Contractual Hand Book

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CONTRACTUAL HANDBOOK for

Steelwork Contractors and

Other Specialist Contractors

Edited by

Roger Button, Partner, Eversheds

With thanks to Lindy Patterson Partner, MacRoberts For Chapter 23

BCSA The British Constructional Steelwork Association Ltd.

EVERSHEDS Business Lawyers in Europe

Eversheds

THE BRITISH CONSTRUCTIONAL STEELWORK ASSOCIATION LTD


BCSA

BCSA is the national organisation for the Constructional Steelwork Industry; its Member companies undertake the design, and erection of steelwork for all forms of construction in building and civil engineering. Associate Members are those principal companies involved in the purchase, design or supply of components, materials, services etc., related to the industry. The principal objectives of the Association are to promote the use of structural steel-work; to assist specifiers and clients; to ensure the capabilities and activities of the industry are widely understood and to provide members with professional services in technical, commercial, contractual and quality assurance matters. The Association’s aim is to influence the trading environment in which member companies have to operate, in order to improve their profitability. A current list of members and a list of current publications and further membership details can be obtained from: The British Constructional Steelwork Association Ltd. Apart from any fair dealing for the purposes of research or private study or criticism or review, as permitted under the Copyright Design and Patents Act 1988, this publication may not be reproduced, stored or transmitted in any form by any means without the prior permission of the publishers or in the case of reprographic reproduction only in accordance with the terms of the licences issued by the UK Copyright Licensing Agency, or in accordance with the terms of licences issued by the appropriate Reproduction Rights Organisation outside the UK. Enquiries concerning reproduction outside the terms stated here should be sent to the publishers, The British Constructional Steelwork Association Ltd. At the address given below. Although care has been taken to ensure, to the best of our knowledge, that all data and information contained herein are accurate to the extent that they relate to either matters of fact or accepted practice or matters of opinion at the time of publication. The British Constructional Steelwork Association Limited, the authors and the reviewers assume no responsibility for any errors in or misinterpretations of such data and/or information of any loss or damage arising from or related to their use. The British Constructional Steelwork Association Ltd., 4, Whitehall Court, Westminster, London SWlA 2ES Telephone: +44 (0) 20 7839 8566 Fax: +44 (0) 20 7979 1634 [email protected] E-mail: Website: www.steelconstruction.org

Publication Number 32/01 Third Edition May 2001 ISBN 0-85073-035-X British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. © The British Constructional Steelwork Association Ltd. Printed by The Chameleon Press Limited

CONTENTS


Foreword

........................................................................................................................ Overleaf

Chapter 1 ................................................................................................ Formation of Contracts Chapter 2

..................................................................................................... Classes of Contract

Chapter 3

....................................................................................... Standard Forms of Contract

Chapter 4

................................................................................................... Tendering Procedures

Chapter 5

........................................................................................... Onerous Contract Clauses

Chapter 6

..................................................................................................................... Certificates

Chapter 7 ................................................................................................... Payment and Set-Off Chapter 8 .................................................................................................................. Fluctuations Chapter 9 ....................................................................................................................... Variations Chapter 10 ........................................................................... Extensions of Time and Completion Chapter 11 ............................................................................................................ Costs of Delay Chapter 12 ............................................................................................................................Claims Chapter 13 ....................................................................................................... Defects of Liability Chapter 14 ....................................................................................................... Design of Liability Chapter 15 ............................................................................ Supply of Goods and Misrepresentation Chapter 16 .........................................................................................................Limitation Periods Chapter 17 ....................................................................................................................... Insurance Chapter 18 .................................................................................................. Bonds and Guarantees Chapter 19 ................................................................................ Disputes and Legal Proceedings Chapter 20 .................................................................................... Insolvency of Main Contractor Chapter 21 .... JCT Standard Form of Contract with Contract with Contractors Design 1998 Edition Chapter 22 ......................................................................................... Scottish Forms of Contract Chapter 23 ................................................................................................................... Nomination Chapter 24 ......................................................................................................... Competition Law Chapter 25 .................................................................................................................... Check List Appendix A ................................................................................ Amendments to Standard Forms


FOREWORD to the third edition The BCSA Contractual Handbook has been comprehensively re-worked to reflect the torrent of changes that have affected construction over the years since the second edition was produced. As might have been anticipated, there have been considerable developments in case law since the last edition which have affected the position of steelwork and other specialist contractors. More surprising has been the impact of statute notably the Housing Grants Construction and Regeneration Act 1996 which contains one of the few pieces of legislation specifically designed for the construction industry. The Commercial Debts (Interest) Act 1998, the Contracts (Rights of Third Parties) Act 1999, the Competition Act 1998 and the Human Rights Act 1998 will no doubt all make their mark in time. Thanks are due to Roger Button and Ray White of Eversheds who produced this edition, and to Lindy Patterson of MacRoberts for contributing Chapter 23, Scottish Forms of Contract. The law is up to date as at 1 January 2001, although later changes have been incorporated where possible.

M. Rich of Middle Temple, Barrister MSc FCIArb BCSA

CHAPTER 1


FORMATION OF CONTRACTS A contract is an agreement between two parties which is legally enforceable.

Elements of a Binding Contract There are five essential elements which must exist to form a binding contract.

1. Intent All parties must intend to create a legally binding obligation between them.

2. Capacity All of the parties to a contract should be capable of entering into a legally enforceable relationship. Incorporated bodies, partnerships and individuals (provided they are not infants or insane) all have capacity to enter into a contract. If one or more parties lack the capacity to enter into a contract, it may not be enforceable.

3. Agreement Agreement is the fundamental characteristic of a contract. In order to decide whether an agreement exists, the Courts will consider the relationship between the parties objectively and look, amongst other things, to see if there has been an offer by one party and an unconditional acceptance of that offer by the other.

4. Reasonable Certainty of Terms The terms of the contract must be reasonably certain. It is not necessary to have resolved every detail, but there must be general agreement, and the parties must intend to create a binding agreement despite any details which remain to be agreed. For example, on a contract let on a “With Approximate Quantities” basis the precise amount of work required will not be known, but this does not prevent a binding contract from being formed.

5. Consideration With the exception of contracts executed as deeds (dealt with in more detail later in this Chapter), there must be “consideration”. Consideration is what one party agrees to do (or not to do) to secure something from the other party. It was defined by the House of Lords in the case of Dunlop v Selfridge (1915) as, “ an act or forbearance of one party, or the promise thereof, the price for which the promise of the other is bought...” In construction contracts the consideration is normally the promise of the contractor (or subcontractor) to provide work and materials, and the promise of the Employer (or main contractor) to pay a sum of money in return. Consideration is not essential in contracts governed by Scots law

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Formation of Contracts


There is no general legal requirement for a contract to be written except for contracts of guarantee and certain transactions regarding land. Although an oral agreement can be legally binding, written evidence of the terms of a contract is of tremendous practical significance, because it can be very difficult to prove the terms of an oral agreement if a dispute arises.

Offer and Acceptance Invitation to Treat Invitations to tender for work may be preceded by an enquiry to ascertain whether contractors are prepared to tender or by a formal pre-qualification process. Often these preliminary procedures take place many months before the actual invitation to tender is issued. Usually response to such enquiries or participation in pre-qualification processes would not impose any legally binding commitment on a Steelwork Contractor to enter into a contract. Such enquiries and processes would normally be regarded as “invitations to treat’, which means they are simply an invitation to enter into negotiation. Provision of catalogues and price lists are also invitations to treat, and do not normally bind the supplier or the recipient to enter into a contract or to buy or sell products at a particular price. There have, however, been exceptional cases where an actual invitation to tender amounts to an offer because the party issuing the invitation binds itself to accepting, for example, the lowest tender (Harvela Investments Ltd v. Royal Trust Co of Canada (CI) Ltd (1986)). In such circumstances, by entering a tender a contractor may be accepting the “offer” and a contract could result.

Offer Tenders, estimates and quotations are all capable of being offers. Pricing information given to main contractors and clients for budget purposes may also be an offer if the information is sufficiently detailed to form the basis of a binding contract if accepted. This is because the law will look at the content of any document to determine its nature, and although the title given to it, e.g. “budget price” or “pricing information” will be relevant, it will not be decisive. If a Steelwork Contractor wishes to give a budget price but does not wish to be bound by it, it would be sensible to include a statement in the document such as: “This information is given for budget purposes only. It does not constitute an offer to carry out the work or provide the materials described, and we will not be bound by it. A tender price will be provided on request.” An offer can be made to a specific person or company, or it can be made “at large”. In the first case the offer can only be accepted by the person to whom it is addressed, but an offer “at large” may be accepted by any person. A tender for a main contract will usually be an offer made to a specific person or company and can only be accepted by that person or company. Similarly, a tender for a domestic sub-contract will usually be made to a specific main contractor and can only be accepted by the main contractor. However, when a company tenders to a client or his professional adviser for a nominated or named sub-contract, the offer may be “at large” and if so, could be taken up by whomever the client appoints as main contractor. This is important for Steelwork Contractors because they are an “early” trade on most projects and often the identity of the main contractor will not be known when they submit their tenders for nominated or named sub-contracts. Unless the Steelwork Contractor qualifies his

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tender to the effect that he reserves the right to withdraw it (or to revise his price) if a main contractor unacceptable to him is appointed, he runs the risk of his tender “at large” being accepted by whomever the client appoints as main contractor. That may be contrary to the interests of the Steelwork Contractor if the main contractor is not credit worthy or has a poor payment record.

Qualified Tenders Invitations to tender frequently attempt to prevent the tenderer from attaching any qualifications to his tender. For example, all of the standard forms of tender produced by the Joint Contracts Tribunal state that the sub-contractor’s tender must be in accordance with the information set out in the invitation. The client can determine the requirements which tenders for work must meet and he can dismiss any tenders which are qualified and therefore not in accordance with his requirements. On the other hand, the invitation to tender documents may have omitted some important information, or lack clarity or may insist upon onerous conditions. In such cases, the tenderer must make the commercial decision as to whether to qualify his tender. When tendering to the client or his professional adviser on a JCT standard form of tender, the only difficulties which should arise from the invitation to tender are either a lack of information or an ambiguity or conflict in the details given. In these circumstances the. tenderer should inform the client (or whoever issued the documents), and request that the information or clarification required be provided and issued to all tenderers. If there is a risk of being unable to obtain adequate supplies of steel to meet contract completion dates, qualification may be appropriate. However, tenderers should bear in mind that qualification may result in their tender being rejected by the client.

Withdrawal of Tenders A tender may generally be withdrawn at any time before it is accepted, notwithstanding any statement or undertaking to hold the tender open for acceptance for a certain period. Even where such undertakings are signed by the tenderer, they are not usually legally enforceable as contracts under English law. (They may, however, be enforceable under Scottish law). One situation in which they will be enforceable is where the tenderer is paid for holding the tender open for a specified period (this is known as an option). The option may in some cases be backed up by a bid bond which the client can call if the tender is withdrawn during the specified period. Steelwork Contractors should also take into account the commercial implications of withdrawing a tender. These may include that Steelwork Contractor not being invited to tender for further work for that client. There may also be a technical difficulty with the withdrawal of tenders. Under English and Scots law an acceptance is sometimes binding as soon as it is posted, whereas the revocation of an offer must normally be actually brought to the knowledge of the other party before it takes effect. A tender may therefore have been accepted before the tenderer is aware of the fact, and if this is the case any subsequent attempt to withdraw the tender will not be successful. Tenders which are held open for acceptance for a fixed period will automatically lapse on expiry of that period and thereafter cannot be accepted without the agreement of the tenderer. Some standard forms of tender give the tenderer the opportunity to state a period after which the tender is

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automatically withdrawn. Tenderers should fill in a realistic period after which they would prefer to review their price or their ability to carry out the contract.

Acceptance Assuming the other criteria discussed above have been met, a contract will be formed when one party makes an offer and the other party unconditionally accepts that offer. Sometimes the offer will impose restrictions on the manner in which it may be accepted (e.g. only in writing). However in the absence of such restrictions, an offer may frequently be accepted orally, in writing, by e-mail or other electronic means, or may even be inferred from the conduct of one party e.g. by starting work. As stated above, acceptance sent by post can sometimes be binding as soon as it is posted, even if it is never received. However, in practice, if the letter is lost the sender may have difficulty proving that it was posted unless it was sent by registered post or recorded delivery. Acceptance by all other methods of communication, such as by telephone, must actually be communicated to the other party before it takes effect. To date there has been no ruling on faxes or email, although it seems likely that they will be treated in the same way as telexes, and will not be binding until received. Given the negotiations, offers and counter-offers which often precede the award of a construction contract, it is sometimes difficult to ascertain precisely what offer has been accepted. The following general rules should be borne in mind: 1.

If new terms are introduced in what purports to be an acceptance (e.g. an order) the document is actually a counter-offer, which must in its turn be accepted before a binding contract is formed.

2. Acknowledgement of receipt of a tender or other offer does not normally, in itself, constitute an acceptance of that offer. 3. Silence cannot be an acceptance. Therefore if an offer is made and the words added, “we will proceed on the above basis unless we hear from you to the contrary within [so many] weeks” and no reply is received, that would not in itself constitute acceptance and therefore no binding contract. 4. The acceptance may be stated to be “subject to a formal contract”. The precise effect of this phrase depends on the state of the negotiations between the two parties. Where further negotiations over essential terms of the contract are contemplated, there will be no binding contract. If all the essential terms have been agreed and the parties intend to incorporate them into a formal document at a later stage, there may be a binding contract. However, this will not be the case if the parties have expressly or impliedly agreed that no contract shall come into existence until a formal contract is executed J. Jarvis & Sons Limited v. Galliard Homes Limited (1999).

Counter-Offers An acceptance which purports to qualify an offer in any respect amounts, in law, to a counter-offer. When faced with a counter-offer, the person who made the original offer may decide to accept it, in which case a binding contract is formed on the basis of the counteroffer, or to decline it. The counter-offer may be declined either expressly or by making yet another offer, including re-submission of the original. Like any offer, in the absence of any express time limit, a counter-offer will lapse after the passage of time.

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Formation of Contracts Contract negotiations are frequently a series of counter-offers, but in construction contracts there are dangers arising from the tendency to begin work before the contract negotiations are complete. While this is an entirely pragmatic approach, it is important to ensure that beginning work is not deemed to be acceptance by conduct of terms and conditions with which the Steelwork Contractor is unhappy. A typical sequence of events runs as follows: 1. A Steelwork Contractor is invited to tender for work on the basis of an unamended standard form of sub-contract (invitation to treat). 2. The Steelwork Contractor submits his tender on the basis of the standard form. (Offer). 3. The main contractor places an order with the Steelwork Contractor on the basis of his own terms and conditions which appear on the reverse of that order. (Counter-offer). 4.

The Steelwork Contractor acknowledges receipt of the order and begins work. (Acceptance of Counter-Offer).

5.

Several days after starting work the Steelwork Contractor attempts to negotiate terms of contract with the main contractor (the Steelwork Contractor may well be bound by the terms of the Counter-Offer).

In the above example, the Steelwork Contractor could have started work without tying himself to the main contractor’s terms although this does not mean that the Steelwork Contractor is working under his own terms. It is crucial that unacceptable terms are disputed before any work is carried out, and the Steelwork Contractor should also make clear that any off-site or on-site work does not constitute an acceptance of the main contractor’s terms. Main contractor’s orders frequently have an apparently innocuous tear-off acknowledgement slip attached at the bottom. Careful consideration should be given before such tear-off slips are signed and returned, as they almost invariably include a statement that by signing and returning the slip the sub-contractor is deemed to have accepted all of the terms contained in the order. This would probably result in the contract being concluded on the main contractor’s own terms. If Steelwork Contractors wish to acknowledge receipt of an order, they should write a simple letter of0acknowledgement on their own stationery, making it clear that the terms contained in the order are not accepted.

Battle of Forms The negotiations leading up to a contract are often a series of offers and counter-offers. This is sometimes referred to as the “battle of forms” to describe each side’s standard terms and conditions being sent backwards and forwards. The leading case on the battle of forms is the Court of Appeal decision in Butler Machine Tool Co. v Ex-Cell-O Corporation (1979). The sellers (Butler) offered to sell to Ex-Cell-O a machine tool on their standard terms which included a variation of price clause. Ex-Cell-O ordered the machine tool on their own terms and conditions which did not contain a variation of price clause. The buyer’s conditions contained a tear-off “Acknowledgement” slip which contained the words, “We accept your order on the terms and conditions thereon”. The sellers completed and returned the slip, accompanied by a letter stating that they accepted the order on the basis of their original offer. However, the Court of Appeal held that by signing and returning the tear-off slip, the seller had accepted the buyer’s terms, notwithstanding the accompanying letter.

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A more recent case on the battle of forms is Sauter v Goodman (1986) which concerned a contract for boiler replacement at Windsor Castle. The key question was whether a retention of title clause in Sauter’s own terms and conditions had become part of the contract. Sauter had quoted to Goodman on the basis of their own terms and conditions which included a retention of title clause. Goodman had accepted the quotation on ‘terms and conditions in accordance with the main contract” which was GC/Works/1 Edition 2. GC/Works/1 provides that every subcontract must include a term that, “all things for incorporation belonging to the subcontractor which are brought onto site in connection with the sub-contract shall vest in the contractor,” in other words the exact opposite of a retention of title clause. The Court held that Sauter had accepted Goodman’s terms (which amounted to a counter-offer) by delivering the goods, and therefore there was no retention of title clause in the contract. On the battle of forms, the following key principles should be borne in mind by Steelwork Contractors: 1. An acknowledgement slip should not be completed and returned unless the Steelwork Contractor agrees that the conditions to which it refers are acceptable in their entirety. 2. Rejection of the terms of an offer should be written in unequivocal terms and should be incapable of being misconstrued. 3. If Steelwork Contractors wish to proceed with the work while continuing negotiations, they must make it very clear prior to commencing work that by so doing they are not accepting the employer’s or main contractor’s terms and conditions.

Letters of intent Letters of intent are a minefield for the unsuspecting sub-contractor. Steelwork Contractors are particularly vulnerable as they are an early trade and are therefore frequently requested to carry out preparatory work and fabrication off-site before a formal order or contract is issued.

1. Definition In law, a letter of intent is simply astatement of the writer’s intentions. It does not constitute an offer, counter-offer or acceptance, and therefore does not create a binding contract. Letters of intent are sometimes used as a device by the Employer (or architect or consulting engineer acting on his behalf) whereby the Steelwork Contractor is effectively instructed to carry out preliminary work pending the selection of a main contractor and the execution of a sub-contract. In such cases although a document may be headed “letter of intent”, consideration of its content may reveal that it is actually an acceptance or counter-offer which requests the recipient to carry out all or part of the work referred to in the letter. If the so-called “letter of intent’ makes it clear that all the essential terms of the contract have been agreed, commencement of work following receipt of such a letter may lead to a contract coming into being. In the event of a dispute as to whether or not a contract had actually been concluded, the Court would take into account the heading of the document but it would not be decisive in determining its nature. The Court would look at the content of the document, and, if it was in substance an acceptance or counter-offer, they would construe it as such.

2. Terms of Letter of Intent When a Steelwork Contractor receives a letter of intent, his first thought should be: “If I act on this and the job is subsequently cancelled (or given to someone else) will I get paid for the work I’ve done?”

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Formation of` Contracts


Provided the letter clearly instructs the Steelwork Contractor to undertake the work, and the Steelwork Contractor does not go beyond that instruction, the answer to that question is likely to be yes: the Steelwork Contractor will be entitled to be paid for the work he has carried out. As to payment for work done in reliance upon a letter of intent, in the absence of any provisions in the letter about payment, the Court would imply an entitlement to payment of a reasonable sum (sometimes referred to as ‘quantum meruit) for the work. A Steelwork Contractor‘s position would be strengthened if the letter included an express undertaking to pay a reasonable price for the work executed. If the letter simply refers to covering the costs incurred, Steelwork Contractors should be aware that while “a reasonable price” will include overheads and profit, “costs” may not. The phrase “loss and expense” has been equated by the courts with damages, and would therefore be preferable to “costs” as it would include overheads and profit. Obviously the best position for a Steelwork Contractor as to payment under a letter of intent would be one where the price or the rates for his work are clearly set out or referenced in the letter. It is vital that the Steelwork Contractor does not carry out more work than is authorised by the letter of intent. Ideally, the letter should identify in detail what the Steelwork Contractor is required to do. For a Steelwork Contractor this will normally comprise: (a) (b) (c) (d) (e)

ordering the material designing the connections preparing detailed drawings planning the contract both on site, and at the Steelwork Contractor’s works fabricating the material.

If the Steelwork Contractor is required to carry out work beyond that specifically authorised, he should obtain a further written instruction (including an undertaking to pay) from the party who issued the letter of intent.

3. Obligations Regarding Time With the popularity of “fast-track” construction the question of how quickly work must be carried out is becoming increasingly important. If no contract is ever agreed, it seems that there is no obligation to adhere to a particular programme. This is illustrated by the case of British Steel Corporation v Cleveland Bridge & Engineering Co Ltd (1981). Cleveland Bridge had been engaged as sub-contractors to fabricate an unusual steel lattice-work frame for a bank in Saudi Arabia. Cleveland Bridge approached British Steel with a view to employing them to cast nodes for the frame, but the negotiations both regarding the specification and the terms of the contract were long and complex. In February 1979 Cleveland Bridge sent British Steel a letter of intent which stated an intention to place an order at the price quoted by British Steel, but on Cleveland Bridge’s own terms, which placed unlimited liability on the sellers for the costs of any delay. British Steel made it clear they would not accept those terms. but nevertheless constructed and supplied the nodes. The final node was not delivered until April 1980 owing to a national steel strike. British Steel sued for the value of the nodes and Cleveland Bridge counter claimed for damages for late delivery. The Court held that there was no contract because the parties had not agreed on important aspects such as progress payments and liability for late delivery. British Steel could not be liable for damages for late delivery. However, they were entitled to be paid a reasonable price for the work because it had been done at Cleveland Bridge’s request and accepted by them.

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Formation of Contracts It is not always, of course, the case that a Steelwork Contractor who carried out work in anticipation of entering into a contract will be able to claim a reasonable sum for that work if the contract is not, ultimately, entered into. In Regalian plc v. LDDC (1995) the Court rejected the contractor’s argument, holding that the costs which it now sought to recover were the costs of putting itself in the position to obtain and perform the contract. However, this does not mean that when working on a letter of intent, Steelwork Contractors can afford to ignore the main contractor’s or employer’s requirements regarding programme, because any terms subsequently agreed may apply retrospectively to the work executed on the basis of the letter of intent. For example, in the case of Trollope & Colls Ltd v The Atomic Power Construction Company Limited (1963) sub-contractors had tendered for a power station contract. In June 1959, the sub-contractors were asked to start work on the basis of the letter of intent which read as follows: “We have to inform you that it is our intention to enter into a contract with you for (the works). As soon as matters outstanding between us are settled we will enter into a contract agreement with you, and in the meantime please accept this letter as an instruction to proceed with the work necessary to permit you to meet the agreed programme”. The parties agreed the terms of the contract in April 1960, but the contract was never signed. The sub-contractors subsequently argued that no contract had been formed and therefore they were entitled to reasonable payment rather than the prices they had quoted. They also argued that the terms of the contract eventually agreed applied only to work executed after April 1960, and did not cover the work executed on the basis of the letter of intent. The Court held that a contract came into existence in April 1960, and the terms of that contract applied retrospectively.

4. Authority to Write Letter of Intent It is important that a Steelwork Contractor checks the letter of intent is written by someone with appropriate authority to act. A letter from the Employer or from the main contractor should be acceptable. Where, however, a letter is received from another party, such as a consultant, a Steelwork Contractor should check with the Employer or main contractor that they have the necessary authority. If a Steelwork Contractor is in any doubt about the authority of the person who has signed the letter, he should ask for a written confirmation from the employer or the main contractor before starting any work.

Payment for Preparatory Work where No Letter of Intent is Issued Following the decision of the Court in Marston Construction v Kigass (1989), it may be possible to recover the cost of preparatory work even where no letter of intent has been issued. Marston tendered for a design and build contract to provide a replacement for Kigass’ factory, which had burnt down. The insurers did not pay enough to cover the cost of rebuilding so the contract was never placed, but Marston claimed a substantial sum for the preparatory work they had carried out over and above the preparation of the tender itself. Kigass had not written a letter of intent, nor had they given an assurance (requested by Marston) that the preparatory costs would be met. On the other hand, Marston were not given any indication that the preparatory work would be at their risk. The Court held that Marston were entitled to be paid a reasonable sum for the preparatory works, because they had been done at the implied request of Kigass, and Kigass had obtained a realisable benefit, in the form of some design work as a result.

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Notwithstanding this decision, it is obviously preferable for Steelwork Contractor to obtain clear undertakings regarding payment before executing any preparatory work as described in “Letters of Intent” above.

Incorporation of Terms by Reference Frequently, neither the invitation to tender nor the tender itself spells out all the conditions which will apply to any resulting contract. They will simply refer to conditions written elsewhere such as “ DOM/1”. The conditions referred to will be incorporated into the as if they were written out in full. The Courts have held such incorporation by reference valid even where the reference was incomplete and partially incorrect e.g. referring to the “green form” as “the appropriate form for nominated subcontractors (RIBA 1965 Edition)”. Where there is an indication that some step, such as signature of documents, is to be taken, in order to incorporate conditions, the Courts will take this into account in deciding whether the conditions have been incorporated especially if the conditions contain onerous provisions. In Jonathan Wren & Co & anr v Microdec plc (Case Number 1999 TCC 8), the Technology and Construction Court considered the case of a software supplier whose quote stated that it was subject to their standard conditions. Although the quote was signed and returned on behalf on the buyer, the supplier’s standard conditions were not given to the buyer. In addition, the conditions themselves stated that they would only become binding when signed by the parties. They were never signed. The Court held that the supplier’s standard conditions were not incorporated into the contract. Tender documents frequently include a general statement that the sub-contractor shall observe and comply with all the terms of the main contract as if the same were set out in the sub-contract. Whether such attempts to incorporate the main contracts terms will be successful depends on the circumstances of the individual case. In Dunlop & Ranken v Hendall Steel Structures (1975) it was held that the incorporation of the terms of the main contract by loose general words would not normally bind the sub-contractor to specific terms in the main contract. Conversely, in the case of Sauter v Goodman described above, the Court held that relevant main contract terms could apply between the main contractor and sub-contractor (with the necessary changes) so that for contractor one read subcontractor, and for Authority, contractor. Steelwork Contractors should carefully consider whether it is appropriate to incorporate all of the main contract terms into a sub-contract, which they may be about to enter into. For example, if the main contractor provides for the main contractor to provide insurance covering all of the main contract works, it may not be appropriate to impose the same obligation on a sub-contractor who will be responsible for only part of the works. The Steelwork Contractor will in any event normally expect the main contractor to provide temporary work such as access roads and hardstandings and would therefore not wish to accept the obligation to provide these.

Simple and Specialty Contracts A contract ‘under hand’ is one which is simply signed by the parties. It is sometimes referred to as a “simple” contract. A contract which is executed under seal (i.e. where the company seals of the parties is affixed to the contract) or as a deed is known as a “specialty” contract. Until July 1990, the common method of executing a specialty contract was to impress a seal on the document. As part of a package of measures designed to lighten the administrative burden on smaller companies, the Companies Act 1989 abolished the requirement for company seals, and introduced arrangements whereby a document

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Formation of Contracts stated to be executed as a deed, and signed by two directors or a director and the company secretary, had the same effect as if it had been executed under the company seal.


The main differences between contracts executed under hand and those under seal or executed as a deed are: •

contracts under hand have a limitation period of six years from the date of the breach of contract whereas those under seal or executed as a deed have a limitation period of twelve years.

•

contracts under seal or executed as a deed do not require “consideration” (see “Elements of a Binding Contract” above).

Interpretation of Contract In deciding the meaning of words used in the contract, the Courts will follow their natural and ordinary meaning. The fact that one party may not have appreciated or intended the meaning of any particular words or understood their implications does not normally affect the position. However, it is important to note that the Courts when interpreting contracts, will take account of the factual background to the contract i.e. information available to all parties at the time the contract was made. This may well help in situations where there is ambiguity. Further, where consideration of the factual background makes it clear that the words used cannot have reflected the intention of all parties, the Court will construe the contract so as to give effect to that intention. This occurred in another context in Mannai Investment Co. Limited v. Eagle Star Life Insurance Co. Limited (1997) and in Investors Compensation Scheme v. West Bromich Building Society (1997).

Rights of Third Parties under a Contract The traditional position of English law has been that Third Parties (persons not parties to a contract) are not entitled to enforce any rights under that contract. This is known as the doctrine of Privity of Contract. The doctrine has been subject to a number of limited statutory exemptions. The position has now been considerably changed by the Contracts (Rights of Third Parties) Act 1999. When a contract either: a. expressly provides that the Third Party may enforce a right under the contract, or b . ‘purports to confer a benefit on’ a Third Party the Third Party may enforce provisions of the contract as though he were a party to the contract. A Third Party may be an individual person or company or a member of a defined class. No consideration from the Third Party is required. There is considerable uncertainty as to the effect of the words quoted in (b) above. It is possible that in certain circumstances they could be interpreted as allowing, for example, the Employer, to enforce direct the provisions of a sub-contract against the sub-contractor. For that reason, almost all of the standard forms are being amended to make it clear that the contract does not intend to confer a benefit on any Third Party. The Act came into force on 11 October 1999 and applies automatically to all contracts entered into on or after 11 May 2000. The parties may opt into the Act before that date. The Act does not apply to Scotland.

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Summary Interpretation of Contracts: The Courts will normally adopt the natural and ordinary meaning of words used. Where there is ambiguity, then that may be resolved by reference to the factual background. The Courts may disregard the literal meaning of words where it is clear from the factual background that such an interpretation would not reflect the intention of all parties. Third Parties: Until recently, a Third Party could not in most cases enforce rights under a contract. This has now changed in respect of contracts concluded on or after 11 May 2000. A Third Party will be able to enforce provisions under a contract where the contract expressly so provides or the contract purports to confer a benefit on the Third Party. Elements of a binding contract: There are five elements of a binding contract: intent, capacity, agreement, reasonable certainty of terms and consideration. Consideration is not necessary in contracts executed under seal. There is no legal requirement for writing, but in practice it is important for reasons of proof. Invitation to Treat: is merely an offer to receive offers. Invitations to tender, catalogues and price lists are normally invitations to treat. Offer: a document may be an offer even if described as a budget price if it is sufficiently detailed to form the basis of a binding contract. Offers at large may be accepted by anyone, and therefore when tendering to the Employer for a nominated sub-contract Steelwork Contractors may wish to reserve the right to withdraw if an unacceptable main contractor is appointed. The decision to qualify a tender is a commercial one which may result in the rejection of the tender. Offers may be withdrawn at any time before acceptance under English law unless the tenderer has been paid to hold the offer open. Acceptance: an acceptance must normally be unconditional: if it introduces new terms it is probably a counter-offer. Acceptance can be inferred from conduct (e.g. starting work). It must be communicated to the other party, unless made by post in which case it often takes effect when posted. If a sub-contractor does not accept all the terms in a main contractor’s order, he must communicate that fact before starting work. Acknowledgement-of-order slips provided by the main contractor normally refer back to the terms of the order and should not be signed unless the sub-contractor wishes to accept all the terms contained in the order. Letter of Intent: should include an express undertaking to pay the contractor for preparatory work if no contract results, and should specifically authorise the work required. The sub-contractor should not go beyond the terms of the letter of intent, and should ensure it is written by someone with appropriate authority. Incorporation by reference: terms incorporated by reference are binding, even if the reference is incomplete or partially incorrect.

Chapter 1

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CHAPTER 2


CLASSES OF CONTRACT Construction contracts fall into a number of classes or types, and the “class” of contract determines whether certain documents form part of the contract and, to an extent the basis of payment to the contractor. The most widely used standard forms are discussed in more detail in Chapter 3; this Chapter outlines the main distinguishing characteristics of the main classes of construction contract.

1. Lump Sum, Without Quantities This type of contract incorporates an agreement to carry out and complete a whole project, e.g. a bridge, for a lump sum, in return for a stated cash sum. Such a contract is normally based on drawings and specifications which taken together define the work covered by the price. Quantities are not part of the description of the work and any rates incorporated in the contract are for variation purposes only. In a “pure” lump sum contract, the contract price is to be changed only where the Employer’s plans are varied (e.g. by a design change), and the contractor will not be entitled to extra payment if carrying out the work for which he tendered turns out to be more difficult and costly than he originally envisaged. No work done or cost incurred which is indispensably necessary to carrying out the works may be valued as an extra. This type of contract is not therefore suitable for a job where the extent of the work necessary is uncertain. JCT98 Without Quantities is an example of this class of contract.

2. Lump Sum, with Quantities In this type of contract, the bills of quantities are intended to be the exact measure of the work to be carried out. If there are errors in the bills, or if the contractor finds any discrepancy between the bills and any other contract document, any corrections are treated as variations and are valued accordingly. The rates in the bills will also be used, where appropriate, for the purpose of valuing any variations which may be ordered under the contract. The essential feature which distinguishes a lump sum contract with quantities from that without quantities is that the quantities in the bill form part of the description of the works to be done, and thus the lump sum tendered for the work is only in respect of the quantities set out in the bill: the contractor is entitled to extra payment for any work done beyond that. Any provisional sum included within the bills is measured and valued when the work in respect of which the provisional sum was included is carried out, unless it relates to work which is to be carried out by a nominated sub-contractor, in which case the work will be valued under the relevant sub-contract terms. JCT98 With Quantities is an example of this class of contract, although if the bills have been prepared in accordance with SMM7, they may include approximate quantities in an otherwise firm bill. When the contractor executes work for which an approximate quantity was included in the bills, the rate for the approximate quantity determines the valuation of the work, provided the approximate quantity was a reasonably accurate forecast of the quantity of work required. Some commentators feel that the inclusion of approximate quantities undermines, to some extent, the lump sum character of this form of contract.

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Classes pf Contract


3. Remeasurement A remeasurement or “measure and value” contract is one where the contract price is recalculated on final measurement using the rates set out in the tender. There may be a bill of approximate quantities against which the contractor tenders. The final quantities are remeasured when the work is completed and the contractor is paid at the rates he tendered for those measured quantities. The contractor’s tender total is simply an estimate based on the proposed volume of work to be carried out, and has no purpose other than as a basis for selection. On re-measurement contracts variations are normally concerned with design or quality changes rather than quantity changes. JCT98 With Approximate Quantities and the ICE 7th Edition are re-measurement contracts. Under JCT98 With Approximate Quantities, if the approximate bills are not a reasonably accurate forecast of the work required, the work is valued at the tendered rates and prices plus “a fair allowance” for the difference in quantity. Work not covered by the bills is subject to a “fair valuation”, or if appropriate, may be measured on daywork.

4. Prime Cost Under a prime cost contract the contractor is entitled to be paid the actual cost he incurs in carrying out the work plus a fixed fee for his overheads and profit. Architect’s Instructions will not normally lead to any variation in the fee, although additional work will be paid for as part of the prime cost. This type of contract is normally used where an early start is required. e.g. after fire damage. The JCT Management Contract 1998 is an example of a Prime Cost Contract.

5. Design and Build The classes of contract described above are based on the traditional division of responsibilities between the designer and contractor: they assume that a professional practitioner (architect and/or engineer) appointed by the Employer will be responsible for design, and the contractor will be responsible for materials and workmanship. In recent years there has been a pronounced move by clients away from traditional contracting towards, amongst other things, design and build contracts, whereby the contractor provides a total design and construction package. The two major characteristics of design and build contracts are that they provide for the contractor’s responsibility for design and the Employer may only vary the design of the works with the contractor’s consent. The JCT publishes both a standard form “With Contractor’s Design” WCD98 and a Contractor’s Designed Portion Supplement to JCT98 for use where the Contract is to design only part of the works. WCD98 is discussed in more detail in Chapter 21.

6. Management Contracting There are many variants of management contracting but in its most popular form the Employer appoints a professional team, normally led by an architect and a management contractor. The management contractor manages and co-ordinates the project but does not carry out any of the work on site: this is done by works or trade contractors, each of whom has a separate contract with the management contractor. This method of contracting is normally of very low risk for the management contractor, as he is relieved of the consequences of default by the Works Contractors,

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Classes of Contract provided he has enforced the provisions of the works contracts against them. It is therefore the Employer who takes the risk of Works Contractors’ insolvency or failure to pay claims.


Management contracting is generally acknowledged to be suitable only for large and complex projects, and is particularly appropriate where an early start and fast completion are required. The JCT publish a Standard Form of Management Contract - MC98. Comments on MC98 are made throughout this Handbook.

7. Construction Management Another approach to construction projects is construction management. Under this system each of the separate trades has a direct contract with the Employer and is paid by him. The work on site is managed and co-ordinated by a “project manager or “construction manager”.

8. Partnering ‘Partnering’ has no precise legal meaning. There are various types of partnering but some common features of partnering arrangements include: •

An intention for the parties - employers, contractors and sub-contractors - to work together cooperatively, in good faith for the benefit of the project as a whole. This intention is sometimes supported by a commitment to a ‘mission statement’, arrangements for early reporting of problems and a ‘team’ approach to problem-solving.

•

Some form of risk/reward sharing. This may, for instance, involve the parties agreeing to take responsibility for a portion of cost overruns if the project finishes late or over budget or to be paid a bonus if the project finishes early or under budget.

Steelwork Contractors may derive benefits from participating in partnering arrangements but the risks involved in such arrangements should also be considered. In particular they should consider: •

The extent to which their exposure to taking a share of cost overruns is under their control or under the control of other parties.

•

The extent to which their entitlement to bonus is under their control or under the control of other parties.

•

Whether the roles of and resources to be provided by each of the parties is clearly stated or, if not, that there are fair mechanisms for agreeing these.

Sometimes the high-level partnering ideals are contained in a non-legally binding document such as a charter leaving the legally binding provisions to be dealt with in contracts. In some circumstances, however, even though a partnering charter may not be legally binding, a court may still take its provisions into account at it did in the case of Birse Construction Ltd v St David Ltd (1999). The Association of Consultant Architects have recently published a ‘Standard Form of Contract for Project Partnering’ PPC 2000. PPC 2000 aims to address the key recommendations of Sir Michael Latham in his report “Constructing the Team”. PPC 2000 describes itself as a “single, fully integrated project partnering contract, designed to underpin a team-based approach and to promote clarity and confidence among partnering team members,”

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Classes pf Contract

9. Prime Contracting


Prime contracting aims to replace the traditional confrontational relationships with processes which concentrate on delivering better value. Prime Contracting often features: •

Long term relationships between the Prime Contractor and suppliers - not just for one project.

•

Collaborative working.

•

Focus on through-life costs of a project rather than solely on capital cost.

•

A continuous improvement regime.

•

Acceptance by the Prime Contractor of responsibility for almost aspects of the project from inception.

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CHAPTER 3


STANDARD FORMS OF CONTRACT There are various “standard” or “model” forms of contract published for use in connection with construction projects. In this Handbook we will concentrate on the forms most likely to be encountered by Steelwork Contractors, namely, those published by the Joint Contracts Tribunal (‘JCT’) and by the Institution of Civil Engineers (‘ICE’) and the associated sub-contract forms published by the Construction Confederation and by the Civil Engineering Contractors Association. The ICE have also published the “Engineering and Construction Contract” - a brief comment on this form is included at the end of this Chapter.

The JCT Forms of Main Contract and Associated Sub-Contracts The JCT publishes a wide variety of forms of contract. Many of these forms were until recently subject to numerous and lengthy amendments which made them cumbersome to work with. Fortunately, in 1998 most of the relevant amendments were incorporated into new editions of the JCT forms with the exception of the Terrorism Cover provisions which are still separate. In this Handbook, we will concentrate on the 1998 editions of the JCT forms. For those readers who wish to know more about the previous editions and the various amendments, please see Appendix A. The forms most likely to be relevant to Steelwork Contractors are: Standard Form of Building Contract - JCT98 JCT98 is the main JCT document for use where the Employer has engaged professional consultants to design the works, and requires a contractor to carry out those works by supplying the necessary workmanship and materials. There is no upper limit on the size of project for which the form can be used, but it would be somewhat complex for reasonably simple contracts of relatively low value and short duration. Six versions of JCT98 have been published: •

Private With Quantities

•

Private Without Quantities

•

Private With Approximate Quantities

•

Local Authorities With Quantities

•

Local Authorities Without Quantities

•

Local Authorities With Approximate Quantities

Nominated Sub-Contracts for use with JCT98 Various documents are issued by the JCT relating to nominated sub-contractors. These are referred to in clause 35.4 of JCT98 and are as follows: •

NSC/T The Standard Form of Nominated Sub-Contract Tender. It comprises 3 parts: • Part 1: The Employer’s Invitation to Tender to a Sub-Contractor • Part 2: Tender by a Sub-Contractor

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Standard Forms of Contract


•

Part 3: Particular Conditions (to be agreed by a Contractor and Sub-Contractor nominated under clause 35.6 of JCT98)

•

NSC/A The Standard Form of Articles of Nominated Sub-Contract Agreement between a Contractor and a Nominated Sub-Contractor

•

NSC/C The Standard Conditions of Nominated Sub-Contract

•

NSC/W The Standard Form of Employer/Nominated Sub-Contractor Agreement

•

NSC/N The Standard Form of Nomination Instruction for a Sub-Contractor

Domestic Sub-Contracts for use with JCT98 In addition to nominated sub-contractors, JCT 98 also provides for the appointment of “domestic” (i.e. non-nominated) sub-contractors. Domestic sub-contractors are selected by the main contractor to carry out work which has been priced by the main contractor. JCT98 does not specify any mandatory form of domestic sub-contract. Most large main contractors have their own forms of domestic sub-contract, but there is a standard form, “DOM/ 1”, which is published by the Construction Confederation. DOM/ 1 is published in two parts: the Articles of Agreement and the Sub-Contract Conditions.

Intermediate Form IFC98 – Main Contract This form is intended for use on projects where JCT98 is considered to be too heavy-weight. Notes on the back of IFC98 state that it is suitable for use where: 1. the works are of simple content (i.e. involving the normally recognised trades and skills of the industry); 2. there is no specialist complex work: 3. the work is adequately specified and billed pre-tender The main provisions of IFC98 and the ways in which it allocates risk are generally similar to JCT 98. However, the contract is much shorter than JCT 98, and some of the procedural aspects of that document have been omitted. The main differences between JCT98 and IFC98 are: 1. JCT98 provides for the nomination of sub-contractors, whereas IFC98 provides only for naming, which is an upgraded form of domestic sub-contracting whereby the architect selects the sub-contractor, but once appointed he is treated as a domestic sub-contractor. 2. IFC98 does not allow for conventional fluctuations. Contracts are let either on a fixed price or formula basis. There is an embargo on oral instructions under IFC98.

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Sub-contracts for use with IFC98


Clause 3 of IFC98 permits the appointment of two types of subcontractor: named and domestic.

Named Sub-Contracts for use with IFC98 Where a named sub-contractor is to be appointed, the Employer (or the architect/engineer on his behalf) selects the tender list, invites tenders, selects the sub-contractor and instructs the main contractor to enter into a sub-contract with that sub-contractor. The use of both a standard form of tender (NAM/T) and a standard sub-contract (NAM/SC) is mandatory. To this extent, naming is very similar to nomination. However, named sub-contract work will be priced by the main contractor, and will not be the subject of a prime cost sum. Once the sub-contractor has been selected, he is treated like any other domestic subcontractor, albeit he has the protection of a standard and mandatory sub-contract form. The named subcontractor does not receive copies of architect’s certificates of payment, and it is the main contractor who issues instructions to him and awards extensions of time. For these reasons, naming under IFC98 should be regarded as upgraded domestic sub-contracting rather than down-graded nomination. In addition to the standard tender, NAM/T, and the standard sub-contract, NAM/SC, there is an Employer/Subcontractor agreement, ESA/ 1, which deals with design carried out by named subcontractors.

Domestic Sub-Contracts for use with IFC98 A standard form of domestic sub-contract for use with the Intermediate Form called IN/SC has been produced. This document is completely optional: the main contractor is free to use his own terms and conditions if the sub-contractor agrees. IN/SC is produced in two parts: the recitals and articles of agreement. Which incorporate by reference the separately issued conditions of contract. In view of the named sub-contractor’s essentially domestic status once he has been appointed, the terms of IN/SC are very similar to the terms of NAM/SC.

JCT “With Contractor’s Design” Main Contract – WCD98 The JCT “With Contractor’s Design” Form – WCD98 – is for use where the contractor is designing the works. This form has become increasingly important, partly because of the trend towards design and build contracts and also because the form is used by some major private sector employers where the contractor is required to have only a partial design input. WCD98 requires the Employer to state his requirements, which may be little more than a description of the accommodation required, or anything up to a full scheme design prepared for the Employer by his own consultants or other professional advisers. •

In response, the contractor submits his proposals for the design of the works, a lump sum price and a contract sum analysis which will be the basis of valuing changes (variations) in the Employer’s requirements. A more detailed commentary on WCD98 is given in Chapter 21 - JCT Standard Form With Contractor’s Design.

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Sub-contracts for use with WCD98 The JCT itself has not published any standard forms of sub-contract for use with WCD98, and as all sub-contractors under WCD98 are domestic, no standard sub-contract is stipulated. However, the Construction Confederation have issued a standard form, DOM/2. DOM/2 comprises Articles of agreement, and a set of conditions. JCT Management Contract 1998- MC98 – Main Form MC98 comprises Articles of Agreement and Conditions. MC98 is deliberately low risk for the Management Contractor. Essentially, the Management Contractor manages the construction process while the work on site is actually carried out by Works Contractors. The JCT advises that suitable conditions for use of the Management Contract would be where: (i) the Employer wishes the design to be carried out by an independent architect and design team (ii) there is a need for early completion (iii) the project is fairly large (iv) the project requirements are complex (v) the Employer while requiring early completion wants the maximum possible competition in respect of the price for the building works. Under MC98, the design of the project is to be carried out by a Professional Team comprising an architect or contract administrator, quantity surveyor and any other professional advisers as are necessary, for example, consulting or structural engineers. Works Contractors may also carry out some design work, which is catered for both by the separate Works Contractor/Employer agreement and a provision in the Works Contract which makes the Works Contractor liable to the Management Contractor for the failure to exercise reasonable skill and care in any design he carries out. The Management form is not a lump sum contract. The quantity surveyor prepares a Contract Cost Plan which is an indication of the price the Employer will pay for his project (exclusive of the Management Contractor’s fee). The Management Contractor is entitled to be paid the actual cost of building the project (i.e. the prime cost). In addition to the prime cost, the employer also pays the Management Contractor’s fee for his management services, which can be either a lump sum or may be calculated as a percentage of the contract cost plan total. The project period is divided into two phases: a pre-construction period and a construction period. During the pre-construction period the Management Contractor will prepare a detailed construction programme, assist in appointing Works Contractors and advise on the practical aspects of design. Before the end of the pre-construction period the Management Contractor and the Professional Team must have agreed upon the Contract Cost Plan, and the content of the all important “third schedule” of MC98 which is a list of the services to be provided by the Management Contractor. When the Architect decides that it is practicable to commence construction of the project, the Employer must decide whether he wishes the Management Contractor to proceed. In other words, there is a “break clause” between the pre-construction and construction periods, which gives the Employer an opportunity to decide whether he wishes the same Management Contractor to continue into the construction phase. If he does not, then the Management Contractor is paid a separate pre-construction period management fee which is identified in his tender.

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Standard Forms of Contract During the construction period the Management Contractor has possession of the site. He is not contractually responsible for the prime cost of the project if it exceeds the contract cost plan total, but he is contractually responsible for securing the completion of the project on or before the date of completion. His main obligation during the construction period is to set out, manage, organise, supervise and secure the carrying out and completion of the project through the Works Contractors. The provisions of MC98 in terms of risk are somewhat complex. The Management Contractor is fully liable to the Employer for breach of obligations regarding time, workmanship and materials by the Works Contractors. He must enforce the terms of the Works Contracts, if necessary to the extent of taking any disputes to adjudication, litigation or arbitration. However, the Management Contractor is entitled to be paid by the Employer the costs of such litigation or arbitration, provided it has been undertaken after consultation with the Employer and the architect. Any shortfall which cannot be recovered from the Works Contractor (for reasons of insolvency or otherwise) is borne by the Employer and not the Management Contractor. Similarly, the Employer may recover liquidated damages from the Management Contractor only to the extent that the Management Contractor recovers them from the Works Contractors. The only exception to these “relief provisions” is where the Management Contractor has incurred costs due to his own negligence in carrying out his duties which are listed in the third schedule.

Works Contracts for use with MC98 MC98 describes the contractors who carry out the work as Works Contractors, not sub-contractors. The Works Contract documentation comprises: •

Works Contract/1 which is a standard form of tender

•

Works Contract/2 which contains the conditions of contract

•

Works Contract/3 which is an (optional) agreement between the Employer and the Works Contractor

ICE Conditions 7th Edition The ICE Conditions of Contracts are widely used for civil engineering projects. The 7th edition of the ICE Conditions was published in September 1999. ICE 7th is a re-measurement contract. Where there are significant changes in quantities, the contract rates may be altered.

Sub-Contracts for use with ICE 7th The ICE 7th prohibits sub-contracting of the whole of the works without the prior consent of the Employer. Sub-contracting of part of the works is permitted but the extent of the works to be subcontracted and the name and address of the sub-contractor must be notified to the Engineer prior to the sub-contractor’s entry onto the site or, where the sub-contractor is carrying out design, on appointment. The ICE 7th provides for the appointment of nominated sub-contractors, but does not make the use of a standard form of sub-contract mandatory.

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A Form of Sub-Contract (1998 edition) has been published by the Civil Engineering Contractors Association for use with the ICE 6th but as at 1 January 2000 no version has yet been published for use with the ICE 7th.

The Engineering and Construction Contract - 2nd edition The contract comprises a set of “core clauses” which are to be used in every case where the contract is used. The core clauses must be supplemented by one of six possible sets of provisions aimed mainly at payment which are: •

Option A

Priced contract with activity schedule

•

Option B

Priced contract with bill of quantities

•

Option C Target contract with activity schedule

•

Option D Target contract with bill of quantities

•

Option E Cost reimbursable contract

•

Option F Management contract

Although A to F are called “Main Options”, at least one of them must be chosen. In addition to the above, the parties may chose other Secondary Options to form part of the contract. It not necessary to adopt any of these Secondary Options and, except where otherwise stated, they may be used in any combination. These other optional provisions are: •

Option G Performance Bond

•

Option H Parent company guarantee

•

Option J

•

Option K Multiple currencies (not to be used with Options C,D,E and F)

•

Option L Sectional Completion

•

Option M Limitation on the Contractor’s liability for his design to reasonable skill and care

•

Option N Price adjustment for inflation (not to be used with Options E and F)

•

Option P

•

Option Q Bonus for early Completion

•

Option R Delay damages

•

Option S Low performance damages

•

Option T Changes in the law

•

Option U The Construction (Design and Management) Regulations 1994 (to be used for contracts in the UK)

•

Option V Trust Fund

•

Option Z Additional conditions of contract

6

Advanced payment to the Contractor

Retention (not to be used with Option F)

Chapter 3



Some of the key feature of the Engineering and Construction Contract are: •

The wording of the Engineering and Construction Contract is much simpler than that found in the other standard forms especially the JCT forms with none of the extensive cross referencing of provisions which is a feature of the JCT forms.

•

The Contract includes a ‘mission statement’ that the parties will act “in a spirit of mutual trust and co-operation”.

•

It provides for both parties to give to the other early warning of any matter which could increase the total of the prices or delay completion or impair the performance of the works in use.

•

The Contractor’s liability for defects in the works due to his design that are not listed in the defects certificate are limited to the amount stated in the contract data (in addition to any stated damages for delay or low performance). If Option M is incorporated into the contract, the Contractor will not be liable for defects in the Works caused by his design provided he can prove that he used ‘reasonable skill and care’ to ensure that his design complied with the Works Information.

•

Bad weather for the purposes of assessing compensation is defined as being a value which, by comparison with weather data, is shown to occur on average less frequently than once in 10 years.

Chapter 3

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CHAPTER 4


TENDERING PROCEDURES As explained in Chapter 1, a tender is a form of offer and will form the basis of a binding contract if it is unconditionally accepted. This Chapter deals with general tendering matters, particularly the “Code of Practice for the Selection of Subcontractors”. The Code was published as part of a series of Codes and Guidance Documents by the Construction Industry Board in April 1997. This Chapter also describes the tendering procedures under the standard forms of subcontract, and comments upon the standard tender documents. Qualifications to tenders and withdrawal of tenders are dealt with in Chapter l-Formation of Contracts.

The CIB Code of Practice for the Selection of Subcontractors The Code states that it is “aimed at improving the quality, effectiveness and efficiency of the construction industry.” There follows a summary of the key provisions of the Code - the numbers in square brackets are to paragraph numbers of the Code.

•

•

QUALIFICATION •

Main contractors to follow a formal and systematic qualification process as a preliminary to compiling tender lists (if they neither maintain nor have access to an approved list). [2.4]

•

Criteria for qualification to include [2.3]: • work quality • past performance • overall competence • health and safety record • financial stability • insurance cover • size and resources • technical and organisational ability • ability to innovate

•

Main contractors to regularly review their list and notify any additions or removals.[2.5] • It should be noted that whilst the Code is stated to apply to sub-contracts/sub-subcontracts of more than £10,000 (excluding VAT), there is no reason why the principles should not be applicable to contracts of any size.

SELECTION FOR A SPECIFIC PROJECT •

Main contractors to draw up preliminary list (e.g. from an approved list of qualified subcontractors). [2.6]

•

Tenderers on preliminary list to be asked if they are willing to tender. [2.8]

•

Tenderers to be assured that Code will be applied. [2.8]

•

Potential tenderers to be given sufficient information to enable them to decide if they are willing to tender. [2.9]

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Tendering Procedures •

Any briefing sessions must have standard agenda to ensure consistent treatment.

•

Points to note: • The information to potential tenderers should include: • job and location • nature, scope and approximate value of the sub-contract works including reference to the extent of any design work required • the likely dates and duration of both the tendering process and the sub-contract works • the number of tenderers being invited to submit a formal tender • whether the main contractor is already being appointed or is also tendering • the main contract tender date • the approximate value and period of the main contract, if known • whether, and how, any costs of tendering, may be shared • whether the tender will be based on bills of quantities or other pricing documents or on specification and drawings • the selection procedure and selection criteria • the main and sub-contract conditions • the names of the client and the relevant consultants

• COMPILING TENDER LISTS

•

2

•

Main contractors to produce draft tender lists and seek confirmation from potential tenderers of willingness to tender. [2.13]

•

Potential tenderers to notify unwillingness to tender before issue of full tender enquiry documents. [2.13]

•

Maximum number of invitations to tender not to exceed 6 in respect of construct/install only. For design only, maximum is 4. For design and construct maximum is 3. [2.15]

•

If minimum number of tenders is received contractor should not seek more. Design only = 3. Construct only = 4. Design and construct = 2. [2.15]

•

Potential tenderers to reconfirm willingness to tender if tender documents not received within 3 months of initial confirmation of willingness to tender. [2.18]

•

Main contractors to identify and notify reserve tenderers - maximum of 2 reserves to be invited to tender if original tenderers drop out but must have sufficient time in which to tender. [2.16/2/17]

•

Point to note: In no case should the maximum number of tenderers exceed six.

