Scottish construction collateral warranties: timeless, or on borrowed time?

Third party rights in Scotland have potential, but will collateral warranties ever really be on borrowed time? In this article, Kate Faith Senior Solicitor, Construction at Burness Paull LLP investigates.

Kate Faith, Burness Paull LLP

Procuring warranties can be very time-consuming and expensive, so there was much interest when the Contracts (Third Party Rights) (Scotland) Act 2017 (the “Act”) came in to force a few weeks ago.

The Act consolidates a previously ambiguous area of Scots law, and makes it easier for parties to transfer rights to third parties without the need for a separate contract, such as a collateral warranty.

Third party rights can now be granted by reliance on a schedule setting out largely the same information as you would find in a collateral warranty such as an express duty of care and the grant of a copyright licence. Employers/developers can now enjoy the efficiencies and cost savings that come with just one schedule to negotiate. Potentially, this is a big time saver.

In practice though, has the Act really provided the change that so many of us were hoping for?

Here are three reasons collateral warranties may stand the test of time:

1. Step-in Provisions

Funders commonly seek the right to step in to construction contracts as a means of protecting their investment. Along with rights, step-in provisions create obligations for the funder (eg. payment obligations), and obligations cannot be transferred to a third party via a third party rights schedule. We expect that funders may therefore continue to prefer collateral warranties.

2. Loss of Rights to Adjudicate

There are limited scenarios (not discussed here) in which collateral warranties could grant a third party beneficiary the right to adjudicate. This is a divisive point of law. The decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC) overturned the presumption that a collateral warranty was not a “construction contract” for the purposes of the Housing, Grants and Regeneration Act 1996. As the statutory right to adjudicate flows from having a construction contract, it follows that a collateral warranty could offer third party beneficiaries the benefits of adjudication.

Conversely, it’s doubtful that a beneficiary could raise an adjudication using third party rights granted under the main contract. Statutory rights to adjudicate are granted to the parties to a construction contract. A third party is defined in the Act as “a person who is not a party to the contract”. This has not been tested in the Scottish courts, however.

In reality, the range of circumstances whereby a third party beneficiary could have adjudication rights via its collateral warranty is narrow. Nevertheless, we anticipate that there will be some resistance to third party rights arising from this issue.

3. Market Expectation

Third party rights are not a new concept in Scottish construction contracts. The Scottish Building Contract Committee (SBCC) suite already contains schedules of third party rights. Yet these are rarely used, perhaps because some parties prefer the security of having a physical collateral warranty.

So far we’ve seen little uptake of third party rights – but it is early days. It’s understandable that third party beneficiaries may favour the tried and tested route, but in time the efficiencies and cost-benefits of third party rights may be sufficient to overcome long-established practices.

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House Prices stable

May data has been released for the UK House Price Index, showing an annual rise of three percent, with a monthly rise registering at 0.1%. This is the lowest UK annual rate since August 2013, which also registered at three per cent.

From data across England, the East Midlands was the fastest growing region with an annual house price growth rate of 6.3%, up from 5.1% in the previous month. London was the slowest growing region, falling by 0.4% in the year to May 2018, down from -0.3% in the previous month. This is the fourth consecutive month that London house prices have fallen over the year.

Looking across the country, the largest annual price growth was recorded in Scotland, where house prices increased by 4.9% over the year to May 2018. Northern Ireland was not far behind, showing a 4.2% increase over the year.

Wales saw a modest increase of 1.0% over the last 12 months, while in England, the average price increased by 2.9% over the year.
Looking at the demand for housing, the Royal Institution of Chartered Surveyors’ (RICS) UK Residential Market Survey for May 2018 revealed their new buyer enquiries series continued its downward trend.

On the supply side, RICS reported their new instructions series showed a positive balance for the first time in 27 months.

In the Bank of England’s Agents’ summary of business conditions for the period covering late March 2018 to late May 2018, Agents reported supply and demand were broadly in balance across the whole market. The market for new builds was much stronger than the market for existing properties. However, there were some reports suggesting that new builds are becoming more difficult to sell compared to a year ago. Activity is expected to remain subdued and house price inflation to remain modest.

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Canterbury Council invests in social housing

Canterbury Council has announced it is investing in social housing for its community, with a £23M deal designed to provide decent affordable permanent homes to families in the area.

The council has bought the freehold of 44 properties off Sturry Road in Canterbury, which will be converted into 63 self-contained flats and houses. With some 2,401 households on the city council’s Housing Needs Register, plus some 1,000 households a year fearing they may be made homeless, the need for affordable properties is critical.

Statistics show homes that are among the cheapest in the district, cost more than 13 times the income of the lowest earners. House-price-to-income ratios show most single earners and people on low incomes cannot afford to buy or rent a home.

The Council will now convert the properties in Parham Close, Riverdale House, Albert Mews, Stour Promenade and Glenside Avenue, from student bedsits into 52 self-contained homes, providing a mix of houses and flats for council tenants.

