2022 brought both predicted and unpredictable challenges but what lies ahead for the construction sector in 2023?
- The Building Safety Act 2022 – Building Liability Orders
The first provisions of the ambitious Building Safety Act 2022 came into force on the 28 June 2022 and include a new right to apply for a Building Liability Order (BLO). Where it considers it just and equitable to do so, the High Court can now make a BLO which will extend the specific liabilities of one body corporate to another associated body corporate and make them jointly and severally liable. In effect the BLO sweeps away privity of contract and pierces the corporate veil – a significant change to the previous contractual regime.
A BLO has not yet been the subject of a reported decision so it is currently unclear what factors the court will take into consideration when deciding whether it is just and equitable to make a BLO.
The government is continuing to take steps to force building owners to complete essential cladding repairs as soon as possible. In December 2022, more than £8mn of government funding was allocated to dedicated council enforcement teams to pursue building owners who are dragging their heels. Split between 59 councils, priority is being given to those with the highest number of unsafe building, focusing on London, Birmingham and Manchester.
We are already instructed on the very first Remediation Order application bought by the Government and with BLOs and we expect many more to be issued in 2023.
- Adjudication
Since statutory adjudication was first introduced in 1998, it has become a common and effective method of dispute resolution in the construction sector and that looks unlikely to change. A survey carried out by King’s College London in 2022 has concluded that the UK’s system for construction adjudication is “robust and resilient”. Adjudicator’s decisions rarely proceed to litigation or arbitration. However, in addition to a problem of perceived bias, one area of abuse identified is the use of “smash and grab” adjudications. Here the referring party takes advantage of the other party’s failure to comply with the strict deadlines and requirements of the Construction Act. With the continuing difficult economic conditions, clients must ensure that they issue the correct payment notices and on time. We expect the trend of “smash and grab” adjudications to continue in 2023 as a result. - Significant cases
A significant decision in 2022 was the overturning of the first instance decision in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) Ltd and the Court of Appeal’s finding that a collateral warranty could be a “construction contract” for the purposes of the Construction Act 1996. As a consequence, the adjudicator’s decision could be enforced as Abbey had been entitled to refer the dispute to adjudication. However, leave to appeal to the Supreme Court has now been granted so this may not be the final word on this important issue.
With the current economic climate bringing an increasing number of insolvencies, especially in the construction sector, the recent decision of Rashid v Direct Savings Ltd (2022) is particularly pertinent. The court held that the limitation period continues to run in claims against the liability insurers of an insolvent insured under the Third Parties (Rights against Insurers) Act 2010 (in contrast to the position under the 1930 Act). Consequently, a claimant will not benefit from an extended limitation period simply because the insured has entered liquidation. The decision in Rashid is only a county court decision and therefore not binding. However, it is consistent with earlier unreported decisions. (For further commentary on recent decisions under the 2010 Act, click here.) We expect this Decision to be very relevant in 2023, due to the economic conditions and parties focusing on the recovery of costs from Insurers. - JCT Contracts
The Joint Contracts Tribunal was expected to start to publish new editions of its contracts and guidance notes in 2022 but these did not materialise save for the updated 2022 edition of the Project Bank Account Documentation. We understand that the JCT had expressed a desire to cater for recent market developments in the new editions, with specific reference to MMC. No details have yet been published but the updates could deal with amendments bought about by the Building Safety Act 2022 on limitation and possibly the introduction of the Building Safety Regulator (planned for later this year). New editions of the JCT suite of contracts are now expected during the course of 2023. - Manufacturers and suppliers of construction products
The Building Safety Act 2022 both strengthens and extends the government’s powers to regulate construction products. The intention is that all construction products marketed in the UK will fall under a regulatory regime, allowing them to be withdrawn from the market if they present a risk. There is power to make regulations requiring manufacturers to ensure the products that they supply are safe. A concept of a “safety critical product” is also created. Other powers relate to costs contribution orders and building industry schemes. The Building Safety Act also introduces new causes of action against manufacturers and suppliers of construction and cladding products. We anticipate that this will lead to more contribution claims.
The publication of new Construction Products Regulations is expected shortly. With the previous draft regulations (and fact sheet) withdrawn shortly after the Building Safety Bill received Royal Assent, we do not know what last minute changes may be made. However, the new National Construction Products Regulator has already started taking enforcement action under the scope of existing regulations. - Professional Indemnity Insurance
Obtaining insurance for those in the construction sector has for some years been a difficult process with some companies being unable to find economically viable insurance terms; there is no immediate sign of significant improvement. The current hard market has led to increased premiums and excess with more limits on cover. A cross-industry survey on professional indemnity insurance carried out by the CLC in summer 2022 revealed that 22% of respondents were unable to buy the cover they wanted or needed.
Worryingly, 42% of respondents said that their experience of buying PII cover at the last renewal was significantly worse, and a further 25% slightly worse, than the previous renewal. In addition to concerns about rising building material costs, labour shortages and increasing insolvencies, insurers are now also concerned about increased responsibilities imposed by the Building Safety Act 2022. - Cash flow and late payment
Maintaining good cash flow in the construction sector has been an objective for many years. The latest step taken by the government to tackle the issue of late payment across all sectors is the Payment and Cash Flow review which will have a particular focus on small businesses. The wide-ranging review will include a consultation on the payment reporting regulations and a statutory review of the effectiveness of the Small Business Commissioner. A “conclusions” document will be produced in 2023. - Climate Change
A Private Members’ Bill, the Carbon Emissions (Buildings) Bill, is set to have a second reading on 24 February 2023. The Bill will require the whole-life carbon emissions of buildings to be reported and will set limits on embodied carbon emissions in the construction of buildings. It remains to be seen whether the Bill will become law, but it is a further example of the “green” policies and legislation which are being considered which are specific to the construction industry.
With the built environment a significant contributor to rising emissions the message remains that the industry urgently needs to reduce carbon emissions. For DACB’s full coverage of COP27 click here. - Insolvency
Construction company insolvencies are at their highest level in over a decade. A ‘perfect storm’ of labour and material shortages, high inflation, rising interest rates and slowing demand is proving too much for many in an industry that exists on notoriously thin margins. Figures released by the Insolvency Service reveal that company insolvencies in the first three quarters of 2022 were significantly higher than pre-pandemic levels. Where one construction company involved in a project folds, significant losses can be incurred due to the disruption and it can also have a domino effect on others in the supply chain. With a recession still looming and mixed economic data as to how bad it may be – insolvency in the construction industry and supply chain is a well-known phenomenon. - Infrastructure
The National Infrastructure Commission is due to publish the second National Infrastructure Assessment in autumn 2023. This Assessment, published every 5 years, analyses the long term economic infrastructure needs of the UK. It will set out a strategic vision for the next 30 years and provide recommendations for how the needs should be met. It will focus on three key strategic outcomes: reaching net zero; reducing environmental impacts and adapting to a changing climate; and supporting levelling up.
The Construction Playbook which sets out key policies and guidance for how public works projects and programmes are assessed, procured and delivered was updated in September 2022 and we now also have the private sector construction playbook, Trust and Productivity, which was published in November 2022.