TENDER ENQUIRY DOCUMENTS •

Tenderers to be informed if information is approximate. [3.1]

•

Level of detail required in tender submission to be clearly stated and it should be indicated if priced schedules are required as well as a lump sum price. [3.1]

•

Points to note: • Annex I to the Code lists the minimum information to be included in tender documentation assessment criteria (should have regard to value for money rather than lowest price); contract conditions and amendments to standard forms; payment terms (cash retentions or retention bonds, advance payment for materials, security of payment and protection against non-payment); approximate dates for commencement and completion of sub-contract works programme.

Chapter 4

Tendering Procedures


•

•

•

•

TENDERING TIME •

10 weeks for design and construct; 6 weeks for construct only and 3 weeks for design only. [3.5]

•

Points to note: • The time for tendering should take account of bank holidays • The above periods are suitable for most projects but extra time could be required in certain circumstances, e.g. where products or materials have to be obtained from distant or unfamiliar suppliers.

TENDER INVITATIONS •

Tender invitations to be issued on the same date for all tenderers and should state whether alternative tenders are acceptable in conjunction with (but not instead of) compliant tenders. [3.7]

•

Tenderers to acknowledge receipt of documents and confirm willingness to supply compliant tender.[3.7]

•

The tender invitation should also state whether tenderers are to be interviewed and, if so, for what purpose and at what stage. Interviews must not involve second round bidding.[3.8]

•

Not later than 7 days before the date for submission of tenders, tenderers should submit in writing any clarification which they may require.[3.9]

•

The main contractor should inform all tenderers in writing of its response to requests for clarification.[3.9]

•

If the tender documentation is consequently amended, all tenderers must be informed.[3.9]

•

Point to note: The Code states that its provisions are designed to encourage compliant tenders.

TENDER SUBMISSION AND OPENING •

Under no circumstances should tender prices be disclosed to third parties by the main contractor before the award of the sub-contract. Use of ‘cover prices’ is a breach of confidentiality.[3.12]

•

Tenders to be submitted in sealed packages and clearly labelled as tenders for the works; identification of tenderers’ names is not permitted.[3.13]

•

Tenders to be kept in a secure place and only opened on the date and time stated for receipt of tenders.

•

When opened, forms of tender should be signed and prices should be listed against the names of the tenderers. The person opening the tenders should sign the list.[3.13]

•

Bills of quantities should only be completed if they were in the tender documentation and it is also required that they be part of the tender submission.[3.14]

•

Point to note: It is suggested those inviting tenders self-certify to their tenderers that these requirements have been met.

LATE TENDERS •

Tenders received after the date and time specified for return of tenders will not be accepted.[3.15]

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•

•

4

TENDER ASSESSMENT •

Tendering enquiry documents to provide tender assessment criteria.[4.1]

•

Weighting factors to be decided in advance, used consistently and a record kept of scores awarded during the assessment.[4.1]

•

To ensure parity of tendering, non-compliant tenders to be rejected.[4.3]

•

Unsolicited tenders are unacceptable.[4.5]

•

Any mathematical errors to be notified to the tenderer who should be asked whether he stands by his tender price.[4.6]

•

The next preferred tenderers can only be approached if the preferred tenderer withdraws or post-tender negotiations break down.[4.9]

•

In general, tender prices can only be changed in exceptional circumstances e.g. where the programme or scope of the works in respect of specification, quantities, programme have changed or where more information has become available.[4.11]

•

Where a preferred sub-contractor’s tender is used in a main (or principal sub-contract) tender submission, the sub-contractor should be notified.[4.12]

•

The identity of the sub-contractor whose price has been incorporated in the main contract tender should be notified to the client unless the client has indicated that this is not necessary.[4.12]

•

Point to note: The provisions about unsolicited tenders, changing of tender prices and identity of sub-contractor are designed to combat ‘dutch auctioning’.

TENDER ACCEPTANCE •

Where a main contractor has submitted a sub-contract tender price as part of the main contract tender which is accepted, he should also accept that sub-contract tender price.[5.l]

•

Formal notification should be sent to the preferred tenderer following acceptance of the main contract tender.[5.2]

•

Once a main contractor has accepted the sub-contract tender price, acknowledgement by the preferred tenderer is required.[5.3]

•

A list of compliant tender prices and tenderers should be made available to tenderers on request after a sub-contract tender has been accepted (names of tenderers should not be matched to prices).[5.4]

•

Unsuccessful tenderers should be informed and arrangements made with them to destroy or return their documents.[5.5]

•

Main contractors to prepare formal records of selection of preferred tenderers.[5.6]

•

Suites of contracts and unamended standard forms (compatible with other contracts in the suite) from recognised bodies to be used.

•

The identity of the sub-contractor whose price has been incorporated in the main contract tender should be notified to the client unless the client has indicated that this is not necessary.[4.12]

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•

Points to note: • The procedures will be different according to whether a main contractor in incorporating sub-contract tenders as part of his tender or is inviting sub-contract tenders post-main contract tender. • It is not clear what is meant by ‘recognised bodies’ but main contractors’ own forms must not be used.

TENDERING UNDER STANDARD FORMS OF CONTRACT Nominated Sub-Contractors under JCT98 Nomination is a system of tendering whereby the employer through his professional advisors, selects a sub-contractor whom he nominates to the main contractor as a nominated sub-contractor. The arguments in favour of nomination are set out in detail in Chapter 23- Nomination. Clause 35 of JCT98 contains detailed provisions regarding the nomination of sub-contractors. The nomination procedure works as follows: 1. The architect completes the invitation to tender in part 1 of NSC/T, and the relevant section of the employer/nominated sub-contractor agreement NSC/W, and sends them to the competing tenderers for the nominated sub-contract work. 2. The tenderers complete part 2 of NSC/T, and the relevant sections of NSC/W. They return these documents to the architect, who selects the sub-contractor, and the employer signs the successful sub-contractor’s tender to signify his approval of the architect’s choice. 3. The architect then immediately nominates the sub-contractor on the standard form of nomination instruction, NSC/N. 4. On receipt of the nomination instruction, the main contractor must agree the “Particular Conditions” set out in Part 3 of NSC/T with the nominated sub-contractor. These include the sub-contract period and programme, insurance details and the identity of the adjudicator and trustee stakeholder. 5. When all of the “Particular Conditions” have been agreed. the contractor and sub-contractor sign part 3 of NSC/T and execute the articles of agreement in NSC/A. At stage 2. the employer signs NSC/W, so at that early stage there is a binding contract between the employer and the nominated sub-contractor. This allows the architect to instruct the sub-contractor to proceed with design work, purchasing goods and materials and fabricating components before a contract is concluded between the main contractor and the nominated sub-contractor. NSC/W also provides for payment by the employer for such work, and this will be mandatory if for any reason the nomination process breaks down and no nominated subcontract is concluded. Problems often arise at stage 4, when the main contractor tries to agree the “Particular Conditions” with the nominated sub-contractor. Clause 35.8 of JCT98 allows 10 working days from the main contractor’s receipt of NSC/N for an agreement to be reached. If this proves impossible, the main contractor must give a written notice to the architect stating either the date by which he expects to reach agreement or, if lack of trust is not the problem, the other matters which are preventing agreement. If the main contractor simply needs more time, the architect may extend the time for reaching an agreement with the nominated sub-contractor, but this will not entitle the main contractor to an

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extension of time or loss and expense if the prolonged negotiations with the nominated sub-contractor result in a delay in the completion of the main contract works. If other matters are preventing agreement, the architect must decide whether, in his opinion, they justify a failure to agree. If he feels they do not, he can instruct the contractor to reach agreement with the nominated sub-contractor and execute NSC/A. Failure to comply with this instruction would presumably entitle the employer to implement the usual sanction for failure to comply with architect’s instructions, namely employing and paying others to carry out the necessary work and recovering the cost of doing so from the main contractor. It is difficult to see how this would work in practice in relation to this type of instruction, although it may entitle the employer to employ the nominated subcontractor as his own direct contractor. Where the architect is of the view that there are genuine reasons for the failure to agree he must issue further instructions under clause 35.9.2 of JCT98 either to facilitate agreement (for example by amending the main contract period), or to omit the work altogether or to nominate another sub-contractor. Instructions under clause 35.9.2 will entitle the main contractor both to an extension of time and loss and expense.

Named Sub-Contractors Under IFC98 IFC98 does not provide for nomination of sub-contractors, but does allow the architect to name a sub-contractor to carry out an identified section of the works. Although named sub-contractors have the protection of a standard and mandatory form of sub-contract NAM/SC, once they are appointed their status on the site is very similar to that of a domestic sub-contractor. Named sub-contractors may be named either in the main contract documents (and therefore will be appointed before the main contractor) or in an architect’s instruction as to the expenditure of a provisional sum. In either case, tenders must be sought from the potential sub-contractors on the standard form of tender and agreement NAM/T.

Tender and Agreement NAM/T falls into three sections: Section I - Invitation to Tender - the whole of this Section is to be completed by the architect. In Section 1, he gives particulars of the Main and Sub-Contract Works, together with indications of the sub-contract programme and basis of fluctuations etc. The architect also indicates whether the sub-contractor is to be named in the contractor’s invitation to tender or in an instruction to expend a provisional sum. Section II - Tender by Sub-Contractor - the whole of this Section is to be completed by the tendering sub-contractor. The tenderer quotes a VAT exclusive sub-contract sum together with percentage additions to the prime cost of daywork. In addition, he specifies the attendances he requires, gives programme information and details of fluctuations arrangements to the extent that they have not already been specified by the Architect in Section I. Section III - Articles of Agreement - if the sub-contractor’s tender is accepted, he and the contractor complete Section Ill. This Section consists of the Sub-Contract Articles of Agreement and incorporates by reference the mandatory sub-contract conditions (Sub-Contract Conditions NAM/SC). Upon completion and execution of Section III a subcontract is formed without any need to execute the Sub-Contract Conditions NAM/SC.

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Works Contractors under the Management Contract – MC98


Works Contractors under MC98 must be selected by agreement between the Management Contractor and the Architect. By clause 8.2 of MC98, the standard Works Contract documentation must be used unless the Employer (or the Architect on his behalf) and the Management Contractor agree otherwise. It may be advantageous to use the standard documents, as they have been drafted specifically for use with MC98 and therefore their terms are complementary. However, most management contractors have their own ‘home made’ works contracts which they will be anxious to persuade the Employer to allow them to use. Experience to date has shown that the standard works contract documents are infrequently used, and where they are, they are heavily amended. As with any other non-standard form, it will be a matter for the commercial judgement of the Steelwork Contractor what action he takes when faced with amendments or non-standard forms of works contract. If the standard Works Contract documentation is used, tenders will be sought using Works Contract/ 1. The Management Contractor completes Section 1, which is the invitation to tender. This sets out all of the information which the Works Contractor requires to prepare his tender. It describes the project and the works to be undertaken by the Works Contractor, identifies the other parties involved in the project and reproduces relevant parts of the Management Contract Appendix. Section 1 also states that the standard Works Contract conditions (which are contained in Works Contract/2) will apply unamended, unless the Employer has amended the Management Contract, or the Architect has instructed the Management Contractor to amend the Works Contract Conditions. Any such amendments are identified on a separate sheet and attached to the invitation to tender. Steelwork fabricators will need to take careful note of any changes which are proposed at the tender stage. Attendances can be a particular problem on management contracts. MC98 deals with attendances as follows: clause 1.5.4. of the Management Contract requires the Management Contractor to provide such site facilities and services as are listed in the Fifth Schedule toMC98. That list will have been compiled by agreement between the Management Contractor and the Employer (or the Architect) before the construction period commences. There is no minimum requirement for items of general attendance, but there is a model checklist for the Fifth Schedule in the JCT’s Guidance Note. Section 1 of Works Contract/ 1 sets out a list of the attendance items which are to be provided free of charge to the Works Contractor by the Management Contractor. A list of common site facilities and services is printed in the document, which includes: (i)

Canteens, sanitary accommodation and first aid accommodation.

(ii)

hoardings, entrances and exits for the site, together with site security arrangements.

(iii) access roads, ramps, walkways, etc. within the site. (iv) facilities for handling and storage of materials. (v)

hoists and scaffolding for the general use of Works Contractors.

(vi)

site drainage, electricity and water supplies for general use by Works Contractors.

(vii) general fire-fighting equipment and services. (viii) small multi-service labour force to carry out general site cleaning duties. (ix)

the clearance of all site rubbish providing that Works Contractors collect to designated points.

However, the Management Contractor may delete items from this printed list and/or add others, so the Works Contractor must not make any assumptions: he must check this list to see if any changes have been made.

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Tendering Procedures In his tender, Section 2 of Works Contract/l, the Works Contractor can require the Management Contractor to provide other attendances. However, if he does so, then under Clause 3.11.2 of Works Contract/2, the Works Contractor must pay an agreed price for these additional attendances, or if no agreement is reached a fair and reasonable price. Therefore, items of special attendance will not be provided free of charge to the Works Contractor, as may have been the case if he were a sub-contractor requiring special attendances from a main contractor. Section 2 of Works Contract/1 also sets out important matters such as the tender price, daywork percentages and the Works Contractor’s proposals for the period he requires to execute the work, both off site and on site. There are several areas where discrepancies may occur between Sections 1 and 2 of Works Contract/ 1, particularly with regard to matters such as programme and attendances. All three sections of the Tender document are prefaced by a warning that it is essential that before the Management Contractor and the Works Contractor execute the Articles of Agreement, they have satisfied themselves that such discrepancies have been removed. Any agreed alterations to Sections 1 and 2 as originally completed must be initialled by the Management Contractor and the Works Contractor. When this has been done, Section 3 is executed by the parties, either under hand or as a deed. The JCT have also produced a standard form of Employer/Works Contractor Agreement, Works Contract/3, which is optional. The Works Contractor will be informed in the invitation to tender (Section 1 of Works Contract/1) whether this will be required.

ICE – 7th Edition – Nominated Sub-Contractors Clause 58 of the ICE 7th Edition permits the Engineer to nominate sub-contractors to the main contractor. The publishers of the ICE conditions do not produce standard tender or contract documents for use by nominated sub-contractors, but the Civil Engineering Contractors Association have published a form of sub-contract (July 1998 edition) for use with the ICE 6th Conditions although as at 1 January 2000 no version has yet been published for use with the ICE 7th. Clause 59 of the ICE 7th specifies minimum provisions for the nominated subcontract, which are essentially designed to ensure that the nominated sub-contractor undertakes similar liability in respect of the nominated sub-contract work as the Contractor has to the Employer under the main contract.

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CHAPTER 5

ONEROUS CONTRACT CLAUSES


Onerous Clauses Defined The Oxford English Dictionary defines onerous as meaning “burdensome, causing or requiring trouble”. In the building industry, the term “onerous contract clauses” is normally used to describe unusual clauses which alter the balance of risk and give one party a significant advantage over the other. Sub-contractors are particularly vulnerable to onerous clauses, as in many situations the use of standard forms of sub-contract is not prescribed, which leaves the parties to negotiate their own terms. Main contractors, being large, sophisticated and contractually informed organisations, tend to be very good at this and holding the money, and most have their own standard terms of sub-contract which they will impose upon sub-contractors if they can. In addition, main contractors may attempt to incorporate into their sub-contracts the main contract provisions, including potentially onerous amendments to the main contract conditions. This Chapter looks briefly at the benefits of standard forms, identifies where onerous clauses are to be found, gives some common examples, and ends with some advice on combating them both during pre-contract negotiations and after they have become terms of the contract.

The Benefits of Standard Forms The need for negotiated standard conditions of contract was recognised as long ago as 1909. when builders and architects formed the origins of what is now the Joint Contracts Tribunal. In the move towards fair and equitable conditions, standardisation developed until the precursor of the current JCT Standard Form appeared in 1939. During the process of reviving an ailing building industry after World War II, the need for standardisation in both main and sub-contract forms was emphasised, particularly in the Banwell Report and the follow-up “Action on Banwell”. Standardisation ensures that those using forms are familiar with the contents and effect of the provisions. The risk areas are known and identifiable - confidence results, and this creates better contractual relationships. The use of standard forms also saves considerable time and effort, particularly during brief tender periods. If a contractor or sub-contractor is tendering on the basis of a standard form, he knows precisely how the risks and liabilities will be allocated, and does not need to spend precious time analysing the conditions. Standard forms of contract and sub-contract fall into two categories. There are forms such as those issued by JCT which have been negotiated at national level by representatives of the users of the forms. There are other standard forms are not negotiated, but are drafted by a single body. Examples of this type of document include: •

GC/Works/ 1, drafted by PACE for use on government contracts,

•

forms produced by the British Property Federation (BPF)

•

forms produced by the Association of Consultant Architects (ACA)

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Onerous Contract Clauses •

MF1 published by the Joint IMechE/IEE Committee on Model Forms of General Conditions

•

the Engineering and Construction Contract published for the Institution of Civil Engineers

These documents tend to favour the body which publishes them, and sometimes incorporate a number of clauses which are onerous to contractors and sub-contractors. However, even these forms possess one of the main advantages of standardisation in that their terms are familiar.

Sources of Onerous Clauses There are two “breeding grounds” for onerous conditions of sub-contract: amendments to the standard forms of contract, and completely “home-made” or “bespoke” contracts drafted by main contractors or clients. Onerous conditions may also be found in suppliers’ terms and conditions of sale: these are considered in Chapter 15 - Supply of Goods and Misrepresentation. Perhaps the greatest enemy of the sub-contractor is the wordprocessor. Amendments to word processed contracts are almost impossible to trace without reading every word of the document: the red line processed change of 17 days to 28 is through the payment period is easily identifiable, the word not.

Examples of Onerous Clauses The prevalence of non-standard forms and amendments to standard documents makes it impossible to set out an exhaustive check-list of onerous clauses. However, the commercial ingenuity which inspires such clauses follows a fairly predictable pattern, so the following examples should highlight the main areas affected.

Payment There are two amendments commonly made to the payment clauses in the standard forms. The first is simply to lengthen the payment period. For example, under the nominated sub-contract NSC/C, payment is due to the sub-contractor within 17 days of the date of any interim certificate issued by the Architect. It is a simple matter for this to be amended to delay payment for a longer period, such as 28 days. This means that the sub-contractor may have to work on site for almost two months before he receives any payment at all, which would clearly have an adverse effect on his cashflow. Steelwork Contractors may be especially exposed to the risk of delayed payment as they will usually have to expend money before they go on site and their contract may not provide for payment for off-site materials. The second common amendment relates to cash discount (often incorrectly described by main contractors as “Main Contractor’s discount”). The amendment provides that the main contractor is always entitled to a discount even if he does not pay the sub-contractor on time. This removes a significant incentive for the Main Contractor to pay within the specified period. However, as explained in more detail in Chapter 7 - Payment and Set-Off, the Late Payment of Commercial Debts (Interest) Act 1998 now makes it an implied term in most contracts involving the supply or goods or services that statutory interest is payable if payments are not made by the agreed payment date. In addition, where section 112 of the Housing Grants, Construction and Regeneration Act 1996 applies, a party who has not been paid in full by the final date for payment and to whom no effective notice of intention to withhold payment has been given, is entitled to suspend performance after giving notice.

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Onerous Contract Clauses Moreover, the standard forms also provide for interest on late payment.


Pay-When-Paid Clauses Until recently virtually all main contractors’ own “home-made” forms of sub-contract and their amendments to standard forms of sub-contract included “pay-when-paid” provisions under which the sub-contractor did not become entitled to any money until the main contractor had received payment for the work in question from the employer. Apart from delaying payment, the main disadvantage for the sub-contractor of such clauses is that if the employer withholds money from the main contractor, either because he has a dispute with him about work unrelated to the sub-contract, or simply because he does not have the money to make the payment, the sub-contractor suffers. The sub-contractor cannot even force the main contractor to pursue payment from a defaulting employer, which the main contractor may be reluctant to do if there is a risk of jeopardising an otherwise profitable business relationship. The position of sub-contractors in relation to pay-when-paid provisions has been much improved by the Housing Grants, Construction and Regeneration Act 1996 which, as explained in more detail in Chapter 7 - Payment and Set-Off, renders “ineffective” pay-when-paid provisions in most cases. The only exception (i.e. where a pay-when-pay clause would still be effective) is where the reason for the non payment is because of the insolvency of the ultimate payer (usually the employer). This should be explicitly stated in the contract. Care should be taken to delete clause 32 of DOM/ 1 since a correction was issued to that effect in July 1998.

Set-Off Steelwork Contractors should carefully consider any set-off provisions in their contract with the main contractor or with the employer. The set-off clauses in the standard forms are described in more detail in Chapter 7 - Payment and Set-Off.

Insurance Main contractors may attempt to reduce their insurance premiums by making the sub- contractor responsible for damage to the sub-contract works caused by the sub-contractor’s own negligence. Under a standard form the sub-contractor is often protected by the main contractor’s policy if the damage is caused by one of the “Specified Perils” which include fire, explosion and water damage, even if the Specified Peril is caused by the sub-contractor’s negligence so that a failure to give the notice will mean that the Steelwork Contractor has lost the right to make a claim. As the sub-contractor’s insurance policies will normally be worded to cater for the position under the standard forms, it is vital that such matters are picked up at the tender stage, or the sub-contractor could discover he is responsible for major fire damage, but is uninsured.

Attendances The provision of appropriate attendances by the main contractor is something which must never be assumed. Even under the standard forms of sub-contract it is vital that the sub-contractor has identified at tender stage other items of attendance, not provided for by sub-contract conditions, and agreed with the main contractor who will be responsible for providing them. The standard forms of tender for

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Onerous Contract Clauses


nominated and named sub-contractors tend to make clear provision for attendances. For a domestic sub-contractor under the DOM/1 Sub-Contract Conditions clause 27 explains which attendances will be provided by the main contractor and makes provision for other attendances to be dealt with by agreement. Steelwork Contractors should beware of amendments to the standard forms, or the use of non-standard forms, that make the provision of normal attendance items, such as storage space and welfare facilities, the responsibility of the Steelwork Contractor. Management contracts particularly may require the Steelwork Contractor to provide his own attendances as the management contractor himself will have no labour on the site.

Obligations Regarding Time A phrase frequently found in non-standard sub-contracts is “time shall be of the essence”. That means that obligations regarding time are fundamental terms of the sub-contract, and if they are breached by the sub-contractor the main contractor has the right not only to claim damages but also to treat the sub-contract as being at an end. This is technically known as a “repudiation” of the sub-contract, and (subject to exclusion clauses) also allows the main contractor to recover the additional costs of employing another sub-contractor to complete the works. In view of the uncertain nature of the building process and in particular the Steelwork Contractor‘s dependence on steel supplies, these are very onerous clauses, especially as they are often combined with inadequate provisions for extensions of time. Sub-contractors should also beware of general obligations requiring them to comply with the main contractor’s programme and all of his directions regarding order of the work. etc. Such clauses mean that the sub-contractor will be at the beck and call of the main contractor, and will therefore find it almost impossible to frame claims for delay and disruption. Sub-contractors should therefore check to see that the sub-contract contains provisions which entitle the sub-contractor to recover additional expenditure and/or to be granted extensions of time resulting from changes to the main contractors programme and unforeseen directions. It is becoming increasingly common for notice of delay to be made a condition precedent to entitlement to claim for delay and disruption.

‘Non-Arbitrable’ Clauses A non-arbitrable clause is one which makes the decision of the Architect, Engineer or Main Contractor “final and binding” or “final and conclusive”. This is an attempt to ensure that the decision of that party is not open to challenge in adjudication, arbitration or in the courts. The effect may well be that the Steelwork Contractor will have no remedy in the event of incorrect certification. For that reason, clauses such as these should be avoided.

Design Agreements/Warranties Many of the most onerous clauses are to be found not in the sub-contract itself, but in the direct warranties required from sub-contractors by employers (and, increasingly, future tenants. purchasers and funding bodies).

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The reasons for the prevalence of such warranties, and a full discussion of their terms, are set out in Chapter 14 - Design Liability. They frequently require impossibly high standards for the sub-contract work such as: ... the sub-contract works will satisfy appropriate statutory and other official recognised requirements and any performance specification or requirement insofar as the same are included in or referred to in the tender of the sub-contractor as part of the description of the sub-contract works or have formed the basis of the tender and will be of good quality, and where appropriate, electrically, mechanically and structurally sound, free from fault or defect and fit and suitable for their intended purpose whether or not the same is described in such performance specification or requirement. This wording requires the sub-contract works to be perfect in every particular. It does not refer to any fault on the part of the sub-contractor, nor to the extent to which the works were designed by the sub-contractor. To take an extreme example, if a steel frame had been entirely designed by the consulting engineer and the design proved to be defective, the sub-contractor could be sued by the employer under the above warranty for the total amount of his loss, and it would then be up to the sub-contractor to attempt to recover the money from the consultant. Other clauses may require the sub-contractor to check the consultant’s design, including all calculations - an impossible task if the sub-contractor is not provided with the appropriate documents, quite apart from being time-consuming and expensive. Steelwork Contractors should also take particular note of any requirements to take out and maintain insurance. Product liability insurance covers legal liability, including negligent design, arising out of products and requires actual physical injury or damage to third parties or their property before it is triggered. Some Steelwork Contractors believe that unless they undertake design and build, they only require products liability insurance and not professional indemnity insurance, but this is a very high-risk strategy. Steelwork Contractors almost invariably do undertake some design - for instance, of connections. If design is negligent and is condemned without any physical damage or injury taking place, then the Steelwork Contractor will not be covered unless professional indemnity insurance is in place. Undertakings to maintain insurance for a period of years after practical completion should also be treated with great caution. At some point within the required period it may become impossible or prohibitively expensive for the Steelwork Contractor to maintain the insurance. Steelwork Contractors may want to ensure that their contract includes a proviso to the effect that they will only be obliged to maintain insurance for as long as its remains available at reasonable commercial rates.

Combatting Onerous Clauses The first step in combatting onerous clauses is to identify them. It is tempting to ignore the “small print”, particularly during a short tender period, but it could be as fatal to the profit margin on that job as missing out a page of the specification. The contract conditions should be carefully checked. particularly if they are contained in a completely non-standard form. Beware too of “look-alikes”, documents printed on the same colour paper and in the same type as standard forms, but which are actually entirely “bespoke” forms. Clause wordings can be checked against the equivalent condition in the standard forms. Remember to look for clauses that are not there, as well as checking the ones that are. Having identified the onerous clauses, do not let them slip into the contract by mistake. Look again at the rules on formation of a contract set out in Chapter 1 - Formation of Contracts, and be aware

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that starting work (including design and off-site fabrication) may be construed as acceptance of the main contractor’s terms and conditions by conduct unless these terms have been expressly and clearly rejected preferably in writing beforehand. When negotiating with the main contractor or employer regarding non-standard clauses, the following points may be of some assistance: 1.

In general, the negotiated standard forms allocate risks to those who are best able to quantify and control them. Arbitrary changes to this balance of risk can have serious consequences. On the face of it a one-sided contract may seem attractive to it the employer or main contractor, but in practice there are many drawbacks. For example, when the industry is buoyant many responsible contractors will simply refuse to tender or will qualify their tenders so heavily that comparison becomes extremely difficult.

2. Even if contractors tender without qualification, they may have attached a price to the amendments. In that case, it is likely that they will be making a guess at their liability, particularly in areas where they cannot control the risk they are being asked to accept. This will artificially inflate the cost of the building, particularly if the risk more correctly rests elsewhere (for example with a member of the professional team for whose services the employer is also paying). 3.

If the contractor has chosen not to price the risk and the contract goes badly, he may be pushed into insolvency by contractual claims. This is not in the interests of anyone, least of all the client.

There may be times when Steelwork Contractors need to take a commercial decision on whether to accept onerous terms and conditions of contract. In these circumstances, if the main contractor or employer attempts to enforce a particularly onerous term, there are some arguments that may be of assistance namely:

1. Lack of Notice of the Onerous Clause In the case of Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1987), the Court of Appeal held that in order to rely on an onerous or unusual condition printed on a delivery note, the party seeking to rely on it had to show that it had been fairly brought to the attention of the other party. This case should not, however be understood as setting out a general rule applying to all printed conditions, and it has been distinguished, for example in Nutting v Baldwin (1995). In addition, it should be emphasised that if a particular clause is common practice in the trade, and the sub-contractor is aware that a particular main contractor regularly includes such a clause in his contract he may be found to have had the particular condition sufficiently brought to his attention.

2. Unfair Contract Terms Act 1977 By Section 3 of the Unfair Contract Terms Act 1977, where a contract is made on one party’s written standard terms, that party cannot rely on those terms to exclude his liability for breach of contract unless it is reasonable to do so, nor can he render a performance substantially different from that reasonably expected of him or refuse to carry out the contract at all unless it is reasonable to do so. A more detailed explanation of how to determine what is reasonable is set out in Chapter 15 - Supply of Goods and Misrepresentation. This section can be used to curb the worst excesses in main contractor’s own terms and conditions.

3. Contra Proferentem This is a useful rule of law for victims of one-sided clauses. It provides that any ambiguity will be construed against the part who proposed the inclusion of the clause.

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Chapter 5



It is relatively easy for a main contractor or employer to go through the standard forms deleting everything which he believes is detrimental to him. It is much more difficult however to amend a standard form properly. Many of the clauses are interrelated, and if consequential amendments are not made, ambiguities arise or provisions are rendered meaningless. In view of the contra proferentem rule, if a contract is not clearly amended, the ambiguity will be construed against the person seeking to amend, and the attempted change could have exactly the opposite effect to that intended.

Summary Onerous contract clauses are frequently imposed upon sub-contractors in the form of “bespoke” documents or amendments to standard forms. Standardisation has considerable benefits: it ensures that users of the forms are familiar with the allocation of risk, and allows easily comparable tenders to be obtained. Not all standard forms are negotiated documents like JCT. Some are unilaterally published, e.g. GC/ Works/ 1 and the BPF forms, and are therefore more likely to contain onerous conditions. In “home-made” contracts watch for word processed changes and look-alike forms. Converting a cash discount for prompt payment into a main contractor’s discount to which he is entitled regardless of payment on time removes the main incentive to prompt payment. Pay-when-paid clauses mean the sub-contractor has no right to payment until the employer pays the main contractor, which is an event over which the sub-contractor has no control. However, the Housing Grants, Construction and Regeneration Act 1996 now renders ineffective pay-when-pay clauses in most construction contracts except where non-payment is the result of a third person’s (usually the employer) insolvency. Broad set-off clauses are a blank cheque to the main contractor. Particularly onerous clauses allow the main contractor to set-off loss on other sub-contracts and to set-off future losses. Attendances must be checked with great care, particularly on management contracts. Contracts where “time is of the essence” mean that any delay is a fundamental breach, which will allow the main contractor to treat the sub-contract as being at an end. Warranties and design agreements contain some of the most onerous clauses of all, often amounting to guarantees of perfect work. They can also impart responsibility for design carried out by others. The way to combat onerous clauses is: (i)

recognise them - check the small print.

(ii) don’t accept them by default e.g. by starting work. (iii) be prepared to negotiate with the main contractor/employer. (iv) if they are a part of the contract they may be displaced if the sub-contractor was not aware of them, or if they fail to satisfy the requirement of reasonableness under the Unfair Contract Terms Act or if they are ambiguous and can be construed against the drafter. (v) check to see that the warranty agreement contains wording which provides that the sub-contractor is under no greater liability under the warranty than they are to the main contractor under the sub-contract.

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CHAPTER 6


CERTIFICATES Definition All of the standard forms of contract contain provisions requiring the Architect or Engineer to express his opinion or make a decision on certain matters by means of certification. Such certificates are frequently a condition precedent to some further action, such as the making of an interim payment or the deduction of liquidated damages for delay. The term “certificate” is used to describe such decisions or opinions where they are required to be in writing.

Form and Content of Certificates The precise form of the certificate is rarely specified in the contract, other than a general requirement that it should be in writing. Even this may be only implied e.g. “the Architect shall issue a certificate”. Certificates may simply take the form of a letter from the certifier, although bodies such as the RIBA issue printed forms for payment certificates etc. which are widely used. Steelwork fabricators should note that a letter from the appropriate certifier is equally valid unless the use of a printed form is required by the contract (which would be most unusual, and is not the case in the JCT standard forms). The contract will however specify certain details which the certificate must contain, namely: 1. The person to whom the certificate must be addressed e.g. “the Architect shall so certify in writing to the Contractor”. 2. The content of the certificate e.g. ICE 7th Edition clause 61(1) “a Defects Correction Certificate stating the date on which the Contractor shall have completed his obligations to construct and complete the Works to the Engineer’s satisfaction.” 3. Sometimes the time at which the certificate must be issued is stated e.g. within 28 days of a specified event. To be valid, a certificate must comply with all such requirements in the contract.

Who May Issue? The standard forms of contract all specify the person or persons who may issue certificates. In the JCT forms. the certifier is invariably the Architect named in the contract. Under unamended JCT standard forms, certificates issued by other members of the professional team, such as the Quantity Surveyor or Consulting Engineer have no effect, and will not “trigger” the relevant consequences such as a right to interim payment. If an individual other than the Architect or Contract Administrator purports to issue a certificate, the Architect should also be requested to issue a certificate, and if he wishes to delegate the power for the future, appropriate amendments must be made to the contract. Under the ICE Conditions, only the Engineer himself may issue certificates: the powers of the Engineer’s Representative under clause 2(3) are strictly limited in that respect.

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Certificates

What Constitutes Issue of a Certificate?


The Courts considered what constitutes “issue” of a certificate, in the case of London Borough of Camden v McInerney (1986). It was held that simply signing the relevant certificate is not sufficient: it must actually be sent to the recipient or otherwise communicated to him.

Negligent Issue of Certificates A certifier will be liable for the losses suffered by his employer if he negligently issues a certificate, following the decision in the case of Sutcliffe v Thackrah (1974). In that case, an Architect issued interim certificates for certain work, and the Employer made payments in accordance with them. Subsequently, the Employer discovered that the work certified was defective, but as the contractor had become insolvent the Employer could not recover the costs of rectifying the defective work from him, and sued the Architect. The House of Lords held that the Architect was liable because he was aware that the work was defective when the certificates were prepared. This case does not mean that every Architect who certifies an incorrect sum will be liable as an error of judgement will not necessarily constitute negligence. If the Architect has used all reasonable skill and care he will be exonerated. If not, he will be guilty of negligence. It has been suggested that a certifier will be liable to the contractor as well as the Employer if he fails to exercise reasonable skill and care in issuing certificates. In Salliss v Cahill (1987) it was held that the Architect in JCT contracts must act fairly as between the Employer and the contractor when issuing certificates, and awarding extensions of time. However, in a subsequent case, Pacific Associates v Baxter (1988), the Court of Appeal disapproved of Salliss v Cahill, and held that an Engineer under the FIDIC form owed no duty of care to the contractor when issuing certificates. Salliss v Cahill can therefore no longer be relied upon to found an action by a contractor or a sub-contractor against a certifier; they must rely on challenging the certificate in adjudication, arbitration or litigation against the other party to the contract.

Contractual Effect of Certificates Once a certificate has been issued, it is generally binding upon both parties and cannot be amended or withdrawn. However, as discussed in more detail in Chapter 19 - Disputes and Legal Proceedings, certificates may be revised by adjudicators, arbitrators or the courts unless the contract provides that the certificate is final and conclusive. So, for example, in Oxford University Fixed Assets Ltd v Architects Design Partnerships & Others (1999) the Technology and Construction Court considered the effect of the final certificate under JCT80. The Court held that the certificate acted as an “evidential bar” to a claim against the contractor to contribute to damages resulting from allegedly defective works. The Court followed the earlier case of Crown Estate Commissioners v John Mowlem & Co Ltd (1994) in which the Court of Appeal held that a Final Certificate under JCT80 was conclusive evidence not merely that, where the quality of materials or the standard of workmanship were to be to the reasonable satisfaction of the Architect, that the same were to his satisfaction but also that it covered all materials and workmanship where approval of such matters was inherently something for the opinion of the Architect. This in practice meant that a Final Certificate was a bar to any claim by an Employer in respect of defective works after the Final Certificate had become operative. The effect of the decision was reversed by Amendment 15 issued in 1995 but this decision is still valid in respect of those JCT Contracts which are not subject to this Amendment. The effect of this decision does not in any

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event extend to the design obligation of the Contractor under the JCT (With Contractor’s Design) Form - see London Borough of Barking and Dagenham v Terrapin Construction Limited (2000).

Types of Certificate Interim Certificates Interim certificates are the means by which contractors obtain progress payments during the course of the contract. Their content is described more detail in Chapter 7- Payment and Set-Off. Interim certificates are normally issued monthly, although on very large contracts a shorter period may be specified. The effect of an interim certificate is to create a binding obligation on the Employer to pay the amount certified within the period prescribed by the contract (in JCT98, 14 days from the date of issue). If the Employer defaults, the contractor is entitled to sue for the sum certified. However, even if the certificate contains patent errors which mean that the sum certified is too low, the Employer need only pay the certified sum, even if he knows of the errors. The error should then be corrected in the next certificate, or if the Architect refuses such a correction, the matter can be referred to adjudication or arbitration. The exception to this rule is where the Employer himself has prevailed upon the Architect to under-certify, or has otherwise prevented him from properly carrying out his duties, in which case the Employer would be in breach of contract and therefore liable to the contractor. In the absence of an express contractual term to the contrary, interim certificates are not conclusive evidence that the Employer or his Architect or Engineer are satisfied with the work. They are therefore, in effect, provisional valuations which are subject to review in later interim certificates and in the final certificate.

Practical Completion Certificates under JCT Contracts Practical completion is an extremely important term in the JCT contracts because it marks the date at which: –

the defects liability period begins;

–

liability of the contractor for liquidated damages ceases;

–

the first half of the retention fund is released,

–

the contractor’s liability to insure the works under clause 22A ceases;

–

the sub-contractor’s protection under the main contract all risks policy ends;

–

arbitration on any issue may be commenced.

Despite the enormous significance of the date. the term “practical completion” is not defined in the contract. Under clause 17.1 of JCT98 the Architect must issue a certificate forthwith when, in his opinion, practical completion has been achieved. It is generally agreed that the architect cannot insist on total completion, otherwise the word “practical” would not have been added. Beyond this, there is considerable scope for dispute. It is very difficult for a contractor to force the Architect to issue a certificate of practical completion, and there may

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Certificates well be compelling practical reasons why the Employer feels he should not: for example if the Employer knows he could not let or sell the building. or if he is not yet ready to move into it himself. If this is the case, it is to the contractor’s disadvantage for the certificate to be withheld, and to the Employer’s advantage that it is. This puts the contractor in a very weak position. There is no decisive case law on the definition of practical completion. The view which commands most support is that expressed in H.W. Nevill v Wm Press & Son Ltd (1981) when it was held that the Architect had a discretion to certify practical completion where there were very minor works still to be carried out, but there were no patent (i.e. obvious) defects in the work the contractor had done. In view of the length of the “snagging list” on the average contract it will be appreciated that this case will not help the contractor to force the Architect to certify practical completion. It is important to note that as the law currently stands, the Employer may actually be in occupation of the building, and yet can still be entitled to claim liquidated damages for late completion because no certificate of practical completion has been issued. This is because the works may be capable of occupation but nevertheless would not pass the strict definition of practical completion described in Nevill v Press. This situation is manifestly unjust and should serve to deter contractors from permitting Employers to occupy buildings until the practical completion certificate is issued. Under clause 18.1.1 of JCT98, Practical Completion of any part of the works for which the Employer takes possession is deemed to have occurred.

Practical Completion under NSC/C Under clause 35.16 of JCT98, the Architect is obliged to issue a separate certificate of practical completion to each nominated sub-contractor when the relevant nominated sub-contract works are practically complete, which has the same effect in relation to those works as a certificate issued under the main contract has in relation to the main contract works. Notwithstanding the difficulties of defining practical completion, this is therefore a major advantage of nomination for Steelwork Contractors as their work is always complete many months or even years before the remainder of the project.

Practical Completion under DOM/1 The Architect has no involvement with domestic sub-contract works, and therefore different rules have been evolved to determine when practical completion occurs. Under clause 14 of DOW/ 1, the sub-contractor must notify the contractor of the date when he thinks the sub-contract works are practically complete. If the contractor does not disagree with this within 14 days of receiving the notice, practical completion takes place on the date notified by the sub-contractor. This is a particularly useful provision for early trades such as structural steelwork as it allows the sub-contractor to instigate the process of determining practical completion, and if the contractor does not respond quickly, the sub-contractor’s view will prevail. If, however, the contractor does disagree with the sub-contractor’s notification within 14 days of receipt, they may either agree the date of practical completion, or if they cannot, either one of them can commence adjudication proceedings or open a reference to arbitration to decide the matter. If no agreement is reached and adjudication or arbitration is not commenced, practical completion is deemed to occur at the same time as practical completion of the main contract works. As this will be very much later than the date of completion of structural steelwork, every effort should be made to agree a sensible date with the main contractor, or in serious cases the sub-contractor should consider adjudication or arbitration (see Chapter 19 - Disputes and Legal Proceedings).

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Practical Completion Under NAM/SC and IN/SC


The rules regarding practical completion in the sub-contracts for use with the Intermediate Form follow DOM/ 1.

Practical Completion Under Works Contract/2 Under Works Contract/2, separate certificates of practical completion for each works contract are issued by the Management Contractor with the consent of the Architect. Such certificates are issued when in the opinion of the Architect the works contract is practically complete, so the provisions are very similar to the nominated sub-contract arrangements.

Certificate of Substantial Completion: ICE 7th Edition Under the ICE 7th there is provision in Clause 48 for a Certificate of Substantial Completion of Works. The contractor is entitled to give notice in writing when he considers that the whole of the works have been substantially completed; and such notice is deemed to be a request for the Engineer to issue a Certificate of Completion. The Engineer is then required within 21 days either to issue the certificate, stating the date on which, in his opinion. The works were substantially completed in accordance with the contract; or give instructions to the contractor for work which, in his opinion, is required to be done before the issue of the certificate. The contractual effects of the issue of a Certificate of Substantial Completion are similar to those in the JCT forms. They are: 1. to fix the commencement of the Defects Correction Period 2. to allow payment of half of the retention monies, where the certificate is for the whole of the works 3.

to determine the Employer’s entitlement to liquidated damages for delay

4.

to terminate the contractor’s obligation to insure the works under clause 21 save in respect of any outstanding work or damage arising out of a cause occurring prior to the issuing of the certificate.

The procedure outlined above is also to be followed in respect of (i) any section for which a separate time for completion is provided in the Appendix to the Form of Tender, and (ii) any substantial part of the works which has been both completed to the Engineer’s satisfaction and occupied or used by the Employer. In addition, the Engineer has a discretion to issue a Certificate of Substantial Completion in regard to any part of the works which has been substantially completed whether the Employer has taken up occupation or not. The issue of a Certificate of part-completion proportionately reduces the contractor’s liability to liquidated damages and obligations to insure.

Completion under CECA Sub-Contract The provisions of the CECA sub-contract are somewhat vague compared to the precise clauses of the JCT forms. Under clause 13(1) the sub-contractor is required to complete the sub-contract works before completion of the main contract works. There is no indication as to how the decision that the works are complete is to be reached, nor as to whose opinion will be decisive. In practice, the views of the main contractor are likely to prevail.

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Certificates


Final Certificates Final certificates are normally required to be issued within a specified period of the expiry of the defects liability or maintenance period. It marks the end of the contractor’s obligations under the contract, although he will continue to be liable for any defects in the work or damage caused by such defects for the relevant limitation period (for further details see Chapter 16 - Limitation Periods).

Final Certificate under JCT98 The sequence of events leading up to issue of the Final Certificate is as follows: 1. Within 6 months of practical completion of the Works the contractor provides the Architect with all the documents necessary for calculating the final contract sum. 2. Within 3 months of receipt of those documents, the Architect must give the contractor a statement of his final account figure and the adjustment on which it was produced. 3. The Architect must issue the Final Certificate not later than 2 months after the last of the following: (i) the end of the Defects Liability Period (ii) the date of issue of the Certificate of Completion of Making Good Defects (iii) the date of the statement of the final account The balance of the contract sum due under the Final Certificate becomes a debt due to the contractor when 28 days have expired from the date of its issue. Under JCT98, the Final Certificate is conclusive evidence of certain matters, namely: (i) where the quality of materials or standard of workmanship are to be to the reasonable satisfaction of the Architect, that they are to his satisfaction - see Crown Estate Commissioners v. John Mowlem (1994). Note that this will not relieve the contractor of responsibility for work and materials which are required to comply with the objective terms of a specification or drawings etc.; (ii) that the adjustment of the Contract Sum is in accordance with the contract save for accidental or arithmetical errors (iii) that all extensions of time due have been awarded; (iv) that all loss and expense due to the contractor have been paid. The Final Certificate takes such conclusive effect on the expiry of 28 days from its issue. Therefore if either the contractor or the Employer wishes to challenge any of the matters listed in (i) to (v) above he will need to refer the dispute to adjudication or issue a writ or notice of arbitration very quickly. No separate final certificates are issued to nominated sub-contractors, although the Architect has an obligation to inform all nominated sub-contractors of the issue of the Final Certificate under the main contract. Note: The timing of final certificates under other JCT forms is dealt with in Chapter 7 - Payment and Set-Off.

ICE 7th Edition Under ICE 7th, the final certificate relates only to payment: clause 60(4) provides that within three months after the date of the Defects Correction Certificate, the contractor shall submit a statement of final account: and within a further three months, the Engineer shall issue a final certificate stating

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the amount finally due under the contract and the balance outstanding, which balance shall be paid within 28 days. The Engineer’s satisfaction with the works is dealt with by the issue of the Defects Correction Certificate, following the expiry of the Defects Correction Period. It should be noted, however, that the Defects Correction Certificate is not conclusive evidence as to the performance of the contract, and disputes on this may become the subject of adjudication or arbitration.

CECA Sub-Contract Separate final certificate for sub-contractors are not issued under the CECA form. Final payment to sub-contractors is commented upon in Chapter 7- Payment and Set-off.

Certificates of Delay JCT 98: Main Contractor’s Delay Under clause 24 of JCT98 it is a condition precedent to the Employer’s right to deduct liquidated damages from payments due to the contractor that the Architect has issued a Certificate that the Contractor has failed to complete the Works by the Completion Date.

NSC/C: Sub-Contractor’s Delay Certificates of delay are particularly significant to nominated sub-contractors under NSC/C. Unless and until the Architect has certified under clause 35.15 of JCT98 that the sub-contractor has failed to complete on time, the main contractor is not entitled to claim loss and expense in respect of that delay. In addition, the main contractor may not set off money from payments otherwise due to the sub-contractor in respect of loss and expense due to the sub-contractor’s delay until a clause 35.15 certificate has been issued.

Certificates of Non Payment Both JCT 98 and the ICE 7th include mechanisms whereby the Employer may pay nominated subcontractors direct. Part of the mechanism involves the issue by the Architect or Engineer of a certificate of non-payment. The direct payment provisions are discussed in detail in Chapter 7 – Payment and Set-Off

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CHAPTER 7


PAYMENT AND SET-OFF Cash flow has been described as “the life-blood of the construction industry” – without it survival is impossible. Steelwork Contractors are particularly vulnerable if they do not receive regular payments because their contract periods are relatively short and they are forced to expend a considerable proportion of their total contract value on goods and materials and off-site work at the beginning of the contract. Understanding the payment provisions in the standard forms is therefore vital. This Chapter describes the payment clauses in the major standard forms and sets out the range of remedies for non-payment. Since the last edition of this Handbook two Acts which affect the way payment and set-off is dealt with in the construction industry have come into force. These are:

The Housing Grants, Construction and Regeneration Act 1996 This Act applies to all contracts in writing entered into after 1 May 1998 for the carrying out of ‘construction operations.’ Construction operations are widely defined and will cover most works traditionally considered to be construction (and a number which would not). Of particular importance to Steelwork Contractors, Parliament has expressly excluded erection or demolition of steelwork for the purposes of supporting or providing access to plant and machinery on a site where the primary activity is nuclear processing, power generation or water or effluent treatment. In Palmers Ltd v ABB Power Construction Ltd (1999) it was held that a sub-contract for scaffolding in connection with works involving the assembly and erection of a heat recovery system at Esso Fawley Cogeneration Project fell within the Act. In Nottingham Community Housing Association Ltd v Powerminster Ltd (2000) the Technology and Construction Court held that a contract for the carrying out of annual services on gas appliances and provision of breakdown and repair services was also caught by the Act. Also of importance, the Act expressly excludes “supply only” contracts, although they are usually let on exactly the same terms as other construction contracts. Unless a Steelwork Contractor’s contract expressly includes the protections provided by the Act - and standard forms probably will - it may be worthwhile making sure that any “supply only” arrangement is made under a contract of sale. The Act is supported by the Scheme for Construction Contracts which sets out certain default provisions which will be implied into construction contracts in the event of failure to comply with the act. The Act provides in relation to payment provisions in construction contracts: •

A party is entitled to instalment, stage payments or any other periodic payments unless the contract specifies or the parties agree that it is estimated that the works will last for less than 45 days.

•

The parties are free to agree the amount of the payments and the intervals or circumstances in which they become due. In the absence of agreement, the payment provisions in the Scheme for Construction Contracts will apply (see below).

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Payment and Set-off •

Every contract must provide an adequate mechanism for determining what payments are due and when and provide a final date for payment of sums due. The parties are free to agree how long the period is to be between the date when payment becomes due and the final date for payment. If not then the relevant provisions of the Scheme for Construction Contracts will apply.

•

Every contract must provide for notice to be given by the payer not later than 5 days after the payment due date specifying the amount of payment to be made and the basis on which the amount was calculated. If not then the relevant provisions of the Scheme for Construction Contracts will apply.

•

Payment may not be withheld after the final date for payment unless notice of intention to withhold payment has been given. The notice must specify the amount to be withheld and the reason or reasons for withholding payment. The notice must be given not later than the agreed period before the final date for payment. If the parties do not reach agreement on the period, the period specified in the Scheme for Construction Contracts will apply - which is 7 days before the final date for payment.

•

Where a sum due has not been paid by the final date for payment and no effective withholding notice has been given, the party to whom payment is due has the right (in addition to any other rights he may have) to suspend performance of the contract provided that he first gives the other party at least 7 days notice of his intention to suspend stating the reason or reasons for suspension. This right to suspend ceases when payment in full of the amount due is made. The Act in effect grants the receiving party an extension of time for the period of the suspension. It does not however make any provision for the recovery of loss and expense incurred as a result of suspension - this point should be expressly covered in the contract as it is in JCT98.

•

Pay-when-paid provisions (see Chapter 5 - Onerous Contract Clauses) are ineffective unless linked to the insolvency of a‘ third party payer (usually the Employer). There should be specific wording in the contract to cover this. Where a provision included within a construction contract is, as a result, ineffective then, in the absence of agreement between the parties, the relevant provisions of the Scheme for Construction Contracts apply.

The Scheme for Construction Contracts - Payment Provisions The payment provisions of the Scheme are contained in Part II of the Scheme. Part II will apply to a construction contract if the contract does not: •

provide for interim payments (unless the works are for less than 45 days)

•

contain an ‘adequate mechanism’ for ascertaining what payments become due and when

•

have provision for a ‘final date for payment’ in respect of any sum due

•

prescribe a period before the ‘final date for payment’ in which an effective notice of withholding monies should be given

•

exclude pay-when-pay (except in case of insolvency of third party payer)

Unlike the adjudication provisions of the Scheme, the payment provisions of the Scheme do not automatically apply in their entirety - they merely fill in any gaps in the contract. If, however, the payment provisions in the contract do not comply with the Act at all or where there is a pay-whenpaid provision which is ineffective under the Act and there is no provision in the contract to operate in that event, then the entire payment provisions of the Scheme will apply.

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Payment and Set-off If the parties to a contract cannot agree on whether the Scheme applies to their contract, the matter can be referred for decision by an adjudicator.


The price for work to be done under a contract is defined in the Scheme as the ‘contract price’. Under the Scheme this includes: •

the value of work conforming to the contract (not including goods and materials), and

•

the value of goods and materials manufactured on site or brought onto the site, and

•

any other amounts/sums specified in the contract as being payable (e.g. loss and/or expense).

Where instalments are to be made, each instalment will include the total amount of the above items minus sums already due/paid: in the case of amounts other than for work and materials, the contract must have stipulated for payment at some time prior to the end of the period covered by the instalment in question if such amounts are to be included. The Scheme appears to refer to other payments in respect of which there is no time for payment stated in the contract and, therefore, will not form part of an instalment or periodic payment. Such payments become due on the expiry of 7 days following completion of the work to which the payment relates or (whichever is the later) the making of a claim by the payee. ‘Value’ is ascertained by applying the contract rates or, if there are no such rates, the value is the cost of the work and any overheads and profit included in the contract price. The Scheme does not allow for the deduction of retentions. With regard to timing of payments under the Scheme, the Scheme makes a distinction between ‘relevant construction contracts’ and other construction contracts - the latter being where the contract states or the parties have estimated that the duration of the works is less than 45 days. In the case of the former, the payee is entitled to be paid the ‘contract price’ in instalments. Instalment payments under ‘relevant construction contracts’ are to be made in respect of a ‘relevant period’. In the absence of any period stated in the contract, the ‘relevant period’ is 28 days. Payment is due on the expiry of 7 days from the end of the ‘relevant period’ or on the making of a claim for payment - whichever is the later. The final payment under ‘relevant construction contracts’ (the difference, if any, between the contract price and the total of the instalments payments) is due on the expiry of 30 days after completion of the work or (whichever is later) on the making of a claim for payment. By contrast, payment of the contract price under all other construction contracts - where there is no entitlement to interim payments - is due on the expiry of 30 days following completion of the work of (whichever is later) on the making of a claim for payment. Any other payment under any contract becomes due on the expiry of 7 days following completion of the work to which the payment relates or (whichever is later) on the issue of an application from the payee. The last or ‘final date’ for any payment under any contract is 17 days from the due date. Instalment payments are calculated from commencement of the contract - this may be earlier than commencement of work on site. As to information about payment entitlement, the Scheme requires that within 5 days of each due date for payment, the payer must notify the payee of the amount (if any) to be paid and to what the payment relates and the basis upon which the amount was calculated. The notice of intention to withhold payment must be given no later than 7 days before the final date for payment as stated in the contract or, if none is stated, 7 days before the expiry of the 17 days from the due date. Although neither the Act nor the Scheme provides a sanction for failure to issue a 5 day notice, the payer may find himself in difficulties in the event of a dispute when he has not issued the notice.

