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Construction Law in Northern Ireland: How does it work?

Construction Law becomes contentious when something goes wrong. 

Contracts drawn up at the procurement stage, set out how disputes should be dealt with. Construction legal teams are continuously engaged in negotiating and agreeing terms with all relevant parties. They continue to be involved throughout a project – common construction law duties include making site visits and liaising with all parties to ensure everything is running smoothly within the contracts.

What is construction law?

Construction law is a specialist area of lawyers who provide advice specifically tailored for the construction and engineering industry.  It covers a wide variety of areas of law including contract law, public procurement, disputes and employment law.

What are the most popular methods of procurement?

Procurement is the process of acquiring or obtaining goods or services.  In a construction contract it is important to choose the correct method for an individual project.  Choosing correctly will allow for suitable allocation of risk, budget management, quality control, project timeframes, and financing.

Traditionally constructions contracts are procured as:

  • Lump-sum contracts – where the price is fixed at the outset based on the information provided in the tender pack;
  • Re-measurable contracts – payments are based on the actual work carried out;
  • Cost Plus – payments will cover the actual cost plus an incentive based upon the final product.

More innovative methods of procurement have become very popular in the 21st century such as:

  • Design & Build – where the contractor designs and develops the project;
  • Joint Venture – where the contractor and the client engage in the development jointly sharing risk and reward;
  • Management Contract – where the client employs various contractors directly along with a main contractor who is responsible for managing the other contractors.

Are there any restrictions or legislative regimes affecting procurement?

If one of the parties is a public body or otherwise publicly funded the methods of procurement available to the parties may be restricted by the Public Contracts Regulations 2015 (“PCR”).  A contract which falls with the PCR requires specialised procurement advice as the PCR provides additional grounds for a third party to issue a procurement challenge.  

Do parties typically engage consultants? What forms are used?

The project will need the input of a design team normally consisting of at least an architect and an engineer.  There may well be other specialist consultants engaged such as M&E, grounds surveyors and environmental consultants.  

The employer may wish to appoint an integrated design team where the lead consultant will be responsible for all other members of the design team.  The lead consultant will normally also be the project manager under standard form construction contracts such as JCT, NEC3 or NEC4.

It is important that suitable collateral warranties are in place where the employer does not have any direct contractual link with a key consultant or subcontractor.  

How are projects typically financed?

There are a wide range of methods by which a project may be funded ranging from self-funding through to debt funding from a bank or other financial institution to equity project finance using a separate corporate vehicle.  

Where third party funding is involved it is important that all of the construction documents meet certain legal standards for the third party to be satisfied and advance funds.  

Do contracts contain retention provisions and, if so, how do they operate?

Normally a construction contract will provide for a sum to be retained for a period of time following the practical completion of the project.  This allows the client to check the work and if there are defects the employer is normally permitted to use the sum held in retention to fix the defects after a period of time.  Parties need to carefully agree to any defect provision to ensure they are suitable to the size and risk relevant to the project.

Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?

Liquidated damages – also known as LDs, liquidated and ascertained damages, LADs, or delay damages – are a contractual mechanism used to pre-determine a sum in damages payable by a default party for a particular breach of contract.  Commonly LDs are used to compensate an Employer for delays, although they may also be applied to other breaches.  

The parties to a construction contract may find LDs a useful mechanism to provide certainty over the quantum of damages payable for a particular event.  This can avoid expensive disputes over the precise losses generated by a particular breach.  A Contractor will wish to ensure that the contract is drafted so that LDs are an exhaustive remedy for issues such as delay.  This will act as a limitation of liability for the Contractor on that issue.

LD clauses will generally be enforced by the Court provided the claim for LDs falls within the contract and the LD is not a penalty clause.  To determine whether a liquidated damages clause is a penalty Courts have traditionally looked as whether the amount of the LDs represents a genuine pre-estimate of the losses arising out of such a breach.  In more recent years the Courts have also looked at other commercial rationales but the test of a genuine pre-estimate remains important.  A sum set in LDs cannot be extravagant and unconscionable compared to the greatest loss that would have resulted from the breach to which the LDs relates. 

Careful drafting and assessment is essential to ensure that LADs are enforceable in the manner in which the parties intend.

Are the parties able to exclude or limit liability?

Parties are free to agree to an exclusion or limitation of liability in a construction contract in the same manner as for other contracts.  An overall cap on liability may well be limited to specific types of loss such as loss of profits.  An Employer can often be reluctant to agree to a limit of liability for direct losses arising out of defects in design and/or construction.

There are statutory tests of reasonableness which apply to clauses which exclude liability, for example the Unfair Contract Terms Act 1977.  Liability cannot be excluded for death or personal injury resulting from negligence or for fraud.

It is important that limitations on liability do not sit in isolation.  For a contract to work effectively any limitation on liability should be combined with suitable assignment of risk, whole agreement clauses, insurance provisions and liquidated damages.  

Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

All standard forms of construction contracts; such as NEC3/NEC4, JCT and FIDIC will provide a mechanism for termination as well as consequences of termination.  The grounds for termination vary from contract to contract and parties are free to agree their own grounds.

Reasons for termination are normally related to breach by the other party. Termination for convenience clauses appear in some contracts – for example Reasons 5 in the NEC3 Engineering and Construction Short Contract allows the Employer to terminate for “any other reason”.  The consequences of termination under a termination for convenience normally involve paying compensation to the other party over and above what they would ordinarily have been due under the contract at the point of termination.