In total there will be 132 bedrooms plus generous living space and modern facilities.

Canterbury Council has chosen to buy and convert these properties, rather than building from scratch for a number of reasons. Firstly, it would be impossible to find a similar size site, negotiate its acquisition, get planning permission and develop 63 homes in anywhere near the same timeframe. Secondly, having a large number of homes in the same place makes managing them much easier when compared to 63 homes spread across the district. And, lastly, the council can tailor the existing 44 properties to suit its immediate housing needs.

Council leader Cllr Simon Cook said: “This deal has been a long time coming and is the result of a great deal of hard work by officers behind the scenes. We have not been able to talk about this earlier for fear of being gazumped by those with deeper pockets than our own.

“These properties, which are close to the city centre, will provide a massive boost in the number of socially-rented homes across the district. Local people tell us affordable housing is one of their key priorities and high house prices and market rents are an issue.

“This is part of an ongoing programme to increase the number of council flats and houses that started in 2015. By 31 March this year, we had already bought 47 homes. This deal will take the number to 110.”

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Tougher requirements needed for company chiefs

NEDonBoard has called for tougher requirements on non-executive directors and board members following the collapse of Carillion.

The collapse of Carillion has reignited debate about the effectiveness of non-executive directors. Specifically, the report issued by the Parliamentary select committee in May outlined the role of Carillion’s board of directors in the collapse of the company.

As the Professional Body for the non-executive director and board member community, NEDonBoard calls for non-executive directors and board members being required to demonstrate and evidence an understanding of their responsibilities to the organisation’s stakeholders and of their legal duties.

The findings of the MPs’ report reinforce the message NEDonBoard has been communicating to its audience of non-executive directors and board members: Taking on a non-executive or board member role entails extensive responsibilities to the organisation’s stakeholders and a comprehensive understanding of duties and liabilities, it requires a good understanding of governance, initial training and ongoing investment in professional development.

The Parliamentary report states that “Carillion’s board members did not give the impression that they were acutely conscious of the wide range of legal duties they had, nor of the prospect of any penalties arising from failure in this regard”.

Not a single non-executive director of Carillion is a member of NEDonBoard, the Professional Body for non-executive directors and board members. Therefore it came as no surprise to discover that the non-executive board members at Carillion are being criticised by Parliament.

Being a non-executive director is not a role for those seeking an easy life or early retirement; the role has legal and ethical responsivities that cannot be discharged without a deep understanding of current and prospective legislation as well as obligations to investors, staff and other stakeholders.

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BAM Nuttall targets vibrating tools

BAM Nuttall, the leading construction and engineering company is aiming to eliminate the use of rock drills, hand breakers and scabblers on its projects by the end of the year in a significant step towards improving workforce health and welfare.

Hand-arm vibration comes from the use of hand-held power tools and is the cause of significant ill health (painful and disabling disorders of the blood vessels, nerves and joints), and is a particular source of concern in the construction industry. Advice from the HSE says that whilst HAVS (Hand Arm Vibration Syndrome) is preventable, once the damage is done it is permanent.

BAM Nuttall believes that over the years people have underplayed the impact of vibrating tools on people in the industry.

“Many of these tools are really from a bygone age and have been part and parcel of every day civil engineering life and as an industry we’ve been slow to develop alternatives,” says Divisional Director at BAM Nuttall, John Heffernan. “Thirty years ago, white finger was not only considered an old man’s illness but also something of a badge of honour, especially in the tunnelling industry. Nowadays that is simply not acceptable.

“If we want to attract the best talent to our industry, while retaining those people we already have, then giving them the best working conditions is vital, and that means ensuring they remain healthy and can safely operate modern equipment that is truly fit for purpose.”
The drive to eliminate the most harmful vibrating tools, while promoting innovative alternatives, echoes the recent industry stance on forward tipping dumpers following some high-profile incidents.”

While conceding that eliminating these tools would be very difficult, he says there needs to be a attitudinal change towards the use of vibrating tools by contractors, their workforce and manufacturers.

“First we have introduced a permit system for the use of hand held rock drills, breakers and scabblers to highlight the need for our projects to exhaust all possible alternatives before using these tools, and then ensuring all the appropriate controls are in place,” he says. “We have already seen a positive response from our people, with this initiative generating smarter ways of working which are not only less harmful but also more efficient.”

“Contractors and manufacturers alike need to find an innovative solution to the challenge. Sometimes it may seem impossible to find a quick solution but I think that we haven’t necessarily looked hard enough. One of the main purposes of the permit system is to incentivise this search for a better, healthier way of doing things. We need to think hard and not set ourselves up to fail. For example, we should be thinking about design regarding lack of space – particularly around temporary works – where there’s not much room so we struggle to use machines where the work should be done mechanically.”