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Payment and Set-off


The Late Payment of Commercial Debts (Interest) Act 1998 This Act applies to contracts for the supply of goods or services concluded on or after 1 November 1998 and will therefore apply to almost all contracts or sub-contracts which a Steelwork Contractor may enter into. At present the Act applies only to contracts which involve a ‘small business’ supplier contracting with either a UK public authority, a ‘large business’ purchaser or (in relation to contracts concluded after 1 November 2000) another ‘small business’. A small business is one which employs 50 or fewer full-time employees. A large business is any other business. The Act is being phased in and will apply to all business contracts by November 2002. Where the Act applies it implies into such contracts a right to statutory interest on late payments. At the time of writing the rate is 8% above official dealing rate of the Bank of England. Any provision in a contract attempting to exclude the right to statutory interest will be void unless the contract provides some other “substantial” remedy for late payment. In judging whether the alternative to statutory interest is a substantial remedy, regard is to be had to all of the relevant circumstances but the alternative must be sufficient to compensate the payee for late payment or to deter late payment. In addition, any exclusion or variation of the right to statutory interest must be fair or reasonable again taking into account all relevant circumstances including: •

the benefits of commercial certainty

•

the strength of the bargaining position of the parties

•

whether the term was imposed by one party to the detriment of the other (whether by the use of standard terms or otherwise)

•

whether the supplier received an inducement to agree to the term

Construction Industry Scheme The Construction Industry Scheme started on 1 August 1999 and affects almost all contractors and sub-contractors in the construction industry. A new registration card was introduced which most sub-contractors need to show to the main contractor in order to get paid. The main contractor will then make a deduction from the subcontractor’s payment on account of tax and National Insurance contributions. Construction sub-contractors within the CIS need to obtain either a registration card (CIS4) or a tax certificate (CIS5 or CIS6) from the Inland Revenue. The only exceptions to this are: •

where all of the sub-contractor’s work is for (and the sub-contractor is directly paid by) people who are not contractors (e.g. private householders)

•

the sub-contractors employer is deducting tax under PAYE for all of the sub-contractor’s work.

Payment Provisions under Standard Forms Interest on late payment under JCT and ICE forms The JCT forms provide for simple interest on late payment at 5% above the Bank of England base rate.

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Payment and Set-off The ICE 7th and CECA forms provide for compound interest at 2% above the base rate of the bank referred to in the Appendix.


Interim Payment under JCT forms All of the JCT contracts considered in this Chapter provide for interim payment. Clause 30 of JCT 98 requires the architect to issue interim certificates at the intervals stated in the Appendix, which is usually monthly. The work is valued by the quantity surveyor, but it is the architect who issues the certificates. The sums which should be included in the interim certificate are listed in clause 30.2, and are as follows: 1. The total value of work properly executed including variations, plus formula fluctuations if applicable; 2. Goods and materials on site provided they are not prematurely delivered and are adequately protected against weather and other risks; 3. At the discretion of the architect, goods and materials off site (see below); 4.

Sums in respect of 1 – 3 above due to nominated sub-contractors plus the main contractor’s profit.

All of the above are subject to retention. Certain other sums may also be included in the certificate from which no retention will be deducted. These are: 5. Statutory fees and charges; opening up and testing costs, if appropriate, royalties; premiums for subsidence insurance if required; 6. Loss and expense due to delay and disruption, and the cost of reinstatement work if the Works have been damaged by the Specified Perils; 7. Amounts due to nominated sub-contractors under the early final payment provisions; 8. Tax or conventional fluctuations if applicable; 9. Sums in respect of 5 – 8 above due to nominated sub-contractors (but note the main contractor is not entitled to add profit to these items). The valuation in accordance with clause 30.2 should take into account all work executed, materials delivered, charges incurred etc. up to the date 7 days before the date the interim certificate is issued.

Payment and Set-off Interim valuations are always carried out on a cumulative basis: the quantity surveyor will value the whole of the work executed up to the valuation date and then sums previously certified will be deducted. Under clause 30.1.1.1, the final date for payment to the main contractor is 14 days from the date of issue of the interim certificate.

Under-Certification : Contractor’s Remedies The question of the employer’s obligations where the architect has issued a certificate which states a sum much lower than should have been certified was considered it, Lubenham Fidelities v South

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Payment and Set-off Pembrokeshire District Council (1986). In that case, the Court of Appeal summarised the position in relation to under-certification as follows:-


(a) the architect’s certificate is a condition precedent to the contractor’s right to payment i.e. the contractor has no entitlement unless and until a certificate is issued; (b) even if the certificate contains obvious errors, the employer need only pay what is stated as due; (c) the error should then be adjusted in the next certificate. or if the architect will not do so, the contractor may commence arbitration proceedings; (d) the employer himself will be liable for the under-certification only if he prevailed upon the architect to under-certify or if he hindered the architect in carrying out his certification duties. If a nominated sub-contractor has suffered due to an under-certification, he can also arbitrate against the employer, using the name-borrowing procedure in clause 4.20 of NSC/C.

Nominated Sub-Contract NSC/C One of the major benefits of being a nominated sub-contractor is that payment is linked to architect’s certificates issued under the main contract. When the architect issues an interim certificate under the main contract, clause 35.13 of JCT98 obliges him to direct the main contractor as to how much of the amount certified is due to each nominated sub-contractor, and to inform the nominated sub-contractor of the amount due to him. This narrows the scope for disputes as to the value of the nominated sub-contractor’s work, which frequently occur on domestic sub-contracts. As the nominated sub-contractor will know precisely how much is due to him each month. his energies can be concentrated on extracting that sum from the main contractor. The nominated sub-contractor is entitled to be paid within 17 days of the date of issue of each interim certificate which will normally be issued monthly. The amount due to the sub-contractor will be the sum certified in his favour by the architect. This will consist of: 1.

The total value of work properly executed including variations, plus formula fluctuations, if applicable;

2. Goods and materials on site provided they are not prematurely delivered and are adequately protected against weather and other risks; 3.

At the discretion of the architect, goods and materials off site (see below).

The above will be subject to the deduction of retention, normally at 3 or 5%. Certain other sums may also be included in the certificate, which are free from retention. These are: 4. Statutory fees and charges; 5. Loss and expense due to delay and disruption; 6. Tax or conventional fluctuations, if applicable. Items 4 – 6 are treated as costs which the sub-contractor is entitled to recover in full, therefore no retention is deducted from them. Interim valuations are carried out on a cumulative basis. and therefore the “gross valuation” described above will be subject to certain deductions. These are: (i) The appropriate retention percentage (deducted from items 1 - 3 above only):

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Payment and Set-off (ii) Sums previously certified


Retention Since July 2000, BCSA members have not accepted deduction of cash retentions on any steelwork contracts. The BCSA’s policy in relation to retentions is set out in its paper “A Progressive End to Retentions” dated July 2000. Nevertheless for a number of years, it has been normal practice in construction projects for a percentage to be withheld from payments otherwise due to the contractors or sub-contractors during the course of the project to build up a retention fund. In JCT98 and NSC/C, the retention percentage will be 5% unless a lower rate is agreed and inserted in the main contract appendix. Half of the retention fund is released on the issue of the certificate of practical completion. A nominated sub-contractor is entitled to half of the retention retained in respect of his works when his work is certified as practically complete: he does not have to wait until practical completion of the main contract works. The second half of the retention fund is released on the expiration of the Defects Liability Period under the main contract, or after the issue of the Certificate of Completion of Making Good Defects, whichever is later. This may be many months, or even years after the Steelwork Contractor’s defects liability period has expired, and therefore can create cash flow problems on larger and longer contracts. However, there are arrangements for early final payment to nominated sub-contractors in JCT98 which allow for release of the second half of the retention fund within twelve months of practical completion of the nominated sub-contract works. Retention money in respect of the main contract works and nominated sub-contract works has trust status. This means that if either the employer or main contractor becomes insolvent while holding retention money in respect of nominated sub-contract work, the nominated sub-contractor is entitled to recover the retention money in full, direct from the employer if necessary. It was confirmed in the case of Re: Arthur Sanders (1981) that where a main contractor had gone into liquidation, the employer was entitled to pay retention money direct to a nominated sub-contractor, because its trust status meant that it was not subject to the normal rules on distribution of assets which apply on an insolvency (which prohibit direct payment). Under clause 30.5.3 of JCT98, nominated sub-contractors may also request the employer to pay retention money into a separate bank account: this reinforces the protection of trust status which may be lost if the retention money has become “mixed” with the other assets of an insolvent employer. As a matter of good practice, Steelwork Contractors should take advantage of this extra protection where they are nominated sub-contractors, as it will ensure that there are no arguments regarding the identification of their retention money if the employer should become insolvent.

Off-Site Goods and Materials This is a crucial issue for Steelwork Contractors, as unlike most other trades, a substantial proportion of the cost of any contract is incurred before the sub-contractor starts work on site. 7. JCT98 clause 30.3 sets out the requirements which must be met for the value of off-site materials to be included in an interim certificate. These are aimed at ensuring that the employer will acquire a good title to the goods and materials for which he is paying.

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Payment and Set-off

Domestic Sub-Contract DOM/1


The payment terms in DOM/1 are frequently misunderstood or ignored by both main contractors and their domestic sub-contractors. There are two particular misconceptions: first, that the sub-contractor’s rights to payment are in some way dependent on certification under the main contract: secondly, that DOM/ 1 is a pay-when-paid contract. Both of these are incorrect. Clause 21 of DOM/ 1 establishes a system for paying the sub-contractor which operates quite independently of what occurs under the main contract. Clause 21 provides that the first payment is due to the sub-contractor not later than one month after the date he commences work on site, or, if so agreed, off site. Subsequent interim payments are due at monthly intervals thereafter. Payments must be made within 17 days of the due date. The domestic sub-contractor is not contractually required to make applications for payment, and if he does not do so, that should not prevent timely payment in accordance with the rules explained above. However, in practice most Steelwork Contractors apply for their monthly payments as a matter of course, and this is a sound commercial approach. If, however, the main contractor claims he cannot pay a sub-contractor “because your application was late”, the sub-contractor should point out that his right to be paid is not dependent on his making an application, and that if he does not do so, it is up to the main contractor to value the sub-contractor’s work himself. One of the reasons specialist sub-contractors apply for their monthly payments is that most main contractors would have some difficulty in valuing their works, and they are far more likely to make a reasonable payment if they have received a clear application together with supporting documentation if appropriate. Under clause 21.4.4 if the subcontractor does apply for payment, he must provide “any details reasonably necessary” to substantiate his application. Normal practice should not, however, be confused with contractual requirements, and DOM/ 1 is absolutely clear that an application is not a prerequisite for payment. The amount due to the domestic sub-contractor is calculated on similar principles to those in JCT98 and NSC/C which describe what should be included in architect’s certificates. The sub-contractor is entitled to be paid for the following:1. The total value of work properly executed. including variations, plus formula fluctuations if applicable; 2. Goods and materials on site provided they are not prematurely delivered and are adequately protected against weather and other risks: 3. If the architect has exercised his discretion under the main contract. goods and materials off-site, provided the sub-contractor has fulfilled all the relevant criteria in clause 30.3 of the main contract (which are explained above under “Payment for Off Site Goods and Materials; All of the above are subject to the deduction of retention. normally at 3% or 5%. Certain other sums may also be paid which are not subject to retention. namely: 4.

Statutory fees and charges;

5. Loss and expense due to delay and disruption., 6.

Tax or conventional fluctuations if applicable.

In NSC/C and JCT98 it is clear who is obliged to value the works: the quantity surveyor, who will pass that valuation to the architect who issues the interim certificate. Under DOM/1, there is no provision requiring anyone to value the sub-contract works. They will, of course, be valued by the quantity surveyor when he is valuing the main contract works, but the figure included in respect of the sub-contract works will not be separately identified, and in any event the valuation will be at the

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main contractor’s rates for the work and may thus bear little relation to what the sub-contractor is entitled to be paid. In practice, the main contractor normally values the work, based on an application from the subcontractor and on what he thinks he is likely to be paid (or has been paid) under the main contract. This means that domestic sub-contract work is often under-valued, particularly if it includes contentious items such as variations. The sub-contractor’s only remedy may be adjudication or arbitration which is often the only way to establish how much the rules set out in 1 - 6 above will actually produce as a sum due to the sub-contractor when applied impartially. Remedies for under-valuation are considered further at the end of this Chapter under the heading of “Remedies for Non-Payment”.

Retention money The retention percentage will be 5% unless a different percentage is inserted in the Appendix to DOM/1. A note in DOM/1 states that the percentage retained should not exceed that retained under the main contract, but this is advisory, not mandatory. Half of the retention fund will be released on practical completion of the domestic subcontract works. The remaining portion of the retention fund will be paid on the expiration of the defects liability period under the main contract, or after the issue of the Certificate of Completion of Making Good Defects, whichever is later. As this will be a considerable time after the structural steelwork contractor’s defects liability period has expired, there may be cash flow implications on large contracts. Unfortunately, there are no early final payment arrangements in DOM/1. This delay should be taken into account when tendering. Retention money does not have trust status under DOM/1. This means that if either the employer or main contractor becomes insolvent while holding the domestic subcontractor’s retention money, the domestic sub-contractor will be an ordinary unsecured creditor, and will receive the same percentage payouts as any other unsecured creditor, often only a few pence in the pound.

Intermediate Form IFC98 The rules for interim payments under IFC98 are very similar to those in JCT98. Under clause 4.2 the architect issues interim certificates at monthly intervals (unless a different interval is stated in the Appendix). The sum certified must be paid within 14 days of the date of the certificate. The certificate will reflect interim valuations made by the quantity surveyor at a date not more than seven days before the date of the certificate. The composition of interim payments under IFC98 is the same as JCT98 except for the following:-

(i) Percentage Withheld The contractor is entitled to be paid only 95% of the value of work properly executed goods and materials on site and, if appropriate, goods and materials offsite. The 5% withheld will be released to the contractor on the same basis as retention money is released under JCT98. Although it is not designated as “retention money” under IFC98, it fulfils exactly the same function and is subject to similar rules. As far as the main contractor is concerned the percentage withheld has trust status unless the employer is a local authority.

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Payment and Set-off

(ii) Payment for Off-Site Goods and Materials Clause 4.2.1(c) provides that the contractor may be paid the value of off-site goods and materials.


Named Sub-Contract NAM/SC The provisions for interim payment in NAM/SC follow those in DOM/1. The “percentage withheld”, the equivalent of retention, will always be 5% before practical completion and 2.5% thereafter. As in DOM/1, the percentage withheld under NAM/T does not have trust status.

Domestic Sub-Contract IN/SC The provisions for interim payment in IN/SC also follow those in DOM/1. Management Contract 1998. The composition of payments due to the Management Contractor differs from that in other JCT standard forms. There are two reasons for this: first, the Management Contract is a prime cost contract: secondly, there are two distinct periods during which payments are made - the Pre-Construction Period and the Construction Period. During the Pre-Construction Period, the architect must issue certificates at the periods specified in the Appendix. These certificates will consist of instalments of the Pre-Construction Period Management Fee, which is separately quoted and will also appear in the Appendix. During the Construction Period the architect will issue certificates at monthly intervals. The sums which should be included in those certificates are as follows:(i) Amounts due under the various Works Contracts, less any retention; (ii) Amounts for site staff general facilities, site facilities, services and materials provided by the Management Contractor which will be calculated in accordance with the Second Schedule definition of prime cost less retention; (iii) The Pre-Construction Period Management Fee (although this will have already been paid - it is included here because all valuations are on a cumulative basis); (iv) An instalment of the Construction Period Management Fee, adjusted where appropriate (the Fee will be adjusted if the prime cost of the project is more than 5% more or less than the contract cost plan); (v) Any other expenditure incurred by the Management Contractor. From the total of those sums the following are deducted:(i) Any payments or credits which the Management Contractor has received for materials; (ii) Any other payments or credits which the Management Contractor has received to which the employer is entitled (e.g. liquidated damages from Works Contractors); (iii) Amounts previously certified. Payments should be made to the Management Contractor within 14 days of the issue of each interim certificate. The retention percentage under the Management Contract will always be 3%: this is to reflect the high value of projects for which the contract is designed.

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Payment and Set-off

Works Contract/2


The payment arrangements for Works Contractors are similar to those for nominated subcontractors. In his interim certificates issued under the Management Contract, the architect must direct the Management Contractor as to the amount certified in respect of each Works Contractor, (if the Works Contractor has executed the standard Employer/Works Contractor Agreement Works Contract/3, the Works Contractor can also insist upon being informed directly by the architect of the amounts certified in his favour). Although the Works Contractor is not contractually obliged to apply for payment, he may do so if he wishes, and the Management Contractor must pass that application on to the architect. The composition of payments due to Works Contractors is the same as the composition of payments due to nominated sub-contractors under NSC/C. Payments must be made to Works Contractors within 17 days of the date of issue of interim certificates under the Management Contract. As under the Management Contract, retention will always be at 3% prior to practical completion, and at 1.5% thereafter. Retention money in respect of the various Works Contracts has trust status in the hands of both the Management Contractor and employer, and therefore it is protected if either of them should become insolvent. The Works Contractor has the option to require his retention to be held in a separate bank account unless the employer is a local authority.

ICE 7th Edition Under the ICE conditions unlike the JCT forms, it is the Contractor who triggers the payment mechanism. Under clause 60(1), the Contractor must submit a statement to the Engineer at the end of each calendar month which shows: (i) the estimated value of the works executed up to the end of that month; (ii) a list of any unfixed goods or materials delivered to site and their value; (iii) a list of off-site goods and materials (provided certain conditions have been satisfied - see below) and their value; (iv) any other amounts to which the Contractor considers himself entitled (e.g. variations. fluctuations etc.). The Contractor must also list separately the amounts payable in respect of each nominated sub-contractor. The form of the Contractor’s statement may be prescribed in the specification, and if so that form must be used. If a form is not included in the specification, the Contractor should ensure that a reasonable level of detail is given, and in particular that the value of permanent work (item (i) above) is calculated by reference to detailed quantities and rates. Within 28 days of the delivery to the Engineer of the Contractor’s monthly statement the Engineer must certify and the Employer pay the amount due. The amount certified should comprise: (a) the amount which in the Engineer’s opinion is due in respect of (i) and (iv) above (permanent works and other amounts) less retention: (b) such amount as the engineer considers proper in respect of (ii) and (iii) above (on-site and off-site goods and materials) subject to a limit of the percentage of the value stated in the Appendix to the Form of Tender. No retention is deducted from these payments, but the Engineer has a wide discretion in respect of unfixed goods and materials.

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Payment and Set-off Amounts certified for nominated sub-contractors are to be shown separately on the certificate.


A minimum value below which the Engineer need not issue a certificate will be specified in the Appendix to the Form of Tender but in some circumstances the Engineer may choose to issue a certificate below this limit, for example, to clear a small balance on completion of the works.

Retention Money The ICE 7th provides for a retention calculated at the rate set out in the Appendix to the Form of Tender. Half of the retention fund will be released to the contractor within 14 days of the issue of a Certificate of Substantial Completion and the remainder within 14 days of the expiration of the Defects Correction Period applicable to the works, save that if defects remain outstanding or tests are required, the employer may withhold the cost of that remedial work or testing. Steelwork Contractors should note that although retention funds under ICE are generally smaller than those under the JCT forms, the ICE does not give retention money trust status. Accordingly, the contractor and sub-contractors will be unprotected in the event of the insolvency of the employer.

Payment for Off-Site Goods and Materials The Engineer has a discretion to include the value of off-site goods and materials in interim certificates provided certain conditions are satisfied. These conditions are: (i) the goods and materials must have been listed in the Appendix to the Form of Tender; (ii) the goods and materials are substantially ready for incorporation into the works (this rules out payment for “black” steel); (i) the Contractor can prove that he has or will acquire a good title to the goods. The action required of the Contractor (or his supplier) in this respect is listed in clause 54(2). It comprises: (a) providing documentary evidence that property in the goods and materials has vested in the Contractor: (b) suitably marking or otherwise identifying the goods to show they are the Employer’s property and that they are destined for the site, (c) setting aside and storing them to the satisfaction of the Engineer. (d) sending the Engineer a schedule listing and giving the value of the goods and materials, and inviting him to inspect them. The requirements are therefore not dissimilar to those in JCT98. Steelwork Contractors should be aware that even if they follow this detailed and time-consuming procedure to the letter, it remains a matter for the discretion of the Engineer whether the value of off-site goods and materials is certified: these are the pre-conditions which must be satisfied before he can even consider doing so but fulfilment of them does not mean that he must include them in a certificate. If the Engineer does exercise his discretion no retention is deducted from the payment; the relevant percentage will be deducted when the goods and materials are incorporated into the works.

CECA Sub-Contract The payment procedure is set out in clause 15, which requires the sub-contractor to submit a written statement of the value of his work, similar to that required of the main contractor under the ICE 7th. The statement must be submitted to the main contractor at least 7 days before he is required to

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Payment and Set-off submit his statement under the main contract: this date is inserted in the First Schedule to the Sub-Contract and is referred to as the “Specified Date”. The statement will include the value of on-site goods and materials and, if allowable under the main contract the value of off-site goods and materials as well as the value of work properly executed. Payment for off-site goods and materials will not be contemplated unless they are listed in the Appendix to the Form of Tender for the main contract. Accordingly, if the Steelwork Contractor is to he employed as a sub-contractor under this form of sub-contract he should endeavour to ensure that prefabricated steelwork items are included in that Appendix, by means of direct arrangement with the Engineer if necessary. The main contractor is bound to incorporate statements from the sub-contractor in his applications for payment under the main contract. Payment becomes due to the sub-contractor within 35 days of the “Specified Date”, and will comprise the value of work and materials included in the sub-contractor’s statement calculated in accordance with the rates and prices specified in the sub-contract or by reference to the price if it is a lump sum contract. Previous payments and retention money will be deducted. Clause 15(3) permits the main contractor to withhold or defer payment where: •

the amount claimed does not exceed the minimum amount stated in the Third Schedule

•

the amount claimed is insufficient to justify the issue of an interim certificate under the main contract

•

the amount claimed is not certified in full by the Engineer (providing the reason for noncertification is not due to act or default of the contractor)

•

the Engineer has certified the Employer is insolvent

•

a dispute exists between the sub-contractor and the contractor and/or the contractor and the employer in relation to the amount claimed

Steelwork Contractors should take into account the risk of delayed or withheld payment when tendering for sub-contracts based on the CECA form.

Retention Money Retention money will be deducted from interim payments due to the sub-contractor at the rate specified in the Third Schedule to the CECA form. Release of retention money is linked to its release under the main contract: the first half will be due. within 35 days of the Engineer’s certificate which includes retention under the main contract. The final date for payment of the first half of the retention is 7 days later. The remainder of the retention is due within 28 days of the issue of the Defects Correction Certificate under the main contract. The final date for payment is 7 days later. Like the ICE main form, retention money does not have trust status therefore the subcontractor will be unprotected if either the employer or main contractor goes into liquidation while holding retention in respect of the sub-contract works.

Set-Off One of the greatest commercial advantages an employer or a main contractor has is the ability to deduct money from payments due to his contractors or sub-contractors. If he has a claim against a contractor or sub-contractor during the progress of the works, he will be negotiating from a position of strength because he has the money; the contractor or sub-contractor has the much more difficult task of trying to get it back.

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Payment and Set-off


As stated at the beginning of this Chapter, the Housing Grants, Construction and Regeneration Act 1996 provides that payment may not be withheld after the final date for payment unless proper notice of intention to withhold payment has been given.

JCT main and sub-contract forms JCT98, NSC/C, DOM/1 all provide for the payer to give notice to the payee not less than 5 days before the final date for payment of amounts due if the payer intends to withhold payment specifying the amount to be withheld and the reason or reasons for doing so.

ICE 7 th Clause 60(10) provides for the Employer to notify the Contractor not less than 1 day before the final date for payment specifying the amount to be withheld and the reason or reasons for doing so.

CECA Sub-Contract Clause 15(9) provides for notice of any withholding of payment to be given not less than 1 day before the final date for payment.

Works Contract/2 Like the JCT forms, this provides for notice of withholding to be given not less than 5 days before the final date for payment.

Final Payment Final payment is an important issue for Steelwork Contractors because they are involved at the very early stages of the building process. Unfortunately, only one contract, the nominated sub-contract NSC/C, provides for early final payment to sub-contractors. In all other cases the Steelwork Contractor will have to wait for months, or sometimes years, before he receives payment of his final account. The adverse effect on cashflow of these arrangements can be lessened, to some extent by obtaining the maximum sums in interim payments and leaving as little as possible to be agreed at the final account stage. Agreeing lump sum prices for variations, compromising on loss and expense claims and keeping retention money at the lowest possible level (i.e. 3 rather than 5%) will all help to ensure that only a small retention percentage remains outstanding from the time the sub-contractor completes his work until the main contract final account is settled.The timetable for agreeing and paying final accounts under each of the different forms of contract is described below.

JCT98 Clause 30.6 of JCT 98 provides that within six months of practical completion of the main contract works, the main contractor must send to the Architect all the documents relevant to the preparation of the final account. The Quantity Surveyor then has three months from receipt of that information to ascertain any loss and expense and to prepare a statement of all the necessary adjustments to the contract sum. The Architect is required to issue a final interim certificate which includes the final adjustment of all Nominated Sub-Contract sums. This certificate will be issued at least 28 days before the final certificate is issued. In practice, it will probably be issued a month before the final certificate, although the clause requires It to be issued “so soon as is practicable”.

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Payment and Set-off The final certificate itself is issued within two months of: (a) the end of the Defects Liability Period; or


(b) the date of issue of the Certificate of Completion of Making Good Defects: or (c) the final statement of adjustments prepared by the Quantity Surveyor, whichever is the later. The final date for payment to the contractor of the amount shown in the final certificate is 28 days from the date of issue of the Final Certificate. The Final Certificate is conclusive evidence that: (i) where the quality of workmanship or materials is to be to the reasonable satisfaction of the Architect, they are to his reasonable satisfaction (this does not mean the main contractor is released from liability for all patent (i.e. obvious) defects as many people suppose). See Chapter 6 under ‘Contractual Effect of Certificates’ and under ‘Final Certificate under JCT98’; (ii) that the Contract Sum has been correctly adjusted save for accidental or arithmetical errors; (iii) that all extensions of time have been awarded; (iv) that all loss and expense has been awarded.

Nominated Sub-Contract NSC/C Under clause 4.23 or 4.24 of NSC/C (as applicable), within six months of practical completion of the sub-contract works, the sub-contractor must send to the main contractor the documents necessary for computing his final payment: this will normally be a formal application backed up by any relevant invoices, daywork sheets, copies of Architect’s instructions etc. Within three months of the Contractor receiving these documents, the Architect or Quantity Surveyor must prepare a statement showing the final sum which the sub-contractor is entitled to be paid. Thus, within nine months of practical completion the Steelwork Contractor should know the amount of his final account. Unfortunately, there will often be some considerable delay before it is actually paid to him. If he cannot obtain early final payment under clause 4.16.2, the certificate containing his final payment need not be issued until 28 days before the issue of the final certificate for the main contract works, which will be at least six months after the main contract works are complete. Clause 30.7 of the main contract obliges the Architect to issue a certificate which includes the finally adjusted sums due to all nominated sub-contractors “so soon as is practicable”, but does not specify that early nominated trades should be treated separately. The early final payment provisions are therefore very important for Steelwork Contractors. The nominated sub-contractor will only be entitled to early final payment where he has entered into the Employer/ Nominated Sub-Contractor agreement NSC/W. If that requirement is satisfied, the Architect must certify final payment for the sub-contractor within twelve months of practical completion of his works provided: (i) the sub-contractor has remedied all defects in his work: and (ii) the sub-contractor has provided the main contractor with all the information necessary for the computation of the final account. If he so wishes, the Architect is permitted to certify early final payment to the nominated sub-contractor before the twelve month period from practical completion has expired. For the effect of the final certificate, see the comments under JCT 98.

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Payment and Set-off


Domestic Sub-Contract DOM/1 Under clause 21 of DOM/1 not later than four months after practical completion of the sub-contract works, the sub-contractor must provide the main contractor with all the information he requires to calculate the final payment. The final payment becomes due to the sub-contractor 7 days after the Architect issues the final certificate under the main contract and must be made within the next 28 days. Before the final payment becomes due, the main contractor must notify the domestic sub-contractor of the amount of the final payment which will be made to him.

Intermediate Form IFC98 The final payment arrangements in IFC98 are identical to those in JCT98 save that there is of course no mention of nominated sub-contractors. As named sub-contractors are treated as domestic sub-contractors under IFC98, they are not specifically referred to in the main form.

Named Sub-Contract NAM/SC The final payment provisions in NAM/SC are exactly the same as those in DOM/ 1.

Domestic Sub-Contract IN/SC The final payment provisions in IN/SC are in identical terms to those in DOM/ 1.

Works Contract/2 The rules governing final payment of Works Contractors in Works Contract/2 are the same as those in NSC/C, save that there is no provision for early final payment of Works Contractors.

ICE 7 th Edition Under clause 60(4) of the ICE 7 th the main contractor must submit a statement of his final account and supporting documents to the Engineer within three months of the date of the

Defects Correction Certificate. The Defects Correction Certificate under the ICE 7 th does not have any final and conclusive effect unlike its equivalent in the JCT forms.

CECA Sub-Contract Clause 15(6) of the CECA form deals with final payment. The Contractor must make final payment to the sub-contractor either: •

within three months of the end of the maintenance period; or

•

within 14 days of the main contractor recovering full payment for the sub-contract works under the main contract

whichever is the sooner. The sub-contractor must submit a “valid statement” of his final account in a form and containing such details as the main contractor may reasonably require, at least one month before the final payment is made. Accordingly, it would be advisable for the sub-contractor to apply for his final payment as soon as possible after he has completed his work.

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Payment and Set-off


Remedies for Set-off and other Non-Payments As stated at the beginning of this Chapter, the Housing Grants, Construction and Regeneration Act 1996 provides that where a sum due has not been paid by the final date for payment and no effective withholding notice has been given, the party to whom payment is due has the right (in addition to any other rights he may have) to suspend performance of the contract provided that he first gives the other party at least 7 days notice of his intention to suspend stating the reason or reasons for suspension. In addition the conditions of contract may provide an express right to interest for late payment, for instance clause 21.3.4 of DOM/1. Also, the Late Payment of Commercial Debts (Interest) Act 1998 implies a right to statutory interest on late payments. Other remedies available under the standard forms are:

1. Direct Payment JCT98 and ICE 7th provide for direct payment to nominated sub-contractors. Under JCT98, nominated sub-contractors are contractually entitled to direct payment from the Employer provided two conditions are satisfied: (i) they are employed as nominated sub-contractors on the basis of the standard form of nominated sub-contract NSC/C; and (ii) they have entered Into the standard Employer/Nominated Sub-Contractor agreement NSC/W. If condition (ii) is not satisfied, i.e. there is no NSC/W, the direct payment machinery still applies, but it will only be operated at the Architect’s discretion and therefore the subcontractor cannot insist on direct payment. The direct payment procedure, which is set out in clauses 35.13 of JCT98 is summarised below: (a) before the issue of each interim certificate, the main contractor must provide the Architect with reasonable proof that he has paid the nominated sub-contractor the sums due to him under the last certificate (or that he is not obliged to do so because, for example, he has set-off money in accordance with the set-off rules in NSC/C); (b) if he cannot provide that reasonable proof, the Architect issues a certificate to that effect, and copies that certificate to the nominated sub-contractor; (c) the Employer then deducts that unpaid sum from the next payment due to the main contractor and pays it direct to the nominated sub-contractor. The Employer is not bound to pay to the nominated sub-contractor more than he can deduct from the main contractor, so the Employer should never be out of pocket due to a direct payment. If direct payments are due to a number of nominated sub-contractors and the amount certified in favour of the main contractor is not enough to meet all the direct payments in full, the Employer can either pay the sub-contractors pro rata or split the payment on any other basis which he considers to be fair and reasonable. Because of the way in which the procedure operates, direct payment is always one certificate behind, so it is not an ideal basis upon which to work for any length of time. It is, however, a good deal better than most of the other remedies considered here, and is therefore a very real benefit of the current system of nomination. One very important limitation on direct payment is that the sub-contractor’s rights cease automatically if the main contractor goes into liquidation. Although this may seem illogical. being the very time when direct payment would most benefit a sub-contractor, the JCT were forced to introduce this rule

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Payment and Set-off


by court decision in the case of British Eagle-International Airlines v Compagnie Nationale Air France (1975). In that case it was held that any arrangement which directs payment from an insolvent company straight into the hands of an unsecured creditor is void as being contrary to the Companies legislation and public policy. This is because all payments due to the insolvent company must be distributed in accordance with the rules for payment of secured and unsecured creditors. Sub-contractors should note that, technically, the direct payment provisions will still operate where an administrative receiver or administrator has been appointed to the main contractor, although in practice it may be difficult to persuade the Employer to make a direct payment in these circumstances. Under Clause 59(7) of ICE 7th the Employer has the discretionary right to make direct payments to nominated sub-contractors. The Engineer may demand from the main contractor reasonable proof that he has discharged his liability to pay amounts included in previous certificates for nominated sub-contractors. If the main contractor cannot do so, and cannot show reasonable cause for his failure to pay, the Employer may make a direct payment.

2. Determination All of the standard forms of sub-contract except NSC/C and the CECA form have express provisions allowing sub-contractors to determine their own employment due to non-payment. However, determination is only permitted where there is no other remedy in the subcontract which would adequately recompense the sub-contractor, and as suspension is normally available, the right to determine for non-payment is very rarely used.

3. Dispute Resolution Proceedings Late or non-payment may trigger the dispute resolution provisions specified in the contract or implied by statute. See Chapter 19 - Disputes and Legal Proceedings.

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CHAPTER 8


FLUCTUATIONS Introduction After a Steelwork Contractor has tendered for a contract, there is a likelihood that the cost of carrying out the work will increase due to rises in material prices and labour costs. There may also be changes in the rates and types of taxes he has to pay. There are two possible ways of dealing with this: either the Steelwork Contractor can estimate what those changes will be and make an allowance in his price for them (a fixed price contract); or the contract can provide a mechanism for the measurement and recovery of the changes (a fluctuating price contract). Clauses which deal with such price changes are variously known as contract price adjustment clauses (CPA clauses), variation of price clauses (VOP clauses), or, more commonly, fluctuations clauses. The Steelwork Contractor should be told when he is invited to tender whether the contract will be fixed price or, if it is to be fluctuating, the basis upon which fluctuations will be recoverable, as this will obviously be crucial to the estimating process. There are four types of fluctuations clauses: 1. formula fluctuations 2. conventional or full fluctuations 3. tax fluctuations 4. civil engineering fluctuations Each of the first three is considered below in relation to JCT contracts. There is also a brief section at the end of this Chapter on fluctuations under the ICE forms.

Choice of Fluctuations provisions All of the standard JCT contracts and their related sub-contracts provide for the three possible methods of calculating fluctuations described above with the exception of the Intermediate Form IFC98 and its related sub-contracts, which do not provide for the recovery of conventional or full fluctuations. The applicable clause will be indicated either in the contract appendix, or where there is a standard form of tender, in the tender document. If no selection is made or if neither full nor formula fluctuations are stated to be applicable, the Choice of Fluctuations provisions clause in the JCT forms provides that the Tax Fluctuations clause will apply. However, this is sometimes deleted and the contract is made totally fixed price, with the contractor taking the full risk of any cost increases, including those due to a change in the rate or type of taxes.

1. Formula Fluctuations Formulae to measure fluctuations were first developed in the mid-1970’s in response to a decision by the Government in December 1973 to abandon its policy of requiring contracts of up to two years duration to be on a fixed price basis. Two schemes were developed by a Steering Group of the Economic Development Council using a

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Fluctuations


formula for general building contracts based on Work Categories and a number of specialist formulae for certain trades. including structural steelwork. A separate Steering Group developed formulae for use on civil engineering contracts, (this is often referred to as the “Baxter Formula”). Formula fluctuations payments are linked to movements in various indices. Those indices are based on national averages of the cost of labour and the cost of materials. For this reason, formula fluctuations payments will not necessarily reflect the actual increases incurred by any particular contractor. However, the disparity between actual cost fluctuations and formula recovery should not be great, and many contractors feel that the administrative convenience of the formula outweighs any minor under-recovery. In particular, contractors do not have to expend time and costs to prove increases in cost as the contract value will automatically be adjusted against Index movements. The operation of the formula will be governed by the version of the JCT Formula Rules applicable to the particular contract. The JCT has produced a set of Formula Rules for each of its main contracts.

(a) Application of the Formula to Structural Steelwork The JCT Sub-Contract/Works Contract Formula Rules provide two possible methods of calculating fluctuations in the value of structural steelwork: (i) by using the specialist formula for structural steelwork set out in Part III of the Rules: or (ii) by using the Work Category or Work Group Method, which contains a Work Category for Steelwork numbered 2/27. The Work Category or Work Group Method is not normally appropriate for use by Steelwork Contractors. Work Category 2/27 uses a composite index the materials element of which is derived from the same materials index as the Specialist Steelwork Formula, but the labour element is based on the wage rates for labour employed in the general building industry. The advice in this Chapter is therefore confined to the operation of the Specialist Steelwork Formula.

(b) Work Not Subject to Formula Adjustment - Rule 4 Certain work is excluded from formula adjustments: (i) work valued as daywork; (ii) imported goods (actual fluctuations in the cost of imported goods will be recoverable under the formula fluctuations clause provided the relevant goods have been listed in the subcontract tender form or the sub-contract appendix, as applicable); (iii) any work valued at fair rates and prices. current when the work is carried out e.g., a variation which is not of similar character to work included in the sub-contract documents; (iv) direct loss and expense; (v) any other amount paid to the Steelwork Contractor which is based on costs actually incurred by him.

Description of the Structural Steelwork Indices (c) Cost of Labour The index which is applied in respect of both fabrication and erection under all the steelwork formulae

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is designated “Cost of Labour in Fabrication and Erection of Steelwork”. It is based on average earnings in the mechanical engineering Industry drawn from Table 127 (Mechanical Engineering) of the Department of Employment Gazette, it also takes into account: Employer’s Liability Insurance; National Insurance; annual holidays and public holidays; Sick Pay; and EITB Levy. The average earnings’ index is then related to average weekly hours worked as shown by Table 121 (Engineering, shipbuilding, electrical and metal goods) of the Department of Employment Gazette. The Index is calculated on a four-month moving average in order to mitigate seasonal fluctuations. Using the moving average means that the “troughs” in the movements of Table 127 in the summer at the time of works shut-downs, and in the winter at Christmas, are eliminated. In fact, although “smoothed” by this average, the Cost of Labour index has consistently gone up, which is the natural consequence of the fact that some 5000 firms supply the basic data to the Department of Employment for the production of Table 127; and that the agreements which they are reaching with their work forces are spread throughout the whole year. Thus although a Steelwork Contractor may have one Wage Agreement with his work force in any one year, which means that his labour costs jump up dramatically in one month of the year, his recovery will be spread over that year through the contracts which he has subject to formula adjustment. The Index values are published in monthly Bulletins. The Bulletin for any particular month normally has the Labour Index for the previous month on a provisional basis. It is published on a provisional basis for three months before going firm, and no provisional Index, once published, is changed until it becomes firm. (See below under “Index Numbers”).

(d) Cost of Materials The Materials Index used with all the formulae is prepared by the Department of Trade and Industry under Code No. 3112.920. The Index is deemed to cover all types of steel since separate consideration for steels of different qualities is neither desirable nor practicable. different The Index is, however, designed to reflect the extras charged by Corus in respect of sections rolled and sizes cut. Allowance is also made for Corus’s Inland Freight charges. No allowance is made for hollow sections. The only prices used in the Materials Index are Corus’s prices - no allowance is made for the price of imported steel nor that obtained from stockholders. In order to clarify misunderstandings which existed concerning the treatment of rebates in the make-up of the Materials Index, it is agreed by BCSA and PSA that the Index does, and will continue to, take into account any rebate which may be offered from time to time and is freely available to all purchasers, i.e., the Index is, and will continue to be based on the nett value of the published price less rebates. The Materials Index incorporates the price level current in the month to which the Index No. refers calculated on a weighted basis to represent the average price level for the month. Where Corus makes selective or different increases, e.g. they put up the prices of only some of the items included in the Index, the movement of the Index value as a whole will be “damped” by the weightings of the items not subject to the increase. Thus, for example, if Corus increase Plate prices by 10%, since the Plate weighting is 47.5% the Index Value will move upwards by only 4.75%. The effect of this is that differential price increases by Corus result in over-recovery on contracts using materials which are not increased and, conversely, under-recovery on contracts using increased materials. The overall effect over a period of time should not be great. but particular contracts may either over-recover or under-recover.

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Fluctuations (e) Non-Adjustable Element


On local authority contracts, a non-adjustable element will apply to formula fluctuations. This is a deduction from the fluctuations payments at the rate specified is the standard form of tender or the sub-contract appendix, as applicable. The rate must not exceed 10% and no deduction should be made where the Employer is not a local authority.

(f) Negative Fluctuations Throughout this Chapter, reference is made to the various methods of calculating fluctuations in the context of recovering increases in cost. However, occasionally, costs will drop rather that rise, and in these circumstances whichever of the fluctuations clauses applies to the contract will operate to reduce the amount the contractor or sub-contractor is entitled to be paid.

2. Conventional or Full Fluctuations - JCT 98 clause 39 This is the basis of fluctuation under which the contractor should recover a sum very close to the actual variations in his costs. However, the procedure is cumbersome to operate and therefore it is infrequently used. The JCT contracts deal separately with labour and material costs in this respect; these are considered in turn below.

(a) Labour Three categories of labour are covered by the clause: (i) workpeople working on site. e.g. steelwork erectors; (ii) workpeople directly employed by the contractor working off site, to the extent that they are working on materials or goods for the works, e.g., Steelwork Contractors; (iii) site staff, such as contract managers, provided that they are employed on site for at least two whole working days per week. The fluctuations recoverable in respect of (i) and (ii) above (i.e. workpeople on and off site) will be the net amount of any increases in: –

wages

–

other emoluments

–

expenses, including holiday credits

due to an alteration in the rules, decisions or agreements of the National Joint Council for the Building Industry or other relevant wage fixing body, provided the alteration is promulgated after the Base Date identified in the Contract. Consequential increases in the cost of employers’ liability and third party insurance and taxes, contributions and levies paid by the contractor in his capacity as an employer will be added to the fluctuations payments. Recovery of actual variations in labour costs is restricted by the rule that only increases due to a change in the relevant national agreement will be payable. Most employers treat the rates promulgated by the relevant wage fixing body as a minimum, and actually pay their labour at a higher rate.

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Fluctuations However, for fluctuations purposes, they are treated as being paid at the relevant nationally agreed rate. Thus, for example, if a Steelwork Contractor pays his labour at the rate of £10 per hour, and the nationally agreed rate is £5 per hour which is increased to £6 per hour (i.e. by 20%), the fluctuations recoverable will be calculated on the basis of an extra £1 per hour, not on the basis of an additional 20% of the rate actually paid, which would be £2 per hour. Further if the Steelwork Contractor is forced by local conditions to increase the rates he pays to his workpeople, such an increase will not be recoverable under the fluctuations clause because it is not due to a change in the rules, decisions or agreements of a national wage-fixing body. The JCT fluctuations clauses contain specific provisions to deal with changes in fares paid to workpeople. They provide two possible methods of calculation: (i) the contractor produces a list of the basic transport charges he incurs in respect of labour both on and off site (excluding site staff), and if those charges rise after the Base Date he is paid the net amount of the increase; or (ii) the fares which the contractor is required to reimburse to his on and off site labour (again excluding site staff) by the relevant national agreement are the benchmark, and if there is either any change in the national agreement relating to the reimbursement of fares or if the actual fares rise, the Contractor will be paid the net amount of the increase. In addition to the cost fluctuations described above, the contractor will also be entitled to any increase in labour costs due to a change in the rate or type of tax, contribution or levy in accordance with exactly the same rules as those described in connection with clause 38 of JCT 98.

(b) Staff As with tax fluctuations, special arrangements apply to the recovery of fluctuations in labour costs relating to site staff. Actual increases in cost are not paid. but a notional amount for site staff is added to the fluctuations payable in respect of a craftsman paid at the highest rate under the relevant national agreement. It is likely to bear little relation to the actual cost fluctuations in employing site staff, but it will go some way towards recompensing the contractor - indeed on occasion he may even be paid more that the actual changes, which are completely ignored for the purposes of this clause. The payment for site staff is proportionate to the amount of time spent on site by the staff so if a contracts manager spends three whole working days a week on site, fluctuations will be paid in respect of him at three fifths of the weekly amount paid for a craftsman at the highest rate. Parts of days are not taken into account when calculating how many days staff spend on site, nor may parts of days be aggregated. Thus if a contracts manager spends five mornings a week on site, no fluctuations will be payable in respect of him.

(c) Materials Fluctuations in materials costs are assessed by reference to a list of market prices prepared by the contractor. In the main contract, this list will be set out in the contract bills, or if there are no bills of quantities, in the specification. In sub-contracts where there is a standard form of tender, such as NSC/T the list will be set out there. In domestic sub-contracts, the list is attached to the sub-contract appendix. The contractor is entitled to recover increases in the market price after the Base Date up to the date he actually purchases the materials. Changes in the cost of electricity (and other fuels if specifically so stated in the contract documents) will also be recoverable, providing the electricity or other fuels

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Fluctuations are consumed on site for the execution of the works. Contractors should remember to include the market price of electricity and, where appropriate, other fuels, in the list mentioned above.


Changes in market prices due to changes in duty or tax (except VAT) are also payable under this clause.

(d) Other Rules relating to Conventional Fluctuations The rules relating to domestic sub-contracts notice requirements, freezing, work to which fluctuations do not apply and the percentage addition set out below in relation to tax fluctuations apply equally where full fluctuations are recoverable. The notice requirements are particularly onerous as there may be many changes in the market prices of materials and goods on a complex contract and this is one of the reasons why the clauses are seldom used.

(e) Full Fluctuations Not Applicable to IFC98 IFC98 does not provide for full or conventional fluctuations. The clauses were felt to be inappropriate to a contract intended for less than a year’s duration and IFC98 therefore only provides for tax or formula fluctuations.

3. Tax Fluctuations JCT 98 clause 37 Under the JCT standard forms, tax fluctuations are defined as a change in the rate or type of contribution, levy, or tax after the Base Date (which is a date stated in the contract appendix). Two changes are expressly excluded from the definition of contribution, levy and tax: VAT and CITB levy. Any cost increases arising out of changes in such charges will therefore be borne by the contractor or sub-contractor who has incurred them. It is important to appreciate that the variation in price must be due to a change in the rate or type of tax. For example, if the amount of an employer’s national insurance contributions were to be increased by legislation, that would be a change in the rate of tax, levy, or contribution and would therefore be recoverable as a tax fluctuation. If, however, wages were increased due to an agreement with the relevant union, one consequence of that would be that the employer’s national insurance contribution would increase, but this would not be caused by a change in the rate or type of tax and would therefore not be recoverable as a tax fluctuation. The tax fluctuations clauses in the JCT forms deal separately with labour and materials costs: these are considered in turn below.

(a) Labour Tax fluctuations are recoverable on costs related to: (i) workpeople working on site, e.g. steelwork erectors; (ii) workpeople directly employed by the contractor working off site, to the extent they are working on materials or goods for the works, e.g. Steelwork Contractors; (iii) site staff, such as contract managers, provided they are employed on site for at least two whole working days per week.

(b) Staff Special arrangements apply to the recovery of tax fluctuations in labour costs relating to site staff. The actual tax fluctuations relating to site staff are not paid, but a notional amount for site staff is

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added to the fluctuations paid in respect of workpeople. The notional amount is the sum which would have been recoverable for a craftsman paid at the highest rate under the relevant national agreement it may bear little relation to the sum the contractor or sub-contractor actually has to pay in respect of his site staff but it is at least some recompense. The additional payment will be proportionate to the amount of time spent on site by the staff, so if a contracts manager spends three whole working days a week on site, fluctuations will be paid in respect of him at three fifths of the weekly amount paid for a craftsman at the highest rate. Parts of days are not taken into account when calculating how many working days staff spend on site, nor may parts of days be aggregated. Thus if a contracts manager spends five mornings a week on site, no fluctuations would be payable in relation to him.

(c) Materials As with fluctuations in labour costs, only variations in price due to a change in the rate or type of tax will be recoverable. Changes in the rate of VAT are expressly excluded from the standard JCT clauses, but changes in all other taxes and duties payable on the import, purchase, sale, appropriation, processing or use of materials and goods are covered. Tax fluctuations in the cost of electricity are also payable, and the employer has the option of allowing fluctuations on other types of fuel as well. The materials, goods, electricity and fuels on which fluctuations are to be recovered must be listed in the contract documents. In the main contract, the list will be set out in the contract bills or, if there are no bills of quantities, in the specification. In sub-contracts where there is a standard form of tender, such as NSC/T or NAM/T, the list will be set out there. In domestic sub-contracts, the subcontractor compiles the list, which is then attached to the sub-contract appendix. Materials and goods must be included in the list if fluctuations are to be recovered in respect of them, so it is in the sub-contractor’s own interests to compile and check the list with great care. Where only tax fluctuations are recoverable, there is no need for the list to include prices.

(d) Domestic Sub-Contractors If tax fluctuations are applicable to the main contract, the contractor should incorporate the same provisions in all domestic sub-contracts. This is often not done, particularly where a non-standard form of domestic sub-contract is used, and sub-contractors should bear in mind that if the main contractor does not pay them tax fluctuations where they are recoverable under the main contract, he is in breach of his contract with the employer.

(e) Notice The contractor must give written notice to the Architect of any event giving rise to a payment or recovery under the fluctuations clauses. The notice must be given within a reasonable time of the occurrence of that event. Failure to give the appropriate notice means that fluctuations will not be paid: the contract expressly states that the notice is a condition precedent to the recovery of fluctuations. This was confirmed by the Courts in the case of John Laing v County and District Properties (1982).

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e) “Freezing” of Fluctuations The contractor or sub-contractor may not recover tax fluctuations where the change in the rate or type of tax occurs during a period of culpable delay. This is sometimes described as the "freezing" of fluctuations, and is based on the principle that if the contractor or sub-contractor is not entitled to an extension of time for a delay, he should bear all the costs of that delay. The JCT clauses provide that this “freezing” shall operate only where the clause which sets out the entitlement to extensions of time, is unamended and where the Architect, or main contractor as appropriate, has responded to all of the contractor’s or sub-contractor’s applications for an extensions of time.

(f) Work to which fluctuations will not apply Certain work is excluded from the operation of the fluctuations provisions, in particular work paid for on a daywork basis.

(g) Percentage Addition The amounts paid to the contractor under the rules set out above will not compensate him for the full cost of changes in tax, because they do not include the full costs of supervisory staff and allow nothing for plant costs and head office overheads. There is therefore a facility in the appendix to the main contract for a percentage to be added to fluctuations payments to take account of such costs. A similar facility is included in the appendix to the domestic sub-contracts and in the tender documents for the nominated and named sub-contracts. The percentage will be stipulated by the employer, and is usually at a fairly low level such as five or ten per cent. Some employers may delete the facility altogether, or specify that the percentage is nil.

4. DETR Formulae The Department of the Environment, Transport and the Regions publishes the Monthly Bulletin of Indices, Price Adjustment Formulae for Construction Contracts. This contains: Section A: Notes for Guidance - Applicable to all series Section B: Series 3 - Building and Specialist Engineering Formulae Indices & 1990 Series Civil Engineering Formula Indices & 1990 Series Structural Steelwork Formula Indices Section C: Series 3 - Building and Specialist Engineering Formulae Indices & 1970 Series Civil Engineering Formulae Indices DETR also publish a User’s Guide for use with the 1990 Series of Indices. These Price Adjustment Formulae are the successors to indices first drawn up by NEDO (National Economic Development Office). The compilation and maintenance of the indices is now the responsibility of the Construction Sponsorship Directorate of the DETR, in its capacity as Technical Secretariat to the Working Group on Building and Civil Engineering Indices.

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CHAPTER 9


VARIATIONS Architects and engineers have wide powers to order variations under all of the standard forms of contract. As the design process is rarely completed when work starts on site, these powers are frequently exercised. The valuation of variations is one of the most contentious areas of building contracts, and therefore it is particularly important for Steelwork Contractors to have a clear understanding of the contractual framework. It is worth remembering that there is no generally implied power for the work to be varied, and so the Architect, Engineer or Main Contractor must follow precisely the procedure for instructing variations which is laid down in the contract.

Definition of a Variation All of the JCT forms define the term “variation” in a similar way. They provide for two types of variation: a change in the work itself, and a change in obligations or restrictions relating to the way in which work is executed. For example. clause 13.1. of JCT98 defines the first type of variations as the alteration or modification of the design, quality or quantity of the Works (required by the Contract Documents) including: –

the addition. omission or substitution of any work;

–

the alteration of the kind or standard or any of the materials or goods to be used in the Works;

–

the removal from the site of any work executed or materials or goods … (other than defective work, materials or goods).

Clause 13.1.2, defines the second type of variation as the imposition of, or changes in the originally imposed obligations or restrictions in regard to: –

access to the site or use of any parts of it

–

limitations of working space

–

limitations of working hours

–

the execution or completion of the work in any specific order.

The ICE 7th does not expressly define the term “variation”. but clause 51(1) permits the Engineer to order “any variation … (which) may include additions omissions substitutions alterations changes in quality form character kind position dimension level or line and changes in any specified sequence method or timing of construction required by the Contract and may be ordered during the Defects Correction Period.” Despite the broad terms used in both sets of forms to describe variations, disputes frequently occur as to whether a particular instruction amounts to a variation. The Architect, Engineer or main contractor will maintain that the instruction involves no more than was originally required under the contract, while the contractor or subcontractor will argue that it entitles him to extra money. Such disputes can be minimised by ensuring that the description of the work in the contract documents is as clear as possible - sub-contractors can contribute to this by checking the documents at tender stage and asking for clarification of any ambiguities or conflicts.

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Variations A common misconception is that all Architect’s or Engineer’s instructions amount to variations. This is not correct: if the instruction simply re-iterates an original contractual obligation, or if it does not fall within the definition of a variation for some other reason, the contractor or sub-contractor will not be entitled to recover the costs of complying with it on the basis that it is a variation (although in the latter case he may be able to recover the costs under some other clause in the contract).

Power to Instruct Variations There are two rules to remember here: (i) get the instruction from the right person; and (ii) get it in writing. This is particularly important for Steelwork Contractors because, in practice, their work is often controlled and supervised by a structural engineer. However, such engineers have no status or power to issue instructions and order variations under a standard JCT contract. Even if the structural engineer is expressly given authority by the Architect to order variations (a comparatively rare event), this will only mean he is entitled to do so under the main contract and nominated sub-contracts. If Steelwork Contractors are in any doubt about the authority of a person who issues instructions to them, they should seek written confirmation from the party with whom they have contracted to confirm (or deny) such authority. Failure to do so may result in Steelwork Contractors not being paid for work ordered by unauthorised persons.

