a specialist nature and most are written from the perspective of English law. The aim of this book is to provide a practical guide to construction contracts governed by the law of Scotland.
There is no doubt that the construction industry not only in Scotland, but throughout the UK, is currently being presented with continuing challenges of an almost unprecedented nature. In the first quarter of 2013, the construction industry suffered a contraction of 2.5% compared with the same period in the previous year, despite a growth in overall Scottish gross domestic product (GDP) of 1.2%. While some major public sector infrastructure projects have lessened the impact of the economic downturn on the Scottish construction sector, the lack of external funding has been a major factor in the sharp reduction in the number of new private commercial development projects.
However, the very size of the construction industry means that it is of huge significance to the economy. According to figures contained in the report by Construction Scotland, Building for the Future: The Scottish Construction Industry's Strategy, 2013â2016, the construction industry generates ÂŁ27.4 billion (GDP) to the Scottish economy every year, contributing 10% of Scotland's total economic output, and 170,000 people work in construction in Scotland, around 10% of the total Scottish jobs.
1.2 Definition of a construction contract
1.2.1 General
The definition of a construction contract is not straightforward. The construction industry encompasses building and engineering projects which differ enormously in nature, size and complexity. The terms âbuilding contractâ and âconstruction contractâ are often used interchangeably. The term âconstruction contractâ was given a statutory meaning for the first time by section 104 of the Housing Grants, Construction and Regeneration Act 1996 (âthe 1996 Actâ) and the breadth of the definition illustrates the wide-ranging nature of construction contracts. The 1996 Act has been amended by the Local Democracy, Economic Development and Construction Act 2009 in relation to contracts entered into in England and Wales from 1 October 2011 and in Scotland from 1 November 2011. One of the key amendments was the repeal of the requirement that a construction contract for the purposes of the 1996 Act must be in writing. The following sections summarize the principal requirements of the statutory definition of âconstruction contractâ. However, it is important to bear in mind that this statutory definition is relevant only for the purposes of the 1996 Act and for determining whether the provisions of Part II the 1996 Act, such as adjudication and payment requirements, will apply to a particular contract. The fact that a contract is not a âconstruction contractâ for the purposes of the 1996 Act does not mean that it may not be a construction contract in the commonly understood sense of the term, and indeed some contracts falling with the statutory definition, such as for architectural services, would not be described as a construction contract in everyday terms. An English court has recently held that a collateral warranty may, depending on its terms, be a construction contract for the purposes of the 1996 Act and thus subject to the statutory adjudication provisions, see Parkwood Leisure Ltd v. Laing O'Rourke Wales and West Ltd (2013) and the discussion of this case in Section 13.4. The 1996 Act has no relevance in determining whether a contract exists in the first place since this will be determined by a matter of law and evidence; putting it at its simplest, whether there was sufficient consensus as to the essential terms and sufficient proof of such consensus.
It should also be noted that the Scottish Government's legislative programme for 2013â2014 includes the Conclusion of Contracts, etc. Bill, which is intended to allow contracts to be concluded by email and to provide a simpler process for formal execution (signing) of contracts.
1.2.2 Construction contracts under the 1996 Act
Part II of the 1996 Act applies to âconstruction contractsâ, being agreements in relation to âconstruction operationsâ. These terms are defined respectively by sections 104 and 105.
Section 104 provides as follows:
- In this Part a âconstruction contractâ means an agreement with a person for any of the following â
- the carrying out of construction operations;
- arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise;
- providing his own labour, or the labour of others, for the carrying out of construction operations.
- References in this Part to a construction contract include an agreement â
- to do architectural, design or surveying work, or
- to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape, in relation to construction operations.
- References in this Part to a construction contract do not include a contract of employment (within the meaning of the Employment Rights Act 1996).
- The Secretary of State may by order add to, amend or repeal any of the provisions of subsection (1), (2) or (3) as to the agreements which are construction contracts for the purposes of this Part or are to be taken or not to be taken as included in references to such contracts âŚ
It will be noted that the 1996 Act applies to matters beyond the carrying out of building works. It applies to architectural, design and surveying works and to advising on building, engineering, interior or exterior decoration or on the laying-out of landscape in relation to construction operations.
