Introduction to Construction Law Principles

Construction

17 Mar

Introduction

Construction law encompasses a complex framework of legal principles governing procurement methods, contractual obligations, and dispute resolution mechanisms within the construction industry. The choice of procurement strategy—whether traditional contracting, design and build, or a hybrid approach—significantly impacts risk distribution, project control, and cost management. Additionally, contractual provisions governing timelines, payment structures, and adjudication play a crucial role in mitigating disputes and ensuring compliance with legal and regulatory requirements. Understanding these principles is essential for employers, contractors, and legal professionals to navigate the complexities of project execution while mitigating potential conflicts.

Procurement

There are various ways in which a construction project can be procured, each with its own advantages and disadvantages.

Traditional contracting

The employer engages the design team direct and the design is then tendered to contractors. The selected contractor is also engaged direct by the employer.

The contract administrator, although the employer's agent, is legally obliged to act fairly between the parties when valuing or considering extensions of time.

Advantages

Tighter control over design. Greater ease in effecting variations during the build phase.

Design and build

The employer employs the contractor direct both to design and to construct the development, making the contractor responsible for both.

Advantages

Integration of the design and build phases, facilitating efficiency. The employer has a single point of responsibility to look to in the event of failure.

Disadvantages

The contractor has an incentive to design (and build) as cheaply as possible, so quality can suffer. Changing the contractor's design in the build phase can be difficult and expensive.

Hybrid

Employers may initially engage their own design team but then require the contractor to assume responsibility for that team, and its design, before commencement of the build stage. That gives the employer some of the advantages of both the traditional method and of design and build, but does lose control over design; and forcing a relationship on the design team and contractor does not always work well.

Remember that novation requires the agreement of all parties. The obligations of a contract cannot be assigned as they do not constitute a chose in action.

Note

A responsibility for both design and build together implies a fitness for purpose obligation on the contractor, but contractors in major contracts usually limit their design responsibility to that of a professional designer - in simplistic terms that means reasonable skill and care. Design responsibilities are insurable, build quality is not.

Management contracting

The contractor becomes closer to the professional team and so is less of a contractor proper. He employs works contractors to undertake the various elements of the construction and is paid a management fee plus for doing so, plus actual cost - primarily the monies due to works contractors.

Advantages

Management contracting can be considered for very large developments, eg a retail centre. It facilitates the overlapping of design and construction, allowing greater flexibility. Elements of design can be left to a later stage where the requirements of the ultimate users are not be known before construction starts.

Disadvantages

Management contractors take less responsibility for defaults. For example, where there is defective work, the employer may have to claim against works contractors direct (all of whom may blame each other); so the advantages of a single point of responsibility are lost. Costs can increase because flexibility tends to generate uncertainty. Further, the management fee is frequently calculated as a percentage of the final build cost, giving the management contractor an incentive to increase costs artificially (though counter-incentives can be included in the drafting).

Construction management

The "contractor" really ceases to be a contractor at all. He is not directly responsible for carrying out the works themselves but procures them to be undertaken by trade contractors who are employed by the employer direct.

Advantages

The same as for management contracting, but amplified. Only suitable for very large projects requiring considerable flexibility in the build phase.

Examples of major legal issues arising in construction

Time for completion

Construction contracts typically provide for completion dates, but also incorporating a regime for extensions of time where certain delaying events occur. Neutral events, such as "exceptionally adverse weather" allow the contractor more time but not money. Culpable events, such as variations or late instructions, give contractors the right to both time and money. If a culpable delaying event occurs for which the contract does not provide an extension of time, the contractor no longer has to complete by a specific date, but only within a reasonable time, which can be difficult to establish; ie time has become "at large".

Time at large also means that damages become at large. The employer thereby loses the right to liquidated damages for delay (ie pre-specified sums for specific periods of delay - e.g. so much per week) and has to demonstrate his actual losses caused by the delay, which can be difficult and expensive. Therefore, well drafted extension of time clauses benefit the employer as well as the contractor.

Note that liquidated damages are expected to be a genuine pre-estimate of the employer's possible delay losses. If they are set too high, they constitute a penalty and can be struck down, (again requiring the employer to prove actual losses).