JCT 98 Under clause 13.2 of JCT 98 the Architect, and only the Architect, may issue instructions requiring a variation. Those instructions will normally be in writing, and if so the contractor must begin to comply with them immediately. If the instruction is given orally then it does not take effect until it is confirmed in writing by either the Architect or the main contractor. If the Architect confirms his oral instruction in writing within 7 days, it takes effect on the date of the Architect’s written confirmation. The contract also provides for the contractor to confirm the oral instruction in writing within 7 days of receiving it: the Architect then has a further 7 days from receipt of the contractor’s confirmation to dissent if he so wishes. If he does not do so, the instruction takes effect on the expiry of the 7-day period allowed for the Architect’s dissent. If neither party confirms an oral instruction in writing, but the contractor nevertheless carries out the work, the Architect has the option of issuing a retrospective written confirmation at any time before the issue of the Final Certificate. There is only one set of circumstances in which the contractor has an express right to refuse to comply with a properly issued instruction. The criteria which must be satisfied are found in clause 4.1.1: –

the instruction must require a variation: and

–

that variation must be of the obligations or restrictions on the way in which the work is to be carried out (see the definition in clause 13.1.2); and

–

the contractor must have made a reasonable written objection to complying with the instruction.

The contractor has no express right to refuse to comply with instructions regarding such matters as carrying out extra or less work, even if the size of the contract is dramatically increased or decreased

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Variations by that instruction. Most commentators argue that it is not possible for the whole scope of the contract to be changed, so, to take an obvious example, a Steelwork Contractor could not be forced to erect a timber frame. However, such major changes are rare, and therefore the contractor under JCT98 will find it very difficult to argue he is not bound to carry out varied work unless it falls within clause 4.1.1, described above.

Nominated Sub-Contract NSC/C Only the Architect may instruct variations to nominated sub-contract work. The main contractor may issue any “reasonable direction” regarding the sub-contract works, but he is not entitled to vary them because “variation” is defined in clause 1.4 of NSC/C as “any of the following changes which are required by an instruction of the Architect .......” Architect’s instructions which affect the nominated sub-contract work are passed to the sub-contractor by the main contractor, who is expressly required to pass them on “forthwith” by clause 3.3.1 of NSC/C. If the Architect’s instruction or main contractor’s direction is given orally, the subcontractor is not obliged to comply with it until it as confirmed in writing by the main contractor or the sub-contractor within 7 days of its issue. If the sub-contractor has confirmed it, the main contractor has a further period of 7 days within which to dissent, after which the sub-contractor’s confirmation takes effect as a valid instruction and the sub-contractor must then begin to comply. It is very tempting to ignore this procedure and to begin complying with oral instructions immediately, but this is a temptation which should be resisted. The sub-contractor may misinterpret the oral instruction or the Architect or main contractor may change his mind - if either of these things happens it will be virtually impossible for the sub-contractor to obtain payment. Because the instruction does not take effect until it is confirmed in writing, the sub-contractor cannot be held responsible for any delay due to his failure to comply with an oral instruction, and the rules in clause 3.3.3 to that effect should be pointed out to any Architect or main contractor who suggests otherwise. If neither party confirms an oral instruction in writing but the sub-contractor nevertheless complies with it, the main contractor has the option of issuing a retrospective written confirmation up until the final payment is made to the sub-contractor. However, as this is entirely at the discretion of the Architect or main contractor, it would be a considerable risk to rely upon this as a justification for complying with oral instructions. Once the instruction has been properly issued, the sub-contractor must begin to comply with it “forthwith” i.e. immediately. If he fails to do so, the main contractor may issue a written notice requiring him to comply, and if he fails to comply the Architect may permit the main contractor to employ others to carry out the direction or instruction. The costs of doing so will be recoverable from the sub-contractor. Nominated sub-contractors have an express right to refuse to comply with a properly issued instruction providing the following requirements are satisfied: –

the instruction requires a variation; and

–

that variation relates to the obligations or restrictions on the way in which the work is to be carried out; and

–

the sub-contractor has made a reasonable written objection to complying.

Note that the sub-contractor cannot object to variations in the design, quality or quantity of work regardless of how radical they may be, although if the variation was sufficient to change the whole character of the contract there may be an implied right to object.

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Variations

Domestic Sub-Contract DOM/1


Under DOM/ 1 it is the main contractor, and only the main contractor, who has the power to vary the domestic sub-contract, works. Clause 4.2.1 permits him to issue any reasonable direction to the sub-contractor, including directions requiring variations. Architect’s instructions which affect the sub-contract works are deemed to be directions of the contractor provided they are issued to the sub-contractor by the main contractor. Many domestic sub-contractors assume that any instruction issued by the Architect or any other member of the professional team must be complied with and will automatically entitle them to payment. This is not correct. Only Architect’s instructions passed on by the main contractor or the contractor’s own directions are validly issued under the contract. This situation gives rise to particular problems for specialist trades such as structural steel. whose work will frequently be designed and supervised by a structural engineer. That engineer has no status under the contract to issue instructions or to order variations, so the Steelwork Contractor must, as tactfully as possible, ensure that everything is passed through the main contractor. If he fails to do so there is a serious risk that he will not be paid. The basic rule is that the main contractor must give his directions in writing. Oral directions have no immediate effect, so the sub-contractor is not obliged to begin complying with them until they are confirmed in writing, either by the main contractor or the domestic sub-contractor himself. This must be done within seven days of the issue of the oral direction. If it is the sub-contractor who has confirmed the direction, the main contractor has seven days from receipt of that confirmation to dissent from it. If he does not do so, the direction takes effect and therefore the sub-contractor must begin to comply with it. It is very common for domestic sub-contractors to ignore this procedure and to begin complying with oral directions as soon as they are issued, but this is a dangerous habit. The sub-contractor will only be entitled to payment if the main contractor does issue the written confirmation or does not dissent from the sub-contractor’s confirmation - if not, the sub-contractor will not be entitled to payment for the work he carried out pursuant to the oral direction. Sub-contractors should remember that they cannot be held responsible for any delay caused by their failure to comply with oral directions because they do not take effect under the contract until they are confirmed in writing, and the rules in clause 4.4 to that effect should be pointed out to any main contractor who suggests otherwise. If neither party confirms an oral direction in writing, but the domestic sub-contractor nevertheless complies with it, the main contractor has the option of issuing a retrospective written confirmation at any time up to the final payment. However, he is not bound to do so, so sub-contractors comply with unconfirmed oral directions at their own peril. Once a direction has been properly issued under DOM/ 1, the sub-contractor must begin to comply with it “forthwith”, i.e. immediately. If he does not, the main contractor may issue a written notice requiring his compliance, and if he continues to fail to do so, the contractor can employ others to comply with that direction. The costs of doing so will be borne by the domestic sub-contractor. Domestic sub-contractors under DOM/1 have exactly the same rights to object to main contractor’s directions as nominated sub-contractors have to object to Architect’s instructions.

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Intermediate Form IFC98


The rules in IFC98 regarding variations and instructions are broadly similar to those in JCT 98, save for one very important characteristic: there is no provision for oral instructions in IFC98. All instructions must be issued in writing. If they are not, they have no effect under the contract. This is a laudable principle, but it is frequently ignored by Architects, which puts the contractor in a difficult position. As he does not have the option of confirming the instruction in writing himself, he has a straight choice: comply with the oral instruction and risk not being paid, or insist on written confirmation from the Architect and risk antagonising him. The first alternative is the more popular, but the second is more sensible and should lead to no more difficulties than insisting on compliance with any other clause in the contract. Contractors should note that any form of writing is sufficient for an instruction to have contractual effect - it does not need to be on the standard RIBA Instruction form -instructions in letters, on scraps of paper, even on the back of a cigarette packet are sufficient provided the terms are clear and it is signed by the Architect.

Named Sub-Contract NAM/SC The rules regarding instructions and variations in NAM/SC are the same as those in DOM/ 1. save that there is no provision for oral instructions. (For the effect of this, see the comments above on IFC98). As a named sub-contractor under NAM/SC is essentially domestic once he has been appointed, only the main contractor may issue valid variations or directions relating to the named sub-contract work.

Domestic Sub-Contract IN/SC The rules regarding instructions and variations in IN/SC are exactly the same as those in NAM/SC.

Management Contract 1998 Under Clause 3.3 the Architect must issue to the Management Contractor such instructions as are reasonably necessary to enable the Management Contractor to fulfil his contractual obligations. The Architect may also issue variations to the project, which are called “Project Changes”. If the Architect issues an oral instruction, it is valid only if he confirms it in writing within 7 days. There is no facility for the Management Contractor to confirm oral instructions. The Architect has no express powers in the event of the Management Contractor failing to comply with instructions, although there is a general right in clause 7.2.1.2 to determine the Management Contractor’s employment if he “fails to proceed regularly and diligently with the carrying out of his obligations ...“. This is a considerably more drastic remedy than the right to employ others to comply with the particular instruction which is included in other JCT standard forms.

Works Contract/2 Works Contract/2 provides for two types of instructions to be given to the Works Contractor:(i) instructions, which are Architect’s instructions issued under the Management Contract and passed on to the Works Contractor by the Management Contractor;

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Variations (ii) directions, which are the Management Contractor’s own reasonable requirements.


Either an instruction or a direction will amount to a variation if it falls within the appropriate definition (see beginning of this Chapter), therefore the Management Contractor clearly has the power to vary the Works Contract works. The general rule is that both instructions and directions must be issued in writing. Either the Management Contractor or the Works Contractor may confirm oral instructions in writing within 7 days, but if they are not so confirmed they have no effect. There is no contractual mechanism for the Management Contractor to dissent from the Works Contractor’s written confirmation, although if he does disagree he can simply issue a further written instruction to clarify the position. If the Works Contractor fails to comply with a properly issued instruction or direction the Management Contractor may issue a written notice requiring him to do so. If he still does not respond, the Management Contractor may employ someone else to carry out the instruction and recover the cost of doing so from the Works Contractor. Works Contractors have slightly wider powers to object to instructions than other subcontractors because their works may include design. Under clause 3.4 of Works Contract/2 the Works Contractor need only comply with instructions involving alterations to work designed by him if he consents. The consent should be given in writing, and must not be unreasonably withheld or delayed. If the Works Contractor withholds his consent the matter must be referred to the Architect for his decision. The Works Contractor also has the right to make a reasonable objection to variations in the conditions under which the work is to be executed: this right is the same as that in NSC/C.

ICE 7th Edition The ICE 7th gives the Engineer very wide powers to issue instructions - the contractor has a general obligation to execute the works strictly in accordance with all Engineer’s directions and instructions, regardless of whether any matter in respect of which the Engineer has issued an instruction is mentioned in the contract. Clause 51 deals with variations. It provides that the Engineer shall order a variation that in his opinion is necessary for the completion of the Works and may order a variation that he considers desirable for the completion and/or improved functioning of the works. Variations should only be made in the works by order of the Engineer - the contractor may not make changes on his own initiative. The Engineer may expressly authorise the Engineer’s Representative (who may be a resident engineer on site, an assistant or a clerk of works) to order variations, but such a delegation of his powers (which is permitted by clause 2(3)) must be preceded by written notice to the contractor. The general rule is that variations should be ordered in writing. However, if they are given orally the contractor must nevertheless begin to comply with the oral order immediately. The Engineer is required to confirm oral orders in writing as soon as is possible in the circumstances. If the contractor confirms the order in writing that will be effective unless the Engineer contradicts it in writing “forthwith” i.e., almost immediately. The contractor under ICE 7th therefore has, at least in theory, a better chance of his own written confirmation being valid than the contractor under the JCT forms, where the Architect has 7 days to dissent. Note that the contractor has no express right of objection to any variations ordered under ICE 7th no matter how dramatic their effect. If the variation altered the whole scope of the contract it is possible

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that the contractor would have the right to refuse to comply with it, but changes in scope of such magnitude are unusual and difficult to prove.

CECA Sub-Contract (‘Blue Form’) The CECA form clearly distinguishes between the power to order variations and the power to issue other instructions. Generally, the sub-contractor must comply with all instructions or decisions of the Engineer or his representative under the main contract which are notified and confirmed in writing to him by the main contractor. Even if the instruction is technically invalid under the main contract, for example because the Engineer’s Representative was not authorised to issue it, the sub-contractor must comply with it if required to do so by the main contractor. He will, however, be entitled to recover the costs of complying with such invalid instructions. In addition, the main contractor has the same wide powers as the Engineer has under the main contract to give instructions and make decisions. Clause 8 of the CECA form goes on to provide specifically for the ordering of variations. There are three bases upon which a variation can be ordered: (i) by the Engineer under the main contract and confirmed in writing to the sub-contractor by the main contractor: (ii) agreed by the Employer and main contractor under the main contract and confirmed in writing to the sub-contractor by the main contractor; (iii) ordered in writing by the main contractor. The CECA form is commendable in making it absolutely clear that the sub-contractor must not act on variations ordered directly by the Employer or Engineer, but must wait for written confirmation from the main contractor. Note that there is no provision for variations to be ordered orally: there must be a written instruction from the main contractor. As with the ICE main form, there is no express right for the sub-contractor to object to variations, although this may be implied if the variation alters the scope of the works.

Valuation of Variations In all JCT standard forms variations are valued on the same basis. The basic rules are therefore set out first, followed by brief sections on each of the standard forms dealing with any departures from the basic rules and matters such as who carries out the valuation. As the ICE 7th and the CECA form have different basic rules they are commented upon separately, at the end of this section.

Basic Rules of Valuing Variations in JCT Contracts There are four types of work which fall to be valued in accordance with the rules for valuing variations.

(i) additional or substituted work which can be measured Such work will be valued at the rates and prices set out in the contract bills (or other appropriate contract document if there are no Bills of Quantities) provided –

it is work of a similar character to that in the bills; and

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Variations –

It is executed under similar conditions; and

–

it does not significantly change the quantity.

Many quantity surveyors and main contractors automatically value varied work at the rates in the bills or other contract documents, but it will be seen from the above that those rates will only be applicable in certain circumstances. If the varied work is of a similar character to work in the bills but is not executed under similar conditions or there is a significant change in quantity, the bill rates will still be the basis for valuing the work, but a “fair” allowance should be made for the difference in conditions or quantity. If the varied work is not of a similar character to work set out in the bills, it should be valued at fair rates and prices. This provision creates problems because the valuer’s perception of a fair rate rarely coincides with the sub-contractor’s. The only practical solution is negotiation, and if a large disparity remains, adjudication, arbitration or litigation as appropriate.

(ii) work for which an approximate quantity is included in the contract bills If the approximate quantity included in the contract bills is a reasonably accurate forecast of the work actually required, the rate in the bills for that work will determine its price. If it is not a reasonably accurate forecast the contractor will be entitled to a fair allowance over the bill rate to allow for the difference in quantity. The obvious area where disputes may arise here is what constitutes a reasonably accurate forecast. Few quantity surveyors will be ready to admit their forecast was inaccurate unless it is so wildly different as to be unarguable.

(iii) additional or substituted work which cannot be measured Where work cannot properly be valued by measurement, the contractor or subcontractor will be entitled to be paid on the basis of daywork. This permits the recovery of the prime cost of labour, materials and plant which are used to execute the varied work, plus a percentage addition which will be quoted at tender stage. Steelwork Contractors are paid for daywork on the basis of the standard definition of prime cost agreed between the RICS and the CC. The definition of prime cost is fairly restrictive (the claimable hours are working time only - the cost of non-working time being included in the percentage addition), and therefore Steelwork Contractors should ensure that the percentage addition which they quote is sufficient to cover all of their other labour and material costs, as well as overheads and profit.

(iv) omissions Omitted work is valued at the rates set out for that work in the contract bills or other priced contract document. The contractor or sub-contractor will also be entitled to additional costs for extra preliminaries, unless

8

-

the variation is valued on the basis of daywork; or

-

the instruction being valued is an Instruction to expend a provisional sum for defined work, because SMM7 requires the contractor to have included in his tender sum for any such preliminary costs.

Chapter 9

Variations The basic valuation rules provide two other grounds on which contractors and subcontractors can claim extra money as a result of variations. These are:


(i) if the variation changes the conditions under which any other, unvaried, work is executed, that unvaried work should be valued under the rules for valuing variations; (ii) if the variation does not relate to additional, substituted or omitted work, e.g. because it is a variation in the conditions under which work is executed rather than a change in the work Itself, or to the extent it is not reasonable to value a variation in accordance with the rules set out above, a fair valuation should be made. Both of these provisions give a wide scope for making claims for matters such as uneconomical working, but such costs are hard to quantify and prove, and Steelwork Contractors should not expect to recover large sums unless their case is exceptionally strong. If variations cause delay, contractors and sub-contractors will be entitled to any loss and expense arising out of that delay, but this is not valued as Part of the cost of the variation. The recovery of such sums is considered in Chapter 11 - Costs of Delay. Although all of the JCT standard forms provide for varied work to be valued and paid for on a monthly basis in the same way as other work, the full value is often not paid until the final account stage. Disputes tend to arise on what is often described as the “claim” element of variations, for example the disruptive effect of variations on unvaried work and the costs of variations in the conditions under which work is executed, such as changes in working hours or limitations on working space. The only foolproof way to avoid such disputes is to agree a price for the variation before the work is carried out. This has its dangers, for if the contractor under-estimates the true cost he will lose money, but at least his cash-flow will be improved and the endless wrangling over valuations at the final account stage will be avoided. The Intermediate Form IFC98 and its sub-contract and DOM/l expressly provide for pre-agreement of a lump sum, but there is no reason why it should not be done on contracts under other standard forms provided both parties agree.

JCT98 Under JCT98 the Quantity Surveyor is required to value variations in accordance with the valuation rules in clause 13.5. The value of the varied work will be included in the relevant interim certificate issued by the Architect. JCT98 also provides for the pre-agreement of all of the time and cost consequences of a variation where the employer and contractor agree to do so. The procedure, which is set out in clause 13A, provides that where the architect has requested a quotation for comparing with a variation instruction and the contractor has agreed to provide one, if the parties can reach an agreement on the basis of the quoted sum and extension of time, that will take the place of the conventional valuation of the cost and time consequences of the variation. When he receives an instruction stating the architect requires a clause 13A quotation the contractor has 7 days to disagree with the application of those arrangements - this is an absolute right so the contractor is not under a contractual obligation to act reasonably or to justify his decision, although it would obviously be commercially sensible for him to do so. The variation instruction must provide the contractor with sufficient information to enable him to provide a quotation - if not, the contractor may request further details within 7 days of receiving that instruction.

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Variations


The contractor is required to include a considerable amount of detail in his clause 13.A quotation. It must separately set out: –

the total adjustment to the contract sum the contractor requires for complying with the instruction (including its effect on the execution of other work and additional prelims);

–

the extension of time required by the contractor for complying with the instruction;

–

the amount to be paid in lieu of the ascertainment of loss and expense;

–

the cost of preparing the quotation (which must be calculated on a fair and reasonable basis).

If specifically required to do so by the instruction, the contractor must also state the additional resources he will require to carry out the varied work and the method he will be using to do so. The quotation must be submitted to the Quantity Surveyor within 21 days of receipt of the instruction (or within 21 days of receiving the additional information requested by the contractor) and must remain open for acceptance for 7 days from its receipt. At this point it is likely that there will be some negotiation between the contractor and the professional team. If they can reach an agreement, the employer (not the Architect or QS acting on his behalf) must notify the contractor in writing, and to avoid any misunderstanding as to the precise details of the agreement the Architect must then issue what clause 13A describes as a ‘confirmed acceptance’ setting out the details of the cost and time consequences which have been agreed. As the quotation is open for acceptance for only 7 days the contract envisages that the negotiations will be concluded relatively quickly, but for major variations this may not be feasible. It will, of course, be open to the parties to agree an extension of that period, and this is contemplated by clause 13A itself, which provides that the time periods may be reduced or increased by agreement between the employer and contractor. If there is a considerable delay while the employer decides whether to accept the quotation, the contractor may need to retain the right to revise it, and so should think carefully before agreeing to extend the period for which it is open for acceptance. While the negotiations are taking place, the contractor is not obliged to carry out the varied work, although he must do so once he receives the confirmed acceptance. If no agreement can be reached, the architect may either instruct that the variation is to be valued in the normal way or that it is not to be carried out at all. In either event, the contractor is entitled to be paid the cost of preparing the clause 13A quotation, provided the quotation itself was a fair and reasonable one (i.e. not outrageously high). If the clause 13A quotation is not accepted, the architect may not use the information contained within it for any purpose whatsoever, so he will be unable to use any rates or prices it contains if the work goes ahead but is valued in the normal way. This recognises the fact that the quotation will have been prepared on a commercial basis and is likely to include an element of pricing of risk. Clause 13A also expressly provides for the further variation of work for which a clause 13A quotation has been accepted, and states that such further variations should be valued on a fair and reasonable basis having regard to the content of the clause 13A quotation. Although there are some technical difficulties with Clause13A, particularly in relation to further revisions to the completion date once a clause 13A quotation has been accepted, the arrangements provided by this clause should be welcomed by both contractors and employers. They should save money, as the process of attrition which so often takes place when major variations are valued after the event will be avoided. Although employers may find the sums quoted are a little higher than they anticipate, (particularly in relation to the loss and expense element of the quotation, where the

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contractor is pricing risk as much as anything else) the certainty that the agreed sum is all they will have to pay will often make that worthwhile. Contractors had been concerned that the quotation provisions may encourage some employers to treat them as a free estimating service for work which they had no real intention of ever carrying out, but the arrangements for the contractor to be reimbursed the costs of preparing a clause 13A quotation should minimise that risk.

Nominated Sub-Contract NSC/C As the value of nominated sub-contract work is separately set out in Architect’s certificates issued under the main contract, the Quantity Surveyor values variations in nominated subcontract work. He will apply the rules in clause 4.4 - 4.9 if it is a lump sum contract and those in clause 4.10 - 4.13 if it is a remeasurement contract: the actual rules for valuing variations in those clauses are virtually identical. The value of the varied work will be included in the relevant interim certificate issued by the Architect. The option of pre-agreeing the cost and time consequences of variations in JCT 98 has been stepped down into NSC/C. Like the main contractor, the nominated sub-contractor has an absolute right to refuse to provide a quotation for complying with a variation instruction. If he does so, and the employer and contractor nevertheless wish the work to go ahead on the basis of a pre-agreed sum, the nominated sub-contractor retains his right to be paid on the basis of a valuation, but the employer and contractor can agree that the remainder of work is subject to the pre-agreed sum. The arrangements for the preparation and submission of a quotation by the nominated sub-contractor are very similar to those described above which apply to the main contract, save that the time scale for preparation of the quotation is slightly shorter (17 days rather than the 21 allowed at main contract level) to allow the contractor to include the nominated sub-contractor’s quotation in the details which he submits to the QS. The nominated sub-contractor’s quotation must also remain open for acceptance for 14 days rather than the 7 required under the main contract.

Domestic Sub-Contract DOM/ 1 DOM/1 does not expressly provide who is responsible for valuing variations in domestic sub-contract work. It simply requires the sub-contractor be paid the value ascertained in accordance with the basic rules set out above. In practice, the domestic sub-contractor will apply for what he considers to be the proper value of the variation and the main contractor will pay him what he considers to be the proper value. If there is a significant disparity between the two figures and no agreement can be reached, the sub-contractor’s only remedy will be adjudication or arbitration. There are two sets of valuation rules in DOM/ 1: clause 16 applies to lump sum contracts and clause 17 applies to remeasurement contracts.

Intermediate Form IFC98 The valuation rules in IFC98 are broadly in accordance with the “basic valuation rules- set out above, although they are in a different format. There are only two significant differences: (i) valuation on the basis of daywork is not confined to work which cannot be measured: IFC98 provides for daywork to be used wherever it is the appropriate basis of a fair valuation; and

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Variations (ii) clause 3.7 of IFC98 expressly provides for the value of variations to be agreed between the contractor and Employer before the contractor carries out the work. Only if such an agreement cannot be reached will the valuation rules apply. As mentioned above, the pre-agreement of a price for a variation can improve cash-flow and reduce disputes at the final account stage, although there is a risk that the contractor will under-estimate the value of the varied work. The Quantity Surveyor is responsible for valuing variations under clause 3.7 of IFC98. The value of varied work will then be included in the relevant interim certificate issued by the Architect. Named Sub-Contract NAM/SC The valuation rules in NAM/SC follow the same format as those in IFC 98. There is therefore slightly more scope for valuation on the daywork basis, and a facility for pre-agreement of the value of variations with the main contractor. As in DOM/ 1, there is no express provision for anyone to value the varied work. In practice it is normally done by the main contractor on the basis of an application by the subcontractor. If the sub-contractor disagrees with the valuation, his remedy would be adjudication and/or arbitration.

Domestic Sub-Contract IN/SC The rules in IN/SC governing the valuation of variations are exactly the same as those in NAM/SC.

Management Contract 1998 Because the Management Contract is a prime cost contract the Management Contractor is paid the full cost he incurs in carrying out his contractual obligations, including complying with instructions and carrying out variations. There are therefore no separate provisions in the Management Contract for valuing variations.

Works Contract/2 Works Contract/2 provides for payments to be made to Works Contractors under Architect’s certificates: therefore valuation of variations will be carried out by the quantity surveyor. He will apply the rules in clause 4.4 - 4.10 if it is a lump sum works contract, and those in clause 4.11- 4.16 if it is a remeasurement contract: both contain virtually identical rules for valuing variations, which are very similar to those in NSC/C and therefore to the basic rules set out above. Works contracts may include a schedule of rates for variations or a schedule of daywork prices, which will have been compiled by the Works Contractor during the tender stage, and if so, those rates will be used to value the variations, rather than the basic rules described above.

ICE 7th Edition Clause 52 of the ICE 7th sets out the rules for valuing variations under this contract which are similar but not identical to the JCT rules. The Engineer is responsible for valuing variations. The basic rules are:–

12

work of a similar character to and executed under similar conditions to work In the Bills of Quantities is valued at bill rates;

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Variations –

if the work is not of a similar character or executed under similar conditions the bill rates are to be used as a basis for valuation so far as is reasonable;

–

failing that a fair valuation is made.

The contract makes it clear that although agreement between the contractor and the Engineer as to the value of variations is the aim, if this is not achievable the Engineer is entitled to value the work in accordance with the above principles. Clause 52(2) permits the Engineer to fix a “reasonable and proper” rate for work if: (i) the nature or amount of the variation in relation to the rest of the work is such that the Engineer or contractor is of the opinion that the bill rates are inapplicable or unreasonable; and (ii) whichever party is of that view has given notice to the other before the varied work is commenced or so soon thereafter as may be reasonable. This introduces a welcome element of flexibility into the valuing of unusual or “difficult” variations, but its efficacy depends on the Engineer fixing a reasonable rate. In Henry Boot Construction Ltd v. Alstrom Combined Cycles Ltd (2000) the Court of Appeal held that, where the nature of the varied work was such that it could properly be valued at bill rates, those rates had to be applied even if they were unreasonably high or low. In Weldon Plant Limited v. The Commission for New Towns (2000) the Technology and Construction Court stated that, where a ‘fair’ valuation is used, that should normally include elements of profit and the contribution which the varied work would make towards the fixed and running overheads of the Contractor’s business. The ICE 7th provides for work to be paid for on the daywork basis only where the Engineer has so ordered in writing. The basis of payment will be either the rates given by the contractor in his tender, or failing that, in the CECA “Schedules of Dayworks carried out Incidental to Contract Work”.

CECA Sub-Contract The rules for valuing variations contained In the CECA form are less detailed than those in other contracts, and are drafted in such a way that Steelwork Contractors may find it even harder than usual to claim anything other than bill rates. Clause 9 provides that variations are to be valued by reference to rates specified in the subcontract for like or analogous (i.e. similar) work. A fair and reasonable valuation may be made if there are no such’ rates or if they are “not applicable” - no guidance is given as to the circumstances in which the bill rates will be inapplicable, but the sub-contractor will presumably claim a fair valuation if the work is executed under different conditions or if there are significant changes in quantity. Clause 9(2) provides that any valuation of the work under the main contract shall be taken into account when determining a fair and, reasonable valuation. Where an authorised variation of the sub-contract works, which also constitutes an authorised variation under the main contract, is measured by the Engineer, then provided that the rates and prices in the sub-contract permit variations to be valued by reference to measurement, the contractor must permit the sub-contractor to attend any measurement made on behalf of the Engineer. Measurement made under the main contract also constitutes the measurement of the variation of the purposes of the sub-contract. Save where the contrary is expressly stated in any Bills of Quantities forming part of the sub-contract, no quantity stated therein defines or limits the extent of any work to be done by the sub-contractor in the execution and completion of the sub-contract works, but any difference between the quantity billed and the actual quantity executed is ascertained by measurement and valued as if it were an authorised variation.

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Variations


Variations will be valued on the daywork basis only where so ordered in writing by the main contractor. Such variations are paid for in accordance with the rates in the sub- contractor’s tender or as otherwise agreed. If there are no rates in the tender or other agreement, the sub-contractor will be paid in accordance with the CECA Schedules of Daywork carried out Incidental to Contract Work. Variations will be valued by the main contractor in accordance with the above rules, and on the basis of any application by the sub-contractor. If the sub-contractor disagrees with the valuation and cannot negotiate a suitable increase in it, his remedy will be adjudication or arbitration.

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CHAPTER 10


EXTENSIONS OF TIME AND COMPLETION Time Not of the Essence None of the standard forms of contract expressly provides for time to be of the essence of the contract. Given the nature of construction work and the circumstances under which it is carried out this is a realistic approach. The standard forms of contract acknowledge the possibility of delay, and provide for it by the inclusion of extension of time clauses (for delays where the contractor is not culpable), and liquidated damages provisions (for delays for which he is responsible). In a non-standard contract where time is of the essence, there may be limited rights to extensions of time, and any delay in completion by the contractor entitles the employer to treat the contract as being at an end, with the contractor being liable for all the consequent costs. “Fast Track” techniques, many drawn from the American building industry, have made a significant impact on the UK industry in recent years. But even on fast track contracts, it is rarely a provision of the contract that time is of the essence. Rapid completion is achieved by other means: more flexible systems of contracting such as management contracting and construction management; even “carrot and stick” clauses where the contractor is paid a bonus for each week or day he finishes ahead of the scheduled date, but must pay liquidated damages for each day or week he exceeds it. With increasing emphasis on the need for faster building, contract clauses regarding commencement, completion and extensions of time are of vital importance to Steelwork Contractors.

Establishing the Contract Period It is essential to establish the contract period at the pre-contract negotiation stage. It is very tempting to leave this “to be agreed” when there are so many other pressing matters to consider, but to do so opens the door to disputes and claims during the contract. There are two reasons for this: (i) If no period is agreed, the law will imply a term that the work must be completed within a reasonable time. If the parties cannot agree on what is “reasonable” the only way of establishing it may be through adjudication, arbitration or by going to court. As a result it will be very difficult for the Steelwork Contractor to demonstrate that he has been delayed, and is therefore entitled to an extension of time and (more importantly) the costs of the delay. (ii) In the absence of an agreement as to the contract period, the main contractor is likely to act as though the sub-contractor is bound by the main contractor’s programme, and set-off costs from the sub-contractor if he does not conform to the programmed dates. Although this may be contractually incorrect, it will create tremendous practical problems for the sub-contractor. All of the standard forms of tender issued by the JCT (see Chapter 4 -Tendering Procedures) invite the tendering sub-contractors to specify the period of notice they require to commence work on site, the period of time they require for off-site works and the period required for work on site. It is up to the tendering sub-contractors to specify realistic periods of time, which will then be negotiated with the main contractor if their tender is successful. Although this negotiation may be a difficult task, it is preferable to establish entitlement to a sensible contract period at the outset rather than to deal with spurious delay claims and set-offs once work has started.

Chapter 10

1

Extensions of Time and Completion


In view of the nature of structural steelwork, particular attention needs to be paid to the notice to commence work on site and the period for off site works, as main contractors frequently expect sub-contractors on site at very short notice, and overlook the time required for design, fabrication etc.

Programme There is often considerable confusion over the status of programmes - particularly the main contractor’s programme, which the contractor himself tends to treat as if it were written in tablets of stone (no matter how many times he has revised it!). The key point to bear in mind is that a programme may not have any legal validity unless it is formally incorporated into the contract between the main contractor and the sub-contractor. In fact, many programmes are simply management tools used by the main contractor to measure and co-ordinate progress on the contract, and do not form part of the contractual obligations of the parties. Some tender documents, such as NSC/T and Works Contract/1, provide for the agreement of a programme between the main contractor and sub-contractor, and where this is done the dates in the programme for the completion of various operations will have contractual force. However, unless a programme is formally agreed in this manner, it will not be a breach of contract if the contractor fails to meet each date in the programme. This is due to the “precedence” clause in all of the JCT contracts, which basically provides that nothing in the contract bills, specification or other ancillary documents overrides the conditions of contract themselves, which clearly provide for extensions of time and damages only where there is a delay to the overall completion date. This was confirmed in the case of Gleeson v Hillingdon (1970), where a programme is contractually binding, failure to comply with it will result in liability for liquidated damages only if the overall completion date is exceeded. If this is not the case, the main contractor will be entitled to any actual costs flowing from the breach. which will usually be disruption claims from other subcontractors. Under the standard forms, the sub-contractor must carry out and complete the works in accordance with the agreed details, and “reasonably in accordance with the progress of the Main Contract Works”. The main contractor’s programme, even if it does not have contractual force, may be used as evidence to show that a sub-contractor has not complied with this requirement. The sub-contractor cannot therefore expect complete continuity of working. However, if he is significantly disrupted, he will be entitled to claim loss and expense resulting from that disruption (see Chapter 12 - Claims). Non-standard forms may deal with the situation somewhat differently. For example, they may provide that the sub-contractor will comply with all the requirements of the main contractor regarding progress of the works. Such a clause was included in a non-standard sub-contract in the case of Martin Grant v Sir Lindsay Parkinson (1984). In that case, subcontractors agreed to “proceed with any portion ... of the work at such time ... as the contractor should require having regard to the requirements of the contractor in reference to the progress or conditions of the main works”. In considering a claim for loss and expense due to disruption, the court held that under such a clause the sub-contractors could be required to execute their work in a way, and at a time, which might not necessarily be convenient for them. There was no implied term that they were entitled to reasonable continuity of working. Steelwork Contractors should therefore look out for sweeping statements in non-standard forms regarding proceeding with the works to suit the main contractor.

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Time at Large “Time at large” is a phrase frequently used when discussing delay and extensions of time. When time is at large, the contractor’s obligation will be to complete within a reasonable time: and there will be no definite date on which the Employer can rely for completion. If time has become at large, the Employer will not be entitled to liquidated damages, although if he can prove the contractor has taken longer than a reasonable time he will be entitled to recover any actual loss he has suffered as a result. Time will become at large in the following situations:(i) where the employer’s default has caused a delay, but there is no provision for it In the extension of time clauses; (ii) where the machinery for granting an extension of time breaks down e.g. the architect fails to grant extensions within the timescale laid down by JCT 98. It will be noted from (i) above that the extensions of time clauses are not inserted in standard forms entirely for the benefit of the contractor, they also preserve the employer’s rights to claim liquidated damages by preventing time from becoming at large.

Procedure for Awarding Extensions of Time JCT Contracts Notice Requirements All of the JCT main contracts and their related sub-contracts require the main or subcontractor affected by a delay to give the appropriate notice of the delay. Under Clause 25.2 of JCT98, as soon as it becomes reasonably apparent that the progress of the works is being or is likely to be delayed, the contractor must “forthwith” give written notice of the delay to the architect, including the cause if he can identify it. As soon as practicable he must give details of the effects of the delay and an estimate of how long it is likely to last. Nominated and domestic sub-contractors are under a similar duty to give such information to the main contractor. The information must also be kept up to date, so if further consequences of a delay become apparent, further notices must be issued. Steelwork Contractors should note that they are contractually obliged to give such notices, and doing so at the proper time will certainly improve their chances of being awarded adequate extensions of time. However, if for any reason such notices are not given, contractors can rely on the case of London Borough of Merton v Stanley Hugh Leach (1985), which it was held that failure to give the notices will not be fatal to a claim for extension of time under the JCT forms, as the requirement for notice was not expressed as a condition precedent.

Decision of Architect: JCT98 Under JCT98, the Architect is under a duty to award an extension of time if in his opinion any of the “relevant events” defined in the contract caused the delay, and completion of the works is likely to be delayed. In granting the extension of time, he must identify the relevant event he has taken into account. The Architect is obliged to respond to the notice, particulars and estimates from the contractor within 12

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weeks of receipt (or by the completion date, if earlier) provided it is reasonably practicable for him to do so. He must notify negative decisions as well as positive awards of an extension of time within the specified period. Within 12 weeks of practical completion the Architect must review all extensions of time granted, and may revise his earlier decisions if he so wishes.

Decision of the Contractor: NSC/C Under Clause 2.3 of the nominated sub-contract NSC1C, the main contractor may formally grant extensions of time, but he may not do so without the consent of the Architect and therefore in practice, it is the Architect who makes the decision. The time periods for reaching a decision are exactly the same as the main form, i.e. 12 weeks from receiving the notice, particulars and estimate, or the completion date, if earlier. The review provisions also apply.

Decision of the Contractor: Domestic Form DOM/1 Under the standard form of domestic sub-contract DOM/ 1, it is the main contractor who makes the decisions regarding extensions of time. He has a period of 16 weeks within which to reach a decision from receiving the notice, particulars and estimates from the sub-contractor. He also must review the extensions of time previously granted within 16 weeks of practical completion.

Decision of the Architect: IFC98 The Architect awards such extension of time as he considers fair and reasonable to the main contractor under Clause 2.3 of IFC98, provided the delay is caused by one of the “events” listed in Clause 2.4. There is no fixed time period within which the extension must be awarded, but the Architect must act “so soon as he is able to estimate the length of delay”. The Architect may review extensions of time previously granted, or grant additional extensions, any time up to 12 weeks after the date of practical completion, but he is not obliged to undertake a review as he is under JCT98.

Decision of the Contractor: NAM/SC Under Clause 12.2 of NAM/SC, it is the main contractor who makes the decision to grant extensions of time to named sub-contractors. This is consistent with their essentially domestic status once appointed. As under IFC 98, there is no fixed period within which the main contractor must make a decision: he must simply act “so soon as he is able to estimate the length of delay”. The contractor also has the power to review his decisions, but he may not reduce any extension of time previously awarded (Clause 12.4).

Decision of the Contractor: Domestic Form IN/SC The procedure for granting an extension of time to domestic sub-contractors under IN/SC is precisely the same as for named sub-contractors under NAM/SC.

Decision of the Architect: Management Contract 1998 The Architect awards extensions of time to the Management Contractor if he is delayed by any of the “Project Extension Items” identified in Clause 2.13 of the Management Contract. Again, there is no fixed period within which he must act, only “as soon as he is able to assess the length of the delay”. It

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Extensions of Time and Completion is also clear that the Architect must notify the Management Contractor of negative decisions not to award him an extension of time, as well as positive decisions.


Decision of the Management Contractor: Works Contract/2 It is the Management Contractor who decides upon and awards extensions of time to Works Contractors under Clause 2.3 of Works Contract/2. However, he must first notify the Architect of his decision (positive or negative). The Architect may “dissent” from the Management Contractor’s decision, but this does not prevent the extension of time from being awarded, or indeed affect it in any way so far as the Works Contractor is concerned. That is the theory, however, it will be a brave Management Contractor who awards an extension of time after dissent has been expressed by the Architect as it may affect his own entitlement to obtain a “Project Extension” under the Management Contract. It is therefore fair to say that the Architect will be influential in deciding on extensions of time under the works contracts.

CE 7th Edition - Procedure for Obtaining an Extension of Time Clause 44 requires the Contractor to apply for an extension of time giving “full and detailed particulars”. He must make such an application within 28 days after the cause of the delay has arisen, or so soon thereafter as is reasonable in all the circumstances. This last phrase makes the notice requirements less stringent than those in the JCT contracts. The Engineer must inform the Contractor of both positive and negative decisions, but no time period is specified within which he must notify the Contractor of his decision. Within 14 days of the completion date the Engineer must consider all the circumstances known to him, and, whether or not the Contractor has applied for extensions of time, grant an extension if it is appropriate. Should the Engineer decide that the Contractor is not entitled to an extension of time, he must so notify both the Employer and the Contractor. There is then a further provision for final determination and certification of extensions of time to the Contractor within 14 days of the issue of the Certificate of Substantial Completion of the Works (the equivalent of a certificate of practical completion under the JCT forms). At this stage the Engineer may not reduce any extensions previously awarded. Notwithstanding the Engineer’s obligation to act on “circumstances known to him”, it is obviously advisable for the Contractor to draw to the Engineer’s attention any facts relevant to his claim for extensions of time.

CECA Sub-Contract - Procedure for Obtaining an Extension of Time Under Clause 6(2) of the CECA form, it is a condition precedent to the sub-contractor’s right to an extension of time that he gives written notice to the Contractor of any delaying factor within 14 days of the delay first occurring. As the notice requirement is expressed as a condition precedent, if the sub-contractor does not comply with it precisely he will lose his right to an extension of time, however severe the delay may be and regardless of its cause. It is therefore of paramount importance that on sub-contracts under the CECA form all of the staff involved in the contract are aware of the stringent notice requirements, and have clear instructions to give the appropriate notice as soon as any delay occurs. The CECA form imposes no time limits within which the Contractor must grant an extension: there is no reference to a period of weeks or as soon as he is able to estimate the length of the delay as under the JCT forms. There are no express provisions allowing the review of extensions previously granted.

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Grounds for Extensions of Time - JCT Forms


JCT98 Clause 25.4 of JCT 98 defines in some detail the causes of delay (‘Relevant Events’) which will entitle the Contractor to an extension of time. The Relevant Events include the following:-

1. Force Majeure Sometimes defined as ‘Act of God’, force majeure encompasses man-made events such as general strikes and war. Literally translated, it means “superior strength”, and can cover a surprisingly wide range of unforeseeable events. For example, in the case of Matsouskis v Priestman (1915) it was held that delay due to an unforeseen breakdown of machinery constituted force majeure. This is a particularly useful case for trades such as structural steelwork where fabrication is carried out off-site, as any unexpected breakdown of machinery at the works which causes a delay should entitle the Steelwork Contractor to an extension of time.

2. Exceptionally Adverse Weather The weather must be adverse to the particular trade claiming the extension. It must also be “exceptional”. A measure of bad weather, particularly during the winter months, is to be expected, and the Steelwork Contractor is expected to have taken this into account when negotiating his contract period. An extension of time will be awarded only if the weather is worse than normal in that location for that time of year. If necessary, the contractor should be prepared to prove that the weather exceeded the average for the time of year, by using meteorological records.

3. Specified Perils The Specified Perils are the perils in respect of which the sub-contractor has the benefit of the material damage insurance taken out by the main contractor or employer. They are defined as follows: fire lightning explosion storm tempest flood water damage aircraft riot and civil commotion. If a delay is caused by any of the above, the contractor is entitled to an extension of time. Some difficulties can arise if the Specified Peril, e.g. a fire has been caused by the subcontractor’s negligence, as it is a proviso to the sub-contractor’s entitlement to an extension of time that he uses his best endeavours to prevent the delay. If he negligently caused the delaying factor, this is difficult to reconcile. However, it is usually successfully argued that the thrust of the insurance clauses is to relieve the sub-contractor of all consequences of the specified perils, including responsibility for delay.

4. Strikes The strike must affect a trade employed on the works or a trade involved in the preparation, manufacture or transportation of goods or materials required for the works. However, if a miners’

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strike causes power cuts and therefore delay, this would fall within force majeure rather than the strikes clause. The contractor is entitled to an extension of time even if it is his own labour which is striking, unless it is a local dispute caused by his own action, such as introducing another union’s labour on to the site (in which case the contractor will fall foul of the “best endeavours” requirement). It is not necessary for an official strike to be called, as the clause encompasses a local combination of workmen. However, if there is a dispute which falls short of a strike, but disrupts progress due to union meetings etc. the contractor will have some difficulty in obtaining an extension under this ground.

5. Architect’s Instructions If the contractor is delayed by complying with architect’s Instructions, including instructions requiring a variation, he win be entitled to an extension of time. If a variation is the subject of an accepted quotation under clause 13A of JCT 98, the extension of time to which the contractor will be entitled is that agreed as part of the clause 13A quotation, regardless of the extent of any actual delay caused by that variation.

6. Opening Up and Testing If the architect instructs opening up and/or testing which is not provided for in the contract documents, and the work tested is in accordance with the contract, the contractor will receive an extension of time for the delay caused by the testing and any consequential making good.

7. Late instructions The contractor will be entitled to an extension of time if he is delayed by lack of information or instructions from the architect. This is subject to the contractor having specifically applied in writing for the information or instruction on a date not “unreasonably distant from nor unreasonably close to” the date that he needed the information. The precise meaning of the requirement for a timely written application was discussed in the case of London Borough of Merton v Stanley Hugh Leach (1985) where the court decided that a contractor’s programme which indicated the dates when information would be required did meet the requirements of the extensions of time clause. However, to be absolutely certain of complying with the clause, contractors should back up any programme showing information requirements with reminders two or three weeks before the information is required. The programme will also need to be revised to take account of delay, due to other causes, or if there are substantial variations.

8. Delay by Nominated Sub-Contractors The main contractor obtains an extension if he is delayed by a nominated sub-contractor or nominated supplier, provided he has taken all practicable steps to avoid or reduce the delay. This includes culpable delays by nominated sub-contractors. This clause is generally acknowledged as one of the major disincentives to nomination for clients, and is frequently deleted. For further discussion, see Chapter 23 on Nomination.

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9. Employer’s Works


If the employer is having other work carried out by persons employed directly by himself (formerly referred to as “artisans and tradesmen”), and they delay the contractor, he will be entitled to an extension of time.

10. Employer’s Supply of Material If the employer is providing goods and materials for use on the works, either free issue or for a price, and he delays in supplying those goods and materials, the contractor will be awarded an extension.

11. Failure to Obtain Labour or Materials These provisions are frequently deleted. The inability to obtain an extension for delay due to failure to obtain materials is extremely serious for a trade such as structural steelwork, which is dependent on a commodity supplied by a company with a virtual monopoly. If the clause is deleted, the Steelwork Contractor could attempt to obtain an extension on the grounds of force majeure, but his chances of success would be limited. If a steel shortage is caused by a strike, an extension should be awarded under the strikes clause. If the clauses do remain in the contract, the Steelwork Contractor must be able to prove that the inability to obtain the materials was for reasons beyond his control which were unforeseeable at the date of tender. Therefore, if the Steelwork Contractor is aware of an impending steel shortage, he must take this into account when tendering and negotiating contract periods. Inability to obtain appropriate labour for the job may also be a problem in buoyant times, and this should also be taken into account when tendering.

12. Access The employer is obliged to provide access to the site for the contractor over any land which is in the employer’s possession and control, in accordance with the arrangements described in the contract documents. If he fails to do so, the contractor will be entitled to an extension of time.

13. Statutory Undertakers If the contractor is delayed by a local authority or statutory undertaker, he will obtain an extension of time. British Gas etc. remain statutory undertakers despite privatisation because they are carrying out work in pursuance of their statutory obligations.

14. Deferment of Possession There is an optional right in clause 23.1.2 of JCT 98 allowing the employer to defer giving possession of the site to the contractor for up to six weeks. If the option applies and the employer defers giving possession, the contractor will be entitled to an extension for the period of the deferment.

15. UK Government exercising statutory powers If the UK Government exercises statutory powers after the date of tender in a manner which restricts the availability of labour or materials which are essential to the proper carrying out of the works, the contractor is entitled to an extension of time for any delay.

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NSC/C


The extensions of time clauses in the nominated sub-contract NSC/C follow precisely the ‘Relevant Events’ listed in JCT98, with the following exceptions:

Architect’s Instructions If compliance with an architect’s instruction by the main contractor, or other subcontractors causes delay to the sub-contractor, he will obtain an extension. He also, of course, obtains an extension if the delay is caused by an instruction issued to him.

Delay by Nominated Sub-Contractors The nominated sub-contractor obtains an extension of time if he is delayed by other nominated sub-contractors, but not if he has caused the delay himself.

Suspension If the nominated sub-contractor validly exercises his right to suspend work due to non-payment, he obtains an extension of time for any delay. In addition to the ‘Relevant Events’, the nominated sub-contractor will be entitled to an extension if he is delayed by an act, omission or default of the main contractor or any of his domestic sub-contractors. As the architect’s opinion is decisive as far as awarding extensions of time to nominated sub-contractors is concerned, extensions on this ground are not as difficult to obtain as might otherwise be the case.

DOM/ 1 Domestic sub-contractors under DOM/1 are entitled to extensions of time on exactly the same grounds as nominated sub-contractors, although it is the main contractor who takes the decision as to what extensions should be granted - see above.

Intermediate Form IFC 98 The events entitling a main contractor to an extension of time under IFC98 are very similar to the ‘Relevant Events’ in JCT98. However, there are some significant differences, i.e. (i) An additional event is included, namely delay caused by the determination of a named sub-contractor’s employment provided it is not due to the main contractors default. (ii) The main contractor has no other rights to an extension of time for delay by named sub-contractors. (iii) The right to an extension for the exercise of a statutory power by the UK Government is omitted. This would probably be covered by force majeure. (iv) The clauses entitling the main contractor to an extension for inability to obtain labour and materials are optional.

Named Sub-Contractors – NAM/SC A named sub-contractor has all of the rights to extensions of time under clause 12 of NMSC enjoyed by the main contractor under IFC98. In addition, if the named subcontractor validly suspends work for non-payment he will obtain an extension for the resultant delay. He will also obtain an extension

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of time for any act or default of the main contractor and his other named or domestic sub-contractors. As the architect has no involvement in awarding extensions of time to named sub-contractors, this may present considerable practical problems for the sub-contractor, but the contract is quite clear as to his entitlement.

Domestic Sub-Contractors - IN/SC Domestic sub-contractors under the IFC98 have exactly the same rights to an extension of time as named sub-contractors under NAM/SC.

JCT Management Contract 1998 The Management Contractor is entitled to an extension of time if the completion of the project is delayed by a ‘Project Extension Item”. There are two types of Project Extension Item: (i) any cause which impedes the Management Contractor is carrying out his obligations including: (a) a default by the Employer (b) late instructions from the professional team (c) deferment of possession (Note that there are given in the Management Contract as examples, they are not an exhaustive list); (ii) Relevant Events under the works contracts except culpable delay by other Works Contractors. Culpable delays by Works Contractors do not entitle the Management Contractor to extensions. but under the relief provisions the employer may only deduct liquidated damages from the Management Contractor to the extent that the Management Contractor has been able to recover them from the defaulting Works Contractors.

Works Contractors - Works Contract/2 There are only three areas where the “Relevant Events” differ from those under the nominated sub-contract NSJC. They are:

1. Strikes Under clause 2.10.4 of Works Contract/2, strikes etc, must affect a trade employed on the works. It will not be sufficient if they simply affect another part of the project. (In contrast the nominated sub-contracts refer to a strike affecting any part of the main contract works).

2. Inability to Obtain Labour or Materials This is restricted to the Works Contractor’s own inability to obtain labour or materials, whereas the nominated sub-contracts refer to the main contractor’s inability to obtain labour and materials as well as the nominated sub-contractor’s inability. This should not be a significant limitation, as the Management Contractor will not be working on the site.

3. Suspension by Works Contractors There is no express Relevant Event in the Works Contract covering a delay caused by the Works Contractor having withdrawn his labour from site due to non-payment by the Management Contractor. However, this is treated as an act, omission or default of the Management Contractor under clause 2.3. 1.1 (as non-payment has caused the suspension).

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Extension of Time and Completion For the avoidance of doubt such a non-payment is expressly deemed to be a default by clause 2.3.2 of Works Contract/2.


ICE Conditions - 7th Edition The list of grounds for extension of time in the ICE 7th is not as exhaustive as that in JCT 98. Condition 44 of the ICE Form permits an extension of time in the following circumstances: (i) variations ordered under clause 51(1). (ii) increased quantities referred to in clause 51(4). (iii) any other cause of delay “referred to in these conditions”. Such causes include: late issue of drawings or instructions under clause 7(4); adverse physical conditions and artificial obstructions under clause 12; Engineer’s instructions and directions under clause13(3); suspension of work under clause 40(1), and late possession of the site under clause 42(3). (iv) exceptional adverse weather conditions - this wording means the clause will be subject to similar restrictions as apply to the JCT relevant event regarding weather. (v) “other special circumstances of any kind whatsoever”. This “catch-all” is likely to include force majeure, fire and other special perils and any delays by the employer. The main contractor under the ICE form is not entitled to an extension of time for delay by nominated sub-contractors.

CECA Form: Nominated and Domestic Sub-Contractors Clause 6(2) of the CECA forms provides that sub-contractors will be entitled to an extension of time on the following bases: (i) if the delay is caused by any of the circumstances entitling the main contractor to an extension of time under the main contract. (ii) delay caused by variations not within (i) above. (iii) breach of the sub-contract by the main contractor. Extensions of time under (i) must not exceed the relevant extension of time granted to the main contractor.

Best Endeavours All of the JCT Forms of main and sub-contract provide that the main or sub-contractor concerned must constantly use his best endeavours to prevent delay “howsoever caused”. This will mean that any extension of time awarded will take into account any negligence or other deliberate action of the sub-contractor (although this is arguable in relation to the Specified Perils - see Chapter 17). It has been hotly debated whether using best endeavours to prevent delay extends to spending money, i.e. working overtime etc. In an effort to prevent or reduce any delay, it is suggested that the contractor is not obliged to go as far as incurring costs in an effort to prevent delay, as this would amount to a duty to accelerate, which all the commentators agree is a concept foreign to the JCT standard forms (with the exception of the JCT Management Contract).

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Extension of Time and Completion


However, in the case of IBM v Rockware Glass (1976), it was held that best endeavours meant “taking all those reasonable steps which a prudent and determined man acting in his own interests ... would have taken”. This definition would appear to envisage spending money. If this case is raised in any argument against a Steelwork Contractor, he could make the following points: (i) the case was relevant to planning and land law, not building contracts; it does not therefore create a precedent for building contracts; (ii) it is a rule of construction of all contracts that words and phrases are taken in context, and the context in which the words were interpreted in this case was entirely different from a building contract; (iii) it is generally acknowledged that there is no implied right to instruct acceleration in a traditional building contract; to interpret the beat endeavours requirement as suggested in this case would run contrary to that basic principle. In summary, the ‘best endeavours’ requirement in a building contract probably does not extend to incurring costs, but contractors should be prepared for arguments to the contrary.

