Kirsteen Milne is legal director at Brodies LLP
Modular construction has been touted for several years to save time and reduce waste and costs, and is part of the “modern construction methods” promoted by the government. However, it is not without its challenges, as evidenced by the closure of its modular factory by Legal & General.
“If the client becomes insolvent, the contractor may not be able to reuse the modules for another project”
There are also several legal and contractual issues that arise and must be addressed in contracts, such as:
1. Payment and transfer of ownership
In “traditional” construction contracts, a contractor will typically be paid monthly or in stages based on the value of work completed during the previous month or stage.
However, a modular contractor is likely to incur large costs at the start of the project in terms of material and fabrication costs and will therefore seek to front-load payment terms.
A customer (and in particular their financier) will need some security before this payment can be made. Acquisition certificates (in England) and off-site material agreements (in Scotland) are often used to transfer ownership, but will a modular contractor agree to this before full payment is made? And if payment is made before the modules are fully assembled, what ownership can be transferred if the modules do not yet exist?
In these situations, a prepayment bond can provide some comfort, although there is a cost and there will be a limit to the value that can realistically be covered by these bonds before the costs become prohibitive.
2. Location of the modules
Even if title to the modules is effectively transferred under UK law, if the modules are located elsewhere will it be binding under the law of the jurisdiction where the modules are located? And from a practical perspective, in an insolvency, how easy will it be to access the modules and get them delivered to the site?
3. Insolvency
Problems arising from insolvency are compounded in modular construction: modules are specialized materials that are unique to each modular contractor. Other contractors will not have the facilities or intellectual property license to reproduce these designs. From the contractor’s point of view, if the client goes bankrupt, the contractor may not be able to reuse the modules for another project.
4. Delivery
Additional considerations may need to be taken into account such as transit risk, port delays, import duties, site access route and storage space pending unloading.
5. Inspection
Customers will want to inspect the modules at certain stages in the factory before the items are closed. This is of greater importance as the defects identified in the delivered modules have already been replicated in the construction of other modules which have not yet been delivered to the site.
6. Interface
The procurement route may affect contractual liability, but from a practical perspective it will be important that any platform on which the modules are placed is at the correct grade and can support the required structural load.
7. Intellectual property obligations
A modular contractor may try to provide as limited an intellectual property license as possible to prevent their designs, drawings, etc. be shared with a rival modular contractor.
conclusion
There are many advantages to modular construction, especially from a time perspective. However, there are additional complications and parties should not assume that one size fits all. The traditional procurement model and standard contracts are not fit for purpose to ensure that the various risks are adequately addressed and it is important to have considered these before entering into contracts so that all parties are clear about the risks and responsibilities.