The definition of âconstruction operationsâ is central to Part II. This term is defined by section 105(1) which provides as follows:
- In this Part âconstruction operationsâ means, subject as follows, operations of any of the following descriptions â
- construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings, or structures forming, or to form, part of the land (whether permanent or not);
- construction, alteration, repair, maintenance, extension, demolition or dismantling of any works forming, or to form, part of the land, including (without prejudice to the foregoing) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;
- installation in any building or structure of fittings forming part of the land, including (without prejudice to the foregoing) systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or security or communications systems;
- external or internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
- operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this subsection, including site clearance, earthmoving, excavation, tunnelling and boring, laying of foundations, erection, maintenance or dismantling of scaffolding, site restoration, landscaping and the provision of roadways and other access works;
- painting or decorating the internal or external surfaces of any building or structure.
Section 105(2) details a number of operations that are not construction operations for the purposes of Part II. The exceptions relate to oil and gas and mining, both underground and opencast; certain specified operations on a site where the primary purpose is nuclear processing, power generation, water or effluent treatment or the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink; the manufacture or delivery to site of components or equipment where the contract does not also provide for their installation; and the making, installation and repair of wholly artistic works. The scope of excluded operations insofar as applicable to works at power stations was considered in the case of North Midland Construction plc v. AE & E Lentjes UK Ltd (2009).
1.2.3 Excluded contracts
Section 106 provides that contracts with residential occupiers are excluded from the operation of Part II of the 1996 Act, as is any other description of construction contract excluded by order of the Secretary of State (or in Scotland, the Scottish Ministers).
A construction contract with a residential occupier is one which principally relates to operations on a dwelling which one of the parties to the contract occupies, or intends to occupy, as his residence.
The term âdwellingâ means a dwelling-house or a flat; and for s.106(2) âdwelling-houseâ does not include a building containing a flat and âflatâ means separate and self-contained premises constructed or adapted for use for residential purposes and forming part of a building from some other part of which the premises are divided horizontally. In itself, section 106 is self-explanatory. However, it should be noted that a residential occupier cannot be a limited company for the purposes of this section, see Absolute Rentals Ltd v. Gencor Enterprises Ltd (2001).
The Construction Contracts (Scotland) Exclusion Order 1998 (âthe 1998 Orderâ) came into force with Part II of the 1996 Act on 1 May 1998. This excluded from the scope of Part II of the 1996 Act project agreements under the Private Finance Initiative (PFI) (provided certain criteria were met) but not sub-contracts such as the construction contract and facilities management or operation and maintenance contract. One of the amendments to the 1996 Act referred to in section 1.2.1 above was the introduction of section 110(1A) which prohibits payment provisions in construction contracts which are conditional on the performance of obligations under another contract or a decision by any person as to whether obligations under another contract have been performed. To avoid this prohibition applying to first-tier sub-contracts under PFI projects and thus prohibiting what are commonly known as âequivalent project reliefâ clauses in such sub-contracts, the Construction Contracts (Scotland) Exclusion Order 2011 excludes from the operation of section 110(1A) a construction contract if it is a contract pursuant to which a party to a relevant contract (i.e. excluded by the 1998 Order) has subcontracted obligations under that contract to carry out construction operations.
Certain development agreements are also excluded from the operation of Part II under article 6 of the 1998 Order. A contract is a development agreement if it includes provision for the grant or disposal of a relevant interest in the land on which take place the principal construction operations to which the contract relates.
A relevant interest in land means either ownership or a tenant's interest under a lease for a period which is to expire not earlier than 12 months after the completion of the construction operations under the contract.
In Captiva Estates Ltd v. Rybarn Ltd (In Administration) (2006), Captiva entered into a contract with Rybarn to construct 28 flats. Captiva owned the land on which the development was to take place. The contract provided that, as consideration for the works, Captiva would pay Rybarn and would also grant to Rybarn an option to purchase leases in respect of 7 of the 28 flats. The question arose as to whether the contract was a development agreement within the meaning of the English equivalent to the 1998 Order. The court held that the definition of a âdevelopment agreementâ in the 1998 Order is wide and the contract was caught by it.
1.2.4 Agreements in writing
Section 107 of the 1996 Act as originally enacted provided that Part II only applied to agreements in writing or evidenced in writing or recorded by one of the parties or a third party who has been duly authorized to do so. However, this was repealed with effect from 1 October 2011 in England and 1 November 2011 in Scotland, which means that oral contracts may now be subject to Part II of the 1996 Act. This does not, however, avoid the practical...