Sectional Completion Where there is provision for phased completion, the House of Lords has ruled in the case of Trollope & Colls v North West Regional Hospital Board (1973) that an extension of time granted under one phase is confined to that phase and does not have the effect of extending completion time for subsequent phases. A main contractor’s programme will often show dates for completion of certain operations or phases of the work. Unless proper contractual provisions for sectional completion are incorporated, failure to meet these intermediate dates will not amount to a delay by the contractor or sub-contractor unless the overall completion date is delayed, although they may give rise to claims for disruption (as opposed to delay) provided the sub-contractor was contractually bound to comply with the programme. In the case of Gleeson y Hillingdon (1970), the main contractor, Gleeson, was awarded a housing contract on the JCT 63 form. The Bill of Quantities provided for the contract to be completed in sections, but only the final completion date was inserted in the contract appendix. The contract was delayed, and the Employer demanded damages for delay on the individual sections of the work. As the dates for sectional completion were contained only in the Bills, the Court held that only a delay in the overall completion date entitled the Employer to damages, because the contract clearly provided in clause 12(1) for the conditions to override any conflicting provisions in the other contract documents.

Completion before the Completion Date The JCT standard forms all provide that the contractor must complete the works “on or before the completion date”, so it is quite clear that the contractor is entitled to finish the work earlier than the date shown in the contract if he so chooses. Frequently, main contractors do programme the work to finish before the required completion date, and in the case of Glenlion v Guiness (1987), the question arose whether the employer was obliged to perform the contract by supplying information etc. in accordance with a contractor’s programme which provided for completion considerably earlier than the contractually required date. The Court held that there was no such obligation on the employer, and therefore the contractor was not entitled to an extension of time and loss and expense where information was supplied at such a time that the

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works were complete by the completion date in the contract but not by the contractor’s own, earlier, programmed date. This case means that Steelwork Contractors may finish the work earlier than the completion date in the contract, but they cannot force the employer to provide them with the information to permit that early completion.

Acceleration Clause 46(3) of ICE 7th provides for acceleration by the Contractor if so requested by the Employer or the Engineer. If the Contractor agrees to accelerate, any special terms and conditions of payment are to be agreed between the Contractor and the Employer before any acceleration is commenced. Most of the JCT standard forms do not provide for acceleration. If an employer or main contractor wishes to accelerate the works, this should be the subject of a separate agreement properly supported by consideration (i.e. a promise to pay). If asked to accelerate, Steelwork Contractors should negotiate the terms of such an agreement with care, bearing in mind that acceleration will not always be physically possible beyond a certain point, no matter how much overtime is worked. Ideally, the agreement should provide for payment of the acceleration costs even if the accelerated date is not reached, provided the sub-contractor has used his best endeavours and is not otherwise in default as the sub-contractor will have properly incurred those acceleration costs. The JCT Management Contract 1998 and the Works Contract are the only JCT forms which provide for acceleration. This is an acknowledgement of the requirements in management contracting for flexibility and early completion. The provisions are extremely detailed, and effectively leave the Works Contractor to decide how much acceleration can be achieved, and how much he should be paid for it. The procedure laid down in Clause 3.4 of the Works Contract regarding acceleration is as follows: (1) The employer causes the architect to issue a preliminary instruction under Clause 3.6.3 of the Management Contract requiring acceleration or the alteration of the sequence or timing of work. (2) The Management Contractor issues that Preliminary Instruction to all Works Contractors, who will be affected and asks them if they have any reasonable objections to complying with such an instruction. Such objections must be made within 7 days of receipt of the instruction, or within such a longer period as may be reasonable. (3) If the Works Contractors do object, those objections are passed by the Management Contractor to the architect, together with the Management Contractor’s comments, if any. (A copy of such comments must be given to the objecting Works Contractors). (4) If the Works Contractors make a reasonable objection, the architect may withdraw the Preliminary Instruction or may vary it so as to remove the reasonable objection. The Works Contractors then confirm in writing that their objection is withdrawn. Note: It is the architect who decides whether an objection is reasonable. If the objection is not withdrawn, or the architect does not consider the Works Contractors’ objection to be reasonable, or he has varied the Instruction as described above, the onus shifts to the Works Contractors, who must give their proposals as soon as reasonably practicable. (5) These proposals are as to the lump sum which each Works Contractor reasonably requires to comply with any Instruction issued under the Management Contract or, if it is not reasonably

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Extension of Time and Completion


practicable to state such a lump sum, that the cost of the compliance will have to be ascertained under the loss and expense provisions. The Works Contractor must also state the reduction in the period for completion of the Works, of the extent to which extensions of time which would otherwise be granted could be cancelled or reduced. A wise Works Contractor will quote a lump sum, as this will avoid arguments regarding quantification of loss and expense. (6) The architect may then issue an instruction under Clause 3.6.6 of the Management Contract which confirms the proposals of the Works Contractors in the same terms as those proposals. The architect cannot instruct measures which the Works Contractor has not voluntarily proposed, or vary the proposals in any way, e.g. by treating a proposal of £X for one week as a weekly rate, and asking for 3 weeks acceleration at that rate. (7) That instruction is issued by the Management Contractor to the relevant Works Contractors, who must comply with it. They will then be paid the amount they have quoted, and the new completion date will apply to the contract.

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CHAPTER 11


COSTS OF DELAY Delays fall into three categories: (i) those due to an act or default of the Steelwork Contractor or those for whom he is responsible (e.g. his sub-sub-contractors and suppliers) - these delays may render him liable to pay damages; (ii) those due to an act or default of the main contractor or employer or those for whom they are responsible (e.g. other sub-contractors or the Architect) - these delays will entitle the Steelwork Contractor to recover loss and expense; (iii) those which are beyond the control of the parties, such as bad weather or strikes these will entitle the Steelwork Contractor to an extension of time but he will not be able to recover his costs. Extensions of time were discussed in Chapter 10 - Extensions of Time and Completion. This Chapter will concentrate on the first two categories of delay, and describe how the damages payable to the employer or main contractor are calculated, and the procedure which the Steelwork Contractor must follow to recover his loss and expense.

Delays Caused By The Steelwork Contractor There are two issues here: firstly, how much the main contractor or employer will be entitled to claim in the event of a culpable delay by the Steelwork Contractor; secondly, the procedure which he must follow to recover those costs.

Quantification of Damages The JCT standard forms require the sub-contractor to pay to the main contractor “any loss or damage suffered by the contractor” due to the sub-contractor’s act, omission or default or the act, omission or default of his servants, agents or sub-sub-contractors. Such loss or damage will include not only the main contractor’s own costs, such as extended preliminaries and costs of uneconomical working, but also any damages which he has had to pay to the employer because of the delay.

Liquidated Damages The costs paid by the main contractor to the employer will normally be liquidated damages. Liquidated damages (sometimes referred to as liquidated and ascertained damages or LAD) are the sum agreed by the parties to the main contract which is payable as damages if the contract is broken. The employer normally imposes a daily or weekly rate of liquidated damages upon the main contractor if he delays completion of the building in circumstances where he is not entitled to an extension of time. It is vital to appreciate that liquidated damages constitute the amount, no more and no less, that the employer may recover in the event of a delay. He is not required to prove that he has suffered any damage, simply that the main contractor is in delay and is not entitled to an extension of time. However, if his actual loss exceeds the amount of the liquidated damages, he may not recover the balance.

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For example, the employer may be a property developer involved in a speculative contract where the contractor delays completion. The developer may not suffer any actual loss because even if the building had been completed on time he would not necessarily have been able to find tenants. Nevertheless, the property developer is entitled to the sum of liquidated damages included in the contract. Conversely, if rents in the area have doubled since he decided on his liquidated damages, and his actual loss is therefore considerably greater than the sum included in the contract he will nevertheless be limited to recovering the amount of liquidated damages specified in the contract in respect of the delay. The sum agreed as liquidated damages must be a genuine pre-estimate of the loss which will be caused to the employer if the delay occurs. If it is not a genuine pre-estimate it will be a penalty clause, and would not be enforced by the courts. The distinction between penalty clauses and liquidated damages is therefore an important one, and was considered by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (1915). The House of Lords stated that the agreed sum would be a penalty if it was ‘extravagant and unconscionable’ compared with the greatest loss that could possibly follow from the breach. Therefore, if the employer is building a warehouse to let in a low rent area, and he calculates his liquidated damages in accordance with the highest London rents, the sum will probably be a penalty clause, and not a genuine liquidated damages clause. However, very few liquidated damages provisions in building contracts are penalties. Sub-contractors are often confused by the fact that, although there is no liquidated damages provision which applies between the two parties to the sub-contract (i.e. the subcontractor and main contractor) they must still pay “liquidated damages”. This is because of the general legal rules governing the quantification of damages for breach of contract which were laid down in the case of Hadley v Baxendale (1854). In that case, it was held that two types of damage are recoverable upon a breach of contract: firstly, the normal damage which occurs In the usual course of things: secondly, damage which arises because of special or exceptional circumstances provided the other party knew of the special circumstances at the time he entered into the contract. Applying these rules to a building contract, the loss and expense which a main contractor suffers where a sub-contractor has acted in breach of a contract and delayed him will be the main contractor’s own costs, such as extended preliminaries, uneconomic working etc. In addition, the sub-contractor will normally have been aware that there was a liquidated damages clause in the main contract when he was tendering for his sub-contract. Certainly, the standard forms of tender include details from the main contract appendix which will show the rate of liquidated damages. At the time he entered into the subcontract the sub-contractor would therefore have been aware that if he delayed the main contractor in circumstances where the main contractor would not be entitled to an extension of time, the main contractor would be forced to pay liquidated damages to the employer. As the sub-contractor will normally have knowledge of the special circumstances as required by the second rule in Hadley v Baxendale, the main contractor can recover from him the liquidated damages he has paid to the employer. Where the sub-contractor is nominated under JCT 98, if he delays the main contractor, the main contractor is entitled to an extension of time under clause 25.4.7 of JCT 98 and therefore will not have to pay liquidated damages to the employer. This does not mean that the sub-contractor will be “off the hook”, because he will be directly liable to the employer under the standard form of warranty, NSC/W.

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Costs of Delay There is some debate as to the amount of loss the employer can recover in these circumstances. Technically the loss being claimed is unliquidated, because there is no reference in the warranty to the amount of money which the nominated sub-contractor must pay if he is in delay. Some commentators argue that what the employer has lost due to the nominated subcontractor’s delay is the right to claim liquidated damages from the main contractor, therefore the amount of those liquidated damages is recoverable from the nominated subcontract. Others say that the employer must prove the actual loss he has suffered due to the nominated sub-contractor’s delay, and that will be all he is entitled to recover. This is probably the sounder approach from a legal point of view, but in practice most employers claim the amount of the liquidated damages, and unless the difference between the two sums is considerable, it will rarely be worth a major battle. One of the problems with this ‘passing on’ of the main contract liquidated damages is that the level of damages agreed under the main contract may be out of all proportion to the value of the structural steel sub-contract works. From a strictly contractual angle this is irrelevant, because any delay in the contract, even on a relatively small sub-contract, can cause delays to other trades and therefore to the progress of the whole contract. If the client has determined the liquidated damages by genuinely pre-estimating his loss, then it is of no relevance that the delay may be caused by a small sub-contracting company who is carrying out only a limited amount of work. However, some employers and main contractors appreciate that if the main contract liquidated damages are set at a high figure, the only way to obtain sensible, competitive quotations from sub-contractors is to limit the amount of liquidated damages payable by sub-contractors. This may be achieved by reducing the rate, often by reference to a percentage of the sub-contract sum, or by putting a ceiling on the total amount of liquidated damages which may be claimed from a sub-contractor. Obviously if such limitations can be negotiated they will be of very real benefit to the Steelwork Contractor. Where the Steelwork Contractor is nominated, the negotiations will be conducted directly with the employer. In all other circumstances it would be the main contractor who would be claiming the liquidated damages, but it may still be possible to negotiate a limitation with the employer (particularly if he has selected the Steelwork Contractor), although this would require an amendment to both the main and subcontracts.

Main Contractor’s Costs The rules relating to the quantification of the main contractor’s own costs are the same as those for quantifying the sub-contractor’s loss and expense, see Chapter 12 - Claims.

Procedure for Claiming Costs The precise procedure for claiming damages for culpable delay by the sub-contractor varies according to the standard form which applies.

Nominated Sub-Contract NSC/C Under clause 2.8 of NSC/C, the main contractor notifies the Architect if the sub-contractor has failed to complete the sub-contract works on time, taking into account any extensions which have been granted. If the Architect agrees that the nominated sub-contractor is in culpable delay, he issues a certificate of delay against him under clause 35.15 of JCT 98. The Architect must issue this certificate within two months of receiving the notification from the main contractor. When that certificate has been issued, the main contractor becomes entitled to any loss or damage which he has suffered due to the sub-contractor’s delay. This will not include liquidated damages

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paid to the Employer, because as explained above, the main contractor will be entitled to an extension of time for delays by nominated sub-contractors under clause 25.4.7 of the main contract, therefore the employer will be unable to claim liquidated damages from him in respect of the delay. These will be recovered by the Employer directly under clause 3.3.2 of the warranty NSC/W. Once the certificate of delay has been issued by the Architect, the main contractor will be able to set off his delay costs against monies certified in favour of the nominated subcontractor. Note that the Architect is not entitled to certify that the nominated sub-contractor is in delay until the original date for completion has passed, even if it is clear well before that date that the sub-contract works are in delay. The wording of both the main and subcontracts makes this quite clear.

Domestic Sub-Contract: DOM/1 In DOM/ 1 it is the main contractor who decides when the sub-contractor is in delay. He does not issue a formal “certificate” to that effect, but he is required to notify the subcontractor In writing. This cannot be done until the original date for completion (as extended by any extensions already granted) has passed. Once the written notification has been issued, the main contractor may claim or deduct the loss and expense which he suffers due to the delay. He may only deduct these sums from payments otherwise due to the domestic sub-contractor if he follows the set-off procedure in DOM/1 by quantifying his claim and giving the appropriate notice. The sums which the main contractor can claim under DOM/1 will include any liquidated damages which he has paid to the Employer.

Named Sub-Contract: NAM/SC The rules relating to the recovery of the costs of delay from named sub-contractors under the Intermediate Form are precisely the same as those in DOM 1.

Domestic Sub-Contract : IN/SC The rules governing the recovery of the costs of delay from domestic sub-contractors under IN/SC are the same as those in DOM/ 1.

Works Contract/2 Under clause 2.11 of Works Contract/2, the Management Contractor notifies the Works Contractor if he fails to complete his work within the contract period or within any extended time. As with other contracts, that notice may not be issued until those periods have expired, i.e. the Works Contractor must be in the period of culpable delay. Works Contract/2 differs from other forms in that the Management Contractor may not issue the notice of delay until he has reached a decision on all of the Works Contractor’s outstanding applications for extensions of time. If a structural steelwork contractor is aware that a notice of delay is to be issued against him which he feels to be unjust he can delay it by applying for an extension of time, as that application will have to be considered before the notice can be issued. When the notice of delay has been issued, the Management Contractor may claim or deduct any direct loss and expense due to the delay. This will include liquidated damages payable under the Management Contract. If the Management Contractor cannot recover these liquidated damages from

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the sub-contractor (which he must pursue through legal proceedings if necessary) he will not be liable to the Employer because of the relief provisions. However, this does not affect the Works Contractor’s obligations in respect of liquidated damages.

CECA Sub-Contract The CECA form does not contain express provisions like those in the JCT related subcontracts requiring the main contractor to issue a notice of delay. Any culpable delay by the sub-contractor will therefore simply be a breach of contract entitling the main contractor to recover damages calculated in accordance with the rules in Hadley v Baxendale explained above. Clause 3(4) does provide that any loss and expense incurred by the main contractor, due to the sub-contractor’s delay in connection with the Main Works is within the contemplation of the parties as being probable results of any such breach by the Sub-Contractor”. This follows the wording of the second rule in Hadley v Baxendale and makes it quite clear that all of the main contractor’s losses, including liquidated damages payable under the main contract, will be recoverable. As with the JCT contract, the delay does not technically occur until the original completion date (plus any extensions) has passed, and so the costs will not be recoverable until that time. The CECA form preserves the main contractor’s common law set-off rights, so he will not need to follow any particular procedure (provided he complies with the provisions of the Housing Grants, Construction and Regeneration Act 1996) to deduct the costs of the culpable delay from monies otherwise due to the sub-contractor, save for waiting until the period of culpable delay has commenced.

Delays Caused By The Main Contractor or Employer JCT Contracts: Relevant Matters The “matters” entitling the main contractor or sub-contractor to claim loss and expense arising out of delay are very similar in all of the JCT forms and their related sub-contracts. They are as follows:-

(i) Late Instructions If the contractor or sub-contractor is delayed due to not having received not only instructions but also drawings, details or levels he will be entitled to recover the costs of that delay, provided he specifically applied in writing for the instruction etc. That application must have been made at the proper time, i.e. not too distant from nor too close to the date he needed the instruction or drawing. In the case of London Borough of Merton v Stanley Hugh Leach (1985) it was held that a contractor’s programme for the whole contract period showing when he required certain information was sufficient to fulfil this requirement, even though it was issued at the beginning of the contract. However, such a programme would require revision to take account of any significant variations or delays. To avoid disputes Steelwork Contractors should also issue a reminder at the proper time, even if they have produced such a programme at the beginning of the contract.

(ii) Opening Up or Testing The costs of a delay due to opening up or testing of work or goods and materials will be recoverable only where the work etc. tested is proved not to be defective. Even if the test reveals no defects, under JCT98 and IFC98 (and their related sub-contracts) there will be no entitlement to loss and expense if the opening up or testing was instructed following the

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discovery of a defect in similar work. (The contractor or sub-contractor will be entitled to an extension of time in these circumstances - see Chapter 10 on Extensions of Time) The circumstances in which the costs of a delay due to opening up or testing are recoverable are therefore extremely limited.

(iii) Discrepancies in or Divergences between Documents If the contractor or a sub-contractor finds a discrepancy or conflict between documents prepared by or on behalf of the employer, such as a conflict between the drawings and bills of quantities, the architect must issue an instruction to resolve the problem. If this causes a delay, the contractor or sub-contractor may recover the loss and expense arising out of that delay.

(iv) Employees Work or Supply of Materials The employer may choose to reserve certain work on the building to himself, or he may decide to employ someone other than the main contractor to carry out specific tasks. This is becoming increasingly frequent as employers split contracts between the shell and core of the building and the fitting out process. Fitting out contractors are often employed under quite separate contracts with the employer and therefore fall into this category. If such work causes a delay to the main contractor or his sub-contractors, they will be entitled to recover loss and expense. As structural steelwork is such an early trade, Steelwork Contractors will rarely be affected by fitting out works, but they may be delayed by demolition or piling contractors who in some cases will have been employed directly by the client. If the employer has chosen to supply goods or materials to the contractor or subcontractors and he delays in doing so, this will also entitle the affected party to claim loss and expense.

(v)

Architect’s Instruction to Postpone

The JCT main contracts permit the Architect to issue an instruction postponing any work to be executed under the contract. If he does so, the costs of the resulting delay are recoverable by the main contractor and all of his sub-contractors.

(vi) Lack of Access Delays caused by lack of access will give rise to a right to recover loss and expense. However, access is defined in a very limited manner: it is lack of access to the site (or any part of it) over land or buildings which adjoin the site and which are in the possession or control of the employer. The employer may well not control any of the land around the site at all, in which case this clause would have no application. If he does own or control adjacent land or buildings, he will be liable provided the access was stated in the contract documents or agreed between the Architect and the main contractor, and the contractor has given any notice required to the Architect.

(vii) Variations Delays due to variations or instructions as to the expenditure of provisional sums also carry loss and expense. If the variation is covered by a contractor’s quotation which has been accepted under the provisions of clause 13A of JCT98, the amount of loss and expense agreed as part of that quotation will be paid rather than any sum ascertained under clause 26.

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(viii) Deferment of Possession


If the employer exercises his right to defer giving possession of the site, the main contractor and all sub-contractors are entitled to recover loss and expense arising out of the delay.

(ix) Disruption of Regular Progress by the Main Contractor Although it is not strictly speaking, a “relevant matter”, all of the JCT related sub-contracts allow sub-contractors to recover loss and expense caused by any act omission or default of the main contractor which materially affects the regular progress of the sub-contract works. The difficulty with these clauses is proof; unless the main contractor has an express contractual obligation to make areas available to the sub-contractor at specific times, it can be a very uphill task to prove that any disruption is due to the main contractor’s default, particularly as the decided cases on the point e.g. Martin Grant v Sir Lindsay Parkinson indicate that sub-contractors have no implied right to complete continuity of working. Therefore if Steelwork Contractors require uninterrupted, unimpeded access for a specific period, they should state this in their tenders and try to ensure that it becomes a term of their contract with the main contractor.

(x)

Suspension due to Non-Payment

This right to recover loss and expense applies only to sub-contracts, not main contracts, as it is consequent upon the sub-contractor’s right to suspend work if he is not paid in accordance with the sub-contract. Such a suspension obviously causes a delay to the subcontract works, and the sub-contractor is entitled to an extension of time and loss and expense due to that delay.

JCT Contracts : Notice Requirements All of the JCT main contracts and their related sub-contracts require the main or subcontractor to apply in writing for loss and expense. The application should be made as soon as it becomes apparent that one of the events listed at (i) to (x) above will materially affect the progress of their works. This will be very early on in most cases, for example as soon as a variation involving extra work is issued, it is likely that some delay, and therefore some loss and expense, will be incurred. Sub-contractors are often reluctant to mention loss and expense at such a time (or even at all) for fear of seeming too “claims conscious”. This is usually a mistake. A simple, factual statement that loss and expense may be incurred is not an aggressive, over-contractual move, it is simply complying with the contractual requirements. If a claims battle should develop the sub-contractor’s position will be severely weakened if he has not given the notices at the proper time, and the main contractor will be the first to criticise him for not doing so. Although the giving of notices is not a condition precedent to the right to recover loss and expense, it will often be necessary to go part of the way towards adjudication, arbitration or legal proceedings to recover money if the notices have not been given, if only because no-one will have budgeted for it. Initial applications should of course be revised and updated as the full extent of the loss and expense becomes apparent. Although a full-blown claims document is not required by the JCT contracts in any circumstances, it will sometimes be necessary to prepare a very detailed application (for further information on this see Chapter 12 on Claims).

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JCT Contracts : Who Awards Loss and Expense


JCT 98 : Decision of the Architect In the JCT 98 main contract the Architect includes the amount of any direct loss and expense incurred by the main contractor in Interim certificates. Clause 26.1 provides that he may “ascertain” i.e. decide upon the amount of loss and expense himself, or he may instruct the Quantity Surveyor to do so. In practice, the Quantity Surveyor normally conducts any negotiations with the contractor.

NSC/C: Decision of the Architect or Contractor Under NSC/C the nominated sub-contractor applies in writing to the main contractor for his loss and expense. Normally, the main contractor passes that application on to the Architect, who ascertains (or instructs the Quantity Surveyor to ascertain) the amount of loss and expense incurred and includes that sum in the relevant interim certificate. One exception to this rule is where the delay or disruption to the nominated sub-contract works is due to the main contractor’s default (which includes the default of any other subcontractor). Loss and expense caused by such delay or disruption is not certified by the Architect : it must be agreed between the main contractor and the nominated subcontractor. It is not a certified sum, but is simply recoverable from the main contractor as a debt (i.e. a sum legally owed to the sub-contractor). The agreement of the amount of such loss and expense is rarely an easy process, as each side has a diametrically opposed commercial interest in the negotiations. If the amount is substantial however, it is worth making a properly documented claim and pursuing it, up to the point of adjudication or arbitration if necessary.

DOM/1: Decision of the Contractor The domestic sub-contractor under DOM/ 1 applies to the main contractor for his loss and expense. The amount is then agreed between them and is added to the sub-contract sum. If the main contractor has a similar claim against the employer, e.g. in respect of a delay due to late information, the agreement of loss and expense should not be too painful a process - although it may well be a lengthy one. If however the loss and expense arises out of the main contractor’s own default, there will often be considerable difficulties due to the main contractor’s vested interests, but a well-founded claim for a substantial sum will always be worth pursuing.

Intermediate Form IFC98: Decision of the Architect The rules for ascertainment of loss and expense under IFC98 are exactly the same as the rules in JCT 98.

NAM/SC : Decision of the Contractor The procedure for recovering loss and expense under NAM/SC is exactly the same as under DOM/1.

IN/SC : Decision of the Contractor The procedure for recovering loss and expense under IN/SC is exactly the same as under DOM/1

Management Contract: Part of Prime Cost There are no loss and expense provisions as such in the Management Contract 1998, because it is a prime cost contract and therefore the Management Contractor will recover his actual costs, provided they are not incurred due to his own negligence.

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Costs of Delay In any event because the Management Contractor win not be carrying out any work on site, the majority of the loss and expense caused by any delay will be suffered by the Works Contractors.


Works Contract: Decision of the Architect and Management Contractor The procedure for ascertaining loss and expense due to Works Contractors is very similar to that in NSC/C. The Works Contractor makes a written application to the Management Contractor, who passes It to the Architect with any comments. The Architect ascertains, or instructs the Quantity Surveyor to ascertain, the amount of loss and expense, which is then certified in favour of the Works Contractor. The difference between Works Contract/2 and NSC/C is that the ascertainment is carried out in collaboration with the Management Contractor, whereas the main contractor under JCT98 does not participate at all.

ICE 7th Edition Notice Requirements: Clause 53(1) Clause 53(1) of the ICE 7th imposes a general requirement upon the contractor to give notice whenever he intends to claim additional payment under any clause: therefore clause 53(1) applies to claims for costs arising out of delay. The notice must be in writing, and must be submitted to the Engineer as soon as may be reasonable and in any event within 28 days after the happening of the events giving rise to the claim. The contractor also has an obligation to keep such contemporary records as may be reasonably necessary to support his claim, so proper documentation will be vital. On receipt of the contractor’s notice, the Engineer may require specific records to be kept, and the contractor will be obliged to comply. After giving the initial notice, the contractor, “as soon as is reasonable in all the circumstances” must submit an interim account of his claim, giving details of the amount claimed and the grounds upon which it is based. That account must then be updated at the intervals required by the Engineer. Failure to comply with the requirements of clause 52(4) will have serious consequences for the contractor, because although the notice and interim accounts are not a condition precedent to payment, clause 52(4) expressly states that if the Engineer is prevented or prejudiced in investigating the claim. by their absence, to that extent the contractor will not be entitled to payment. Amounts agreed by the Engineer should be paid in the next interim payment. Clause 53(6) makes it clear that the contractor should be paid for any part of a claim which he can substantiate, even though he may be unable to substantiate the whole claim. Failure to settle the whole claim should not therefore delay payment of those parts of it which have been agreed.

Grounds for Recovering Costs Unlike the JCT forms, the grounds for recovering costs due to delay are scattered throughout the contract. They are as follows:-

Clause 7(4) Delay in issuing necessary instructions or drawings by the Engineer. The contractor will recover his reasonable extra costs incurred as a result of such delay.

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Clause 12 Adverse physical conditions and artificial obstructions which could not reasonably have been foreseen by an experienced contractor. Where a claim is allowed under this sub-clause, it should be noted that the contractor is to be paid not only the reasonable cost of carrying out any additional work but also a reasonable percentage addition in respect of profit.

Clause 13(3) This important sub-clause covers those situations where the Engineer issues instruction or directions which delay the contractor, or disrupt his construction arrangements so as to cause him to incur increased costs beyond those “reasonably to have been foreseen by an experienced contractor at the time of tendering”. The Engineer is to take such delay into account when determining extensions of time, and the contractor is to be paid such extra cost as is reasonable.

Clause 14 (8) This sub-clause requires the Engineer to take into account any delay in determining extensions of time, and entitles the contractor to reimbursement of extra costs, where the Engineer’s consent to the proposed methods of construction is unreasonably delayed: or where the requirements of the Engineer or any limitations imposed by any of the design criteria supplied by the Engineer could not reasonably have been foreseen by an experienced contractor at the time of tendering.

Clause 31(2) The contractor is entitled to extra costs arising from the provision of facilities for other contractors which could not reasonably have been foreseen at the time of tender.

Clause 40(1) The contractor is also entitled to the extra costs arising where the Engineer suspends the progress of the work except where, inter alia, the reason is weather conditions or default on the part of the contractor.

Clause 42(3) This clause covers the situation where the Employer fails to give possession of the site in accordance with the contract, and entitles the contractor to extra costs.

CECA Sub-Contract There are no separate express provisions dealing with loss and expense in the CECA form, Clause 10(1) obliges the sub-contractor to give notices in sufficient time to enable the main contractor to comply with his obligations under the main contract, so the timetable under clause 53(1) of the ICE form will be equally important to the sub-contractor. Provided such notices are given, the contractor must take all reasonable steps to secure for the sub-contractor the benefits of the main contract which are applicable to the subcontract works. The sub-contractor may also have a claim for breach of contract against the main contractor if he delays him by his own default, although any unforeseen or “neutral” events are at the sub-contractor’s risk.

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CHAPTER 12


CLAIMS This Chapter describes different types of claim, sets out some basic rules for presenting and quantifying claims and suggests techniques which can be used in negotiations. Given the complexity and diversity of claims together with developments in case and statute law and revisions to forms of contract, this Chapter must, of necessity, represent only broad overview of the subject as at the date of this Handbook and Steelwork Contractors should, of course, seek appropriate legal advice in relation to any claims with which they may be involved. Three other Chapters in this Handbook deal with subjects closely linked to claim: Chapter 9 on Variations, Chapter 10 on Extensions of Time and Completion, and Chapter 11 of Costs of Delay.

Types of Claim Claims fall into two basic categories: (a) those for which specific provision is made by the contract, e.g., loss and expense due to delay; and (b) claims for breach of contract e.g., breach of the implied term that the employer will not hinder the main contractor in carrying out his work. These are sometimes described as “common law” or “extra-contractual" claims.

Claim Provided for by the Contract The most common claims are made under express terms of the contract, for example, claim for extra costs due to variations or for loss and expense due to delay and disruption. Many arise out of a default by the other party, e.g. late issue of drawings, but others, notably claims due to variations, do not. All of the standard forms include a procedure which must be followed if a claim is made under an express term of the contract. Some standard forms, such as the Government Contract, GC/Works/ 1 (Single Stage Design & Build (1998) General Conditions, Condition 46(3)) provide that compliance with that procedure is a condition precedent to the contractor’s right to make a claim. In other words if the procedure is not followed, the contractor loses his rights. The JCT and ICE forms are not so stringent in their requirements, although from a practical point of view the procedure is important, because failure to follow it gives the other party a powerful weapon in negotiations.

Notice Requirements and Procedures JCT Contracts As explained in Chapter 11 - Costs of Delay, all of the JCT sub-contracts lay down similar procedural requirements regarding claims. The most detailed are to be found in the clauses entitling the sub-contractor to claim loss and expense due to disruption of the regular progress to the works. They provide that the sub-contractor must make written application to the main contractor as soon as it becomes (or should have become) apparent to him that his regular progress has been or is likely to be disrupted.

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Claims This will rarely be at the end of the contract, which is when most claims are submitted in practice. As soon as a sub-contractor becomes aware of an event which may delay him, he should give written notice to the main contractor that he may incur loss and expense. Many sub-contractors do not do this because they do not want to get a reputation for being “difficult” or claims conscious, but this is extremely short-sighted. Main contractors do not hesitate to make claims against Employers when they are entitled to do so, and they are more likely to respect a sub-contractor who understands and follows the contractual procedures. The tone of the notice or application is also important. Allegations of blame should be avoided unless the situation is very clear; in general the sub-contractor should simply record the facts as neutrally as possible. Remember that claims from sub-contractors are often an important part of the main contractor’s claim against the Employer, and if this is the case he is likely to welcome early notifications and applications. Another important point is that the first notice or application does not have to be as refined or detailed as the final version of the claim. The contracts envisage that an initial general application will be made, which will later be amplified and substantiated as the full effects of the disruption become apparent. The main contractor is entitled to request further details from the sub-contractor to substantiate the claim, but the sub-contractor should supply the information on his own initiative as soon as it becomes available. For further comments on this topic, see the section headed “Presentation of Claims” below.

ICE Contracts The ICE 7th contains specific requirements regarding the notification of claims, in clause 53(1). If the contractor intends to claim additional payment pursuant to any clause in the contract (other than claims for the direct costs of variations) he must give written notice to the Engineer as soon as may be reasonable after the events giving rise to the claim. The ICE 7th therefore place a slightly different emphasis to the JCT forms as they stress the event giving rise to the claim rather than the incurring of the costs. Having given written notice of the events, the contractor must then keep such contemporary records as are necessary to support his claim, together with any records he is specifically requested to keep by the Engineer. The contractor must also submit interim accounts to the Engineer at reasonable intervals giving “full and detailed particulars” of the amount claimed. The ICE 7th expressly provide for the contractor’s failure to comply with this procedure by stating that the claim will be paid only to the extent that the Engineer has not been prevented from or substantially prejudiced by the failure from investigating the claim. A similar term is probably implied into the JCT contracts, particularly in relation to information specifically requested by the Architect, Quantity Surveyor or main contractor which has not been supplied. Under the CECA form of sub-contract, the sub-contractor is required to give the main contractor such notices and information as will enable the main contractor to comply with his obligations under the main contract, so the above provisions are effectively stepped down into the sub-contract. The penalties for failing to comply with this obligation are severe, for if the main contractor is prevented from recovering any sums from the Employer under the main contract by such a failure, these will be deducted from payments otherwise due to the sub-contractor. Thus if the sub-contractor fails to comply with the notice provisions in the main contract he may not only lose his own rights to make a claim but may also find he has to pay the main contractor’s loss and expense as well. The only mitigation available to him is a proviso to the effect that he will not be so liable if he did not know (and should not have known) of the contractor’s need for the notice or information - although ignorance

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Claims of the terms of the contract will be no excuse, only ignorance of facts which triggered the requirement for a notice or claim.


Common Law Claims As explained above, a common law claim is a general claim for breach of contract rather than a claim under an express contractual provision. One of the most important differences between a common law claim and a contractual one is that at common law no particular notice or other procedural requirements will apply. This can be very convenient if the contractor or sub-contractor has failed to comply with the procedure, but still wishes to make a claim - provided the event giving rise to the claim is a breach of contract (and not a permitted act such as a variation), he can claim damages for breach of contract rather than loss and expense under a specific clause. The damages recoverable at common law for a breach of contract will be evaluated on the same principles as “direct loss and expense” which is recoverable under the JCT forms; this was confirmed in the decision in F.G. Minter v Welsh Health Technical Services Organisation (1980). The rules for quantifying common law damages were set down in the case of Hadley v Baxendale (1854) and fall into two categories: (i) damages which arise naturally from the breach of contract i.e., according to the usual course of things (e.g. related preliminaries arising out of a delay); (ii) damages arising out of special circumstances which were known to both parties at the time they made the contract (e.g. loss of profit on another job lost due to delay). Other likely types of loss (sometimes referred to as “heads of damage”) are considered in the next section.

Quantification of Claims Quantifying a claim is not an exercise in creating fiction. Proof is vital, particularly in the form of contemporaneous records such as letters, minutes of site meetings, site diaries and photographs. Estimates should be avoided in favour of accurate figures and precise calculations. Typical heads of claim are set out below.

Extended/Additional Preliminaries All claims should reflect the costs actually incurred by the contractor or sub-contractor. It is therefore not appropriate to claim a pro rata of the preliminaries section of the Bills of Quantities regardless of what is in that section and the nature of the claim. Many preliminary items will be one-off items of cost such as plant mobilisation, installation of electricity and water etc. Others will be time-related and if the claim is for delay costs it will be appropriate to claim the additional expense, of those time-related items. Similarly, some items may be related to the quantity of work undertaken, so if a variation increases the quantity of work required an adjustment of such items will be recoverable. The basic rule is therefore to identify what is included in the preliminaries and claim the increased costs only of those items relevant to the event giving rise to the claim.

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Claims

Additional Management and Supervision


Variations and delay create logistical problems, which means extra supervision and management is required. Such costs are recoverable, but they must be proved. They should not be claimed both as a separate item and as part of another head of the claim, such as preliminaries or head office management. The need to prove additional management costs means that personal diaries, appointment records etc. will be very important, and if it is clear that a claim will be made on a particular contract all managers should ensure that there are records showing how much time has been spent. Supervisory costs are often easier to prove as there will normally be time sheets, daywork sheets and entries in the site diary to demonstrate the additional time spent on site by supervisors.

Plant Items and Equipment If an additional item of plant is required to carry out a variation, the full cost of obtaining and using that item of plant should be recoverable. In claims for delay the hire rate for the additional period may be allowed where the Contractor has incurred additional hire charges. Where the Contractor owns the plant, he cannot claim on the basis of a notional hire rate over the period of delay - Alfred McAlpine Homes North Limited v Property and Land Contractors Limited (1995). In that event, the claim should be calculated on the basis of depreciation, interest, maintenance and wages. If the plant belongs to the Steelwork Contractor and he can prove that it would be earning him profit on another contract if it were not for the delay, the loss of profit may also be allowed.

Increased Costs If the claim relates to delay costs, increased costs of labour and materials should be recoverable. However, if the contract is fixed price and no limit on the fixed price period has been agreed at tender stage, Steelwork Contractors will find it difficult to persuade a quantity surveyor to pay for fluctuations. Increased costs is one area where theoretical calculations can be helpful, as the NEDO formula is generally regarded as authoritative, and will provide a good basis for negotiations.

Disruption of Regular Progress This features in almost every claim, and although it may be relatively easy to prove that some disruption has occurred it may be much harder to demonstrate that it is legally recoverable and how much it has actually cost. First of all the contractor needs to prove how he would have proceeded if the disruption had not occurred, e.g. by using a programme or method statement. He then needs to show that his progress was disrupted by the main contractor (or other sub-contractors for whom the main contractor was responsible). The degree of disruption is important: all subcontractors are obliged to proceed generally in accordance with the main contract works, and it was confirmed in the case of Martin Grant v Sir Lindsay Parkinson (1984) that subcontractors are not automatically entitled to a flow of work which enables them to carry out their obligations in the most economical manner possible. However, if it can be demonstrated that the main contractor had been properly requested to supply information or had agreed to make an area of the site available but had failed to do so, the costs of any consequent disruption would be recoverable.

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Loss of Productivity It is generally accepted that disruption and excessive overtime working both lead to a loss of productivity, but the actual costs are extremely difficult to prove. The most reliable way is to compare normal output per hour with output per hour during the affected period, but such statistics will not always be readily available. This item is often simply estimated, but in the absence of specific proof it would be unwise to pitch that estimate at too high a figure.

Overheads and Profit There are two types of overheads: those related to a particular contract and fixed overheads. e.g. head office costs. If the event giving rise to the claim increases an overhead specific to the contract it will be a relatively easy matter to prove (and may have been identified in the preliminaries and therefore be claimed under that head). Fixed overheads present greater problems. Head office costs etc. will be payable regardless of delay or variations on a particular contract- and therefore it is often argued they should form no part of a claim. However, if this were correct the allowance for overheads included in the tender would be stretched to cover a period longer (or an amount of work greater) than that originally intended. Profit should also be recoverable as part of the loss and expense or damages, if the budgeted allowance is diminished by the delay. Therefore if the contractor can prove that because of the event giving rise to the claim he has lost the opportunity to deploy his resources on other contracts earning profit and recovering fixed overheads, they should both form part of his claim. The calculation of overheads is another vexed question. The methods used to do this vary from a simple device of providing an auditor’s certificate to prove the normal level of fixed overheads through to complicated mathematical formulae. The most widely used formula is known as “the Hudson formula” which is: Head Office/Profit Percentage 100

x

Contract Sum Contract Period

x

Period of Delay

This formula was approved by an Official Referee in 1988 in the case of J.F. Finnegan v Sheffield City Council, but it is regarded with suspicion by many quantity surveyors. and is certainly capable of producing some ludicrously high figures for overheads and profit. An alternative formula is the “Emden formula” which is similar except the Head Office or profit percentage is derived from the financial records of the claimant company and thus relates to the claimant’s business as whole rather than simply to the contract in question. The Emden formula is: x

h 100

c cp

x

pd

where: •

h

= the head office percentage, normally arrived at by dividing the total costs of the organisation as a whole by the total turnover

•

c

= the contract sum

•

cp = the contract period

•

pd = the period of delay, to be calculated in the same units as cp

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It is important to note that the use of any formula will only be justified if the assumptions on which it is based can be supported by evidence - Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995). In general, an overhead percentage based on detailed costs and an auditor’s certificate is likely to be more acceptable. In order to recover loss of profit, the Steelwork Contractor should also be prepared to demonstrate that any delay prevented him from taking on profitable new work.

Interest and Financing Charges The right to be paid interest in late payment will depend on the provisions of the contract or upon the Late Payment of Commercial Debts (Interest) Act 1998 (see Chapter 7). Financing charges will however be recoverable by contractors and sub-contractors as part of their claims for loss and expense or damages. Financing charges have been defined as the cost to the contractor of financing the delay and/or disruption, either by paying interest on a bank overdraft or by losing interest on money which would have otherwise been invested. This principle was first accepted by the courts in the case of F.G. Minter Ltd v Welsh Health Technical Services Organisation (1980) although this decision is not easy to reconcile with later decisions in President of India v La Pintada Cia, Navigacion SA (1985) and BP Chemicals Ltd v Kingdom Engineering (Fife) Ltd (1994). The period during which the financing charges will be recoverable runs from the date they are incurred up to the date the loss and expense is properly ascertained under the contract. It is important that the Steelwork Contractor makes regular applications for reimbursement of financing charges, otherwise he may lose his rights to claim them, particularly under the JCT forms.

Presentation of Claims Having quantified the claim, it is worth spending a little extra time and effort on presentation. A claim which is well structured and easy to understand has much better prospects of success than a scruffy, disorganised and ill-expressed one. Structure is vital. The document should be divided into sections, which will normally be:

(i)

Introduction This should identify the parties to the contract, the conditions, the actual and programmed commencement and completion dates, and give a brief summary of what is being claimed, for example, ten weeks extension of time and £100,000. Bear in mind that the person evaluating your claim may not have been involved in the running of the contract, so this information cannot be taken as read.

(ii)

Basis of Claim Set out whether your claim is for damages for breach of contract at common law (if so, identify the express or implied terms alleged to be broken) or for loss and expense pursuant to a particular clause of the contract.

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(iii) Details of Events on which the Claim is Based


Set out the events which give rise to your claim, listing the relevant delays, variations etc. You should also refer to the notifications of these events which you issued during the progress of the works.

(iv) Evaluation of the Claim This will be the quantification of your damages or loss and expense which has been explained above.

(v) Appendix This should contain the key documents which support your claim which you have referred to in the previous four sections. The golden rule here is to be selective; do not simply include all of the correspondence, but be prepared to supply further substantiation if it is requested. This structure will be appropriate however brief or detailed the claim, although obviously the length of the sections will vary. Clarity is also important. Identify the facts on which your claim is based and set them out in a comprehensible way. Minor things such as typing errors and poor layouts can be very frustrating to a reader, and should be avoided if possible.

Negotiation of Claim Negotiating claims can be a long drawn out and frustrating business. The better the claim has been prepared the caster the task will be, but even the best prepared, most justified claims are likely to be reduced in negotiations, and many contractors allow for this by including a negotiating margin in their claim. The first phase of the negotiation will usually be by letter. Steelwork Contractors should respond to requests for further information as fully and promptly as possible, even if the requests seem to be no more than an excuse for not dealing with the claim. If you continue to supply the information, there will eventually be no excuses of that type left. If the recipient of the claim will not respond at all, keep up the pressure. Consider involving professional advisers such as lawyers or claims consultants who will be able to advise on the commencement of legal proceedings if necessary. Often the intervention of professional advisers provokes a response of the same sort, if not always a favourable one. Once the parties have set out their respective views in writing, progress is normally best achieved through meetings. If possible, ensure that those attending have the authority to settle and agree the claim as well as discuss it: this can save a considerable amount of time. Concessions will always have to be made, but they should come from both sides. If the Steelwork Contractor is too timid, the claim will be steadily eroded until there is virtually nothing left. Remember that legal proceedings (adjudication, litigation or arbitration) can be a valuable tool in negotiations, but professional advice is imperative in such cases. Finally, if an agreement is reached at a meeting, ensure that Its precise terms are recorded at the meeting and signed by those present. Memories can be both short and inaccurate in such circumstances.

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Claims Consideration should also be given to the involvement of an independent mediator although this will normally require the consent of both sides. The object of the mediation will be to achieve an agreement and neither party is normally bound in advance to accept the outcome of the mediation. A list of accredited mediators can be obtained from the Centre for Dispute Resolution (CEDR), 93 Gresham Street, London EC2V 7NA.

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CHAPTER 13

DEFECTS LIABILITY


This Chapter describes the provisions of the standard forms which deal with defects liability, and summarises briefly the general legal rules regarding defective work and materials. Liability for defective design is considered separately in Chapter 14. It is a common misconception that liability for defects ceases at the end of the relevant defects liability period specified in the contract. This is not the case: a contractor or subcontractor remains legally responsible for defects in his work until the expiry of the relevant limitation period, which will be six years after practical completion if the contract was signed, or twelve years if it was executed under seal or as a deed. If the injured party is suing for negligence rather than for breach of contract it may be even longer - up to fifteen years from the date of the negligent act. (For a full explanation of limitation periods, see Chapter 16). There are therefore four distinct stages in the life of a building at which defects may arise: (i) during the construction of the building (ii) during the defects liability period (iii) after the expiry of the defects liability period but before the end of the relevant limitation period (iv) after the limitation period has expired. Responsibility will vary depending upon the period during which the defect occurs, and therefore this Chapter considers each of the above four stages separately. A brief section at the end of this Chapter discusses the amount of damages payable for defective work

Definition of a Defect Work or materials will be defective if they do not comply with the express and implied terms of the contract. The various standard forms differ slightly in this respect. For example, the JCT forms require compliance with the contract documents (which will normally lay down objective standards), and allow the Architect to specify that certain workmanship and/or materials are to be to his reasonable satisfaction. This subjective standard is normally confined to matters affecting the aesthetic aspects of the building. In contrast, the ICE form requires the contractor to construct the whole works to the satisfaction of the Engineer. Note that they do not merely have to be to his reasonable satisfaction. However, the contractor is relieved of his obligations regarding works and materials insofar as he cannot fulfil them due to legal or physical impossibility.

(i)

Defects Arising During Construction

Frequently, defects will arise during the progress of the works, and all the standard forms give the Architect or Engineer certain powers in that event. The question of whether such defects constitute a breach of contract which will give rise to a right to recover damages (beyond the express remedies given by the contract) was considered in Hosier & Dickinson v Raye (1972). In that case, the view was expressed that such defects were a “temporary disconformity”, which did not constitute a breach if put right promptly on receipt of an instruction.

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Defects Liability However, this view was obiter dicta (i.e. not central to the decision in that case) and does not therefore create a precedent. Indeed, it is a view with which many commentators disagree, on the grounds that correcting a defect at a late stage in the work may give rise to considerable difficulties, and that in a building contract, once work and materials are fixed, they are the property of the Employer. It is therefore more prudent to treat a defect as a breach of contract, which will give rise to a right for the Employer to claim damages.

JCT98 If the contractor under JCT98 executes work or supplies materials which are not in accordance with the contract, the Architect has a range of powers under Clause 8.4. These powers include: •

issuing instructions requiring the removal from site of non-compliant work, materials or goods

•

allowing non-compliant work, materials or goods to remain following consultation with the contractor and agreement of the Employer and an appropriate deduction to be made from the Contract Sum

•

to issue a variation following consultation with the contractor

•

to order opening up for inspection or test

Nominated Sub-Contract NSC/C The Architect’s powers are passed down into the nominated sub-contract by clause 3.4. NSC/C also binds the contractor to consult with the nominated sub-contractor if it is appropriate, and therefore the nominated sub-contractor can enforce the consultation process if necessary. The drafting of the stepped down clauses regarding opening up and testing is somewhat complex. Where the Architect instructs further opening up and testing following the discovery of a defect under the main contract, if that defect is in nominated sub-contract work the instruction will be passed on by the main contractor to the nominated sub-contractor who must comply with it. (Note that the main contractor may not issue such an instruction on his own initiative). The consequences of the instruction, and the criteria to which the Architect must have regard in issuing it, are exactly the same as under the main contract. However, NSC/C also deals with the effect on nominated sub-contract work of other work being opened up for inspection or tested in clause 3.8. For example, if services in a ceiling void are required to be tested under clause 8.4.4 of JCT98 the ceiling contractor may need to take down his work to allow the services contractors to carry out the testing, and when the testing is complete, the ceiling contractor will need to replace that part of his work. Where an instruction issued under clause 8.4.4 of JCT98 necessarily results in the nominated subcontractor’s work being taken down, re-executed, refixed or resupplied, the main contractor is empowered to issue directions to the sub-contractor to take down etc. The sub-contractor will be paid by the main contractor for such work, on the basis of a fair valuation. The payment must be made by the contractor within 14 days of the end of the month when the taking down etc. was carried out. The sub-contractor will also be entitled to an extension of time and loss and expense. When the nominated sub-contractor’s work has reached practical completion, the main contractor may no longer issue directions requiring him to carry out such taking down etc. Although it is open to the main contractor and the sub-contractor to reach an agreement this would be totally outside the terms of the contract. If such a separate agreement cannot be reached, then the Architect must nominate a further sub-contractor to carry out the taking down etc. work.

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In NSC/C, the nominated sub-contractor who has executed the defective work undertakes to indemnify the Main Contractor for any costs he may incur in paying other sub-contractors their costs in respect of taking down etc. work. The Architect’s powers to allow defective work and materials to remain and to issue “free” variations reasonably necessary as a consequence of doing so or as a consequence of ordering the removal of defective work are also stepped down into NSC/C.

Domestic Sub-Contract – DOM/1 The DOM/ 1 clauses differ fundamentally from those in the nominated subcontract in that DOM/ 1 gives the main contractor his own powers to instruct opening up and testing etc: he is not restricted to passing on Instructions from the Architect. The arrangements are set out in clause 4.3 of DOM/l. Clause 4.3.2 gives the main contractor a range of powers where the sub-contractor has executed defective work or supplied defective goods and materials (described in the contract as “non-complying work”). Firstly, the main contractor may require the removal or rectification of any non-complying work. If he does so on his own initiative (i.e. he is not simply passing on an Architect’s Instruction) he must have regard to the Code of Practice “A” which is appended to DOM/1. The purpose of the Code is to assist the main contractor in deciding whether to require removal or rectification, and requires him to consider matters such as the relative costs of removal and rectification, the amount of time involved and the significance of the problem. The Code also stresses the desirability of agreeing with the subcontractor how the non-complying work should be dealt with, and it will normally be in the domestic subcontractor’s interest to make sensible proposals for dealing with the defective work or materials. The main contractor may also, after consultation with the sub-contractor, vary the subcontract works to the extent which is reasonably necessary as a consequence of the instruction to remove or rectify defective work. Such variations are effectively free to the main contractor and the Employer, as the sub-contractor will not be paid the costs of carrying out the varied work, nor will he obtain an extension of time or loss and expense. Once again, the main contractor is not restricted to passing on Architect’s instructions under the main form; he may order variations on his own initiative if he feels it appropriate. It should be noted, however, that variations will only be “free” if they are reasonably necessary as a consequence of removal or rectification; if the main contractor does not fulfil this criterion he will have to pay for such variations in the usual way. A further power available to the main contractor is the right to order opening up and testing. If no defects have already been discovered, that opening up and testing is instructed under clause 4.3.1. and if it reveals no defects the sub-contractor will be paid the lull costs of the opening up or testing and any necessary making good; he will also get an extension of time and loss and expense. If defects are revealed the opening up or testing will be at the sub-contractor’s expense and he will not obtain an extension of time or loss and expense. If defects have already been discovered, different rules apply to the ordering of opening up or testing, which are set out in clause 4.3.2.3 of DOM/ 1. The main contractor may order such opening up or testing as is reasonable in the circumstances to establish to his reasonable satisfaction the likelihood or extent of any further similar defects. As mentioned above, the main contractor is not restricted to passing on instructions from the Architect; he may require such opening up or testing on his own initiative.

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The domestic sub-contractor’s main protection is that the main contractor must have regard to Code of Practice “B” which is very similar to the Code of Practice incorporated into JCT 98. save that two additional matters must be taken into account: (ii) the nature and extent of any opening up or testing instructed by the Architect under the main form which affects the domestic sub-contract works; (iii) any decision of the Architect under the main form not to instruct opening up or testing which affects the domestic sub-contract works. This will make it extremely difficult for the main contractor to differ from the Architect, in particular he will need excellent reasons to order opening up or testing additional to that required by the Architect. Provided the opening up or testing is properly ordered under clause 4.3.2.3. the sub-contractor will not recover the costs of the opening up or testing nor any consequent making good, regardless of whether or not defects were revealed. However, provided no defects were revealed the sub-contractor would be entitled to an extension of time; but not to loss and expense. There is one very important restriction on the main contractor’s own powers to order opening up or testing and to require the removal or rectification of defective work the contractor may not issue such directions on his own initiative relating to work which is a matter for the opinion of the Architect. Further, the main contractor does not have his own powers to allow defective work to remain or to instruct "free" variations which are reasonably necessary as a consequence of doing so; decisions on such matters must be taken by the Architect. The sub-contractor will be aware of whether an instruction originates with the Architect or main contractor because clause 4.3.2 expressly requires the main contractor to inform the sub-contractor if his direction is passing on an instruction of the Architect.

Intermediate Form IFC98 The Architect’s powers under IFC98 regarding defective work are somewhat limited compared to his powers under JCT98. Obviously, he has the power to instruct that defective work, goods and materials are removed (clause 3.14) and consequently the contractor would be bound to install work or materials which complied with the contract. He may also order opening up and testing of any executed work under clause 3.12. Unless such opening up and testing is provided for in the contract documents, the contractor will be entitled to payment for it, and an extension of time and loss expense due to any delay provided the work tested is in accordance with the contract. If not, the opening up and testing is entirely at the Contractor’s cost. Where a defect has already been discovered, different provisions apply regarding opening up and testing. Under clause 3.13. 1, as soon as a defect is discovered, the contractor must give a written statement to the Architect of the action he proposes to take (at no cost to the Employer) to establish that there are no similar defects. If the contractor fails to provide such a statement within seven days of the discovery of the defect, or if the Architect is not satisfied with the contractor’s proposals, he may instruct the contractor to carry out such opening up and testing as the Architect deems necessary to establish there is no further similar failure. He may also issue such instructions if he cannot wait for the contractor’s proposals because of safety considerations or statutory obligations. If the further opening up and testing instructed by the Architect reveals no further defects, he will get an extension of time for any delay caused, but no loss and expense. If the contractor objects to the amount of opening up and testing ordered by the Architect, he may make a written objection within ten days of receiving the instruction. However, this does not affect his obligation to comply with the instruction, and if the Architect chooses to neither withdraw or

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modify it on receipt of the Contractor’s objection. The Contractor’s only remedy is immediate adjudication or arbitration. Furthermore, there is no code of practice to which the Architect must have regard in IFC93 as there is in JCT98. Generally, the IFC98 provisions on opening up and testing do not offer quite as much protection against a capricious Architect as the JCT98 clauses. However, the clauses in JCT 98 regarding allowing defective work to remain and instructing “free” variations do not appear in IFC98. The omission of such clauses will frequently be to the contractor’s advantage.

