Hi, i am a university student and looking for some help with my assignment on the fundamentals of construction law - please could i look to the wider ReachBack community for some assistance and guidance on the following task and example scenario for completion -
Background
Pankhurst Holdings Limited are an established developer with a large land bank in the greater Manchester area. Although they had scaled back some of their activities during the pandemic, they had obtained and then secured planning permission on a number of sites by carrying out some initial enabling works.
Pankhurst Holdings Limited retained a multidisciplinary consultancy firm, Omnes Artes LLP, to carry out all elements of the design, and then came to an understanding with Norske Moduler Ltd (the UK trading arm of a Norwegian manufacturer) regarding the production of the modules. An initial contractor beauty parade was carried out which identified Apis Solutions Ltd as the preferred Main Contractor. By late 2021, Pankhurst Holdings Ltd had a prototype accommodation module complete to their satisfaction, and were ready to pick a time to start the project.
On Saturday 14 May 2022 the Ukrainian Kalush Orchestra won the Eurovision Song Contest with “Stefania”. Traditionally the winning country hosts the following year’s competition, but on 17 June 2022 it was confirmed that, owing to Russia’s invasion of Ukraine, the competition would not take place in Ukraine, and it was likely to be in the UK, as runner up.
The Board of Pankhurst Holdings Limited were all over the news. The Caput Regis site was ideally placed to accommodate visitors to the AO Arena, the only venue in the Manchester area likely to be big enough to host a Eurovision event. Even before the final announcement that Eurovision events would be hosted in the UK was made on 25 July 2022, the Caput Aegis project had been mobilised based on previous negotiations.
The contract between Pankhurst Holdings Ltd and Apis Solutions Ltd included:
NEC4 Option A (Priced Contract with Activity Schedule) with the listed secondary options, but not including X11 (Termination by the Client)
Total Contract Value: £75m
Start on site: 18 July 2022
Option X1: Price Adjustment for Inflation with the Contract Data Part 1 completed with “Steelwork linked to the index for steel” but no base date or specific index mentioned.
Option X2: Changes in the Law
Option X5: Sectional Completion with the Contract Data Part 1 completed as below:
| section | description | completion date |
|---|---|---|
| (1) | Base Frame to Load-Bearing Readiness | 21 November 2022 |
| (2) | Hotel Completion | 6 March 2023 |
Option X7: Delay Damages with the Contract Data Part 1 completed as below:
| section | description | amount per day |
|---|---|---|
| (1) | Base Frame to Load-Bearing Readiness (contract element £20m) | £60,000 capped at 5% of contract element ie £1m |
| (2) | Hotel Completion (contract element £55m) | £60,000 |
A signed copy of this contract is in our contract dashboard, but the key details are outlined above [Note to Students: you will not be provided with the signed contract].
Task
It is December 2022. The Caput Regis project is in distress. You are a contracts and disputes consultant hired by Apis Solutions Ltd. You are instructed to deliver a letter of advice by 16:00 on Friday 9 December 2022, in readiness for the Extraordinary Board Meeting scheduled for the following day. Specifically, you are instructed to provide your reasoned and justified analysis of the potential legal liabilities and opportunities of Apis Solutions Ltd arising from The Caput Regis project – some of the elements of the situation have been outlined for you by the Managing Director below, although you are not restricted to these issues.
Concrete Subcontractors
On top of CFA piling, it was necessary to construct a concrete basement, culverts and drainage, service access, then to top off with a ground-floor slab. As the build continued, it would be necessary to screed each floor until the third storey, which would be the base for the modular elements – reaching that stage was the completion of Section 1 as set out in the Contract Data.
In order to keep to an accelerated critical path, we (Apis) retained two different subcontractors, Beton Ferre Ltd and Salford Screeding Ltd. Their contracts were identical, NEC4 ECS: each with a contract value £5m, the Scope was fully articulated and amounted to 50% each of the mass concrete and screeding work on Section 1 of the works under the main contract. As with the main contract, X1, X2, and X7 were included, although X11 was not and there was no sectional completion under X5. Signed copies of these contracts are in our contract dashboard.
Piles began to be cured and ready for concreting by 8 August 2022. From that very earliest point, Beton Ferre Ltd clearly struggled to mobilise the staff they needed to meet the tight timeline. They were a French-owned and operated firm, and it turned out the urgent mobilisation had caught them unawares and their most skilled workers and specialist equipment had had to be recalled from “le grand congé”, the fabled French shutdown in August. In addition, getting into Britain from France took many days owing to paperwork requirements and border issues. For both subcontractors this was exacerbated when the Caput Regis site went on a “go slow” for a week in summer 2022 owing to an unprecedented heatwave, which slowed progress – the Project Manager assessed the delay as 3 days.
By 22 August 2022, two weeks into the Section 1 construction phase, Beton Ferre Ltd were at last on site, at about half strength and they told our site manager that they did not expect to be up to full strength for another two weeks.