Payment

Interim payments

The parties' entitlement to agree interim payments is circumscribed by statute - the Housing Grants Construction and Regeneration Act 1996, as amended, and the Construction Contracts (England and Wales) Regulations 1998, as amended. These provisions require construction contracts (as defined) lasting for more than 45 days to provide for interim payments to be made by the employer to the contractor (or by the contractor to the subcontractor). For this, they lay down a convoluted regime of notices and counter notices to be served on each other by the parties. The provisions can be difficult to operate in practice and failure to comply can have very serious consequences for employers. In simplistic terms, if a contractor serves an application asserting that a certain amount is due, and if the employer does not serve on time his own payment notice stipulating a lesser sum, or a "pay less" notice saying why the sum demanded is not in fact due, he has to pay the full amount demanded by the contractor - even if the sum claimed is obviously grossly overvalued. And the Regulations require the implementation of a strict timetable for service of notices. If the employer's payment notice, or pay less notice, is even a day late, it is invalid. He may commence proceedings to recover the overpayment, probably choosing to adjudicate; but he may not start such an adjudication until he has made the payment.

Note that the definition of "contractor" in the Act is broad and encompasses professional engagements such as with an architect.

Dispute resolution

The best drafted contracts can, of course, still generate disputes. They can be decided by negotiation, mediation, litigation, arbitration, expert determination, or adjudication. This note refers to the last two.

Expert determination

Some development contracts require all disputes to be decided by a pre-determined expert within a very short period - say 42 days, and mandate that the expert's decision is final, binding, and non-appealable. Evidently, the intention is to avoid expensive legal proceedings. However, that approach fails to understand why legal proceedings may legitimately be lengthy and expensive. The reality is that the time and complexity of proceedings can be necessary in order to get as close as possible to ascertaining and deciding the merits of a dispute. If disputes, however complicated, could be decided in a matter of days we could dispense with the whole panoply of civil litigation. The reality is that a multi-million pound dispute, for example as to the reasons for a lengthy delay to completion, will require a proper understanding of the relevant law, expert delay analysis, compilation of all documents, and witness statements; then, possibly, a trial with cross-examination. Trying to decide such a case in 42 days is often nothing more than palm tree justice; and making the decision final and binding can result in massive irreversible injustice.

Adjudication

A particular feature of construction contracts is the statutory regime for adjudication imported into them by Statute - the Construction Act and Regulations mentioned above. The entitlement to adjudicate is non-excludable, though a claimant is not obliged to use it. Salient features are:

any party can adjudicate at any time;
the adjudicator has to decide the dispute within 28 days of referral to him of the dispute (or 42 days if the claimant - "the Referring Party" - gives him a 14 day extension);
the decision is final and binding unless challenged through litigation (or arbitration if the contract contains an arbitration clause);
if a party chooses to arbitrate or litigate to obtain a reversal of the decision, he must nevertheless honour the decision in the meantime;
adjudicators' decisions cannot be appealed as such. Challenge in litigation or arbitration is by way of a new hearing, not a revision of the adjudicator's decision. Decisions must be complied with even if they are seriously flawed. They will only be unenforceable if the process itself has failed - essentially, if there has been a breach of natural justice, ie if one party has not had a proper opportunity to advance its case, if the adjudicator has shown bias, or if the adjudicator has failed to answer the right question;
each party bears its own costs, win or lose, though the loser usually has to pay the adjudicator's fee.

The Courts recognise that the rationale for adjudication is swiftly to put more or less the right money in the right pocket: the process is acknowledged to be rough and ready, but that limitation is justified given that it produces a swift and relatively cheap decision; and if the decision is in fact wrong, the disappointed party still has recourse to a remedy.

Adjudication is generally regarded as effective: comparatively few decisions are challenged. However, in its detail, it is a highly technical process with very strict time limits and has generated a vast body of case-law. So its implementation does require specialist knowledge.

Conclusion

The legal landscape of construction projects requires a careful balance between contractual clarity, risk allocation, and regulatory compliance. Effective procurement strategies, clear contractual obligations, and robust dispute resolution mechanisms help mitigate risks and enhance project outcomes. Whether dealing with issues of payment, liability, or project delays, proactive legal planning and adherence to best practices play a vital role in maintaining contractual compliance and operational success. As construction law continues to evolve, staying informed of its complexities remains essential for professionals seeking to navigate the industry's legal challenges effectively.

This article is intended for information purposes only and provides a general overview of the relevant legal topic. It does not constitute legal advice and should not be relied upon as such. While we strive for accuracy, the law is subject to change, and we cannot guarantee that the information is current or applicable to specific circumstances. Costigan King accepts no liability for any reliance placed on this material. For further details concerning the subject of the article or for specific advice, please contact a member of our team.