Named Sub-Contract - NAM/SC The Intermediate Form provisions are stepped down by clause 5 of the named sub-contract NAM/ SC. There are only two significant departures from the main form clauses: firstly the time periods are slightly shorter (the sub-contractor must give his proposals within 5 days of the discovery of the defects and must object within 7 days of receiving an instruction regarding further opening up and testing); secondly the Contractor has his own powers to instruct further opening up and testing under clause 5.6. He is not confined simply to passing on instructions of the Architect. The somewhat complex provisions in NSC/C regarding the effect of opening up and testing on other sub-contract work have not been included in NAM/SC, but the lack of such provisions does not appear to have caused any problems in practice.

Domestic Sub-Contract – IN/SC The contractor’s powers regarding defective work, opening up and testing etc. are exactly the same under IN/SC as they are under NAM/SC.

Management Contract 1998 Under clause 3.10 of the JCT Management Contract the Architect may issue Instructions requiring the Management Contractor to secure the carrying out (by Works Contractors) of opening up and testing. Such opening up and testing will be at no cost to the Employer only if it reveals defects In the work tested. There are similar provisions to those mentioned above in the Management Contract clause 3.11 regarding opening up and testing following the discovery of a defect, allowing defective work to remain or instructing "free" variations. The Management Contractor is also expressly required to comply with any instruction of the Architect requiring him to secure the removal or making good of defective work at no cost to the Employer.

Works Contracts - Work Contract/2 The Works Contract conditions follow the provision of the Management Contract regarding defects. The Management Contractor may both pass on instructions of the Architect regarding defects and opening up and testing, and issue his own reasonable directions.

ICE 7th Edition ICE 7th contains extensive provisions regarding the uncovering and testing of work and materials. Clause 36(l) gives the Engineer a general power to instruct that work and/or materials are subjected to such tests as he directs. He may instruct the tests to be carried out at the place of manufacture, on the site or at any other place specified in the contract such as a laboratory.

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The contractor must provide all the resources normally required for the tests. The contractor must bear the costs of the tests if they are provided for in or “clearly intended by” the contract and in respect of certain tests (tests under load; tests regarding the appropriateness of design for Its intended purpose) there must be sufficient detail in the specification or lulls of quantities to enable the Contractor to have allowed for the tests in his tender. In regard to all other tests (i.e. those not referred to or intended by the contract or where sufficient detail has not been given where that requirement applies) the Employer bears the cost of the test provided it reveals no defects. There are no express provisions in ICE 7th regarding testing following the discovery of a defect, but testing of work when a defect has been rectified will normally be at the contractor’s cost, under a general provision requiring him to test all rectified work in the specification of bill of quantities. The contractor is also required to supply samples of materials to be incorporated into the works for testing. This will be at the Employer’s cost unless their supply is provided for or “clearly intended by” the contract. The Engineer may instruct the contractor that in future work or materials is to equal the results of a test or a sample which are below what is specified in the contract. In these circumstances, the contractor should protect himself by confirming the instruction as a variation, otherwise he may subsequently be forced to upgrade the work or materials to the standard specified in the contract. Unlike the JCT forms, the ICE 7th deal separately with testing and uncovering work. Clause 36 deals with testing, whilst clause 38 deals with uncovering. Clause 38(1) imposes a strict duty on the Contractor not to cover up work without the consent of the Engineer, who must be given full opportunity to examine the work. The contractor must give the Engineer notice when the work is ready for examination. If the Engineer delays unreasonably the inspection of the work (or notifies the contractor that inspection is not necessary) the contractor should not cover up the work, but he will be entitled to an extension of time for any delay caused. Once the work has been covered up, if the Engineer then decides he wishes it to be uncovered or openings to be made, he may issue instructions to that effect under clause 38(2). Provided the contractor has complied with his obligations under clause 38(l) regarding inspection before covering up, he will be paid the costs of the uncovering and making good if the work and materials uncovered are free from defects. Clause 39 of the ICE Conditions empowers the Engineer to instruct the removal and reexecution of’ any defective work.

CECA Sub-Contract Clause 2 of the CECA form imposes a general obligation on the sub-contractor to execute the works to the reasonable satisfaction of the contractor and Engineer. The liabilities of the sub-contractor therefore appear to be slightly less than those of the main contractor, who must provide work to the Engineer’s satisfaction (there is no requirement that he must be reasonable) unless it is legally or physically impossible for him to do so. However, clause 3(2) of the CECA form requires the sub-contractor to comply with the provision of the main contract “except where the provisions of the sub-contract otherwise require. It would therefore be open to a main contractor to argue that the sub-contractor was bound to comply with the slightly higher standard in the main contract. As the CECA contract is comparatively brief, there are no express provisions dealing with the testing and uncovering of sub-contract work. However, by clause 7 the sub-contractor must comply with decisions and instructions of the Engineer confirmed in writing to him by the contractor, and the

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main contractor has his own powers to issue such instructions as the Engineer has the right to issue under the main contract. In this simple manner, the main form provisions are effectively stepped down into the sub-contract.

(ii)

Defects Arising During the Defects Liability Period

All of the standard forms considered in this Handbook provide for a defects liability period. During this period, the contractor must rectify all defects which appear and are notified to him by the Architect or Engineer. This has practical advantages for both sides: it gives the Employer reassurance that problems which appear during the early life of the building will be resolved, and it allows the contractor to rectify the work himself, which will almost certainly be cheaper than having to pay for someone else to do the work. The JCT forms all have very similar provisions on the defects liability period, and they are therefore not discussed separately below, but are commented upon collectively.

JCT Main Forms The defects liability period begins on the date of practical completion, and runs for the period specified in the main contract appendix. As a default this is 6 months but is commonly extended to 12 months. During that time, the contractor is bound to rectify at his own cost all defects which appear and which are due to materials or workmanship not being in accordance with the contract, or due to frost occurring before practical completion. If faults appear due to other causes, the contractor will not be obliged to rectify them, although he may reach a separate agreement to do so with the Employer, on the basis that he will be paid for the work. The Architect may issue instructions requiring the contractor to make good defects at any time during the defects liability period, and the contractor is obliged to comply with those instructions, at his own cost, within a reasonable time of receiving them. The Architect must also issue a schedule of defects (known colloquially as a snagging list) not later than 14 days after the expiry of the defects liability period. Although he may issue the schedule at any time before that, he is unlikely to do so, because once the schedule has been issued, the Architect may not issue further instructions requiring the contractor to remedy defects. The Contractor would remain liable for the costs of the remedial works, but he would not be obliged to carry them out himself. The Architect also has the option during the defects liability period of instructing that certain defects are not to be made good by the contractor, and making an appropriate deduction from the contract sum in respect of those defects.

JCT - Related Sub-Contracts The JCT-related sub-contracts contain similar provisions regarding defects liability periods to those in the main forms. For specialist work, the defects liability period is likely to be twelve months rather than six, particularly in relation to engineering services to ensure that the specialist work can function properly during all seasons of this year. As practical completion of nominated and domestic sub-contract works may occur substantially in advance of practical completion of the main contract works, it is quite possible that the defects liability period for the sub-contract works will expire before the expiry of the main contract period. With early trades such as structural steelwork, this will, frequently be the case. The JCT sub-contracts deal

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with this by providing for the sub-contractor to accept a similar liability to the main contractor as he has under the main contract in respect of defects in the sub-contract works. Thus, the sub-contractor’s liability to remedy defects in his work will not end until the main contract defects liability period has expired.

ICE 7th Edition The period during which the contractor must remedy defects is called the “Defects Correction Period “in the ICE 7th. It begins to run on the date of completion, and continues for the period specified in the Appendix to the form of tender, normally 12 months. The contractor’s obligations under ICE 7th are similar to those which arise under the JCT forms: he must remedy defective work is so instructed by the Engineer at his own cost where it is necessary as a result of his breach of contract. At the end of the Defects Correction Period, the contractor must deliver the works up to the Employer “in the condition required by the Contract (fair wear and tear excepted)“. This means that if patent defects (i.e. obvious ones) were overlooked by the Engineer when completion was certified, the Contractor may still be required to remedy them during the maintenance period. If the cause of the defect is unknown, clause 50 allows the Engineer to instruct the contractor to carry out the necessary searches, tests and trials to determine its cause. If the defect is due to the contractor’s breach of contract, he must pay the costs of such searches etc, otherwise they are borne by the Employer.

CECA Sub-Contract Under clause 13(2) of the CECA form the sub-contractor is required to maintain the works and make good defects on the same basis as the main contractor under the main form. Thus, there will be no separate maintenance period for the sub-contract works; it will be the same as the main contract period, even if the sub-contract works are complete significantly earlier than the main works. The only special provision for sub-contract works is a clause providing that if the subcontractor makes good defects caused by the main contractor, the sub-contractor will be entitled to recover the costs of the remedial work from the contractor, although the main contractor will of course be unable to recover them from the Employer.

(iii) Defects Arising after the Expiry of the Defects Liability Period On the expiry of the defects liability or maintenance period, the contractor can no longer be required to remedy defects himself. However, if the defect is due to his breach of contract (i.e. he supplied faulty goods or bad workmanship) he will remain liable for the cost of the rectification work until the expiry of the relevant limitation period. This will be six years if the contract is signed, or twelve years if it is executed under seal or as a deed. (For more detail on limitation periods see Chapter 16 Limitation Periods.) The question is often raised as to whether a contractor who has executed defective work may insist on putting it right himself once the defects liability period has expired. The injured party is under a duty to mitigate his loss, (i.e. not make it worse than it needs to be). As it will frequently be cheaper for the contractor to remedy his own work - both because he is aware of all the details of the work and he will not expect to make a profit on the work as another contractor would - the injured party should normally give the contractor an opportunity to remedy the work himself, unless it was so badly executed initially that it is reasonable not to want the contractor to do any more work.

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Defects Liability The effect of the final certificate on liability for defects and related contractual provisions are discussed below in relation to the standard forms.


JCT Main Forms As stated above, the Architect is bound to issue a final schedule of defects to the contractor within 14 days of the expiry of the defects liability period. Once the contractor has rectified these and any previously notified defects, the Architect must issue a Certificate of Completion of Making Good Defects, which is one of the pre-conditions to a Final Certificate being issued. In relation to defects liability, the main effect of the Final Certificate is that where materials or workmanship were required to be to the Architect’s reasonable satisfaction, he is so satisfied. However, the Final Certificate does not relieve the contractor of any other liability for defects, even if they were perfectly obvious when the Final Certificate was issued.

JCT Sub-Contracts Sub-contractors’ liability under the JCT forms is the same as the main contractor’s, although both nominated sub-contractors and Works Contractors may be entitled to receive early final payment twelve months after practical completion (for more details on this subject, see Chapter 7 - Payment and Set-off). However, they must indemnify the contractor in respect of any latent defects in their works if such a payment is made, so early final payment does not relieve them of their liability for defects.

ICE 7th Edition Under clause 61(l) of the ICE Conditions, the Engineer issues a Defects Correction Certificate when the Defects Correction Period has expired and the contractor has completed any outstanding remedial work. This certificate states the date on which the contractor has completed his general obligation to construct, complete and maintain the work to the Engineer’s satisfaction. However, it does not relieve either the Employer or the contractor from any of their obligations under the contract.

CECA Sub-Contract The sub-contractor’s liability under the CECA sub-contract will be precisely the same as the main contractors due to the general provisions in the CECA form passing down equivalent liability to that which arises under the main contract

(iv)

Liability for Defects After the Expiry of the Limitation Period

Once the relevant limitation period has expired, the general rule is that contractors and sub-contractors are under no further liability in relation to defects. There are two exceptions to this rule. Firstly, if there is fraud or deliberate concealment of the defect. Secondly, and more importantly, the existence of an indemnity clause in the sub-contract may extend the period for which the sub-contractor is liable. Normally, the limitation period for actions for breach of contract begins to run at the date of practical completion. However, in County & District Properties v Jenner (1974) it was held that an indemnity clause such as that in the standard forms of sub-contract did not give rise to a cause of action until its consequences were ascertained. Thus, it was not until a claim was made against the main contractor in respect of negligence by the sub-contractor that the indemnity clause operated, and time began to run on the indemnity clause. Sub-contractors are not therefore completely free of liability until the relevant main contract limitation periods have expired, and no further claims can be brought against the main contractor.

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Damages for Defective Work In respect of defects arising after practical completion, so far this Chapter has considered only responsibility for the remedying of defective work. Of course, the cost of remedial work may be greatly exceeded by the costs arising as a consequence of the defect; damage to the contents of the building or other parts of it, and in serious cases loss of use of the building which may entail loss of rent or loss of profit. Where a defect constitutes a breach of contract (i.e. is due to bad materials or workmanship), the person who executed the defective work will be liable for damages. Damages for breach of contract aim to put the injured party in the same position he would have enjoyed had the contract been properly performed. The type of damages which can be recovered were described in the leading case of Hadley v Baxendale (1854) as: (i) all the loss which arises naturally, i.e. in the usual course of things, from the breach of contract and (ii) if there are special circumstances which increase that loss, damages in respect of it will be recoverable only if the special circumstances were made known to the Contractor or sub-contractor before the contract was made. The second rule in Hadley v Baxendale might apply where a building was to be let for a particularly high rent, only if the Contractor or sub-contractor was or should have been aware of this at the date he entered into the contract will he be liable for loss of rent at that very high rate. In British Sugar plc v NEI Power Plant Projects (1997) the Court considered what was meant by ‘consequential loss’ in the context of a clause limiting the seller’s liability for such loss. The court held that this meant, in the context of the contract in which it was used, loss which did not directly and naturally result from breach of contract. When considering or drafting exclusion provisions in contracts, Steelwork Contractors should consider being specific about types of loss that are included or excluded rather than relying on general terms such as “indirect” or “consequential”. Note that there is no restriction on the type of loss which can be recovered - unlike damages for negligence, damages for breach of contract can include purely financial losses such as loss of profit. Thus the total cost arising from defective work can be very high indeed, particularly if it involves the loss of use of the building.

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CHAPTER 14

DESIGN LIABILITY


Introduction The involvement of specialist sub-contractors in design and their legal liability for it is an issue which has caused great controversy in recent years. There has been a number of developments in the law which have focussed attention on recovering damages for defective design and/or installation from sub-contractors, and this has led to employers, funders, purchasers, and future tenants of buildings requiring sub-contractors to sign non standard warranty agreements which significantly increase their legal liability. This Chapter sets out how Steelwork Contractors become legally liable for design, and explains the impact of both standard and non-standard warranties.

Design Defined There is no hard and fast definition of design within the construction process, but it usually refers to the preparation of plans, drawings and specifications. In the context of specialist work, “design” is normally extended to include not only the dimension, shape and location of any part of the work, but also the choice of particular materials or equipment and the choice of particular work processes. Design therefore encompasses a number of tasks traditionally carried out by specialist contractors, such as the design of connections by Steelwork Contractors and the preparation of working drawings by mechanical and electrical contractors. The fact that the design of specialist work is often split between the sub-contractor and professional designer gives rise to many claims against specialist sub-contractors, sometimes on the basis of joint and several liability. It is particularly important to distinguish between defective design and defective goods, materials and workmanship. For example, if a steel frame is inherently without defect, but cannot maintain the required load, it is defective in design. Such ‘misspecification’ is the responsibility of the designer. However, if the goods are inherently defective, responsibility will lie with the contractor - although he may have a corresponding right of action against his supplier.

Liability of Architects/Engineers for Design On traditional contracts such as JCT 98, the conceptual aspects of design are carried out by professional consultants : the architect, structural engineer and services engineer. They will be engaged by the client, often on standard conditions of engagement produced by the RIBA or the ACE. Such terms require the professional designer to exercise the level of reasonable skill and care expected of a professional designer. They do not extend to any liability for “fitness” for purpose” and they expressly exonerate the Architect or Engineer from liability for design carried out by the other consultants appointed by the employer or, more importantly, by specialist sub-contractors or suppliers. If defects arise in such design, the employer’s remedy lies against the relevant specialist designer, be he a consultant or sub-contractor.

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How Legal Liability Arises Legal liability for defective design may arise under two branches of the law : contract and tort. If a person, firm or company suffers loss due to a Steelwork Contractor’s defective design or workmanship, he will be able to sue the contractor for breach of contract if he has a contract with him, (such as a warranty), otherwise he will be left to seek a remedy in tort for negligence. The same facts may give rise to a right to bring legal action in both, thus giving the injured party a choice as to the basis on which he proceeds. As the amount of damages recoverable for breach of contract is normally substantially greater than the damages recovered for negligence, the injured party will usually choose to sue under the contract rather than for negligence, provided, of course, he has a contract with the person in default. The various possibilities for an employer (rather than a purchaser or tenant), who has suffered loss due to defective design by a Steelwork Contractor are:

A. Contract (1) action via the main contractor; (2) action under a standard form of warranty; (3) action under a non-standard warranty; (4) action under the Contracts (Rights of Third Parties) Act 1999 (unless rights under the Act are excluded).

B. Tort (1) action for negligence; (2) action for negligent misstatement.

A. Contract (1) Action Via the Main Contractor The employer will have a right of action via the main contractor only if the main contractor can be shown to be responsible for the design input of his sub-contractors. In certain circumstances this will clearly not be the case: for example, clause 35.21 of JCT 98 expressly excludes all liability on the part of the main contractor for any design work provided by a nominated sub-contractor. Similarly, clause 3.3.7 of IFC 98 states that the main contractor is not responsible to the employer for design carried out by named subcontractors. The general principle is that the main contractor is responsible for the acts and omissions of his subcontractors, and therefore in the absence of express exclusions such as those in relation to nominated and named sub-contractors, the employer may have the option of suing the main contractor for defective design executed by his sub-contractors. It is often argued that contracts such as JCT 98 and IFC 98 are essentially contracts for work and materials, not for the supply of design, and therefore that the main contractor is not liable in the event of design defects. However, JCT 98 makes provision in clause 42 for what is called ‘Performance Specified Work’.

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Performance specified work is specifically determined areas of work where the Employer has set out performance requirements. Although the contract itself rigorously excludes any mention of the word 'design', in practice, this work is designed by the contractor or his sub-contractors to meet the performance specification. Clause 42 expressly excludes any guarantee by the Contractor of the fitness for purpose of the performance specified work (42.17) and also this states that such work cannot be provided by a nominated sub-contractor (42.18). Employers entitlements to sue the main contractor in respect of defective design by sub-contractors may be assisted where the main contract contains express terms relating to design, such as JCT With Contractors Design WCD98 or the Management Contract. The main contractor may then have a corresponding right of action against the defaulting sub-contractor. The advantage to the employer of suing the main contractor is that if the sub-contractor has insufficient funds to pay the damages or is actually insolvent, the main contractor will still be liable to pay the employer.

(2)

Action Under a Standard Form of Warranty

As main contractors under JCT98 and IFC98 are not responsible to the client in respect of design input by nominated or named sub-contractors, the employer clearly needs a direct remedy if such sub-contractors carry out defective design work. The Contracts (Rights of Third Parties) Act 1999 may give the client such remedies but the position under the Act is uncertain and, in any event, the Act may be excluded by the relevant sub-contracts. Accordingly, the client may need to establish a direct contractual link with the sub-contractors in order that he can pursue contractual remedies against them if they default. A direct contractual link can be created between the employer and nominated subcontractors by the use of the standard employer/nominated sub-contract agreement NSC/W, the use of which is mandatory under clause 35 of JCT98. Agreement ESA/1 is available for use between employers and sub-contractors named under IFC98, but is optional. These standard forms of warranty provide that the sub-contractor has exercised and will exercise reasonable skill and care in designing or selecting materials and goods in so far as he does design or selects materials and goods. Similarly, the sub-contractor warrants that he will exercise reasonable skill and care in the satisfaction of any performance specification in so far as it is included or referred to in the description of the sub-contract works. The standard forms of warranty also allow the architect to instruct the sub-contractor to design and to order and fabricate goods and materials before the main contract is let and before a formal nomination or naming instruction is issued. If, for any reason, the nomination or naming is not proceeded with, then there is a provision for the sub-contractor to be paid expenses reasonably incurred in complying with such instructions. NSC/W also benefits, the sub-contractor in other ways, for example by making direct payment and early final payment mandatory in certain circumstances. The provisions regarding design by Works Contractors under the JCT Management Contract are somewhat different, in that they provide two routes for the employer to sue a Works Contractor who has executed defective design. As explained above, the Works Contractor is liable to the Management Contractor under the express terms of Works Contract/2, and there is also an optional employer/ Works Contractor agreement, Works Contract/3. Works Contract/3 is similar to NSC/W, except that it contains no provision for pre-contract design or early ordering of materials. Steelwork Contractors, as an “early” trade, should note that if early (i.e. pre-contract) ordering of materials is required, a

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separate agreement will be needed which includes terms regarding payment in the event that no contract is eventually concluded. Works Contract/3 also has certain advantages for the Works Contractor; for example, the employer must ensure that the architect complies with any request by the Works Contractor to inform him of the amount certified in his favour in the certificates issued under the Management Contract. It also makes early final payment to the Works Contractor mandatory, which will be made not later than twelve months after practical completion of the relevant Works Contract. The employer’s choice of routes against the Works Contractor if he is in default over design has advantages for the employer because he can sue the Works Contractor direct if the Management Contractor is insolvent, by using Works Contract/3. In addition, if the employer is unsure as to which Works Contractor is in default over design, he can sue the Management Contractor and let him resolve the problem with his various Works Contractors. However, if the Works Contractor is insolvent the employer bears the loss because the Management Contractor has the benefit of the relief provisions. As far as the Works Contractor is concerned, it makes little difference who is pursuing him to obtain a remedy for his default. The only difficulty he may encounter is that employers may be less inclined to use Works Contract/3 because they have a remedy through the Management Contract and Works Contract/2. This could be unfortunate as Works Contract/3 contains some definite advantages for Works Contractors as outlined above.

Responsibility for Design under the ICE 7th Edition There is no standard warranty available for use by designing sub-contractors where the form of contract is the ICE 7th. However, tendering sub-contractors may be required to execute a non-standard warranty to the employer (for the dangers of this practice see below). Alternatively the employer may gain protection under clause 58(3) of the ICE form, which provides for the main contractor to be responsible for any design included in provisional sums or prime cost items, if expressly stated. The requirements regarding design must also be included in the nominated sub-contract, which creates a contractual chain in respect of the design. The employer has redress against the main contractor, who in turn may recover from the nominated sub-contractor. In practice, any nominated sub-contractor undertaking design is likely to be asked for a collateral warranty.

(3) (a) Action under a Non-Standard Warranty - Employers Case law has imposed severe restrictions on the recovery of economic loss in the absence of a contract. The law on this issue may be summarised fairly simply: –

pure economic loss e.g. loss of rent or loss of profits is not recoverable in tort;

–

the cost of remedial work to the defective building is not recoverable in tort;

–

only damages for physical injury or damage to other property (e.g. contents of the building or neighbouring property) is recoverable in an action for negligence.

It is therefore hardly surprising that employers are demanding that all sub-contractors, nominated, named and domestic, enter into warranties to ensure that they have direct contractual rights in the event of defective design (or defective goods and workmanship). As there is no standard warranty available for use between employers and domestic sub-contractors, the employer’s professional advisers (usually solicitors or quantity surveyors) will prepare a non-

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Design Liability standard document. Sometimes such warranties to go beyond their original purpose of creating a contractual link.


Typical onerous clauses in non-standard warranties include: –

liability for all of the design (even where the majority of it was actually carried out by the employer’s own consultant).

–

absolute undertakings regarding the installation e.g. that it will be “free from fault or defect, “of the highest quality”, that any material selected by the sub-contractor will be “the best of its kind”.

–

that the contract works will be fit for their purpose even where that purpose is unknown (in the absence of such an express term duties regarding fitness for purpose would be implied only where the contractor is undertaking the design of the whole of his part of the works).

–

an undertaking that the contractor will take out and maintain professional indemnity insurance for up to twelve years after practical completion (this insurance should be carried by all Steelwork Contractors).

It will be appreciated from the above that non- standard warranties will usually impose additional risks on sub-contractors who sign them. One of the major difficulties for sub-contractors is that there is no standard form that they can offer as an alternative.

(3) (b) Action under a Non-Standard Warranty - Purchasers, Tenants etc Where the Employer is a property developer, there are a number of other parties who could suffer economic loss if the sub-contractor provided defective design, namely future tenants or purchasers of the building, and possibly the funder of the development - which will normally be a bank or insurance company. It is now common for such parties to require warranties from contractors and sub-contractors engaged in design (and for that matter from members of the professional team). Such warranties are likely be in similar terms to the non-standard warranty required by the employer described above, with the addition of a term that the sub-contractor has complied with all of its obligations under the subcontract. Such a term will ensure that if the tenant etc. suffers economic loss due to defective work or materials supplied by a sub-contractor (as opposed to defective design) this will be recoverable under the warranty. If the tenants or purchasers are not identifiable when the sub-contractor is appointed, he may be required to agree, that he will enter into such warranties when they become known, or the warranty to the employer may be freely assignable to such third parties, without the sub-contractor’s consent. All of these devices significantly increase the range of people who may sue the subcontractor and the type of loss which may be recovered, and therefore should not be accepted unless there is a very good reason to do so. Sub-contractors holding professional indemnity insurance should check with their insurers before signing a non-standard warranty to see what, if any, impact such warranty will have on their insurance cover.

B. TORT (1) Action for Negligence A sub-contractor who is designing may be sued by any person to whom the sub-contractor owes a duty of care, provided that person suffers a recoverable type of loss or damage as a result of the subcontractor’s negligence.

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Design Liability There is no requirement that the sub-contractor has any contractual relationship with that person, and therefore there is a wide range of potential claimants. The sub-contractor can discharge his duty by exercising reasonable skill and care. His actual performance or conduct will be compared with that which might have been expected of a reasonably competent sub-contractor working in the relevant field. Claims for negligence have become less frequent in recent years where there is an alternative route in contract because of the cases mentioned below which have severely restricted the type of damage which is recoverable for negligence. Those cases have all been concerned with the principle of whether economic or purely financial loss is recoverable in actions for negligence. If someone is injured or killed due to someone else’s negligence, damages will always be recoverable. Similarly, if property other than the negligently designed or constructed building is damaged (e.g. it collapses onto another building), the damage to that other property is recoverable. If, however, the building itself is defective or damaged, only economic loss (of having to repair the building or the loss of its use) will be suffered. It is this economic loss which the courts have been considering. In 1982, the House of Lords decided a very significant case called Junior Books v Veitchi in which a nominated sub-contractor was held to owe a duty of care to the employer, the breach of which gave rise to a right to recover purely financial losses (in that case the costs of repairing a defective warehouse floor, and storing books elsewhere while the repair was carried out). Subsequent cases have not followed that decision, however, and have distinguished it on its own particular facts. The decision of the House of Lords in the leading case of Murphy v Brentwood has confirmed that the position now is that economic loss may be recovered only if the injured party has a contract with the negligent contractor, not under the general law of negligence.
The Duty to Warn Even where Steelwork Contractors have no design input whatsoever even for connections (which is comparatively rare) they may still have a “duty to warn”. This could arise where there were defects in the design which should have been noticed by a reasonably competent structural steelwork sub-contractor. In Plant Construction plc v Clive Adams Associates (2000) the Technology and Construction Court considered the obligation of a sub-contractor to warn about the inadequacy of measures for temporary roof supports (the roof collapsed) even though those measures were as instructed by the employer’s engineer. The specialist nature of structural steelwork and any involvement in design (including design of connections) may make it more likely that a duty to warn would be placed on Steelwork Contractors by the courts. Steelwork Contractors should therefore ensure that any obvious defects in the design carried out by the consulting engineer are pointed out in writing as soon as they are discovered. It may also be appropriate, depending on the circumstances, if no action is taken following a warning, for the Steelwork Contractor to consider refusing to carry on work especially if to do so would place the safety of personnel at risk.

Joint and Several Liability When considering legal liability for both breach of contract and negligence, it is important that subcontractors recognise the principle of joint and several liability. This arises where injuries are caused

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by breach and/or negligence of more than one party. In such circumstances, the injured party may sue all or any of the people who have committed a breach of duty for the full amount of his loss. This means that if the steel frame of a building were defective so that the building was dangerously unstable due to a glaring design defect by the consultant, which any reasonably competent Steelwork Contractor would have diagnosed instantly, the employer will be able to sue either the consultant or the sub-contractor for the full amount of his loss. In practice, whichever party was sued would normally join the other party to the proceedings as a third party. Under Section 1(1) of the Civil Liability (Contribution) Act 1978, the person who had been sued would be able to recover a contribution from any other responsible person, but this would not affect the position of the injured party, who may recover his loss from whichever party he chooses. The great danger to sub-contractors from this principle arises where other persons who are jointly liable are either financially unstable or uninsured In respect of the loss. Thus, a sub-contractor who was perhaps 5% liable for failing to point out a glaring defect in someone else’s design could pay 100% of the loss to the person who had suffered the damage, and then find that he was unable to recover his loss under the Civil Liability (Contribution) Act because the designer was uninsured and had no assets. In order to minimise the risk of this it is now good practice for those giving warranties to seek the inclusion of a ‘net contribution’ clause which provides that the party’s liability under the warranty is limited to that which would be just and equitable on the assumption that the beneficiary under the warranty had equal rights against all those (often named) parties also involved in the works. The precise effect of such a clause has yet to be tested but it is suggested that any Steelwork Contractor required to provide a warranty should seek the inclusion of such a clause.

(2) Action for Negligent Misstatement The law of negligent misstatement makes sub-contractors liable for any advice which they may give. If a sub-contractor who gives advice regarding design does not exercise reasonable skill and care in giving that advice he may be guilty of negligent misstatement. This liability arises regardless of whether the sub-contractor has been paid for his advice. In the case of Hedley Byrne v Heller (1964), the House of Lords held that one person owes another a duty to take reasonable care in giving information or advice if a “special relationship” exists. A “special relationship” is one where in a particular sphere of activity, one person is so placed that others can reasonably rely on his skill or judgement or on his ability to make careful enquiries, and that person gives information or advice to someone he knows or should know will place reliance upon it. Sometimes Steelwork Contractors will be in this position. Companies who offer a design service, albeit a limited one, are inviting people to rely on their skill and judgement or at least on their ability to make careful enquiries. Therefore, when they give advice about design matters, they should know that employers and others in the building industry will place reliance upon it, and if that advice is negligently given they will be liable for the consequences. It should be stressed that unlike an ordinary action for negligence, there is no restriction on the type of loss which is recoverable as a result of a negligent misstatement. Even if no physical loss or damage is caused, if pure financial loss is suffered due to negligent misstatement it will be recoverable. Two other Chapters in this handbook are relevant to design liability: Chapter 16 - Limitation Periods, which explains how long liability for design defects will last, and Chapter 17 - Insurance, where the question of insurance for defective design is discussed.

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CHAPTER 15


SUPPLY OF GOODS AND MISREPRESENTATION No matter what form of contract is used, it will be part of a Steelwork Contractor’s obligation to supply goods and materials which comply with the requirements of the contract. In order to achieve this, the Steelwork Contractor will be dependent upon his suppliers. This Chapter describes the liability placed on suppliers of goods by the general law, the exclusion clauses which suppliers use in an attempt to limit that liability, and the extent to which they are permitted to do so by the Unfair Contract Terms Act 1977. It also considers briefly the principles of misrepresentation and liability under the Consumer Protection Act 1987. The final section deals with ownership of materials and retention of title clauses.

Liability of Sellers under the Sale of Goods Act 1979 It is important to recognise that the Sale of Goods Act 1979 operates by implying certain terms into the contract of sale. It will therefore only assist a buyer against a seller, who may not be the manufacturer of the faulty goods or materials. Although it may be practical for the Steelwork Contractor to negotiate with the manufacturer, he should bear in mind that if he needed to resort to legal action, it would normally be against the supplier for breach of contract rather than against the manufacturer for negligence. This is because breach of contract is considerably easier to prove than negligence, and also because any purely financial loss would not be recoverable as damages for negligence. (The buyer may have a direct right against the manufacturer under the Consumer Protection Act, but this will be of limited use - see below). One of the most important terms implied into contracts of sale by the Sale of Goods Act 1979 as amended by the Sale and Supply of Goods Act 1994 is that goods must be of “satisfactory” quality. Satisfactory quality is defined in the Act as follows. "Goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory taking into account any description of the goods, the price (if relevant) and all the other relevant circumstances.” Although the definition sounds complex, in general terms if a reasonable Steelwork Contractor would view the goods as defective, they are unlikely to be of satisfactory quality. The reference to price in the definition caters for the situation where goods are brought at a “knock-down” price because they are of inferior quality. A reduction in price due to trade, bulk or cash discounts would not mean that the seller could supply goods of a lower quality with impunity. Very minor defects will not prevent goods and materials from satisfying the requirement of satisfactory quality, provided the defects are easily remediable, and the seller is willing to remedy them. There are two circumstances where there will be no condition regarding satisfactory quality implied into the contract: •

in respect of defects specifically drawn to the buyer’s attention before the contract is made;

•

if the buyer examines the goods before the contract is made, in respect of defects which that examination ought to reveal.

Despite the above, there is no duty to examine the goods, but if an examination is made, it will not be open to the buyer to claim that the goods are not of satisfactory quality because of any defects which were perfectly obvious when the goods were examined.

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Supply of Goods and Misrepresentation The logic behind both of these exceptions is that if the seller knows he is buying goods with defects in them, and still chooses to buy them, he does so at his own risk (at least so far as those defects are concerned.) Note that the time at which the exceptions will operate is before the contract is made. Often, this will be before delivery to site, so any defects drawn to the buyer’s attention at that time, or any examination of them on delivery may not affect the seller’s obligations regarding satisfactory quality. In certain circumstances, a term will also be implied by the Sale of Goods Act that the goods and materials are fit for the purpose for which they were bought. This is a higher standard than the more general requirement of satisfactory quality and it therefore applies only if the following criteria have been fulfilled: (i) the buyer makes known to the seller (expressly or by implication - e.g. by sending him a copy of the specification) the particular purpose for which the goods are being bought before the contract of sale is made, and (ii) the buyer relies on the seller’s skill and judgement and (iii) it is reasonable for the buyer to so rely. If there is a term regarding fitness for purpose implied into the contract this means that even if there is no inherent defect in the goods, the seller will be liable. If they are not suitable for the particular application to which the buyer wishes to put them. Such a term is most likely to be implied when a specialist supplier has seen the specification or drawings and has recommended the use of a particular type of goods or materials. If they turn out to be inappropriate, he will be in breach of contract.

Standard Terms and Conditions of Sale Most suppliers of goods and materials in the construction industry manage to contract only on their own terms and conditions of sale. They achieve this for two reasons: firstly some of them enjoy a virtual monopoly which means they have tremendous bargaining power; secondly, they are adept at manipulating the pre-contract procedures to ensure that their terms apply. For example, if you request a quotation from a supplier, he will quote on his own terms and conditions. Although you may place the order on your conditions of purchase, he will acknowledge it on his terms. These stages will constitute an offer, counter offer and further counter offer respectively. When the seller has acknowledged the order on his terms, if you begin to perform your part of the contact,. for example by making a payment or accepting delivery of the goods without reiterating your own terms, that will constitute an acceptance and the contract will be formed on the basis of the supplier’s own terms. Suppliers’ standard terms and conditions invariably contain a clause regarding responsibility for defective or inappropriate goods. This will normally state that the supplier will repair or replace defective goods where the defect is brought to his attention within a fixed period after the date of supply - often 12 months. The conditions will go on to state that this undertaking regarding repair or replacement will be in lieu of any other legal remedy and that the supplier shall be under no further legal liability whatsoever. The effect of such a condition is to exclude the liability which arises under the general law, including the terms implied by the Sale of Goods Act. In particular, such clauses seek to exonerate the supplier for what are often referred to as “consequential losses”, i.e. liquidated damages, disruption, loss and expense claims, claims for loss of use of the building etc. - all of which may be claimed from the Steelwork Contractor (for a more detailed explanation of this see Chapter 13 - Defects Liability).

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Such exclusion clauses are therefore a very real problem for contractors in the event that defective goods cause substantial damage or delay. However, they can be attacked under the Unfair Contract Terms Act 1977, as described below.

Unfair Contract Terms Act 1977 The Unfair Contract Terms Act is a somewhat misleading name for this statute, as it does not outlaw all unfair terms. It does, however, limit the extent to which sellers of goods may rely on exclusion clauses, particularly where they contract on their own standard terms and conditions. Two sections of the Act are relevant: Section 3 and Section 6. Under Section 3 a party contracting on his own standard terms of business may not exclude or restrict his liability for breach of contract, or claim to be entitled to render a contractual performance substantially different from that reasonably expected of him, except in so far as the relevant clause satisfies the requirement of reasonableness. By Section 6, a seller of goods may not exclude his liability for breach of the terms implied by the Sale of Goods Act regarding satisfactory quality or fitness for purpose in a business contract except in so far as the exclusion or restriction satisfies the requirement of reasonableness. In essence, therefore, exclusion clauses must satisfy the requirements of reasonableness. While it is not an easy matter to challenge an exclusion clause under the Unfair Contract Terms Act, there has been a number of cases where buyers have been successful, including the building industry case of Rees Hough v Redland Reinforced Concrete (1985). More recently in St Albans City and District Council v International Computers Ltd (1996) the Court held that ICL could not rely on limitation of liability provisions in its contract because the provisions did not satisfy the reasonableness requirements of the Act. In coming to this decision the court took into account a number of factors including: •

the inequality of the bargaining position of the parties

•

ICL had not justified the limitation figure (which was small when compared with the potential risk and the actual loss)

•

ICL had worldwide product liability insurance cover which was far in excess of the limitation figure

One important factor in a buyer’s favour is that under the Act the burden of proof is placed upon the party attempting to rely on the exclusion clause. It is therefore up to the seller to prove that his exclusion clause is reasonable rather than up to the buyer to prove that it is unreasonable. There are guidelines contained in Schedule 2 of the Act as to how the “reasonableness” test should be applied, which require the following matters to be taken into account: (a) the relative strengths of the bargaining position of the parties; (b) whether the buyer received an inducement to agree to the term or had an opportunity of entering into a similar contract with others without such a term; (c) whether the buyer knew of the term; (d) whether compliance with the obligation excluded would be practicable; (e) whether the goods were manufactured to the special order of the buyer. It will be appreciated from this list, particularly items (a) and (b), that it would be extremely difficult for a monopoly supplier to rely on his exclusion clause if it were challenged as unreasonable under the Act.

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Supply of Goods and Misrepresentation A gloss has been added to the items in Schedule 2 by case law, in particular the decision of George Mitchell v Finney Lock Seeds (1983) where it was held that a further factor indicating unreasonableness would be if the buyer had not previously sought to rely on his exclusion clause when defects etc. had arisen - the rationale being that this indicated that the supplier felt the clause to be unreasonable, therefore the courts would not enforce it. Where a contract term seeks to limit liability to a set sum, the extent to which such liability is insurable will be relevant in determining whether the limitation is reasonable. If a supplier has limited his liability to the extent to which he can insure it that is likely to satisfy the requirement of reasonableness. In St Albans City and District Council v International Computers Ltd it was confirmed that clauses which were based on a supplier’s standard terms and which attempted to exclude consequential loss and limit liability were subject to the condition of reasonableness imposed by the Unfair Contract Terms Act.

Liability for Late Delivery A further problem encountered by Steelwork Contractors in relation to suppliers is their reluctance to be tied to firm delivery dates. On today’s fast track contracts, which frequently include high liquidated damages, inability to pass costs on to the party responsible for the delay can be extremely serious. Under JCT98 the contractor is entitled under clause 25.4.10.2 to an extension of time for delay caused by his inability to obtain essential goods and materials, provided that inability was not reasonably foreseeable when he tendered However, this provision is frequently deleted from the contract, leaving the contractor responsible for any delay caused by late or non-delivery of materials. Under most standard conditions of sale he will have no remedy against his supplier. In order to rectify this situation, the contractor needs to make it a term of the contract with his supplier that the goods and materials will be delivered in accordance with the programme by which he is bound - no easy task when suppliers are usually reluctant to be bound to any delivery dates at all, let alone those required by a modern fast track project. If he does succeed in making delivery dates part of the contract of supply, the supplier would be liable for damages if he delivered late, which would include all the consequential costs arising from the delay, such as claim_for disruption and loss and expense. He would also be liable for any liquidated damages claimed from the contractor by the main contractor, provided he was aware of the level of liquidated damages before he entered into the contract of supply. It is suggested that the best practical way of encouraging suppliers to accept such liability is by appealing to the Employer and his professional advisors, who will normally be far more anxious to have the building on time than to claim liquidated damages. Suppliers frequently regard consultants and building owners as their “true” clients, particularly if their product is normally specified, and they may be more amenable to commercial pressure from them than from their contractor client.

Consumer Protection Act 1987 The Consumer Protection Act 1987 introduces a type of strict liability for damage caused by defective products. In essence, it makes the “producer” of the defective product liable for any damage caused by that product. Part 1 of the Act, which came into effect on 1 March 1988, implements the European

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Supply of Goods and Misrepresentation Community Products Liability Directive, which provides a similar degree of protection throughout the European Community.


The Consumer Protection Act provides the same rights to anyone injured by a defective product whether or not that product was sold to him. The title of the Act is somewhat misleading, in that liability under Part 1 is not restricted to consumer goods. Unprocessed agricultural products are specifically excluded, but all other goods including those used at a place of work are covered by the Act. Buildings themselves are not covered, although individual goods from which they are built (e.g. structural steelwork) do fall within the Act. Therefore, the producers of building materials will be liable for the defects in the materials, but the builder will not be liable under this Act for defective construction (Note:- he may be liable under the Defective Premises Act 1972 if the building is a dwelling).

Misrepresentation Where one party induces another to enter into a contract by misrepresenting some fact the other party is entitled to rescind the contract, i.e. set it aside and be restored to the position he was in before the contract was concluded. Until the passing of the Misrepresentation Act 1967, damages were only awarded where the misrepresentation was fraudulent. Since the passing of the 1967 Act (which does not apply in Scotland), a party induced to enter into a contract by misrepresentation, however innocent, has been given a right to damages. Thus, where a Steelwork Contractor happens to induce any other party to enter into a contract with him by misrepresenting some fact, such as that a type of structure has a particular virtue which it does not possess, the other party is entitled to rescind the contract, and also has a right to damages. However, on the other side of the coin, where Steelwork Contractors are induced by a supplier to purchase some item of material or equipment on the basis of an innocent or negligent misrepresentation, they are entitled to rescind the contract and claim damages. An example of the operation of the law of negligent misrepresentation is the case of Esso Petroleum Co. Ltd. v Mardon (1976). In that case, the Court of Appeal held that if advice was given by someone who professes to have a special knowledge or skill to another with the intention of inducing the other party to enter into a contract with him, he was under a duty to use reasonable care to see that the representations were correct. If he negligently gave unsound advice or misleading information or expressed an erroneous opinion and thereby induced the other party to enter into a contract with him, he was liable in damages. The case was concerned with representations made in 1963, before the Misrepresentation Act 1967 came into operation. The implications for Steelwork Contractors are that if a member of their staff happens to make negligent pre contract representations to a potential client about the merits of a particular structure or system, and the client is induced to rely on those representations to his financial disadvantage, the client would have an action in damages for breach of warranty and negligent misstatement. The Act also provides that it is not possible to contract out of liability for misrepresentation.

Ownership of Materials – Retention of Title The question of how ownership of steel and other materials passes from a supplier to a Steelwork Contractor, then to a main contractor and finally to the Employer is a complex one. It involves two different types of contract: a contract simply for the sale of goods between the supplier and the

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Steelwork Contractor; and contracts for the supply of work and materials involving the Steelwork Contractor, main contractor and Employer. This section summarises the basic legal rules on passing of property, explains the effect of retention of title clauses and considers how they affect the Steelwork Contractor’s relationship with the main contractor and Employer.

Rules as to Passing of Property - Sale of Goods The basic rule in contracts for the sale of goods is that property will pass when the parties intend it to pass. This would not be a very helpful principle if it had not been amplified, but fortunately certain rules are laid down in section 18 of the Sale of Goods Act 1979 which can be applied to ascertain this mysterious “intention of the parties”. The Act draws a distinction between specific and unascertained goods. Virtually all of the goods which Steelwork Contractors buy from their suppliers are unascertained (ie, generic) goods, for example, so many tonnes of steel. Specific goods are those which are clearly identifiable at the time the contract of sale is made, e.g. a particular second hand car or a specific piece of machinery. The rules on passing of property set out below will only apply if there is no contractual intention expressed in the contract. If the parties have actually agreed when property win pass, (which is the case where a retention of title clause is included), that express agreement will override the terms implied by the general law. The two most important rules are: 1.

Property in unascertained goods will pass when the goods are unconditionally appropriated to the contract. Unconditional appropriation will take place when the goods are set aside and marked for the buyer. If this does not happen, the goods are unconditionally appropriated when they are delivered either to the buyer himself or to a carrier to be delivered to him.

2. Property in specific goods in a deliverable state passes at the time the contract is made These two rules mean that property, (i.e., legal ownership of goods) will frequently pass before the goods are delivered, and that payment is not relevant to ownership. Although the seller has the right to sue for the price of the goods, that right will be useless if the buyer is insolvent. Most sellers therefore include express terms in their standard conditions of sale linking passing of property to payment: the most common version of this type of provision is a retention of title clause.

Retention of Title Clauses These clauses are also known as “reservation of title” clauses and “Romalpa” clauses, after the first case in which they were held to be valid: Aluminium Industrie Vaasen B.V. v Romalpa Aluminium Ltd (1976). The basic function of a retention of title clause is to protect the seller in the event of insolvency or other nonpayment by the buyer by giving him the right to retrieve the goods. They work by literally “retaining” ownership of the goods in the seller even though they have been delivered to the buyer.

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There are several different versions of these clauses which Steelwork Contractors may encounter, but the most common characteristics include: –

reservation of title until all goods supplied by the seller to the buyer have been paid for in full:

–

that the buyer holds the goods as bailee (i.e., he has possession of them for certain purposes, but not ownership):

–

that the buyer shall store the goods in such a way that they are identifiable as the seller’s property (e.g. set apart and labelled);

–

that the seller shall have a right of entry into any premises where the goods are stored so that he can re-possess them if they are not paid for;

–

that the seller shall have the right to the proceeds of the sale of the goods if they are resold by the buyer (although commonly included, it is doubtful whether this term could be enforced if the buyer were insolvent).

Limits on the Effectiveness of Retention of Title Clauses A retention of title clause will become ineffective once goods are fixed or installed. There is an overriding rule of law that once goods are attached to land they become part of that land, and property in them passes to the owner of the land (usually the Employer), regardless of any retention of title clause. A retention of title clause may also be ineffective either because of the way in which it is drafted or because of what has happened to the goods. The former rarely occurs now, as the principles governing the drafting of such clauses are well known. The most obvious defect is to reserve only equitable ownership in the seller, a valid clause must reserve either legal ownership, title or property, or simply ownership, title or property. The seller will lose his rights to the goods if they are incorporated in other goods in a manufacturing process. The point at which this happens to steel in the fabricating process will be a question of fact in each case, but typical stockholder’s conditions expressly provide that: “decoiling, cutting, shearing, slitting, painting or rebundling of goods shall not constitute manufacture...”

Effect of Retention of Title Clauses on Building Contracts The contracts between the Steelwork Contractor and the main contractor, and the main contractor and Employer are contracts for work and materials, not contracts for the sale of goods, and therefore the rules relating to passing of property are different from those explained above. In a contract for work and materials, materials belonging to a contractor or subcontractor which are brought on site remain his property, until they are incorporated into the works. When they are so incorporated they become the property of the person who owns the land, normally the Employer. As in contracts for the sale of goods, this rule will not apply if the express terms of the contract provide otherwise. Express terms on the passing of property were included in all of the JCT main contracts and subcontracts following the case of Dawber Williamson Roofing Ltd v Humberside County Council (1979). In that case the Council had employed a main contractor to build a school on the basis of the JCT 63 Edition. The roofing work was sub-contracted to Dawber Williamson on the basis of the blue form of domestic sub-contract. Dawber Williamson delivered a load of roof slates to site, and these

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were paid for by the Employer under a certificate issued under the main contract, the main contractor did not pass the money on to his sub-contractor before he went into liquidation. The Council refused to return the slates to Dawber Williamson, and relied on a clause in JCT 63 which stated that property in goods and materials passed to the Employer once he had paid for them. The Court held that Dawber Williamson were entitled to recover the slates. They were not a party to the main contract, therefore they could not be bound by it. The slates therefore remained their property until they were paid for them or they were fixed. This decision meant that Employers were at risk of having to pay twice for the same unfixed goods on site if the main contractor went into liquidation without paying his subcontractors. The Joint Contracts Tribunal therefore amended all of the standard forms of sub-contract to provide that the sub-contractor would not challenge the Employer’s title to materials or goods on site once the Employer has paid for them. Although this does not necessarily mean that the Employer technically has good title (because the main contractor cannot pass on a better title than he himself) it does protect the Employer from attempts by the sub-contractor to reclaim the goods. If a supplier to the Steelwork Contractor attempted to reclaim his goods, this would constitute a breach of contract by the Steelwork Contractor, and therefore retention of title clauses can be extremely dangerous in contracts for the sale of goods for use in the building process.

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CHAPTER 16

LIMITATION PERIODS


A limitation period is the length of time for which a contractor will continue to be legally liable for his negligence or breach of contract, notwithstanding the expiry of any defects liability period specified in the contract. The law imposes limitation periods on injured parties because the longer the delay in bringing an action, the less reliable the evidence is likely to be, and the less likely it is that a fair hearing will result. In addition, it is felt that it would be wrong for the threat of legal proceedings to hang over the heads of potential defendants indefinitely, and therefore the expiry of the limitation period is a complete defence - however guilty the alleged defaulting party. On the expiry of the relevant limitation period actions are sometimes described as being “statute-barred”.

Who Can Sue? Someone who has suffered physical injury, loss or damage to property or financial loss due to a defective building must establish a right of action against the responsible party in order to be able to recover damages. This right will normally be in contract or in tort. Those who are not parties to a contract may still be able to sue under it by virtue of the provisions of the Contract (Rights of Third Parties) Act 1999. This Act allows a third party to enforce directly and in its own name, a term in a contract to which it is not a party where: •

the contract expressly provides that right, or

•

the term purports to confer a benefit on him provided that right is not excluded or inconsistent with the remainder of the contract.

The presumption will be made in favour of there being an intention to confer such a benefit, but this can be rebutted by clear words - in other words, it is possible to ‘contract out’ of the Act and many standard forms of construction contract, for instance, the ICE 7th, JCT and DOM seek to exclude third party rights. In view of the Act, it will always be important to check contracts, including third party warranties, very carefully to see if any third party rights are created. For instance, if the employer under a building contract suffers damage due to defective design of the steelwork. he may be able to recover that loss in an action for breach of contract against the Steelwork Contractor provided an appropriate employer/ sub-contractor agreement had been executed and the defective design amounted to a breach of that agreement. If however, the employer does not suffer any loss, but a subsequent tenant or owner of the building does in similar circumstances to those set out above, the tenant/owner may now be able to recover his loss under the employer/sub-contractor agreement, even though he is not a party to it. This is a complete change to the traditional position in English law. The provisions of the Act are complicated and Steelwork Contractors may need to take legal advice.

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Limitation Periods

Limitation Periods in Contract and in Tort


Different limitation periods apply depending whether a party is sued for breach of contract or for the tort of negligence. A summary of current law on limitation is set out below:

In Contract In English Law, the limitation periods for actions for breach of contract are relatively straightforward, being 6 years from the date of the breach of contract (normally, in the context of construction contracts, the date of practical completion of the sub-contract works) where the contract is executed under hand, and 12 years from that date where the contract is executed under seal, or as a deed.

In Tort Limitation periods in tort (i.e. for negligence and other torts such as nuisance and trespass) are set out in the Latent Damage Act 1986.
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Limitation Periods However, Oscar Faber’s liability would not be infinite, because the long stop would come into operation fifteen years after the date of the negligent act. It may be very difficult to ascertain the precise date when the negligent act occurred, particularly if there is a lengthy design and construction period during which the negligent party is involved. If Oscar Faber had not only designed but also supervised the construction of the chimney, it could be argued that the latest date the negligent act would have occurred was the date the chimney was handed over to the client - this case July 1969. If that is correct, then Oscar Faber’s liability in negligence in relation to that chimney would finish in July 1984. If Oscar Faber did not supervise the construction of the chimney but were merely designers, then the negligent act would have occurred at the date they completed the design, which would have been at some time before the date the chimney was completed in July 1969.

Retaining documents One practical consequence of limitation periods is the need to keep documents for a certain period of time. Until the Latent Damage Act came into force, many companies adopted a policy of destroying records after six years had elapsed. This period may not be adequate in the light of the Act. On the expiry of fifteen years after completion of the contract it is most unlikely that legal proceedings will be started, therefore fifteen years will normally be the maximum time for which records should be retained. In view of the restrictions on storage space suffered by most companies, it is suggested that when the contract is concluded, (i.e. defects have been remedied and the final account paid) the contract files are ‘weeded’ and only significant documents are retained. Alternatively, documents could be scanned and stored on CD. From the point of view of litigation the following should be kept as a minimum: enquiry documents and pre-contract correspondence contract documents variation instructions minutes of site meetings progress charts certificates issued by the architect relating to practical completion, payment delay, etc. Although this list is not exhaustive, it should ensure that the majority of the evidence necessary for litigation is available. Obviously, if any other documents exist which relate to the absence or presence of defects or the standard of work required by the client or provided by the contractor, they should also be retained.

Fraud, concealment or mistake The limitation periods under the Act do not apply where there has been fraud, deliberate concealment or mistake relating to the damage. Even the fifteen year long stop is displaced: the injured party has six years to sue from the date he could reasonably have discovered or did discover the fraud, concealment or mistake. It has been suggested that this provision will often apply to latent defects in construction, due to the wording used in the Act in relation to deliberate concealment. In particular, deliberate concealment includes ‘deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time ...’. A breach of duty may be simply progress of the other stages of the work, as no dishonest motive is necessary. Activities such as backfilling a trench or concreting over shear studs could fall into this category, provided the contractor knew or should have realised he was covering defective work.