BAM Nuttall has already successfully trialled machines that significantly reduce Hand-arm Vibration Syndrome on a number of projects. A Positioner-Actuator-Manipulator (PAM) was used on its Heathrow Airport tunnels project. While a PAM OVE carrier, that makes overhead and vertical concrete chipping and drilling easier by reducing vibrations and operator effort, was used at Chswick Bridge.

“There has been very positive feedback around some of the new machinery we have been using recently,” says John. “We have a duty of care to our current and future colleagues and we are determined to eliminate the worst of the handheld equipment by the end of the year. It’s a challenging task but we are determined to succeed and hope that the rest of the industry follows our lead.”

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Construction and road interest groups seek solution to road congestion

A consortium of high powered construction and road user interests have put forward proposals to the National Infrastructure Commission and the Department for Transport aimed at reducing the disruption caused by utility roadworks.

The consortium includes the Institution of Civil Engineers (ICE), the Civil Engineering Contractors Association (CECA) and the RAC Foundation, with the initiative taken following a report from Professor Lord Robert Mair, President of the Institution of Civil Engineers that resulted in a policy paper “What can be done to reduce congestion caused by roadworks?”

The paper resulted from a proposal put forward by the Pipe Jacking Association, a specialist organisation involved with the installation on non-disruptive utilities in urban locations. Contributors to, and supporters of, the non-disruptive installation of urban utilities also include the UK Society for Trenchless Technology and Birmingham University’s Department of Civil Engineering, a world leader in research into non-disruptive trenchless systems for the installation of utilities.

Commenting on the paper Professor Lord Robert Mair, said: “Congestion continues to be a major headache for road users and it is essential that industry, and government, look at ways to lessen the problem. It is important that the users, many who are tax payers, are considered equally alongside the need for utilities companies to undertake their work”.

Graeme Monteith, Pipe Jacking Association Chair, noted:  “We believe that the NIC is responsive to a progressive outcome-based solution to minimising strategic urban road disruption caused by utility roadworks. Non-disruptive solutions need to be prioritised in the interests of road users, local communities and other stakeholders wherever practicable and economic”.

In an open letter to Sir John Armitt, Chair of the National Infrastructure Commission, Graeme Monteith, on behalf of the consortium, notes the conflict between the requirement to install and upgrade essential utilities and the communities’ requirements for a continuous fully operational urban road network. It notes that one of our most important strategic infrastructures, key urban highways, lack coherent protection and management unlike other major transport networks such as those operated by Highways England and Network Rail.

The ICE Report noted other key areas to safeguard key urban roads to include a requirement for utilities to produce impact statements when carrying out works in congested urban areas, empowering highway authorities to enable them to dictate the use of non-disruptive installation and renovation techniques wherever practical and economic, and the further development of innovative technologies that can enable utility installation and renovation with minimal or no disruption to the highway infrastructure.

In its submission the consortium urges the National Infrastructure Commission to prioritise the pressures on urban road capacity in its forthcoming infrastructure assessment. It argues that there is a strong case for government to commission a review of the management of street works, in particular the economic impacts of disruption and the appropriate regulatory incentives that apply to the utility companies, as well as the availability, costs and benefits of the engineering options that exist for minimising the disruption caused by street works – including alternatives to breaking the carriageway at all. It suggests that such a review would need to draw in not just the perspectives of highway authorities and contractors but also the utility companies and their regulators.

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CITB launch skills analysis for Scottish construction

For the first time, newly published CITB research is providing a five-year overview of skills, demand and supply in the Scottish construction sector.

In the report, entitled Local Construction Skills Needs for Scotland, CITB has demonstrated its new evidence based model which will help industry and academia to address the prevailing skills shortage. In 2018, construction demand was estimated to be 247,300, with the Scottish workforce nearing 241,000 workers. This means that 6,400 more workers are required and represents a shortfall of 3%. CITB will revisit the findings on an annual basis.

The core findings from the report include:

1. The construction skills shortage is greatest in such regions as the Highlands & Islands and South East;
2. There are potential skills shortages in the painting, decorating and plumbing trades;
3. There is a clear need for support staff working in the supply chain such as IT specialists, lawyers, procurement experts and researchers.

“We have undertaken the most wide-ranging regional skills mapping exercise for construction in Scotland,” said Ian Hughes, CITB Partnerships Director for Scotland. “The research gives an unprecedented level of detail about the industry, providing us with an in-depth evidence base of construction skills requirements on a regional basis.

“It enables us, in partnership with industry and key stakeholders, to develop regional skills action plans, which will address existing and emerging occupational shortfalls, and really focus on where support is needed most. We will now be able to measure how we are closing skills gaps, and in turn increasing the flow of skilled workers into the Scottish construction industry.”

Ian Rogers, Chief Executive of the Scottish Decorators’ Federation, added: “The construction industry has been calling for the evidence base in Scotland to go into this level of detail for some time. I welcome this initial report, which highlights the skills issues, both geographically, and at an occupational level. The findings will enable us to plan for the future and get the right skills in place across the whole country.”

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