Our financial director became increasingly concerned by the amount of delay damages we might be accruing with our client. We decided to move some of the section 1 work and we issued an instruction to Beton Ferre Ltd reducing their Scope to just the work done to date (about 6% of the original contract value). At the same time we instructed Salford Screeding Limited to do that work, which increased their Scope to around 94% of the total mass concrete and screeding elements. We did this in a bit of a hurry, and didn’t really analyse our contractual obligations or look at alternative contractual mechanisms. [MD: we may need to look at this carefully]
Beton Ferre Ltd were not happy after bringing staff back from their annual shutdown – they were very vocal on site and by various emails ‘reserved their rights’ to challenge the legality and appropriateness of this process. However, they saw the practical sense in what we did and demobilised. Since they left site, their CEO has been writing increasingly forthright letters to our MD saying that ‘Apis Solutions Ltd are guilty of not operating in a spirit of trust and mutual cooperation’ and accusing us of not correctly adopting the early warning process or being in ‘repudiatory breach’ [MD: whatever that means! I’m guessing they’ve had legal advice]. Beton Ferre Ltd are seeking all manner of damages. The Board need to know what our likely exposure might be and if there are any opportunities arising from these events.
[MD: You won’t be surprised to know that Salford Screeding have not raised any issues and have got on with the work swiftly and effectively – no problems there thankfully!]
Steel Subcontractor
The steel subcontractor for the section 1 works, Acier Ltd, has sent us claims for an additional 20% on their steel costs amounting to £150,000. They are relying on Option X1 in their NEC4 ESC which we included in their invitation to tender documents. The Contract Data is worded exactly the same in this regard as our main contract with Pankhurst Holdings Ltd – simply “Steelwork linked to the index for steel”. Acier Ltd have provided details to justify their claim, relying on data from “Steel-O-Markets Online”. This data would justify the 20% Price Adjustment Factor sought by Acier Limited, but we don’t agree it is the right index to use.
So far we have been robustly resisting the 20% on the basis that the Contract Data is uncertain and unenforceable; there are loads of indices which track steel prices, all of which give different figures – some more favourable to us than this one. Acier Ltd refer to an email they sent to our procurement manager shortly before we agreed the price which said “We have been using theSteel-O-Markets index on other contracts and propose its use here too”. That email was not formally incorporated into the contract. It turns out the procurement manager never got the Acier contract documents signed, although they were sent out in draft shortly after this email. We didn’t get round to responding about the index as we were a bit busy with Beton Ferre. We also did not suggest this index to our own client, Pankhurst Holdings Ltd. [MD: at least we have a new procurement manager, although they have their work cut out resolving some of our contract process issues!]
The Board need to understand our exposure regarding these inflation costs, and – in the event we do pay the increased steelwork costs to Acier Ltd – whether we can recover them from Pankhurst Holdings Ltd.
Liquidated Damages and Potential Exit Strategies
For the reasons outlined above, the progress of the build was delayed, and we did not complete Section 1 until 5 December 2022 – based on 14 days of delay for which we are (arguably) culpable, and exposing us to delay damages of £840,000. Our financial director is fuming. When we won the beauty parade and agreed the contract price, we had been in desperate need of turnover having lost a series of big tenders. We bid for The Caput Regis Project on a wafer-thin margin and these delay damages would blow any potential profit ‘out of the water’ – never mind the longer- term impact on our financial stability or even viability. We would like to stay in business, but we need to understand our real financial risks following this project.
The Board are interested in any routes there may be to improve our position. Just off the top of my head, can we argue that the delay damages are too high and unenforceable? The Caput Regis will have 192 bedrooms when complete, and we guess that the £60k / day figure is based on a rack rental calculation for 192 rooms. However, if we end up being late for Section 2, because the delay damages rate is the same for both sections, then we will effectively be paying twice that putative rack rental rate for the hotel for the first 14 days. Since there’s barely any float in the Section 2 programme (there are no Christmas holiday weeks planned in) this looks very likely to happen. Also, what about the impact of the Eurovision competition? When the contract was entered into neither of us had any idea that it might happen and even if it did, there was no guarantee that any events would run in the AO Arena… so perhaps the main contract over-egged their figures.
Of course neither side have been without some issues. Pankhurst Holdings Limited have been late with every single payment – at first just a couple of days, then increasingly later and later and the most recent payment is 3 weeks late and counting. The Board are interested in knowing if this would allow us to terminate the contract and whether we can use that to avoid delay damages or other possible claims. The Project Manager also rejected our programme repeatedly because of some spurious discussion about whether we had clarified how we intended to do the work and the equipment we’d need for the modular units, so we don’t have an accepted programme against which to plan the works.
More recently, since the start of November 2022 and up to the current date, the local community has been increasingly badly affected by a combination of increased rates of Covid-19 and Monkey Pox infection. Most businesses are being affected, including The Caput Regis site. There are murmurings in the press that the Government are wondering about introducing very stringent lockdown regulations, but nothing has yet been put in place. Productivity on The Caput Regis site
is already suffering, increasing the risk of missing the Section 2 completion date (beyond the 14 days). The Board are considering suspending work on the site based on Health and Safety / CDM concerns and invoking Option X2 to get a compensation event. The Board wants to know whether this can be done and if so whether it will “stop the clock” on delay damages. Last week our MD met the MD of Pankhurst Holdings Ltd to discuss the project. Their MD indicated sympathy for the H&S issues on site and said that “it wouldn’t be fair for Apis to carry the can for the delays caused by this stuff”.
The Board need some advice about the liabilities, exposures and opportunities presented by these facts.