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Limitation Periods


There is some assistance for contractors in the Act as it is up to the plaintiff, i.e. the injured party, to prove that the defect was deliberately concealed. As no judicial decisions have yet been made on this aspect of the Latent Damage Act, it remains to be seen whether the ‘fraud, concealment and mistake’ exception will be relied upon in construction cases in an attempt to set aside limitation periods.

Scots Law: Prescription In Scotland different limitation periods apply, and the principle that legal obligations are extinguished after a certain period is referred to as prescription. The current Scots Law is both complex and confusing. The Prescription and Limitation (Scotland) Act 1973 is extremely difficult to interpret, to the extent that legal commentators disagree as to its exact meaning. In general, obligations arising under a contract will be extinguished on the expiry of a period of 5 years provided a “relevant claim” has not been made or the existence of the obligation has not been “relevantly acknowledged”. A “relevant claim” will be commencing legal proceedings by the issue of a writ or summons. A “relevant acknowledgement” which has no parallel in English Law, is either a written acknowledgement that the obligation exists or some part performance of the obligation e.g. a part payment. Some obligations, such as those arising from contracts of partnership or agency or under probative documents are subject to a longer prescriptive period of 20 years, and if there had been fraud by the debtor, no prescriptive period applies. A Pursuer (the equivalent of a claimant in English Law) can serve a summons or Initial Writ with minimal averments of fact and irrelevant allegations of breach of contract or fault and negligence. It is relatively easy for the Pursuer thereafter to take no active steps with his case once the summons has called, because in Scotland there is no procedure to strike out an action for want of prosecution. Accordingly, there is a practice of issuing protective, writs to prevent the expiry of the prescriptive period.

Summary •

The effect of expiry of limitation period The expiry of a limitation marks the end of a person’s right to commence legal proceedings by, commencing adjudication, issuing either a claim form or a notice of arbitration. Limitation periods are therefore of great importance because after they have expired a contractor or designer may no longer be held liable for his negligence or breach of contract.

•

Limitation period in contract In contract, the limitation period is six years for contracts under hand and twelve years for contracts under seal, or executed as a deed.

•

Limitation period in tort The position in actions for negligence needs to take into account the Latent Damage Act 1986. The Act contains rules for calculating limitation periods inactions for negligence where the damage is latent (i.e. hidden) and does not involve personal injury.

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Limitation Periods


Under the Act, the limitation period for actions in negligence involving latent damage will expire on the later of: •

6 years from the date the damage occurred to the building (described in the Act as the date the cause of action accrued), or

•

3 years from the date the person who has the right to sue had the knowledge of the material facts relating to the damage or should have been aware of those facts subject to a fifteen year longstop which runs from the date of the negligent act.

The above limitation periods do not apply where there has been fraud, deliberate concealment or a mistake relating to the damage. In these circumstances, even the 15 year longstop will be displaced as the injured party has six years to sue from the date he could reasonably discover or did discover the fraud, concealment or mistake. Limitation is a complex subject in both English and Scots law, and Steelwork Contractors who feel that claims by or against them may be influenced by limitation periods are advised to seek legal advice.

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CHAPTER 17

INSURANCE


Generally Two types of insurance relevant to building and civil engineering contracts are liability insurance (which covers the insured’s legal liability to pay damages for personal injury or damage to other people’s property) and material damage insurance (which covers loss or damage to a particular structure or object belonging to the insured or for which he is responsible). Both of these categories of insurance are covered by the standard forms. This Chapter summarises the new provisions in both the main and sub-contracts, and describes the insurance arrangements applicable to the ICE 7th Edition. In addition, this Chapter comments on product liability and professional indemnity insurance, which are not expressly required by the standard forms. However, Steelwork Contractors may be requested to take out such insurance by particular clients or on certain types of contract. JCT98 – Main Form

Liability Insurance Clause 20 of JCT98 defines the liabilities of the parties for death, personal injury and property damage arising out of the carrying out of the works, and Clause 21 sets out the extent to which those liabilities must be insured. Under Clause 20.1 the contractor indemnifies the Employer against personal injury or death of any person arising from the carrying out of the Works, except to the extent it is due to the Employer’s act or negligence. Under Clause 20.2 the contractor gives a further indemnity to the Employer in respect of property damage arising from the carrying out of the works, but only insofar as it is due to the negligence of the contractor or of persons for whom he is responsible. The contractor is also responsible under this clause for anyone properly on the site, as well as his own employees and sub-contractors, with the exception of statutory undertakers and the Employer. Steelwork Contractors should note that this indemnity for property damage does not include the works themselves: they are dealt with under the Clause 22 All Risks policy. Clause 21.1 requires the contractor to take out and maintain employers’ liability insurance in accordance with the Employers’ Liability (Compulsory Insurance) Act 1969 i.e. £2 million any one occurrence, although, in practice such policies are normally unlimited. He must also carry public liability insurance with a limit not less than that specified in the Appendix to the contract. Clause 21.2 deals with a different type of insurance, namely the optional cover which the contractor may be required to take out in joint names with the Employer, covering damage to property other than the Works by collapse, subsidence, heave, vibration, weakening or removal of support and lowering of ground water. Premiums paid by the contractor for this insurance are added to the contract sum. The contractor is not liable to indemnify the Employer or to insure against any personal injury or property damage caused by the Excepted Risks, which are the nuclear risks and damage caused by supersonic aircraft.

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Insurance

Material Damage Insurance


Loss or Damage to the Works - All Risks Cover Clause 22 deals with the insurance of the Works. There are three sections of Clause 22, and the Employer must select which is to apply before main contract tenders are invited. If the contract is for the erection of a new building, the Employer may decide that the Works should be insured by the contractor (in which case Clause 22A will apply) or by the Employer himself (Clause 22B). If the Works are to be carried out in an existing structure or are an extension to it, Clause 22C must be used. Clause 22.3.1 provides that either the Contractor or the Employer as appropriate (depending on who is responsible for taking out the insurance) shall ensure that the Joint Names Policies referred to in clauses 22A.l or 22A.3 or 22B.l or 22C.l and 22C.2 shall either provide for recognition of each nominated sub-contractor as an insured under the Joint Names Policy or include a waiver by the relevant insurers of any right of subrogation against the nominated sub-contractor in respect of loss or damage caused by the Specified Perils. Sub-contractors who are not nominated sub-contractors are not covered by these provisions - see, for instance, British Telecommunications plc v. James Thomson & Sons (Engineers) Ltd (1998).

Clause 22A – new buildings, insurance by Contractor If Clause 22A is applicable, the contractor must take out and maintain an All Risks policy for the full reinstatement value of the Works. The policy must be in the joint names of the Employer and the contractor. This means that the Employer does not need to arrange separate insurance to cover property damage arising from his own negligence, as the insurers under the joint names All Risks policy will simply pay any claims for damage to the Works, however it is caused (subject to the exceptions listed below). The insurers will have no subrogation rights against the Employer because he is named on the policy. The All Risks cover required by the contract does permit some exclusions, namely: 1.

property which is defective due to wear and tear, obsolescence, deterioration, rust or mildew.

2. work or materials lost or damaged through their own defect in design or workmanship, or the consequential loss or damage of any other work which relied upon the defective work for support or stability. 3. loss or damage caused by or arising from: (a) (b) (c) (d)

war, invasion, etc. disappearances or shortages revealed by inventories not traceable to a particular event radiation, pressure waves caused by aircraft, etc. If the contract is carried out in Northern Ireland, civil commotion, acts by ‘unlawful associations’, etc.

The All Risks Policy must cover the Works up to the date of practical completion, or determination of the contractor’s employment, whichever is the sooner. Where a single policy for the Works has been taken out by the contractor, it must be sent to the Architect, who deposits it with the employer. The policy’s duration will normally be expressed as ending at the date for completion. Therefore, if the certificate of practical completion has not been issued by the date for completion it is essential

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Insurance that the single policy is immediately extended so as to expire on the date of issue of the certificate of practical completion; it is the contractor’s obligation under


Clause 22A. 1 to keep the policy in force until that date. Where the contractor’s annual policy is used, Clause 22A.3.1 provides for the contractor to supply the employer with the annual renewal date of the policy. This date is inserted in an entry in the appendix so that the employer is aware of the date when the annual policy has to be renewed, and may call for evidence from the contractor that it has been renewed.

Clause 22B - New buildings, insurance by Employer This is similar to Clause 22A, apart from the obvious difference that it is the Employer and not the contractor who takes out the All Risks policy. In the Private Editions of JCT98, the contractor is entitled to require proof from the Employer that the joint names insurance has been effected, and if the Employer has defaulted in his obligation to take out and maintain this policy, the contractor may take out such a joint names policy against any risks in respect of which a default has occurred. In the local authorities editions, the contractor has no such entitlement.

Clause 22C – Existing buildings, insurance by Employer Clause 22C is in two parts: one dealing with insurance of the works and a second dealing with the insurance of the existing structure and its contents. Under Clause 22C.l the Employer must insure the existing structure and Its contents against the “Specified Perils”. The “Specified Perils” are: fire lightning explosion storm tempest flood bursting or overflowing of water tanks, apparatus or pipes earthquake aircraft and other aerial devices or articles dropped therefrom riot and civil commotion. The policy must be in joint names. Therefore if the contractor were negligently to cause damage to the existing structure by a specified peril, such as fire, he would be protected by the policy. However, if he negligently damaged the existing structure by a cause outside the specified perils, such as accidental damage by his employees, he would be liable. Such liability would normally be covered by the contractor’s public liability policy. By Clause 2262 the Employer must take out a separate joint names policy covering damage to the works on an all risks basis. The rules regarding the proof of this insurance cover are precisely the same as those in Clause 22B.

Clause 22D Insurance for Employer’s loss of Liquidated Damages Clause 22D is designed to give the Employer the option to require the contractor to arrange for insurance to compensate the Employer for loss of liquidated damages. The Employer is not

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contractually entitled to recover liquidated damages for a period of delay due to loss or damage caused by the ‘Specified Perils’, because the contractor is entitled to an extension of time in respect of that delay under Clause 25.4.3. If the Employer decides that he wishes to exercise this option, the contractor takes out and maintains the insurance policy and pays the premium. However, it is at the Employer’s cost, because the premiums paid are added to the contract sum.

Terrorism cover It will be apparent from the definition of all risks insurance explained at the beginning of this section that (other than in Northern Ireland) one of the risks in respect of which the works must be covered is damage by fire and explosion due to terrorism. This has created some difficulties in recent years following a number of major explosions on mainland Britain, in particular the IRA bomb at the Baltic Exchange in the City. As a result, at the end of 1992 the Association of British Insurers informed the Government that their members would no longer provide cover for commercial or industrial building, against damage by fire or explosion due to terrorism (‘terrorism cover’). After an intense period of negotiation, the Government agreed to act as ‘reinsurers of last resort’ in the event of damage due to terrorist attacks, and formed a company known as ‘Pool Re’ to provide reinsurance cover for such risks. As a result terrorism cover continues to be available, albeit on a ‘buy-back’ basis which will involve the payment of an additional premium. The JCT has not therefore, amended the definition of all risks cover in its contracts, and it remains the obligation of the party responsible for insuring the works to obtain terrorism cover. However, the Government has indicated that its commitment to act as insurer of last resort cannot be regarded as indefinite, and that it may withdraw from the Pool Re arrangement on 31 December in any year, provided it gives 120 days notice. If the Government chose to exercise this option, it would almost certainly result in terrorism cover ceasing to be available. The JCT has therefore noted that neither party to the contract can rely upon terrorism cover continuing to be available, and in April 1994 it issued a set of emergency amendments MC/94) to be used in that event. In the event of terrorism cover ceasing to be available, the TQ94 amendments provide for the employer either to choose to take the sole risk of terrorism damage or, if he will not do so, to accept the determination of the contractor’s employment.

JCT 98 : Nominated Sub-Contract NSC/C Loss or Damage to the Nominated Sub-Contract Works As explained above; the main contract works are insured for any physical loss or damage on an all risks basis. This insurance includes the contractor and the Employer as the insured (i.e., it is a joint names policy). Unfortunately, when these Clauses were being negotiated in the JCT, the insurance industry would not extend the all risks insurance to provide equivalent cover to nominated sub-contractors. However, NSC/C does provide for the nominated sub-contractor to obtain the benefit of a major part of the cover given to the Employer and contractor under the main contract joint names policy.

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The benefit which the nominated sub-contractor obtains is in respect of loss or damage to the main contract works (which include the nominated sub-contract works) caused by the specified perils, including those arising from the sub-contractor’s own negligence. The “Specified Perils” are: fire lightning explosion storm tempest flood bursting or overflowing of water tanks, apparatus or pipes earthquakes aircraft and other aerial devices or articles dropped therefrom riot and civil commotion. The benefit of the main contract policy continues until the ‘terminal dates’ are reached. Clause 6.4 of NSC/C, defines the ‘terminal dates’ as whichever is the earlier of: •

the date of practical completion of the sub-contract works (as defined in the relevant clause),

or •

the date of determination of the employment of the contractor whether or not the validity of that determination is contested.

After the terminal dates, damage to the works by a specified peril caused by the sub-contractor’s negligence will be a third party risk which should be covered by the nominated sub-contractor’s public liability policy. The main risks excluded from the specified perils are theft vandalism, accidental damage, subsidence and impact, the nominated sub-contractor remains liable for damage caused by these risks until materials and goods have been “fully, finally and properly incorporated into the work”. From that time onwards the sub-contractor is liable for such risks only if the damage results from his own negligence. The phrase “fully, finally and properly incorporated” has given rise to considerable difficulties of interpretation, but has never been the subject of a decision of the Court. Its meaning is therefore a matter for argument. The conventional view is that once the contractor has completed an identifiable section of the works, and nothing remains to be done to that section other than testing, the goods and materials within it are fully, finally and properly incorporated. It is quite clear that full, final and proper incorporation can, and normally does, occur before practical completion of the sub-contract works. If this were not the case the relevant part of Clause 8 dealing with fully, finally and properly incorporated would be redundant, or would simply refer to practical completion. Clause 6 of NEC/C follows the three alternative main contract works Insurance clauses (22A. 22B and 220 by matching Clauses 6A. 6B and 6C. Each of the alternative clauses in the sub-contract requires the contractor to obtain for the nominated sub-contractor the benefit of the joint names policy by one of two methods: either a recognition of the nominated sub-contractor as an insured under the relevant joint names policy or an endorsement that the insurers will waive any rights of subrogation they might have against the nominated sub-contractor. Where the nominated sub-contractor is recognised as an Insured under the relevant joint names policy, Clause 6.6.4 provides that the nominated sub-contractor shall not object to the insurance monies being paid to the Employer.

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Any excesses (i.e. where the insured cannot recover the first part of any claim) in the main contract policies applicable to the specified perils are not borne by the sub-contractor. The sub-contractor must be paid in full for the restoration of the sub-contract works (Clause 6.6.5 NSC/C).

Liability Insurance Under Clause 6 of NSC/C the sub-contractor indemnifies the main contractor in respect of personal injury or death of any person arising out of the carrying out of the sub-contract works, except to the extent that it is due to the Employer’s or contractor’s negligence. The sub-contractor also gives a limited indemnity in respect of property damage. He is liable for damage caused by his negligence to all property, including the works, except for damage to the works due to a specified peril occurring before practical completion. By Clause 6.5, the sub-contractor must insure his liability under an appropriate public liability policy. The sub-contractor is also required by NSC/C to take out and maintain Employers liability insurance which complies with the Employers’ Liability (Compulsory Insurance) Act 1967.

JCT 98 – Domestic Sub-Contract DOM/1 The insurance provisions in DOM/1 generally follow those described for NSC/C with the following important exceptions.

Existing Structures The Employer and contractor are obliged to ensure that the benefits given to nominated subcontractors under the joint names policies for the works under main contract Clauses 22A. 22B or 22C.2 to .4 are also given to domestic sub-contractors. Domestic sub-contractors do not however obtain the benefit of the joint names policy under main contract Clause 22C.l in respect of loss or damage by the specified perils to the existing structures and contents. This means that domestic sub-contractors will be liable for damage caused by their own negligence to the existing structures and contents. This is a third party/public liability risk for which the domestic sub-contractor is expressly liable under the indemnity provisions of DOM/ 1 (Clause 6), and against which he is required to insure by Clause 7. Therefore, domestic sub-contractors will need to ensure that they have appropriate public liability insurance to cover this liability. If it is possible that the existing structure or contents could at any time be in the custody or control of the domestic sub-contractor, it is important that the public liability policy is worded so as to afford adequate protection.

Terminal Dates As explained in the commentary on NSC/C, the terminal dates mark the end of the period during which the sub-contractor is protected by the main contract all risks policy. In NSC/C, they refer to the date of practical completion or determination, whichever occurs first. It has been necessary to adopt a slightly different approach in defining the terminal dates in the domestic forms, due to the nature of the definition of practical completion in those contracts. DOM/1 provides for practical completion to occur on the date notified by the subcontractor to the main contractor, or if the main contractor dissents from that date within fourteen days of receiving the sub-contractor’s notice, on such date as may be agreed, or failing agreement on the main contract completion date. Clause 22.3.2 of the main form provisions provides that the protection of domestic

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Insurance sub-contractors under the joint names policy continues up to and including the date of issue of any certificate or other document which states that the domestic sub-contract works are practically complete. Accordingly, it is not possible directly to relate the definition of terminal dates to practical completion, because one of the options for practical completion refers to an “agreement” but does not require any document to be issued. To overcome this difficulty, the following definition of terminal dates has been included in DOM/l: “Either the date of the written notice of the sub-contractor under Clause 14.1 provided the contractor does not dissent therefrom under Clause 14.1 or, where the contractor does so dissent, the date upon which the contractor issues in writing to the sub-contractor his confirmation of the agreement under Clause 14.2. or, failing such agreement the date of issue of the certificate of practical completion of the works under Clause 17.1 of the main contract conditions, whichever is applicable. ...” Thus, the contractor will have to confirm in writing any agreement reached with the sub-contractor regarding practical completion to bring the sub-contractor’s protection under the joint names policy to an end, even though he need not do so under the practical completion clause. A footnote has also been included in DOM/l pointing out that the written confirmation is not necessary under the definition of practical completion, and advising main contractors to issue written confirmation as soon as an agreement is reached.

Other JCT Forms They follow the precedent of the JCT98 clauses described above, with only minor amendments. The main points worthy of note are as follows:

IFC98 - Named Sub-Contractors Named sub-contractors are equated with nominated rather than domestic sub-contractors for insurance purposes, and are therefore given the benefit of the Employer’s All Risks policy In respect of existing structures and contents where the work is being carried out in an existing building. In the intermediate form, the requirement survives for the main contractor to ensure that all of his sub-contractors both named and domestic carry the same amount of public liability insurance as he is required to have under the main form.

Management Contract: Treatment of Works Contractors Works Contractors under the JCT Management Contract are treated in exactly the same manner as nominated sub-contractors under JCT98, with the exception that the amount of public liability insurance Works Contractors are required to carry is separately specified by the Employer in the Management Contract appendix, and may well be different from the level of cover required of the Management Contractor.

JCT insurance case law In James Archdale v Comservices [1954] an action was brought by an Employer under a building contract against the Contractor to recover the cost of repairs to the Employer’s building which has been damaged by a fire caused by the negligence of the Contractor. The Court held that the contract placed the risk of damage to the building by fire solely on the Employer, who was accordingly unable to recover from the negligent Contractor. In Scottish Special Housing Association v Wimpey [1986] Wimpey had contracted to modernise houses under the JCT 1963 edition with quantities, local authorities edition, 1977 revision. The

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Insurance Scottish House of Lords held that Wimpey that Wimpey could not be liable for damage which was assumed to be caused by it, since under clauses 18(2) to 20(C) the SSHA had been obliged to take out insurance in repect of that damage. Following the decision in James Archdale & Co v. Comservices Ltd [1954], the Court held that that the contractual provisions excused Wimpey from liability. The case did not, however, establish that whenever an Employer is obliged to take out insurance, it would be held to have assumed the risk of damage by the Contractor. In Norwich City Council v Harvey [1989] the position of a nominated sub-contractor whose employee negligently set fire to an existing building and its extension where the main contract was in the JCT 1963 edition, was considered. It was held that, although there was no direct contractual relationship between the Employer and the Sub-Contractor, since each had contracted on the basis that the Employer assumed the risk of damage by fire, there was no sufficiently close and direct relationship between them to impose on the Sub-Contractor a duty of care to the Employer in respect of such damage. However, this position was held not to obtain in respect of domestic (as opposed to nominated) sub-contractors - see British Telecommunications plc v James Thomson & Sons (Engineers) Ltd [1998]. In National Trust v Haden Young [1994] a National Trust property was being refurbished under a JCT Minor Works contract. This required the National Trust (as Employer) to effect joint names insurance with the Contractor for the existing buildings, its contents and the Works and site materials. The main contractor sub-contracted the plumbing works to Haden Young. Haden Young negligently caused a fire which damaged the building and contents. The National Trust sued the main contractor for negligence. The National Trust had not effected joint names insurance and the main contractor’s defence was that the National Trust was in breach of contract and that, if joint names cover had been effected, he could not be held liable for his negligence. However, even if the National Trust had insured in joint names, whilst the main contractor could have claimed an indemnity, the sub-contractor (Haden Young) could not. In British Telecommunications plc v James Thomson & Sons (Engineers) Ltd [1998] Thomson, a domestic sub-contractor, argued that it was not fair, just and reasonable to impose a duty of care on it to prevent damage to BT’s property. Thomson argued that BT’s obligation under the main contract (the JCT 1980 edition) to insure such works meant that Thomson was not obliged to consider the need to insure itself. The House of Lords, although not disapproving cases such as Scottish Special Housing Association v Wimpey [1986], held that Thomson did owe such a duty. The relevant clause (22(C)) distinguished between nominated and domestic such contractors such that it was clear that BT could not sue nominated sub-contractors. By contrast, no such provision served to protect domestic sub-contractors. In Co-Operative Retail Services v Taylor, Young Partnership [2000] the Co-Op entered into a main contract, based on JCT 1980 edition, private with quantities with Wimpey to build new offices. Wimpey sub-contracted the electrical work to Hall based on DOM/l 1980 edition. After the intended completion date but before Practical Completion there was a fire at the site and the building was damaged. It was common ground between the parties that the Co-Op’s insurers, acting through rights of subrogation, could not pursue (in the Co-Op’s name) an action against Wimpey or Hall because they were insured against the same risk under the same insurance policy. So, the Co-Op claimed against their architects (Taylor, Young). Taylor, Young in turn claimed that they were entitled to a contribution from both Wimpey and Hall pursuant to sl(1) of the Civil Liability (Contribution) Act 1978. The Court held that neither Wimpey nor Hall were liable to make such contribution.

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ICE 7th Edition A main contractor under the ICE 7th is required to carry the following types of insurance:


(i) employer’s liability (ii) public liability (iii) all risks cover (iv) Road Traffic Act cover for vehicles and moveable plant The ICE 7th deals with the insurance and liability arrangements somewhat differently from the JCT forms,and are therefore summarised in some detail in this section.

Employer’s Liability Insurance The ICE 7th does not expressly require the contractor to carry Employer’s Liability insurance, as the contractor is under a statutory duty to do so following the Employer’s Liability (Compulsory Insurance) Act 1969, which requires a minimum cover of £2 million for any one occurrence. In practice cover is usually written for £10 million and additional cover is easily available. Clause 24 of the ICE Conditions requires the contractor to indemnify the Employer in the event that he is sued by an injured employee of the contractor or any sub-contractor and the policy should therefore include an “indemnity to principals” clause. However, the Clause 24 indemnity does not extend to damages for injury to the contractor’s employees caused by the Employer’s negligence, therefore the Employer will bear such costs himself.

Public Liability Insurance Clause 23 requires the contractor to carry public liability insurance in the joint names of the Contractor and the Employer. The amount of the insurance must be at least the amount stated in the Appendix to the tender. However, as explained in Chapter 13 - Defects Liability, the contractor’s liability does not end on practical completion, and therefore it is most important that he keeps an appropriate public liability policy in force whilst he has legal liability. The scope of the public liability policy required by Clause 23 is defined in Clause 22, which provides that the contractor will not be responsible for: (i) crop damage on site: (ii) interference with easements as an unavoidable result of construction of the Works; (iii) any failure of the Employer to obtain planning permission, consents etc; (iv) unavoidable damage (i.e. the policy is only required to cover accidental damage). (v) damage caused by the Employer or Engineer at any time, including during the design stage of the project. Exclusions relating to property on which the contractor is or has been working may cause difficulties, and should be deleted if possible, or restricted to the immediate part of the property worked upon.

Loss or Damage to the Works: All Risk Cover Clause 20 imposes a general responsibility on the contractor to “care” for the Works from commencement until the date of issue of the Certificate of Substantial Completion. He must also

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care for any outstanding work he may be finishing off during the Defects Correction Period, until that outstanding work is complete. Under Clause 21 the contractor must insure on an all risks basis the permanent and temporary works and the constructional plant on site. The insurance must be maintained for the period during which the works are in the contractor’s care under Clause 20. The contractor is not responsible for, and need not insure against, damage by the “Excepted Risks” which are defined in Clause 20(2), as: war risks nuclear risks sonic or supersonic aircraft causes due to the use or occupation by the Employer of the Works design defects (provided the design was not provided by the contractor). The contractor will, however, be responsible for loss or damage to the Works caused by the Employer’s negligence (provided it does not fall within (d) or (e) above), and as the all risks policy must be in the joint names of the contractor and Employer, the insurers of the all risks policy will have no subrogation rights against a negligent Employer. If damage to the Works is caused by the Excepted Risks, the Engineer may instruct the contractor to make good the damage, but this will be at the Employees expense, which includes the contractor's profit. The contractor should recover loss and expense due to any delay or disruption under Clauses 12 or 13 of the ICE 7th. Even where the damage to the Works is not caused by an Excepted Risk, the contractor should obtain an extension of time under Clause 44 for any delay, although this is likely to be reduced to the extent that the damage was caused by the contractors or a sub-contractor’s negligence. This is because Clause 44(1) only gives a right to an extension of time to which the contractor is “fairly entitled”. The Employer may insure against delay for which any extension deprives him of the right to liquidated damages, but there is no express provision for this in the contract equivalent to Clause 22D of JCT 98.

Road Traffic Act cover The contractor must also insure against his liability in relation to vehicles and moveable plant in accordance with the provisions of the Road Traffic Act. All of the insurances the contractor is required to carry must be held with an insurer and in terms approved by the Employer. As with JCT98, if the contractor defaults in his obligation to insure, the Employer may take out the appropriate insurance and recover the costs of doing so from the contractor.

Professional Indemnity and Product Liability Insurance Professional indemnity insurance provides cover against professional negligence by architects, engineers and quantity surveyors (as well as other professionals in other industries),and may also be taken out by contractors who are carrying out duties similar to professionals (e.g. designing subcontractors). In recent years, the cost of professional indemnity insurance has dramatically increased, partly due to a high incidence of claims in certain sectors and partly due to general pressure in the insurance market. Large excesses have also been imposed, requiring the insured to pay a substantial proportion of any claim.

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In response to this, many professionals have sought to limit their legal liability, for example by setting up limited liability companies or passing liability on to contractors. They have also attempted to find other sources for professional indemnity insurance, including mutual insurance companies such as the “Wren” which has been set up by a group of large architectural practices. Professional indemnity insurance generally only covers breach of the ‘professional standard’ of care, namely a failure to exercise reasonable skill and care. It does not cover the more onerous obligations frequently imposed on contractors such as fitness for purpose or liability for design prepared by others. Only a relatively small proportion of Steelwork Contractors carry professional indemnity insurance in the belief that they are adequately covered by product liability insurance. Although product liability insurance does include an element of cover for damage caused by defective design, this is only ‘triggered’ where there is associated physical damage to property other than defective property. Such product liability cover is also normally subject to important limitations, namely: (i) design given for a fee is not covered. (ii) if the contractor has professional indemnity insurance, negligent design is not covered; (iii) the cost of remedying the product itself is not covered: only the consequential loss. Under a standard policy wording, consequential loss will normally exclude pure financial losses, such as loss of rent or loss of profit. Financial loss extensions are sometimes available, but usually involve the payment of an additional premium but this will not usually include the Steelwork Contractor’s own costs, which can be considerable. Notwithstanding these limitations, the cover given under a product liability policy is often wider than professional indemnity insurance, as it includes an element of cover for fitness for purpose.

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CHAPTER 18


BONDS AND GUARANTEES In recent years there has been a steady increase in requests for performance bonds or guarantees on UK contracts. Always a feature of the export market, bonds and guarantees are now becoming more widespread in the home market particularly on large contracts. Retention bonds are a particular type of performance bond. Further advice on the BCSA Retention Scheme can be found in ‘A Progressive End to Retentions’.

Definition of a Performance Bond A performance bond is a contract between the employer, the contractor (or sub-contractor) and the surety which guarantees performance by providing the employer with a stated maximum financial benefit in the event of non-performance. The sum bonded is normally 10% of the contract value, although percentages may vary. The surety is usually a bank or an insurance company.

Types of Performance Bond Performance bonds fall into two main categories:

1. Where Liability Arises on Default This is a true performance bond which may be called only if the contractor or subcontractor has defaulted in his contractual obligations. To avoid disputes regarding whether a default has occurred, such bonds may require proof of default in the form of an architect’s certificate, a written admission of liability, a decision by a Court, arbitrator or adjudicator. This type of bond is often provided by an insurance company, who will become involved in the dispute between the employer and the contractor or sub-contractor if they feel the bond has been improperly called. In Perar BV v General Surety & Guarantee Co Ltd (1994) the contractor went into receivership. The contract provided for automatic determination of the contractor’s employment in these circumstances. It was held that the contractor was under no obligation to continue with the work following the determination and therefore there was no breach of contract and so no ‘default’ within the meaning of the performance bond. Accordingly, the Employer was unable to claim against the performance bond.

2. On-Demand Bonds This type of bond also refers to breach or non-performance, but states that the full amount bonded must be paid on first written demand - literally when the beneficiary of the bond writes to the surety requesting the money. On-demand bonds are normally provided by a bank, which will simply make the money available (and indeed is legally obliged to do so). The bank will not become involved in any dispute as to whether or not the bond should properly have been called.

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In practice both types of bond are normally called only when the contractor or subcontractor has gone into liquidation but depending on the wording, most bonds permit payment of the money on any breach of contract, however trivial.

Cost of Bonds If a bond is obtained from an insurance company, a premium will be required. However, the premium is not the only cost of providing the bond. The insurance company will also require a counter-indemnity, which is a promise that the contractor will repay the amount bonded to the surety in the event of the bond being called. If there is any doubt as to the contractor’s solvency or his ability to pay the sum bonded the insurance company may require the counter-indemnity to be secured in some way, for example by a charge on the company’s assets or by personal guarantees from the directors. If a bank provides the bond, a fee will normally be required. In addition, the bank will require a counter-indemnity which entitles them automatically to debit the contractor’s account with the sum they have paid under the bond. Banks treat bonds as an extension of the contractor’s overdraft facility, and therefore the bond effectively ties up a proportion of the contractor’s overdraft facility until it is released.

The Case Against Bonds In 1986, the old National Joint Consultative Committee for Building published advice on performance bonds. Although the NJCC no longer exists, its advice, which is summarised below, still holds good. •

The correct operation of selective tendering procedures should enable competent contractors to be employed, and reduce the possibility of defaulting.

•

Bonds impose an unnecessary additional cost on building.

•

In the case of performance bonds obtained from a bank the contractor’s overdraft facilities may be correspondingly reduced.

•

Performance bonds obtained from an insurance company may involve some charge on the company’s assets and often require personal indemnities from directors.

•

The insurance market for bonds is limited, and consequently the cost could be subject to extreme variations dependent on the level of demand.

•

Experience provides evidence that the cost of bonds is such that an employer with a continuous and substantial building programme wastes money by requiring bonds. having regard to the small number of occasions when bonds are called compared with the volume of the work programme.

•

A contractor’s inability to obtain a bond (perhaps because he has used his available facility with a particular company) may erroneously lead the client to assume that the contractor is financially unsound.

Where Bonds Are Required In spite of the above factors there may be some employers who, because they are rarely involved in building projects, may consider it necessary to require a bond for a particular project. In such circumstances employers and their advisers should give careful consideration to the following

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guidelines in the preparation of the tender document which is to include a requirement for a bond and in the specification of the terms of the bond. •

Performance bonds should be required only where the circumstances of the contract clearly indicate that the bond is a necessary security to the employer.

•

Full details of the requirement for the bond and of the proposed terms of the bond should be included in the preliminary enquiry and in the tender documents, and the tenderer’s attention should be drawn to these requirements.

•

The amount of the bond should not exceed 10 per cent of the contract sum.

•

The contractor should have freedom to choose the source of the bond (bearing in mind the desirability of minimising the cost) subject to reasonable safeguards as to the standing of the surety, and, if required by the employer, the contractor should state the name of the surety in his tender, this should not preclude the use of another surety when the contract is ready for signature.

•

The bond should be released at ‘practical completion’ stage or earlier as required by sectional completion or partial possession appropriate to the particular contract.

•

The tender should include for the cost of the bond to be paid by the employer. The bond should be executed and in the possession of the employer at the same time as the signing/sealing of the contract.

•

The terms of the bond shall be fair and reasonable and should provide for the contractor to be given written notice that he has not fulfilled his obligations and to be given a reasonable opportunity to fulfil those obligations within a reasonable time after such notice prior to the surety being required to make payment to the employer under the bond.

•

The bond in the UK should not be of the ‘on-demand’ or ‘unconditional’ type.

If Steelwork Contractors decide to give a performance bond, they should bear in mind that in the absence of an express termination date the bond will remain in force (provided any fee or premium is paid) for as long as liability under the contract endures. This will be six years from practical completion if the contract is signed, and twelve years if it is executed under seal or as a deed.

Other Types of Bond Steelwork Contractors may occasionally be required to provide other types of bond. The main types are listed below: 1.

Bid Bond: a bond normally for a small amount which is intended to demonstrate the good faith of the tenderer and to assure the employer that a performance bond will be forthcoming if the tenderer is awarded the contract.

2. Advance Payment Bond: a bond as security on the money paid where an employer is making a substantial pre-payment to a contractor. 3. Maintenance Bond: a bond intended to cover a contractor’s liability over a certain period to remedy defects in the work.

Parent Company Guarantees A parent company guarantee is a document whereby the parent company guarantees to the employer that its subsidiary will properly perform its contractual obligations. The document is normally executed as a deed to remove the need for consideration.

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A parent company guarantee may be offered by the contractor in lieu of a performance bond, over which it has a number of advantages. Firstly, the guarantee is usually free to the subsidiary. Secondly, the wording of the guarantee normally requires that the employer gives the contractor an opportunity to remedy any non-performance before the guarantee is called. However, liability is not normally limited to a set sum as it is under the bond: the parent company will pay the full amount of the Employer’s actual loss. This option is obviously not available to companies who are not members of groups, nor to subsidiaries whose parent has a policy of not providing such guarantees. From the point of view of the recipient of the guarantee, the security it offers will only be as good as the parent company itself. If the parent is a substantial and stable company, and the subsidiary is in danger of becoming over-extended, parent company guarantees can offer real security to the client, if only because if the contract does go sour, the guarantee will discourage the parent from putting the subsidiary into liquidation and thus escape paying damages.

Letters of Comfort A letter of comfort is a letter, usually written by a parent company to a lender or other creditor, giving comfort or reassurance to the lender or creditor regarding the subsidiary’s ability to pay. In Kleinwort Benson v MMC (1989), a lender attempted to sue on a letter of comfort. The Court of Appeal held that a statement from a parent that, “it is our policy to ensure that the business of (its subsidiary) is at all times in a position to meet its liabilities to you” was merely a statement of present fact and not a contractual promise. The Court was also persuaded by the fact that the concept of a letter of comfort was known to both sides to be a document under which the parent assumed only a moral responsibility, not a legal liability. Steelwork Contractors may find that in the light of this case, employers are less willing to accept letters of comfort in lieu of legally enforceable guarantees.

Summary There are two types of performance bond: a “true” performance bond where liability arises on default, and an “on-demand” bond which can be called (and on which the surety must pay) at any time. The wording of both types of bond refers to contractual default, but in practice they are normally called only in insolvency. The true cost of bonds exceeds the fee or premium required because an insurance company may require a secured counter-indemnity, and a bank will treat the sum bonded as an extension of the contractor’s overdraft facility. The NJCC has published a comprehensive guidance note on performance bonds which sets out in detail the case against bonds, and lays down guidelines for employers who wish to obtain them. In view of the NJCC’s standing’ as the acknowledged “good practice” body in the industry, this should be of assistance to Steelwork Contractors who wish to resist demands for bonds. If a bond is given, the inclusion of a termination date is vitally important. Parent company guarantees may be given as an alternative to bonds, provided the parent company is willing, and is sufficiently substantial to be an acceptable guarantor. Letters of comfort are merely letters of reassurance written by a parent regarding the creditworthiness of its subsidiary. They have no contractual effect.

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CHAPTER 19


DISPUTES AND LEGAL PROCEEDINGS The building process is lengthy, expensive, complex, and involves a multitude of parties, so it offers enormous potential for disputes. The majority of these disputes are settled by the parties themselves, without recourse to a third party to determine who has right on his side. In the event that disputes cannot be settled by negotiation, the traditional means of resolving them has been by way of litigation in the Courts or arbitration. Any contractor who has become involved in arbitration or litigation will know how expensive and time-consuming they can be, and that it is only worthwhile if large sums of money are at stake. There are, however, alternatives. A new, cheaper and faster means of resolving construction disputes has recently been introduced by the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act’). This is called ‘adjudication’ and more is said about this later in this Chapter. In addition there has been an increase in alternative consensual procedures for resolving disputes, such as mediation. This Chapter explains the legal consequences of making offers during negotiations, briefly describes the position on mediation, adjudication, arbitration and litigation, and sets out some advantages and disadvantages of each process. It should be stressed that the following summary is no substitute for appropriate legal advice. Steelwork Contractors faced with disputes that have not been settled by negotiation are strongly urged to seek professional assistance at the earliest opportunity. Such advice can come from a number of different sources.

Professional Advice (i) Claims Consultants Unlike solicitors and barristers, claims consultants do not need specific qualifications in order to practice: anyone may call himself a claims consultant. However, they are normally chartered surveyors or engineers with particular experience of advising on construction industry problems. They have limited rights of audience in the courts, but they may represent clients in arbitrations.

(ii) Solicitors In the event that a contractor becomes locked in a dispute which cannot be settled satisfactorily but is worth pursuing, he will need to consult his legal advisers. Similarly if he is sued himself, he will require legal advice. In the first instance, this is obtained from solicitors, who should advise on the various methods available for resolving the dispute, the likelihood of success of any legal proceedings, further action which may promote a settlement of the dispute and, most importantly, what the action is likely to cost both if the contractor is successful and if he is not. Building contracts are a very specialised field, and therefore it is unlikely that the best advice will be obtained from a general solicitor’s practice. Solicitors can advise on the law and take the majority of the procedural steps leading up to a trial. Some solicitors have the right to represent their client in the High Court (Solicitor advocates). This is the exception however, and solicitors will generally instruct a barrister to represent clients in actions in the High Court. All solicitors may represent their clients in arbitrations, but rarely do so if the arbitration is complex.

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Disputes and Legal Proceedings

(iii) Barristers (Counsel)


Members of the general public may not approach a barrister direct: they must go through a solicitor, and all communication with the barrister should normally be in the presence of the client’s solicitor. Barristers advise on any particularly difficult areas of law (through the medium of a “Counsel’s opinion”), and represent clients in court and arbitrations. As with solicitors, it is important to engage a barrister who is familiar with the construction industry, but if the solicitor is well-versed in building contracts this should happen as a matter of course. Members of the Bar are known as “Junior Counsel” unless they are a Queen’s Counsel, in which case they are known as “Leading Counsel” or a “Silk”. Where Leading Counsel are engaged they are normally assisted by Junior Counsel. Whether Leading Counsel should be engaged will depend on the size and importance of the case. It is as well to bear in mind that while a Junior may be no less experienced than a Silk, he will invariably be less expensive.

Negotiations - Without Prejudice Letters Most disputes are settled by agreement, often after lengthy negotiations between the parties. Such negotiations can be a series of offers and counter-offers: a main contractor will offer a £10,000 settlement of a sub-contractor’s claim, the sub-contractor will require £30,000, and eventually they may settle around £20,000. The effectiveness of negotiation as a means of resolving disputes should not be underestimated and should be considered at all times, even once other, more formal, means of dispute resolution have begun. To encourage this type of settlement, and to protect the parties from incurring legal liability when they make such offers, the law has evolved the device of “without prejudice” offers. The party making the offer of settlement simply marks the letter incorporating the offer “without prejudice”, and (subject to the points made below) this means that the letter will not be admissible as evidence in any subsequent legal proceedings. The “without prejudice” rule applies to all negotiations genuinely aimed at settlement, whether oral or in writing. Although it is wise to ensure that all correspondence regarding settlement is marked “without prejudice”, if it is clear that the parties are seeking to compromise, any evidence of the content of the negotiations would be inadmissible. This ensures free negotiations, and maximises the likelihood of the dispute being settled. There are some minor exceptions to the “without prejudice” rule. For example, a threat of some kind if the offer were rejected would be admissible evidence against the threatening party, and in some circumstances the courts will look at the without prejudice correspondence after judgment has been given to determine who should be awarded costs. It is also important to note that not all letters marked “without prejudice” will be treated as such. It is important that the “without prejudice” letter should also constitute a genuine effort to compromise the dispute. What is important is the content of the letter and not merely its heading.

Mediation Mediation is perhaps best considered as a facilitated negotiation. It involves a procedure where the parties set out their position to one another and, in effect, negotiate with one another through, and with the assistance of, a trained third party mediator. It is becoming an increasingly common method of resolving commercial disputes. This is not least because it is

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Disputes and Legal Proceedings being promoted by the Courts who will ask the parties to any legal proceedings whether mediation has been attempted, and if not, why not.


The following are the essential principles of mediation: •

the mediator is an independent third party, preferably trained and experienced in mediation.

•

the mediator’s role is to facilitate negotiation and not to judge or decide the issue. The mediation will not result in a “judgment” or decision but, if the parties agree, will result in a negotiated settlement.

•

all matters disclosed by one party to the mediator are confidential and the mediator will not disclose them to the other party without consent.

•

all matters within the mediation, and documents prepared for the mediation, are without prejudice and confidential and cannot be referred to in other proceedings or relied upon by either party.

The advantages of mediation are: •

it is quick to invoke.

•

it is extremely flexible procedurally. The parties are free to agree the format and timing of the mediation.

•

it is relatively inexpensive.

•

it is extremely flexible in terms of outcome. The parties are free to agree all manner of terms of settlement and are not limited to monetary settlements.

The disadvantages are: •

because it is non-binding, it may be inconclusive.

•

it needs the support of both parties to continue and reach a conclusion.

•

during a mediation a party may reveal to the other side issues it would not normally reveal in the course of ordinary negotiation.

In addition to the above consensual methods of dispute resolution there are three types of determinative legal proceedings with which Steelwork Contractors may become involved: adjudication, arbitration and litigation. Adjudication results in a provisional decision, binding until finally determined by agreement or by litigation or arbitration, each of which are final. All construction contracts (other than the exceptions set out in the Construction Act which are fully set out in Chapter 7) must either contain adjudication provisions or, if they do not, the adjudication provisions in the Scheme for Construction Contracts will, as a matter of law, be implied into the contract. If a construction contract contains an arbitration clause, or the parties subsequently agree, then (unless agreed otherwise by the parties) disputes will finally be determined by an arbitrator. If a construction contract contains no arbitration clause any disputes which cannot be finally resolved by agreement will finally be resolved through the courts by litigation.

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Adjudication


Adjudication provisions of the Construction Act A summary of the key elements of adjudication under the Construction Act is as follows: •

Each party to a construction contract has a right to refer a dispute or difference to adjudication. This includes sub-contracts, sub-sub-contracts and consultants’ agreements.

•

The Act requires a construction contract to include a dispute resolution procedure which provides: • • • • • •

that a party is free to give notice to the other party at any time of his intention to refer a dispute to adjudication a timetable which has the aim of having an adjudicator appointed and the dispute referred to him within 7 days of the notice that the adjudicator is required to reach a decision within 28 days or referral or longer if, following referral, the parties agree that the adjudicator is permitted to extend the 28 day period by up to 14 days if the party referring the dispute consents that the adjudicator is to act impartially that the adjudicator is permitted to exercise his own initiative in finding out facts and the law

•

In addition, the contract must require that the adjudicator’s decision remains binding until the dispute is resolved in court or by arbitration (if there are arbitration provisions in the contract or agreed by the parties) or by agreement between the parties.

•

The contract must exempt the adjudicator together with his servants or agents from liability unless acting in bad faith

•

If the contract does not comply with the above requirements, the “Scheme for Construction Contracts” will apply. The Scheme is contained in the Scheme for Construction Contracts (England and Wales) Regulations 1998. Similar Regulations exist for Scotland and Northern Ireland. It should be noted that the whole of the Scheme’s provisions on adjudication apply in the event that the contractual provisions are either non-existent or deficient. The Scheme does not just fill in the gaps.

The following points should be noted: •

The statutory right of a party at any time to refer a dispute to adjudication cannot be contractually waived or excluded. Steelwork Contractors should be aware that some contracts or sub-contracts provide that a dispute does not exist until the parties have exhausted prescribed procedures for resolving any problem or “dissatisfaction”. Recent case law has suggested, however, that such provisions are not enforceable.

•

Adjudication is intended to be a cheap and speedy method of sorting out disputes. It is a stopgap process and, therefore, the subject matter of the dispute may be re-heard at a later stage in a court or arbitration unless the parties decide not to pursue the dispute beyond the adjudicator’s decision.

•

Pre-contract matters are outside the powers or jurisdiction of the adjudicator e.g. any dispute in connection with a tender matter.

•

The proposed contract or sub-contract should be checked before it is entered into to establish whether an adjudicator is named or, if not, an appointing body is named. If an adjudicator is named, Steelwork Contractors should ensure that he or she is wholly independent of the employer or main contractor. Some professional indemnity insurers will require this.

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Disputes and Legal Proceedings •

The contractual procedures should not be excessively formal or long-winded since this could provide opportunities for attacking the adjudicator’s decision on grounds that he has failed to comply with some minor procedural requirements.

•

There is no statutory requirement for adjudicators to give written reasons for their decisions. A requirement to give reasons may be a two-edged sword since it could provide ammunition for attacks on the adjudicator’s decision, thus delaying enforcement. On the other hand, an insured may be unable to substantiate a claim against his insurers without those reasons.

•

There is very little in the Act on enforcement of adjudicator’s decisions except:

•

the decision is binding until the dispute is finally resolved by agreement, judgment of a court or award of an arbitrator, and:

•

an adjudicator’s decision that the whole or part of a disputed “set-off” amount is to be paid to the payee, must be complied with within 7 days of the decision or by the final date for payment whichever is the later.

Uncertainties had been expressed about the enforceability of adjudication decisions. It is now clear, however, following decisions of the Court beginning with Macob Civil Engineering v. Morrison Construction Limited (1999) that the Court will enforce adjudicator’s decisions save where: 1. the Adjudicator was not empowered by the Act to make a decision, for instance because there was no contract between the parties, or that contract was not a “construction contract” within the meaning of the Act. 2. the Adjudicator has answered in his decision a question or issue that was not referred to him. Steelwork Contractors should, however, exercise diligence is there is an arbitration clause in the contract or sub-contract. Such a clause is likely to require that all disputes connected with the contract will have to go to arbitration. This could cause particular problems in the context of applications to enforce adjudicator’s decisions since enforcement may have to be referred first to an arbitrator whose powers in that regard are less than those of the Court. The enforcement of adjudicator’s decisions should, therefore, be excluded from arbitration clauses. •

If a Steelwork Contractor has professional indemnity insurance (or possibly product liability insurance) to cover design liability and/or a contractor’s ‘all risks policy’, they must comply with the notification provisions in the policy. These normally require that the insurer is notified as soon as the insured becomes aware that there are circumstances which could give rise to a claim against the insured. Notification to the insurers should be made (at the latest) immediately after the insured is notified by the other party to the contract or sub-contract that they intend to make a claim against the insured in adjudication proceedings. Insurers will insist that the insured does not agree:

•

provisions in the contract or sub-contract making the adjudicator’s decision final and binding

•

the adjudicator making his decision on grounds other than legal grounds (insurance policies require that legal liability is established)

•

Steelwork Contractors should watch out for contractual provisions stating that either party will, in any event, be liable for the whole of the adjudicator’s fees and expenses. The liability for these should be decided by the adjudicator although, as between themselves and the adjudicator, the parties will be jointly and severally liable for his fees.

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Adjudication provisions of the Scheme for Construction Contracts The Scheme’s adjudication provisions will apply to a construction contract either where the contract does not contain adjudication provisions or where it does contain such provisions but they do not comply with the requirements of the Construction Act. In either case the whole of the Scheme’s adjudication provisions will apply not just those parts of it necessary to fill in any gaps in the contract. •

Appointment and powers of Adjudicator under the Scheme An adjudicator under the Scheme can be the adjudicator named in the contract (or any named substitute adjudicator) or, if there is no named adjudicator, a person nominated by a body named in the contract. If there is no adjudicator or nominating body named in the contract, the adjudicator can be selected by an ‘adjudicator nominating body’ which may be chosen by the referring party from a list kept by the Department of the Environment, Transport and the Regions. The Scheme requires bodies named in the contract or adjudicator nominating bodies to inform the referring party of the name of an adjudicator within 5 days of receiving a request to do so. In deciding disputes the adjudicator is given wide powers to decide the appropriate procedure for dealing with the dispute subject to the express provisions of the Scheme. The adjudicator can deal with all matters arising under the contract but, if a decision or certificate is expressed in the contract to be ‘final and conclusive’ the adjudicator cannot ‘open up, revise and review’ it. Under the Scheme the adjudicator must be an individual not a firm or employee of one of the parties. Steelwork Contractors may want to check to ensure that the adjudicator does not have any connection with the main contractor or employer. One adjudicator nominating body is the Chartered Institute of Building, which is developing a separate panel of adjudicators for the Specialist Engineering Contractors Group. This will include experts on steelwork.

•

Adjudication procedures under the Scheme The adjudication process under the Scheme is initiated by a ‘notice of adjudication’ sent to the other party indicating the intention to refer the dispute to adjudication. The notice of adjudication must set out briefly: •

a description of the dispute including where and when the dispute has arisen

•

the nature of the redress sought

•

the names and addresses of the parties

The next stage (which should immediately follows the above) is to check that any adjudicator named in the contract is able and willing to act. If there is no named adjudicator (or the named adjudicator is unwilling or unable to act) the body named in the contract (or if there is no such body, any adjudicator nominating body) should be asked to select an adjudicator. The notice of adjudication should be sent to the body named in the contract or, if there is no such body named, any adjudicator nominating body. If an adjudicator is to be nominated by an adjudicator nominating body, such body must so nominate within 5 days of receiving a request to do so. A person requested to act as adjudicator (whether named in the contract or named by a body) must indicate his willingness to act as such within 2 days of the request.

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The dispute must be referred (by a referral notice) to the adjudicator within 7 days of the notice of adjudication. The referral notice must be accompanied by the documents to be relied upon including a full statement of the referring party’s case and the contract (or extracts from it). This documentation must also be sent to the other party. •

The Adjudicator’s decision under the Scheme The deadline for the adjudicator’s decision is 28 days from the date of the referral notice. However, if the referring party consents, the adjudicator may extend the time to up to 42 days in total and both parties can agree, after referral, to any extension to the 28 days. The adjudicator must send a copy of his decision to each of the parties as soon as possible after he has reached a decision. Where the decision requires a payment to be made, the due and final date for such payment may be stated in the decision. The decision may also include a requirement to pay interest. The adjudicator is not obliged to include in his decision his reasons therefore, but he must provide reasons if so requested by one of the parties.

Adjudication under the JCT Main Forms and Sub-Contract Forms All of the editions of the above considered in this Handbook (i.e. the 1998 editions) contain adjudication provisions which address the requirements of the Construction Act. th

Adjudication under ICE 7 Conditions Adjudication is dealt with in clause 66(6) which states that adjudication is to be dealt with in accordance with the ICE’s Adjudication Procedure. Clause 66 takes an interesting approach to the question of the right of a party to refer a dispute to adjudication. Clause 66(2) provides that if the contractor or the employer is dissatisfied with any decision etc. of the Engineer, this is to be referred to the Engineer and that no ‘dispute’ shall exist until the time allowed for the Engineer’s decision has expired or the decision is unacceptable or unimplemented or an adjudicator has given a decision on a dispute under clause 66(6) and it has not been implemented. It seems the intent of this is to postpone adjudication until after the Engineer’s decision. Recent case law has suggested, however, that such provision is not enforceable as it seeks to detract from the right to immediate adjudication.

Adjudication under CECA Sub-Contract This form provides for disputes to be referred for adjudication and for the ICE’s Adjudication Procedure to apply. If the sub-contractor wants to make a “submission” to the main contractor that he should be paid more than the amount determined by the main contractor or if the sub-contractor considers that decisions, etc of the main contractor are “unsatisfactory”, the sub-contractor is to notify the main contractor. If the main contractor considers that this “submission” would give rise to a “matter of dissatisfaction” under the main contract, the main contractor is to pursue the matter “promptly” but in the meantime, until the “dissatisfaction” procedure under the main contract has been followed, the sub-contractor agrees that there is no “dispute”. As above, recent case law has suggested, however, that such provision is not enforceable.

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Advantages of adjudication •

Speed

•

Should be cheaper than arbitration or litigation

•

In practice, the parties often will accept the adjudicator’s decision as resolving their dispute.

Disadvantages of adjudication •

Decision is only temporary until the dispute is finally resolved by arbitration, litigation or agreement between the parties

•

An adjudicator is not required to act fairly - only impartially

•

An adjudicator can take the initiative in ascertaining the facts and the law necessary to determine the dispute but he is not bound to tell the parties what information or considerations he took into account in arriving at his decision.

•

The speed of the adjudication procedure is likely in some circumstances to produce results which when fully considered are wrong. This may lead to injustice to one of the parties.

•

In Bouygues v Dahl-Jensen the Court of Appeal held that even where an adjudicator is obviously wrong (for instance, where he ordered payment of retention that both parties agreed was not yet due), his decision should be upheld. In that case, he had jurisdiction, but made a mistake - he asked the right question, but he arrived at the wrong answer. Once an adjudicator has issued his decision, he is ‘functus officio’, that is, his office is ended and he has no more power in the matter. However, it has been established that there is a very limited right for an adjudicator to put right some errors in his decision – for instance, arithmetical errors – but this will last only for a very short time after the decision has been issued.

