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HCR Law Events

8 February 2024

Modular Construction – some legal considerations

In the UK, modular construction has been viewed through the ‘prefab’ home experience of post war emergency homes programmes. Also, mortgage lenders have been wary of this form of construction and obtaining new home structural warranties for modular buildings has not been an option.

There are reports of an increase in the use of this form of procurement and with the critical need to provide more homes. Along with advances in applicable technology modular homes or other form of modular buildings are becoming more acceptable. What though needs to be considered when agreeing a contract for say a modular housing development? Although a completed modular housing development may look similar to a traditionally built project, the route to get there is different.

These factors need to be reflected in the contract.

  1. First, modular developments take different forms, from flat pack components being assembled on site to complete structures, even fully fitted out modules, being craned in. There are no standard form modular construction contracts which cover what is involved. The widely used standard form building contracts published by the JCT and NEC building contracts, all have features which are relevant to modular construction. Therefore rather than reinvent the wheel each time, one of the standard form building contracts can be utilised.

 

  1. In a traditional building contract, the provisions relating to design and intellectual property are important, as such the relevant provisions in the JCT contracts are often taken as the standard wording. When it comes to modular construction the IP position is very different. A producer of modular buildings will have invested significantly in the design of modules, so there will be a greater interest in the IP they will want protected. The employer, on the other hand, will need to be provided with designs and other copyright materials in order to build out the development, to maintain it and as necessary to extend. Therefore, in a contract more thought needs to be given as to what IP the employer gets ownership or control over, and what limitations will apply as to what that can be used for, who it can be shared with.

 

  1. When it comes to factors such as access to monitor progress of building works, a building contract such as the JCT will include clauses entitling the employer to inspect the site, to value progress and so on. Similar provisions are relevant in a modular context. however, the employer will also want rights to monitor at a much earlier stage to identify potential problems in modules while they are on the production line. If faults are not identified early, the same problem may end up being replicated in all modules being constructed for delivery. That will require the contract to provide rights to inspect in the factory.

 

  1. When it comes to payments, most traditional building contracts work on the basis of a stage or periodic instalment payment mechanism. There are statutory requirements which apply under the Construction Act to make payments on an interim basis, plus in practice the contractor will need to be kept solvent if a successful completion is to be achieved. However, that incremental increase in value is not the same in modular construction, as the bulk of the costs are incurred by the constructor before anything turns up on site. Such a constructor will need to be financed to fund production costs.

 

  1. In modular construction, contracts often ensure that ownership of modules transfers to the employer while they are still at the factory. It’s not uncommon for the ownership of the materials being used in manufacture to transfer even before the module is built. This transfer of ownership is documented by way of vesting certificates. The contract will need to specify when ownership transfers, what form of vesting certificate is to be used, who issues that vesting certificate and how to identify what modules and materials the vesting certificate relates to.

 

  1. In regard to the risk of insolvency, this can be particularly difficult to account for when it comes to modular construction. Depending on the construction being used, it may not be possible for another contractor simply to take over. Modules tend to be specialist and are often unique to the original constructor. The employer may have been able to agree the right to step in to the factory and take over production however, in reality, that is rarely a possibility. This might result in the entire project being abandoned part way through where there has been constructor insolvency. The employer in such circumstances will have to clear the site and start again. Such risks can be mitigated by forms of default security such as bonds or guarantees.

 

  1. Where the employer has secured ownership transfer of the modules before they leave the factory, contractual clauses relating to transport are an important consideration when it comes to modular construction. From the employer’s perspective there will need to be provisions in the contract which manages the risks during and after transportation. Most employer’s will want provisions controlling and giving them notice of the modules being ‘on the move’ and a right to inspect the transportation process.

 

  1. Finally, the insurance provisions in contracts for modular development need particular care. Issues to consider include:

 

  • Insurance of modules during transport (including to account for any relevant international jurisdictions and maritime law if the completed modules are being shipped from abroad).
  • Insurance of the factory including insurance of materials and constructed modules while at the factory including to account for the point at which ownership transfers from constructor to the employer.

The above is a sample of some of the key issues to consider in this context. If you would like to discuss further, please contact me.

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About the Author
Colin Jones, Partner, Head of Construction Legal Services

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