The impact of force majeure clauses vary depending on how they are drafted.  Many force majeure clauses do not provide for a right of termination but rather allow the parties to suspend performance for the period during which the force majeure event exists.  The concept of force majeure is closely tied to the doctrine of frustration which may allow relief to parties where performance of the contract has become impossible due to some outside events.  Force majeure and frustration are concepts we have seen referenced a lot as a result of the COVID19 pandemic.

What insurances are the parties required to hold? And how long for?

The level of insurance and the period of time this needs to be held varies contract to contract.  The period insurance is held for should be at least the limitation period under the contract.  

Are there any limitation periods for commencing disputes in NI?

Yes.  The limitation period for a claim for breach of contract or negligence is six years from the date the cause of action arose.  A longer limitation period of twelve years applies where the contract was executed as a deed.  Different time periods apply where the cause of action was unknown at the date it arose.

The contract may impose other time limits for commencing a dispute which should be carefully observed to avoid prejudicing any claim.  These timeframes are separate from the timeframes for the issue of payment notices either under the contract or under the Scheme for Construction Contracts.  

How are construction and engineering disputes typically resolved in NI (e.g. arbitration, litigation, adjudication)? What alternatives are available?

A construction contract will normally provide for some form of Alternative Dispute Resolution (“ADR”).  ADR is a useful means of resolving disputes as it is often quicker than going to Court.  Where a construction contract does not provide for adjudication a statutory right to adjudicate exists in most cases under the Construction Contracts (Northern Ireland) Order 1997 and Scheme for Construction Contracts.  

Adjudication is a 28 day process which can be used for a wide range of disputes arising either during or at the end of a construction project.  Adjudication may be used for any crystallised dispute such as payment disputes, valuation disputes, compensation events, professional negligence or defective works.  Whether adjudication is a final resolution of the dispute will depend on the terms of the contract.

What are the biggest challenges and opportunities facing the construction sector in Northern Ireland at the moment?

The construction industry has shown strong performance through 2021 and into 2022 however skills shortages, inflation and supply chain issues remain a major challenge.   

The acceleration of the economy following the lifting of COVID-19 restrictions has presented key opportunities for those in the sector who have adapted to new and more efficient methods of working.  The increase in productivity has, along with Brexit, placed strain on supply chains and the availability of materials.

The Northern Ireland protocol is generally perceived to have been a positive for companies located in Northern Ireland.  Aecom’s annual construction industry review reported that exports from Northern Ireland to the Republic rose by 60% to £2.4bn in the first nine months of 2021. While, during the same period, total imports from the Republic of Ireland to Northern Ireland surged by 48% to £2.1bn.  Wider political uncertainty over the protocol and the failure of the political parties to form a new Northern Ireland Executive after the May elections present some uncertainty as to whether these gains will continue into the medium term.

Inflation is a significant challenge as supply chain issues and demand pushes up prices.  At the same time legislative changes such as the end of the rebate for use of red diesel have increased costs further. Contractors may be tied into fixed price contracts which do not easily allow them to pass on increasing costs while Employers struggle to limit value engineering solutions in order to ensure the end product is reflective of the quality which was bargained for.  This battle for profitability is combined with the challenge of maintaining capacity and responsiveness in the face of labour and materials shortages.  We see this impacting project programmes and delivery times.  

Overall the construction sector in Northern Ireland remains in a strong position to capitalise on the benefits presented by the protocol of access to markets in both the UK and Republic of Ireland.  There may be some early signs that inflation will ease into the start of 2023 however the challenge presented by labour shortages is likely to persist into the medium term.  

What types of projects are currently attracting the most investment in NI (e.g. infrastructure, power, commercial property, offshore)?

Belfast has continued to see growth in the construction of Grade A commercial office space from the Paper Exchange and Bedford Square in the City Centre while City Quays 3 has expanded office capacity in Belfast Harbour. 

Simon Bedford of Deloitte reported that;
“2022 [is] set to be a record-breaking year for office development in the centre”.  

Major public sector projects such as the Belfast Transport Hub have broken ground while it is anticipated that NI Water will need to make major infrastructure investment to address capacity challenges.

The Social Housing Sector has continued to be a driver of residential development with Housing Associations setting an ambitious programme to deal with the housing shortage in NI.  Private residential development has been steady but faces the ongoing challenge as to whether the market price of new builds can keep up with rising build costs.  

How do you envisage technology affecting the construction and engineering industry in NI over the next five years?

The construction industry’s response to the climate emergency is likely to be the defining feature over the next five years.  The global construction industry is responsible for nearly 40% of direct and indirect carbon emissions.  Increasing regulation in the sector and client demands will require a response in more sustainable development.

The construction industry in NI has shown impressive capacity to adopt new technologies and respond to changing demands in the past and there is no reason why sustainable development will not be grabbed with the same enthusiasm and ambition.  We have already seen significant progress in this direction with City Quays 3 developed to comply with BREEAM ‘Excellent’ ratings in sustainability placing it in the top 10% of sustainable new buildings in the UK. 

New heating technologies, insulation techniques and energy systems are likely to present both a major challenge and opportunity to the sector over the coming five years.  Companies, employers, consultants and supply chains will have to come together to respond to these challenges and embrace new technologies to build on the success already achieved.    

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If you require legal advice on a contentious or non-contentious construction matter in Northern Ireland, contact our expert Construction Law team on 028 90323864 or make an email enquiry here.

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