Arbitration Arbitration is a contractual method of dispute resolution by which both parties agree (either in the initial contract between them, or in connection with any particular dispute) to have their dispute determined by an independent third party arbitrator. Arbitrations are now governed by the Arbitration Act 1996 which gives the arbitrator wide powers to determine the procedure for the arbitration, subject to any agreement the parties may reach. The arbitrator will determine the dispute having received submissions from the parties (either in writing or at a hearing) and, as appropriate, having heard evidence. The Arbitrator’s Award is final and binding subject to fairly limited rights of appeal under the Arbitration Act. The Arbitrator should be a professional well-versed in building contract matters, such as an architect or chartered surveyor, and will normally also be an Associate or Fellow of the Chartered Institute of Arbitrators. Occasionally, legally qualified persons are appointed as arbitrators.

Arbitration under the JCT Forms The JCT forms contain provisions for disputes to be referred to arbitration under the Construction Industry Model Arbitration Rules if the parties elect for the arbitration provisions to apply to the contract. If they do not choose arbitration, disputes will be dealt with by the courts.

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Arbitration under ICE 7th Edition Clause 66 of the ICE 7th makes provisions for disputes (other than failure to give effect to a decision of an adjudicator) to be referred to arbitration. However as discussed above in relation to adjudication, the amendment provides in effect that there is no ‘dispute’ until the Engineer has given (or had the opportunity to give) his decision on a dispute.

Arbitration under CECA Sub-Contract This follows the ICE. There are also joinder provisions for sub-contract disputes which relate to disputes under the main contract.

Advantages of Arbitration The main advantages of arbitration are as follows:•

Arbitration allows the parties (if they are in agreement) to have greater control over the procedure by which their disputes are resolved than would be the case before the Courts. If the parties agree on a procedural issue then the arbitrator will not be able to veto that decision.

•

Arbitrations are conducted in private, whereas anyone can attend a court hearing. This may be important if the subject matter of the dispute is commercially or politically sensitive.

•

If the facts of the dispute are highly technical, a technically qualified arbitrator may be more able to understand the issues fully. However, this should not be confused with normal building or quantity surveying practices, which will be understood by the specialist judges of the Technology and Construction Court who hear most construction cases.

Disadvantages of Arbitration •

Costs The costs of an arbitration may be even higher than those of litigation, as in addition to paying legal advisers, the costs of the arbitration itself must be paid, namely hiring a room and paying the arbitrator (whose fee could be several hundred pounds an hour). However, if one of the shorter arbitration procedures is used, costs may be lower than litigation.

•

Speed If the contract is still running, most arbitrators will make every effort to resolve the matter quickly. However, if the work is finished, litigation is generally more rapid than arbitration. The time limits for the various types of litigation are stricter, and the judge has a number of summary procedures and time-saving devices at his disposal, which the average arbitrator does not.

•

Third Parties A particular drawback of arbitrations is the difficulty of joining third parties to the action. Many building projects disputes involve more than two parties: and it is frequently the case that the dispute between the main contractor and client is substantially the same as the dispute between the main contractor and sub-contractor. However, an arbitrator cannot compel related disputes to be heard together, as a judge could if the cases were to be heard in court. In Lafarge Redlands Aggregates Ltd (formerly Redland Aggregates Ltd) v Shepherd Hill Civil Engineering Ltd (2000) the House of Lords held that where a main contract was governed

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Disputes and Legal Proceedings by ICE (5th Edition) (June 1973) (revised 1979) and a subcontract was governed by FCEC “Blue” Form (September 1984) and the main contractor served a notice under clause 18(2) of the subcontract requiring joint arbitration of disputes under the main contract and the subcontract but the main contractor was unable or unwilling to pursue the joint arbitration, the subcontractor was entitled to have the dispute under the subcontract referred independently to arbitration. The main contractor was not entitled to defer the main contract procedure whilst he negotiated with the employer. Because of the difficulties of dealing with disputes which involve multiple parties and probably multiple contracts in arbitration, these sorts of disputes are better dealt with by litigation. If, however, the contracts contain provisions by which the parties agreed that their disputes will be arbitrated, then all parties concerned would need to agree to the dispute being litigated rather than arbitrated.

Litigation In circumstances where there is no binding arbitration agreement, disputes not settled by agreement will be finally decided by the Courts. Litigation before the Courts is now governed by the Civil Procedure Rules (“CPR”), which were the result of the much publicised Woolf Report. The proposals in the Report and the provisions of the CPR aim to reduce the cost and time inefficiency of litigation, which had previously been seen as its major failing. It is important to note that the CPR have introduced a wholesale change in litigation procedure, and even those elements of the CPR which may look familiar are likely to be interpreted by the Courts in a different manner in order to achieve the aims of the CPR.

Overriding Objective The aims of the CPR are set out in what is known as the Overriding Objective. This states that the Courts should deal with matters justly which includes, so far as practicable: •

Ensuring the parties are on an equal footing.

•

Saving expense.

•

Ensuring proportionality to the amount of money involved, importance of the case, complexity of the issues and financial position of each party.

•

Ensuring litigation is dealt with expeditiously and fairly.

•

Allotting an appropriate share of the Court’s resources, taking into account the need to allot resources to other cases.

The parties are required to help the Court to further the Overriding Objective, and the Court will advance the Overriding Objective by taking a much greater degree of control in managing cases including: •

The early identification of issues.

v

Encouragement to use alternative dispute resolution methods, such as mediation.

•

Encouraging the parties to settle.

•

Giving directions to ensure the case proceeds quickly and efficiently.

The net result of the above is that, perhaps to a greater extent than previously, the Court’s control of the parties’ dispute resolution is much greater. Once proceedings have been issued, the Court will

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Disputes and Legal Proceedings ensure that the parties progress the matter at what the Court considers an appropriate pace and not, necessarily, as the parties might otherwise wish.


Courts and the allocation of cases There remains the distinction between County Courts and the High Court. The allocation of work between the Courts, however, is now more structured and the CPR further allocates cases into one of three “tracks”: • Small claims: • • • •

Generally, where the value of the claim is not more than £5,000. The action will be dealt with in the County Court. Litigation of small claims will be dealt with by an abbreviated and more informal procedure. In general the Court will not award either party their costs of dealing with the litigation, even if successful.

• Fast track: • • • •

Covers all claims which are not small claims and which are of a value of less than £15,000, unless the Court considers it inappropriate that the trial should not be more than one day. Again fast track claims will be dealt with in the County Court. Even a successful party will only be entitled to recover limited costs.

Multi-track • • •

claims:

This covers all other disputes. Matter will be dealt with in either the County Court or the High Court depending upon the value of the claim and complexity of the issues involved. The Court has a full discretion (subject to the CPR) as to the award of costs.

The above allocation applies generally to commercial disputes. The majority of court cases concerned with the building and civil engineering industry, however, are heard in the Technology and Construction Court (“TCC”), a specialist Court within the Queen’s Bench Division of the High Court. The Judges in this Court specialise in certain areas, the most important of which is construction. Because of this specialisation they are well versed in the law and practice of the industry. They have also developed various procedural mechanisms which are helpful in trying building disputes. Many of these are now being embraced by other courts as a result of the CPR. All claims which are properly Technology and Construction Court matters will be dealt with in the TCC and as such will, regardless of the allocation issues set out above, be treated as multi-track claims under the TCC procedure.

Basic procedure in the TCC The basic procedure in a case commenced in the TCC is as follows: 1. The Claimant issues a Claim Form. Before doing so, it is important that the Claimant has given the Defendant proper opportunity to respond to the claim. The CPR provides for costs penalties against a Claimant who has not acted reasonably prior to commencement of proceedings. In general, the Claimant should have set out for the Defendant, the nature of the likely claim and the matters on which it relies in support of that claim. It should have then given the Defendant adequate time to respond to the points raised. The Claimant should also ensure that the claim is properly prepared before issue since, once the Claim Form is issued proceedings will progress rapidly, at the direction of the Court. The Claim Form must be served on the Defendant within 4 months of the date it was issued. This can either be by the Court or the Claimant itself.

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Disputes and Legal Proceedings 2. The Claimant must also serve on the Defendant Particulars of Claim. This amounts to a concise statement of the facts on which the Claimant relies and should also exhibit any contract documents referred to. It must now be supported by a Statement of Truth signed by the Claimant. The Particulars of Claim can be served with the Claim Form. If not they must be served on the Defendant within 14 days of service of the Claim Form. In any event, they must be served within 4 months of issue of the Claim Form. 3. The Particulars of Claim will be served with a “Response Pack” containing: • • •

Admission form; Defence and Counterclaim form; Acknowledgment of service.

The Defendant must respond to the Court within 14 days of service of the Particulars of Claim either admitting the claim in whole or in part, defending the claim or acknowledging service. If the Defendant simply acknowledges service he then has 28 days from the date of service of the Particulars of Claim to file a Defence. Delay in responding within the time periods will enable the Claimant to apply for judgment in default. The Defence will again be verified by a Statement of Truth. The Defendant may also, when serving his Defence, serve a Counterclaim. 4. The Claimant must issue an application for directions within 14 days of service of the Defence or an Acknowledgment of Service (whichever is the earlier). This application is heard at what is known as the First Case Management Conference (“CMC”). Prior to the First CMC the parties are issued with a First Case Management Questionnaire and First Case Management Conference Directions Form. Both are to be completed, exchanged with the other party and returned 2 days before the CMC. At the First CMC the Court will: • • •

Fix a trial date. Give case management directions on questions such as disclosure of documents and exchange of expert and other evidence. ‘Fix a date for a Pre-Trial Review (“PTR”).

5. Prior to the PTR the Court will issue a Pre-Trial Review Questionnaire and Pre-Trial Review Directions Form. Again both are to be completed, exchanged and returned 2 days before the hearing of the PTR. At the PTR the Court will give directions as to the conduct of the trial. The aim under the CPR is to ensure that the relatively tight time periods set out are met and the Courts are now reluctant to grant the parties additional time. The following are key issues of procedure of which Steelwork Contractors should be aware: Summary Judgment under Part 24. If a person bringing a claim, or a person defending a claim has a particularly strong case, then either one may apply for summary judgment under CPR Part 24. If successful, summary judgment substantially reduces the time and costs involved in litigation. In order to be successful the party making the application for summary judgment must show that the other party has no real prospect of succeeding in their claim or defence. When such an application is made, the Court may dismiss the claim or defence or may allow the claim or defence to proceed subject to a conditional order such as the payment of money into Court. ‘Typical claims on building contracts where summary judgment would be appropriate are claims for wrongly withheld cash, and improper set-off where the main contractor has not followed the procedure laid down in the sub-contract. In most cases, however, it would be most appropriate first to obtain an adjudicator’s award and to then enforce that award by way of summary judgment.

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Costs It is important to note that under the CPR there is now much less certainty as to the costs position, even if one party is wholly successful. The previous position was that “costs follow the event”. That meant that the winning party would be awarded its costs. Under the CPR this is not necessarily the case. The Court will consider a number of factors in exercising its discretion as to who should pay the costs. The Court will consider: •

Conduct before and during the proceedings.

•

A party’s reasonableness in pursuing or defending any particular issue.

•

The manner in which a party has conducted its case.

•

Any exaggeration by the Claimant.

•

The extent to which a party has been partially successful.

Importantly, the Courts will also consider whether any payment into Court has been made by a Defendant or whether any offer to settle has been made by the Claimant. Either party can make an offer to settle the whole or part of a claim, or any issue. These offers may be made by either party before proceedings are commenced. A Defendant who wants to make an offer to settle a money claim must, following issue of proceedings, make a payment into Court. The cost consequences of offers to settle and payments into Court are that if the Claimant accepts an offer within 21 days of it being made the Claimant is entitled to the costs up to the date of acceptance. If the Claimant does not accept the offer within 21 days and the matter proceeds to trial then, if the Claimant recovers less than the Defendant’s offer or payment then the general rule applies, and subject to the points made above as to the exercise of discretion, the Defendant will recover his costs of the action. If, however, the Claimant recovers more than the Defendant’s offer then again, subject to the points made above as to the exercise of discretion, the Claimant is entitled to its costs of the proceedings. Importantly, however, if a Claimant has made an offer to settle and he then accepts more than he had offered to accept, the Court may award him a ‘bonus” of : • • •

Interest on damages of up to 10% above bank base rate. Costs on the, higher, indemnity basis. Interest on costs of up to 10% above bank base rate.

The net result of this is that tactical use of offers to settle and payments into Court can significantly increase pressure on the parties to settle cases. When involved, or likely to become involved in litigation, Steelwork Contractors should consider making appropriate offers to settle. Given the cost consequences they should also carefully consider any offer to settle proposed by the other party. In relation to the conduct of the parties before proceedings are commenced, the effects of the ‘PreAction Protocol for the Construction and Engineering Disputes’ should be considered. The Protocol applies to all construction and engineering proceedings. The objectives of the Protocol are: •

to encourage the exchange of early and full information about the prospective legal claim;

•

to enable the parties to avoid litigation by agreeing a settlement of the claim before commencement of proceedings; and

•

to support the efficient management of proceedings where litigation cannot be avoided.

If there is substantial failure to comply with the Protocol, the court may take this into account in dealing with costs and interest.

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Advantages of Litigation The main advantages of litigation over arbitration are:


(i) Costs Unless the dispute is very simple, or the short procedures under the JCT rules are being used, litigation may well cost less than arbitration, because no payments are made to the judge or for the use of the courts as the Court fees payable (whilst higher following the introduction of the CPR) remain significantly less than an arbitrator’s fees. (ii) Time Litigation may well be faster than arbitration (except in the special circumstances mentioned above), the CPR and the judges in the Technology and Construction Court lay down strict timetables for pre-trial procedures to which the parties are expected to adhere. (iii) Third Parties Joinder of parties and third party proceedings are well catered for in court procedure, which is important in building contract cases as they tend to involve a multitude of parties. (iv) Fuller Rights of Appeal There are wider rights of appeal from judges than from arbitrators. (v) Effect of a Claim Form Every company has a procedure for dealing with claim forms, normally involving a Director or Company Secretary. It is therefore an infallible way of bringing the dispute to the attention of senior management, which can sometimes be important, and may initiate settlement negotiations. As noted above, however, it is important that a Defendant is given a proper opportunity to know, consider and respond to any dispute before a claim is issued.

Disadvantages of Litigation •

As noted above, the CPR has given Judges much greater procedural control, and placed an emphasis on them using it. The result is that the parties will have less control over the manner in which their disputes are managed. It is certainly now the case that before commencing proceedings a party should have fully considered and prepared its case. The Court will expect a Claimant to have done so.

•

Litigation is not private - anyone may attend the hearing unless the judge orders otherwise.

Conclusion As stated at the beginning of this Chapter, arbitration and litigation are both time-consuming and expensive. Adjudication offers a quicker and cheaper means of reaching a decision on disputes albeit not final unless the parties agree to treat it as final. Settlement of disputes by negotiation between the parties is almost invariably better for the parties than pursuing matters to the bitter end. When a dispute becomes “a matter of principle” it will always be necessary to review the dispute objectively, and decide exactly how much, in financial terms, that principle is worth.

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CHAPTER 20


INSOLVENCY OF MAIN CONTRACTOR One of the major risks a sub-contractor takes is the solvency of his main contractor. If the worst happens and the main contractor becomes insolvent, sub-contractors have very limited legal rights. However, exploiting those rights can prevent a drama from becoming a crisis, so it is crucial that the sub-contractor knows what steps he should take. This Chapter lists the different types of insolvency, and describes the legal and contractual consequences of the main contractor becoming insolvent.

Types of Insolvency Insolvency is the generic term used to describe a number of situations where a person, firm, or company is unable to pay its debts. The “insolvency events” which trigger the determination of the main contractor’s employment in the JCT forms are widely drawn, and encompass a number of procedures which fall short of full insolvency, but which can be invoked when a person, firm or company is in financial difficulties.

Bankruptcy Bankruptcy is the insolvency of individuals or partnerships. It is often used as a colloquial term to describe all insolvencies, but technically it does not apply to the insolvency of companies.

Composition/Arrangements with Creditors If a company is in financial difficulties, its creditors may agree to accept a percentage of the sums due to them in full and final settlement of their claims. This is particularly appropriate where old debts are threatening to bring down an otherwise viable business, especially where the creditors have a vested interest in the survival of the company, for example, where it is a valued customer. Such compositions or schemes of arrangement may be approved by the Court in certain circumstances under the Insolvency Act 1986.

Administration Administration orders are a relatively new device introduced by the Insolvency Act 1986. They enable a company in financial difficulties to apply to the Court for the appointment of an administrator to manage its affairs. An administrator must be appointed for a specific purpose, for example to rescue the company from temporary cash flow difficulties or to sell off a profitable part of the business. The great advantage of the device for the company in administration is that creditors’ rights are suspended for the duration of the administration thus giving the administrator a real opportunity to turn around the company’s affairs.

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Insolvency of Main Contractor


An administration normally lasts for a relatively short period of time, and can be brought to an end by a creditor if the administrator’s conduct is “unfairly prejudicial” to creditors or members (i.e. shareholders) of the company.

Receivership and Administrative Receivership Most receivers and administrative receivers are appointed by debenture holders. A debenture is a special type of loan, normally given by a bank or similar institution. Part of the security for the loan is the power to appoint a receiver or administrative receiver if the borrower defaults on his repayments. The receiver or administrative receiver will manage the business so that the debenture-holder’s loan is repaid and will then withdraw leaving the company to continue trading if this is possible. Not all receiverships result in the winding up of the company concerned, although this is frequently the case. The distinction between receivers and administrative receivers is a purely technical one: receivers are appointed under a fixed charge relating to a specific piece of property e.g. the business premises of the company, while administrative receivers are appointed under a charge over the whole of the company’s assets. Administrative receivers are more common as a charge over all the assets gives a debenture-holder better security. The company in receivership may continue trading if the receiver decides that this is the best way to pay off the loan made by the body which appointed him. However, he can select which contracts he wishes to continue, and only on those which he “adopts” in this way will be liable to pay sub-contractors, and then only for work carried out after his appointment. On other contracts which are not adopted, the receiver will have no personal liability and the sub-contractors will be ordinary, unsecured creditors of the company in receivership.

Winding up - Liquidation Liquidation is the situation in which a company’s assets are realised and distributed amongst its creditors and the company ceases to exist. Winding up is the term used to describe the legal process by which this is brought about. There are three ways in which a company may be wound up:

(i)

Members’ voluntary winding up This is where the shareholders (members) themselves initiate the winding up procedure, and appoint a liquidator. They may only appoint a liquidator themselves if the company’s liabilities can be paid in full within 12 months of the commencement of the winding up, and it is therefore not the appropriate procedure if the company’s liabilities exceed its assets. A members’ voluntary winding up may be solely for the purpose of reconstruction or amalgamation of the company, and if this is so the JCT forms expressly provide that such a winding up is not an “insolvency event” and therefore will not trigger the determination of the main contractor’s employment.

(ii) Creditors’ voluntary winding up This is where the company will be unable to pay its liabilities in full within 12 months of the commencement of the winding up, and the shareholders pass a resolution to wind the company up. In these circumstances it is the creditors who appoint the liquidator.

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(iii) Compulsory Winding Up


This is where the court orders that the company be wound up on hearing the petition of an interested party, usually a creditor. On the winding up of a company, it will normally cease trading and the liquidator will sell off its assets and meet debts in the following order. (a) Secured Creditors These are creditors who have some type of security, e.g. a mortgage or charge over the company’s property. (b) Cost of the Winding Up These will be all the expenses of the winding up, including the liquidator’s remuneration. (c) Preferential Creditors These are the Inland Revenue, Customs and Excise, social security contributions, contributions to occupational pension schemes and employees’ remuneration (for a period of up to four months prior to the liquidation up to a limit of £800 per employee), and holiday pay to ex-employees. (d) Ordinary Creditors Sub-contractors’ debts will normally fall into this category, except for retention money due to nominated sub-contractors and Works Contractors, which has trust status and should therefore be paid in full (see below).

Contract Terms applicable on Main Contractor’s Insolvency JCT Main Forms All of the JCT main contracts contain similar express terms which apply on the insolvency of the main contractor. They regulate four matters: (i) determination; (ii) use and removal of property from site; (iii) assignment and payment under sub-contracts and contracts of supply: (iv) payment to the insolvent main contractor. Each of these subjects is commented upon below.

(i)

Determination

Under the determination provision in JCT98, the main contractor’s employment will determine automatically in the event of his liquidation or bankruptcy. If, however, an administrative receiver or an administrator has been appointed, or the main contractor has entered into a scheme of arrangement or composition with his creditors, the employer merely has the option to determine his employment. The introduction of the option to determine gives the insolvency practitioner an opportunity to negotiate the continuation of the works or the novation of the contract in appropriate circumstances. The contractor is, not, however, forced to continue to carry out the works until an agreement has been reached, and so when the receivership, etc. occurs, both his obligation to carry out the work and the employer’s obligation to make further payments are suspended.

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If the employer reaches an agreement for the continuation or novation of the contract, the contract simply continues subject to the terms of that agreement. If the negotiations either break down or the employer has no wish to secure a continuation or novation, he may simply determine the contractor’s employment by written notice.

(ii)

Use and removal of property from site

The main contracts state that the employer or his new main contractor may use all temporary buildings, plant, tools, and equipment on site, together with any goods and materials which have been delivered to site. The relevant clauses are so widely drafted that they appear to include plant, goods and materials belonging to sub-contractors. If the main contractor has already been paid for goods and materials on site they will be the property of the employer, and the subcontractor’s only claim for payment will be against the insolvent main contractor. If, however, the employer has not yet paid for the goods and materials on site they will still be the property of the sub-contractor, and the sub-contractor’s consent to their use must be obtained by the employer. This will give the sub-contractor the opportunity to insist on direct payment for those goods and materials. Similarly, if the employer wishes to use the sub-contractor’s plant and equipment he will have to obtain the sub-contractor’s permission and the sub-contractor can insist upon appropriate payment. When required to do so by the Architect, the insolvent main contractor must remove from site all of his temporary buildings, plant and equipment and any remaining goods and materials. If he does not do so, the employer may remove and sell the main contractor’s property: he does not retain the proceeds of sale but holds them to the credit of the main contractor, subject to deducting the costs of removal and sale.

(iii) Assignment and payment under sub-contracts and contracts of supply These provisions do not apply if the main contractor is bankrupt or is being wound up. Both bankruptcy and winding up are total insolvency and trigger special legal rules on the distribution of assets (see the section above on types of insolvency). If the insolvency is of another type, e.g. receivership or administration, the JCT main forms provide for the assignment to the employer of the main contractor’s interest in subcontracts and contracts of supply at the employer’s option. The employer must exercise his option within 14 days of the determination of the main contractor’s employment. The right to assign is subject to the qualification ‘to the extent the same is assignable’, in the absence of an express prohibition on assignment. the main contractor will be entitled to assign the benefit (e.g. the right to sue for defects) but not the burden (e.g. the obligation to pay) without the subcontractor’s or supplier’s consent. Provided the main contractor is not bankrupt or being wound up, the JCT main forms also permit (although they do not force) the employer to pay suppliers and sub-contractors for work executed or materials and goods delivered to site insofar as sub-contractors and suppliers have not already been paid by the main contractor. If the employer exercises his discretion under this clause he may deduct the sums he pays from sums due to the insolvent main contractor. Direct payment is not permitted in the event of total insolvency because of the rule in British Eagle, in which it was held that any direct payment arrangements which would circumvent the ordinary rules as to the distribution of assets on an insolvency would be void, as they were contrary to public policy. These provisions are in addition to the terms regarding direct payment to nominated subcontractors, which In certain circumstances will be mandatory (see below).

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(iv)

Payment to the insolvent main contractor


The employer is not bound to pay the insolvent main contractor anything at all until the works are completed. Once completion has occurred, and the accounts for the works have been verified, the Architect certifies the amount of expense incurred by the employer and the amount of direct loss or damage caused by the determination. This will include damages for any delay caused by the determination, the costs of appointing a new main contractor and the amounts paid to him over and above those which would have been paid to the original main contractor had he completed the work. That sum is then added to the monies paid to the contractor before the determination. If the total exceeds what would have been payable to the insolvent main contractor if he had completed the works, the main contractor must pay the balance to the employer. If it is less than that sum, the employer pays the balance to the insolvent main contractor. If it is the insolvent main contractor who owes the employer money, which will normally be the case, that debt will rank as an ordinary unsecured debt and the employer will receive the same proportion as other unsecured creditors, which may only be a few pence in the pound.

ICE 7th Edition The contractual provisions which apply on the insolvency of the main contractor under the ICE 7th are broadly similar to those which apply under the JCT forms except for the following: (a) determination of the contractor’s employment is not automatic: the employer may expel the contractor from the site after giving 7 days written notice; (b) there are no express terms preventing the employer from taking an assignment of sub-contracts, and contracts of supply in the event of the main contractor’s bankruptcy or liquidation, although these are probably implied by the general law; (c) the insolvent main contractor is not entitled to any payment until the expiry of the period of maintenance, rather than on completion of the works. In Re Cosslett (Contractors) Ltd (1997) the court considered the provisions in the ICE 5th Conditions which provided that: •

all plant, goods and materials owned by the Contractor, while on site, were deemed to be the property of the Employer

•

if the Contractor went into liquidation or abandoned the contract, the Employer could use the plant and materials which were deemed to be its property to complete the works or to sell them and use the proceeds towards the satisfaction of any sums due from the Contractor under the contract.

Before the works were completed the Contractor abandoned the works. The Court held that these provisions did not pass legal ownership to the Employer but rather created a floating charge and that, although failure to register the charge rendered the security created by the power of sale void against the Contractor’s administrator, this did not invalidate the Employer’s right to retain possession of the plant and materials and use them to complete the works.

Position of Sub-Contractor on the Insolvency of the Main Contractor There are four key issues for the sub-contractor: (i) determination;

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Insolvency of Main Contractor (ii) rights to payment; (iii) status of retention money;


(iv) assignment of the sub-contract.

(i)

Determination

Under NSC/C and NAM/SC the sub-contractor’s employment will determine automatically if that of the main contractor has been determined on the grounds of his insolvency. In all of the other standard forms of sub-contract, the sub-contractor’s employment will determine only when the main contractor’s employment is determined, either automatically or by the exercise of an option by the employer. However, as insolvency will often result in one of the events entitling the sub-contractor to determine his own employment, such as non-payment or suspension of the works before completion, the subcontractor can usually bring his employment under the sub-contract to an end within a short time of the occurrence of the insolvency event. Under the CECA sub-contract, the main contractor may determine the sub-contractor’s employment the main contract has been determined, but this will not be automatic. Sub-contractors under the CECA form of sub-contract are in a much less favourable position in this respect than sub-contractors under the JCT forms. They will have to wait until either the main contractor decides to determine their employment or until he behaves in such a way that it is clear he no longer intends to be bound by the sub-contract (i.e. he repudiates it). Repudiation might occur if there was a serious and repeated non-payment or if the site is closed down and the sub-contractor can no longer carry out his work

(ii)

Rights to Payment

Sub-contractors under both the JCT related sub-contracts and the CECA form will be entitled to be paid for the work they have carried out plus (under the JCT sub-contracts) any loss and expense they have suffered due to the determination. The difficulty is that the sub-contractor will be an ordinary, unsecured creditor of the company in liquidation and is therefore most unlikely to be paid in full. Nominated sub-contractors employed under NSC/C may be entitled to direct payment by the employer but this is subject to the following limitations: (a) there will be no right whatsoever to direct payment if the main contractor is bankrupt or in liquidation: it will only be an option if he is in receivership, has had an administrator appointed etc; (b) direct payment is mandatory only if agreement NSC/W has been executed, otherwise it is discretionary (and the employer will normally be most reluctant to exercise the discretion if the main contractor is insolvent particularly if there is any prospect of winding up); (c) the employer is not obliged to pay the nominated sub-contractor any more than is due for payment to the main contractor, which may be a very limited sum, or, if the insolvency has caused significant disruption to the project, may be nothing at all. Direct payment provisions are not therefore as beneficial as appears at first sight.

(iv) Retention Money Under the majority of sub-contracts, retention money is treated in the same way as other sums owed to the sub-contractors and thus if the main contractor goes into liquidation the sub-contractor will be an ordinary, unsecured creditor.

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Insolvency of Main Contractor However, nominated sub-contractors under NSC/C and Works Contractors under Works Contract/2 have a measure of additional protection as their retention money has trust status in the hands of both the employer and the main contractor. It does not therefore form part of the ordinary assets of either the employer or main contractor and on the main contractor’s liquidation the nominated subcontractor or Works Contractor can claim full payment. However there are often major problems with enforcing this protection. Where the main contractor is insolvent, the employer may well have a claim against the retention fund held under the main contract. It was thought that he had no right of recourse to retention money held in respect of nominated sub-contract work, and this was confirmed in the case of Re Arthur Sanders (1981). However in a more recent case decided by the High Court in Hong Kong, Hsing Chong Construction Company v Yaton Realty Company (1988) the court held that the employer could claim against the whole of the retention fund, including elements retained in respect of nominated sub-contract work. If the employer has a claim against the main contractor’s retention fund, nominated sub-contractors and Works Contractors may therefore find that they have lost their retention money, notwithstanding its trust status. Where retention money is held in trust and the employer is not a local authority, nominated subcontractors and Works Contractors may apply to have their retention money held in a separate bank account, and it is a good idea to exercise this right if there is any doubt as to the solvency of the employer or main contractor. This is because any retention money which is mixed with other assets of the employer may lose its trust status. If, however, it is identified by being placed in a separate bank account, the sub-contractor has a much better chance of obtaining full payment of it. Similarly, if the main contractor fails to release retention to nominated sub-contractors in accordance with NSC/C he must place the retention in a separate account to ensure that the money retains its trust status. Although a main contractor who has failed to pay the sub-contractor may be unlikely to comply with this additional obligation, it may be enforced by the sub-contractor obtaining a court injunction if necessary, which may be appropriate if the retention is significant and there is a real prospect of the main contractor becoming insolvent.

(iv) Assignment of Sub-Contracts As explained above, except where the main contractor is bankrupt or is being wound up, the employer under the JCT main forms has the right to require sub-contracts to be assigned to him on the insolvency of the main contractor to the extent that the same are assignable. In the absence of any express contractual terms dealing with assignment, the sub-contractor’s consent must be obtained to any assignment of the burden of the sub-contract (i.e. the obligation to pay). However, as the main contractor is unlikely to be in a position to discharge that burden himself if he is insolvent, it will usually be in the sub-contractor’s interests to consent to an assignment at least to the employer if not on to a new main contractor subject to the best conditions he can negotiate. Under clause 65 of the ICE 7th Conditions the Employer can, after his entry upon the Works following, inter alia, the main contractors bankruptcy or liquidation, require the Contractor via an instruction issued by the Engineer, to assign to him the benefit of sub-contracts. Non-standard employer/ sub-contractor warranties frequently contain clauses requiring the subcontractor to consent to any further assignments, which is obviously a risk for the sub-contractor when he does not know the identity of the assignee and cannot therefore assess his solvency.

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CHAPTER 21


JCT STANDARD FORM WITH CONTRACTOR’S DESIGN 1998 EDITION – WCD98 The contract is drafted on the basis that the contractor will either design the whole of the works, or, if the works have been partially designed by the Employer’s professional team when tenders are invited, the contractor will complete the design. The distinguishing features of WCD98 are set out below.

Contract Documents As well as the contract conditions themselves, there are three sets of documents which must be produced by the parties: the Employer’s Requirements, the Contractor’s Proposals and the Contract Sum Analysis.

Employer’s Requirements and Contractor’s Proposals WCD98 does not provide any definition as to what the Employer’s Requirements and Contractor’s Proposals should contain. A Steelwork Contractor who is about to enter into a sub-contract with a main contractor who has a contract with the Employer under the WCD98 form would therefore be well advised to obtain or provide a clear and comprehensive statement, in writing, of the Employer’s Requirements and Contractor’s Proposals and ensure that (assuming the Steelwork Contractor is happy that he can comply with them) that they are incorporated into the sub-contract.

Contract Sum Analysis The contractor is required to incorporate within his proposals a breakdown of his lump sum price known as a Contract Sum Analysis.

Design Obligations The contractor’s liability for design is defined in clause 2.5, which provides that the contractor is responsible only for design which he (or his designers and subcontractors) carries out; he will not be liable for any errors in design contained in the Employer’s Requirements. The standard of care he must exercise is that expected of an architect or other appropriate professional designers; that is reasonable skill and care, it is important to note that he is expected to be as competent as a professional designer, the fact that he may use his own in-house designers will be no defence if they make an error which a reasonably competent architect would not have made. Clause 2.5 also provides that the contractor should be treated as though he were acting independently under a separate contract with the Employer for the design of the works. This is to ensure that there will be no implied term that the building will be reasonably tit for its purpose, as in the absence of such a provision the general law may imply a fitness for purpose obligation where the contractor was totally responsible for both designing and constructing.

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JCT Standard Form with Contractor’s Design 1998 Edition – WCD98


WCD98 provides for the contractor’s liability arising out of defective design to be limited to an amount agreed between the parties and named in the Appendix. It will be up to the Employer to decide if he is prepared to agree upon a limitation, and in many contracts liability will be unlimited. Even if a limitation is included it gives only partial protection to the contractor, because: •

The limitation applies only in respect of loss of use or loss of profit or other consequential loss and does not limit liability for costs such as those of remedial work.

•

Any liquidated damages for delay in completion are payable in addition to the agreed limitation, even If they are compensating for loss of profit etc.

•

The limit will not apply to the extent that the works are a dwelling because of the special protection given to all those who acquire an interest in a dwelling by the Defective Premises Act 1972.

Any limitation which is agreed will normally be a substantial figure, for example the amount of professional indemnity insurance carried by the contractor or his designers.

Employer’s Agent WCD98 does not provide for the appointment of an Architect or Quantity Surveyor. The Employer must, however, appoint an Agent who may be an architect or quantity surveyor, but who may just as easily be a project manager or one of his own employees. The Employer’s Agent may exercise all the powers given to the Employer under the conditions (which include many of those given to the Architect under more traditional contracts) except to the extent that the employer has restricted those powers by notice in. writing to the contractor. The Employer has the power to remove or change his agent provided he notifies the contractor. Unlike the Architect in JCT 98, the Employer’s Agent is not a certifier and therefore there is no question of his owing a duty of care to the contractor to balance his interests with those of the employer (as was suggested in relation to an Architect under JCT98 Sutcliffe v Thackrah but subsequently doubted in Pacific Associates v Baxter). If the contractor is dissatisfied with a decision of the Employer’s Agent, his recourse will be against the Employer and the Employer alone; he most unlikely to have a direct right against the Agent. Power to Issue Instructions The Employer’s Agent (unless the contractor has been notified to the contrary) may issue instructions, including instructions requiring changes (i.e.. variations).

Changes The Employer is permitted to vary his requirements or to vary the work required by the contractor’s proposals: this is referred to as a “Change” in WCD98. The power is similar to the right to vary the works in JCT98, save that if the change involves any variation in the design of the works, the Employer must obtain the consent of the contractor, which must not be unreasonably withheld or delayed. The rules for the valuation of changes in WCD98 are similar to those in JCT98, save that there is no Quantity Surveyor to carry out the valuation, therefore it will be for the contractor to apply the valuation rules when he compiles his application for payment.

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JCT Standard Form with Contractor’s Design 1998 Edition – WCD98

Extensions of Time


The rules relating to extensions of time in WCD98 are the same as those in JCT98, with two important modifications: •

The employer determines the extension of time to which the contractor is entitled, as there is no architect.

•

Two additional relevant events are included: •

•

Delay in receiving permission or approval from statutory bodies such as planning committees which the contractor has taken all practicable steps to avoid or reduce - this is not included in JCT 98 because under that form any approval or permission would be obtained by the Architect or Employer. Changes in the statutory requirements after the Base Date which the contractor has taken all practicable steps to avoid or reduce, e.g. a change in planning rules or a new law affecting the design of the works. If the changes relate to the light to develop the site, the contractor will also obtain loss and expense. (The contractor may be expressly bound under the Employer’s Requirements to take the risk of changes in the Development Control Requirements - i.e. planning matters - if so he will recover neither time nor money if he is delayed by a change in the planning rules).

Payment There are two alternative bases of payment in WCD98: •

Stage payments, described as Alternative A

•

Periodic payments, described as Alternative B.

The Employer’s Requirements will indicate to the contractor which of these alternatives is to be adopted.

Stage Payments - Alternative A The stages at which payment will be made are identified in Appendix 2 to the contract. The cumulative value of the works is inserted against each stage when the contract documents are completed, so there is pre-agreement of at least part of the sums due to the contractor as interim payments. The stages may be defined in a number of ways, for example: the completion of a number of units on a housing estate: the completion of defined operations such as the erection of the structural steelwork: or the completion of work by floors on a refurbishment contract. The cumulative value of each stage may be expressed as either a sum of money or a percentage of the contract sum. The value of any changes or other employer’s instructions will be added to the cumulative value, provided the change or instruction is relevant to that stage of the works. Fluctuations, fees and charges and loss and expense will also be added in the normal way: the total is referred to as the “gross valuation’. The contractor will be entitled to be paid the gross valuation less retention and previous payments. As there is no Architect to certify when payment is due, the contractor triggers the payment process himself, by applying for payment at the completion of each stage. If the employer does not dispute the application, payment must be made within 14 days of the contractor issuing his application.

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JCT Standard Form with Contractor’s Design 1998 Edition – WCD98 If the employer does dispute the application, he must issue a notice to the contractor to that effect, giving reasons, and at the same time pay the amount he thinks is due (which will presumably be nil if he disputes the application because he thinks the relevant stage is incomplete). In those circumstances the contractor will have to re-apply for the payment at a later date or consider some form of dispute resolution procedure.

Periodic Payments - Alternative B Where alternative B is selected as the basis for payment the calculation of the amount due will be on exactly the same basis as in JCT98. The frequency of payments will be dictated by an entry in Appendix 2, but they will normally be monthly. As in alternative A, it is the contractor who applies for interim payments at the appropriate intervals, and if the employer does not dispute that application, payment must be made within 14 days of its issue. If the employer does dispute the sum claimed, he must issue a written notice to the contractor giving reasons and at the same time pay the amount which he considers to be due.

Final Payment The contractor is required to submit his final account application to the employer within 3 months of practical completion. If the employer does not dispute anything in the final account, it will become conclusive as to the balance due to the contractor within one month of: •

the end of the defects liability period; or

•

completion of making good defects; or

•

the submission of the final account application to the employer

whichever is the later. Payment must be made within 28 days of the application becoming final and conclusive If the employer disputes the contractor’s application, then it is up to the parties to agree the sum due, and payment must be made within 28 days of reaching that agreement.

Sub-Contracting under WCD98 WCD98 imposes relatively few constraints on the main contractor’s power to sub-contract. Under Clause 18.2, the contractor may sublet any part of the works or design with the written consent of the Employer, which must not be unreasonably withheld or delayed. Any form of sub-contract may be used, provided it contains two terms: •

A provision that the sub-contractor’s employment will determine immediately upon the determination of the main contractor’s employment under the main contract;

An undertaking by the sub-contractor that he will not challenge the employer’s title to materials and goods on site for which the employer has paid, even if the sub-contractor has not yet received the money from the main contractor. WCD98 does not contain any provisions for the nomination of sub-contractors. However, as mentioned above, if the Supplementary Provisions apply, the Employer will be entitled to name sub-contractors. The Construction Confederation has produced a standard form of sub-contract which is suitable for use where WCD98 is the main form, which is known as DOM/2 - a version of DOM/1 amended to reflect the differences between WCD98 and JCT98.

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CHAPTER 22

SCOTTISH FORMS OF CONTRACT


The Scottish Building Contract Committee (SBCC) produces number of standard forms of building contract for use in Scotland. The following bodies are members of the SBCC: •

Royal Incorporation of Architects in Scotland (RIAS)

•

Scottish Building Employers’ Federation (SBEF)

•

Royal Institution of Chartered Surveyors in Scotland (RICS)

•

Convention of Scottish Local Authorities (COSLA)

•

National Specialist Contractors Council (NSCC)

•

Scottish Branch of CASEC

•

Scottish Group of the ACE

v

Confederation of Business Industry

•

Association of Scottish Chambers of Commerce

The spread of representation of the SBCC is therefore broadly similar to that on the JCT, although different bodies represent private sector clients. The SBCC is a member of the Joint Contracts Tribunal and is therefore closely involved in the production of the JCT standard forms. The SBCC produce a wide variety of standard forms of contract and care must be taken to select the correct version. For each JCT document, an equivalent Scottish Building Contract is produced. The SBCC publish a Guide to the Scottish Building Contract Committee/Joint Contracts Tribunal documents applicable for use in Scotland which identifies the different contracts produced by the SBCC. In addition, care must be taken to select the correct edition of any particular contract being referred to as the conditions are regularly amended to take account of amendments in the JCT standard forms. The SBCC publications and the Standard Form of Contracts can be purchased from the RIAS or the RICS. Generally, the Scottish Building Contracts work by incorporating appropriate JCT conditions and amending these by Appendix I to the Scottish Building Contract (known as the Scottish Supplement ). The amendments take account of the difference between the law of Scotland and the law of England on various matters such as:-

1. Registration The words “Both parties consent to registration hereof for preservation and execution” appear at the beginning of the attestation section. If the contract is registered in the official register in Edinburgh, either party may proceed for the recovery of money due without the need for a court order. Such a course of action is available only under Scots law.

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Scottish Forms of Contract

2. Payment


The clauses in the JCT standard forms permitting payment for off-site goods and materials are deleted in the Scottish forms due to differences between the law of England and Scotland as to when legal ownership of such materials passes from the contractor to the employer. If, however, the Architect decides it is expedient for the contractor (or a sub-contractor) to be paid for off-site goods and materials, a clause inserted by the Scottish Supplement provides for such payment under a separate contract. The relevant goods and materials are excluded from the building contract and made the subject of a simple contract of sale (as opposed to a contract for work and materials) and therefore the employer will become the legal owner on payment. The SBCC produces three versions of the standard contract of sale for this purpose as noted below (SBCC Standard Forms of Contract of Purchase).

3. Payment for Unfixed Goods and Materials Because of the different rules in Scots law relating to the passing of legal ownership in moveable property, the Dauber Williamson clauses in the standard forms are unnecessary and are therefore deleted by the supplement.

4. Determination The clauses relating to determination on insolvency are slightly different to reflect differences in Scots law relating to insolvency.

5. Arbitration The JCT clauses on arbitration are amended by the Supplement, which provides for the law of Scotland to apply to all arbitrations. Another amendment provides for Scots law to be the “proper law” of the contract. Taken together these provisions mean that all matters of law and procedure will be governed according to the law of Scotland. If structural steelwork contractors become involved in disputes arising out of a contract where the Scottish Supplement applies it is vital they obtain the advice of a Scottish lawyer, as Scots law differs from English law in a number of important areas, particularly on procedural matters. The arbitrator is described in Scotland as the “arbiter”. He has similar powers to an arbitrator in English law, although the Scottish arbitration clauses give him special powers relating to the appointment of a Clerk to assist him and the types of award he may give. The contracts also contain an Appendix II which is entitled Abstract of Conditions. This replaces the Appendix to the JCT documents and therefore sets out matters relevant to the particular contract such as the Dates for Possession and Completion, the level of liquidated and ascertained damages which will be applied and which of the insurance arrangements described in Clause 22 is applicable.

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Scottish Forms of Contract

SBCC Main Contract Documentation The following are the main contract forms currently produced by the SBCC:


•

Scottish Building Contract With Quantities, or Scottish Building Contract Without Quantities The contract incorporates: (a) The conditions of either: (1) the Standard Form of Building Contract: Private With Quantities 1998 Edition; or (2) the Standard Form of Building Contract: Local Authorities With Quantities 1998 Edition; together with any Amendments issued by JCT and the JCT supplemental provisions known as the VAT Agreement and Annex 2 to the JCT conditions. These amendments may also be reflected in the Scottish Supplement to the Scottish Building Contract applicable at that time. (b) The Scottish Supplement forming Appendix I thereto; (c) The Abstract of Conditions forming Appendix II thereto.

There are also the following: •

Scottish Building Contract With Approximate Quantities

•

Scottish Building Contract – Sectional Completion Edition – With Qualities or Without Quantities or With Approximate Quantities The above contracts incorporate: (a) The relevant conditions which are either the Standard Form of Building Contract Private Edition or Local Authorities Edition With Quantities, Without Quantities or With Approximate Quantities (1998 Editions) and the JCT supplemental provisions known as the VAT Agreement and Annex 2 to the JCT conditions. These amendments may also be reflected in The Scottish Supplement to the Scottish Building Contract applicable at that time. (b) The Scottish Supplement forming Appendix I thereto; (c) The Abstract of Conditions forming Appendix II thereto.

•

Scottish Building Contract – Contractors Designed Portion These contracts can be specified to be With Quantities, Sectional Completion/With Quantities, Without Quantities or Sectional Completion Without Quantities.

•

Scottish Building Contract – With Contractors Design or With Contractors Design Sectional Completion These contracts incorporate: (a) The conditions of the Standard Form of Building Contract With Contractor’s Design 1998 Edition as modified; (b) The Scottish Supplement forming Appendix I thereto; (c) The Abstract of Conditions forming Appendix II thereto; (d) An Appendix III entitled Alternative Methods of Payment; Integral to the contracts with Contractors Design are the Employer’s Requirements, the Contractor’s Proposals and the Contract Sum Analysis described in Appendix IV thereto.

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Scottish Forms of Contract •

Scottish Management Contract and Scottish Management Contract – Phased Completion, Edition


The contracts incorporate: (a) The conditions of the Standard Form of Management Contract 1998 Edition; the Annex to the conditions and the VAT Agreement. (b) The Scottish Supplement forming Appendix I thereto; (c) The Abstract of Conditions forming parts 1 and 2 of Appendix II; (d) The first, second, third, fourth and fifth schedules thereto. Reference should also be made to Practice Notes MC/l and MC/2. The Phased Completion Edition follows a similar format; reference should be made to the SBCC Notes for Guidance on the Scottish Management Contract – Phased Completion Edition. In addition to the above the following supplementary documentation is available: Works Contract/1/Scot

Incorporating JCT Works Contract Conditions (Works Contract/2) 1998 Edition and stated supplemental provisions. The SBCC publish Notes for Guidance on Works Contract/1/Scot (revised January 1994). Scottish Employer/Works Contractor Agreement Works Contract/3/Scot This contract should be read in conjunction with the SBCC Notes for Guidance on the Scottish Employer/Works Contractor/3/Scot (July 1991). Scottish Building Contract – Prime Cost Contract This incorporates the conditions of JCT Standard Form of Prime Cost Contract 1992 Edition together with appropriate amendments. •

Scottish Minor Work Contract, 1986 Edition and Scottish Minor Works Sub-Contract, May 1999 Edition These contracts do not incorporate any standard conditions or JCT amendments. It is the intention of the SBCC to issue a new edition of the Scottish Minor Works Sub-Contract in due course. The Scottish Minor Works Contract is the Scottish equivalent of the JCT Agreement for Minor Building Works and is not recommended for contracts lasting more than one year. It should also not be used where specialist sub-contractors are to be employed with design input. There are no optional provisions permitting the use of bills of quantities.

•

Scottish Measured Term Contract for Maintenance and Minor Works, May 1999 Edition This contract is to be used where the Employer requires maintenance work to be executed on a regular basis. It incorporates the conditions of the JCT Standard Form of Measured Term Contract 1998 Edition and supplementary conditions, a statutory tax deduction scheme, the Scottish Supplement forming Appendix I thereto and the Appendix II thereto. Note there is no Scottish version of the Intermediate Form of Contract.

SBCC Domestic Sub-Contract Documentation The SBCC has published Guidance Notes for the purposes of the Scottish Domestic Sub-Contract (September 1997 Edition – August 1998 Revision) to which reference should be made when using this suite of documents. These documents do not incorporate any JCT Conditions or Amendments.

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Scottish Forms of Contract The comments above on registration, payment for off site goods and materials and unfixed goods and materials and arbitration are therefore equally relevant to the Scottish sub-contracts.


•

Tender DOM/T/Scot/Part 1 (May 2000 Edition) Standard Form of Domestic Sub-Contract Tender. An invitation to Tender issued by the Main Contractor to prospective domestic Sub-Contractors to be selected under Clause 19 of JCT 80. The Main Contractor inserts all necessary information regarding both the Main Contract and the Domestic Sub-Contract. The Domestic Sub-Contractor’s Tender will be based thereon.

•

TenderDOM/T/Scot/Part 2 (May 2000 Edition) The Domestic Sub-Contractor acknowledges that he has received invitation to Tender DOM/T/ Scot/Part 1 and completes Part 2 with all necessary information.

•

Scottish Building Sub-Contract DOM/A/Scot (May 2000 Edition) This is the Scottish Domestic Sub-Contract and incorporates DOM/C/Scot by reference.

•

DOM/C/Scot (May 2000 Edition) This contains the Standard Conditions of Domestic Sub-Contract for use in Scotland. These Conditions are only suitable for use with the Domestic Sub-Contract Agreement (DOM/A/Scot) and where the Main Contract is on the Scottish Building Contract (Post July 1997 Revisions). There are also the following:DOM/A/Scot/XD (Without Design) May 2000 DOM/A/Scot/CDP (Contractor’s Designed Portion) May 2000 DOM/A/Scot/WCD (With Contractors’ Design) May 2000

SBCC Nominated Sub-Contract Documentation SBCC produce nominated Sub-Contract documentation which adapts, for use in Scotland, the nominated Sub-Contract documentation produced by JCT. This suite of documents consists of the following. •

Tender NSC/T/Scot/Part 1 - May 1999 Edition (January 2000 Revision) Standard Form of Nominated Sub-Contract Tender for use in Scotland. Part 1 – Invitation to Tender to a Sub-Contractor.

•

Tender NSC/T/Scot/Part 2 – May 1999 Edition (January 2000 Revision) Standard Form of Nominated Sub-Contract Tender for use in Scotland. Part 2 – Tender by a Sub-Contractor.

•

Tender NSC/T/Scot/Part 3 – May 1999 Edition (January 2000 Revision) Standard Form of Nominated Sub-Contract Tender for use in Scotland. Part 3 – Particular Conditions.

•

Nomination NSC/N/Scot – May 1999 Edition (January 2000 Revision) Standard Form of Nomination Instructions for use in Scotland.

•

Agreement NSC/W/Scot – May 1999 Edition (January 2000 Revision) Standard Form of Employer/Nominated Sub-Contractor Agreement.

•

Sub-Contract NSC/A/Scot – May 1999 Edition (January 2000 Revision) This Scottish Building Sub-Contract incorporates by reference Conditions NSC/C which are the Standard Conditions of Nominated Sub-Contract 1998, as amended or modified.

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Scottish Forms of Contract •

Tender NSC/T(PCC) Scot/Part 1 (September 1995 Edition)


Standard Form of Nominated Sub-Contract tender for use in Scotland where the Scottish Prime Cost Contract is used. Part I – Invitation to tender to a Sub-Contractor. •

Tender NSC/T/(PCC) Scot/Part 2 (September 1995 Edition) Standard Form of Nominated Sub-Contract tender for use in Scotland where the Scottish Prime Cost Contract is used. Part 2 –Tender by a Sub-Contractor.

•

Tender NSC/T/(PCC) Scot/Part 3 (September 1995 Edition) Standard Form of Nominated Sub-Contract tender for use in Scotland where the Scottish Prime Cost Contract is used. Part 3 – Particular Conditions.

•

Nomination NSC/N/(PCC) Scot (September 1995 Edition) Standard Form of Nomination Instruction for use in Scotland where the Scottish Prime Cost Contract is used.

•

Agreement NSC/W/(PCC) September 1995 Edition) Standard Form of Employer/Nominated Sub-Contractor Agreement for use in Scotland where the Scottish Prime Cost Contract is used.

•

Sub-Contract NSC/A/(PCC) Scot (September 1995 Edition) This is the appropriate Scottish Building Sub-Contract where the Scottish Prime Cost Contract is used. The Prime Cost Nomination suite of documents has not been revised in light of the 1996 Act, nor have new Editions been printed in 2000. SBCC Standard Forms for Nominated Suppliers SBCC produced 2 documents in relation to this, namely:

•

Standard Form of Tender for use in Scotland by a Nominated Supplier (January 1992 Revision)

•

Schedule 3: Warranty Agreement for use in Scotland by a Nominated Supplier (January 1992 Revision)

Schedules 1 and 2 are incorporated in the Standard Form of Tender. SBCC Standard Forms of Contracts of Purchase These documents are required because of differences in the law of Scotland and England relative to ownership and purchase of off-site materials. Three separate documents are produced by SBCC, namely: •

Contract of purchase from the Contractor (January 2000 Revision)

•

Contract of Purchase from the Sub-Contractor (January 2000 Revision)

•

Contract of Purchase from a Works Contractor (January 2000 Revision)

SBCC Standard Form of Collateral Warranties Three separate Forms of Collateral Warranty are currently produced by SBCC, namely: Collateral Warranty by a Main contractor – MCWa/F/Scot (Funder) May 1999 Revision

• •

Collateral Warranty by a Main Contractor – MCWa/F/P & T/Scot (Purchaser) May 1999 Revision

•

Standard Form of Employer/Sub-Contractor Warranty Agreement (May 1999 Edition)

At the time of writing the SBCC has a number of publications pending including revision of all SBCC Contracts to follow publication of JCT Amendment 3 in January 2001.

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CHAPTER 23


NOMINATION Nomination is a system of tendering whereby the client through his professional advisers invites competitive tenders from a selected number of specialist sub-contractors for an identified section of a project, and then nominates the successful tenderer to the main contractor as a nominated subcontractor. Nomination brings considerable benefits to the nominated sub-contractor: fair tendering procedures; protection from dutch auctioning; and (under the JCT98 system) a standard and mandatory form of sub-contract.

Design Stage Most specialist engineering work has, of necessity, to be designed one step behind building design. Nomination provides a cost-effective and time saving approach to design because: •

design can be on the basis of small scale line drawings using established conventions that save time and money in the designer’s drawing office

•

quality and performance can be defined in the specification

•

such drawings and specification constitute adequate tender documents for pricing by competent specialist engineering contractors but if desired, bills of quantities may also be prepared

•

detailed development of the design and the production of the working drawings and the builders’ work drawings are then done by the most suitable party, namely the successful engineering contractor. He has an incentive to produce the detailed information in time and to responsibility for doing so and for any design input under separate form of agreement with the client

•

the technical input from the specialist contractor helps make the installation more efficient and cost-effective

Nomination thus forges an important link between designer and specialist engineering contractor and enables the design to be implemented in the most productive way.

Early Appointment Of equal importance is the fact that the nomination system offers the opportunity of early appointment. The specialist can then work with the professional team as the design is evaluated and developed. This greatly helps the integration of the engineering design with the building design and the coordination of the various engineering services to predetermine what goes where. Inadequate space for engineering services and lack of co-ordination between them are major sources of difficulty on site which can lead to costly decisions to lower ceiling heights or take other crisis measures. The way to avoid these difficulties is to harness the technical expertise of a competent specialist engineering contractor by early appointment under the nomination system.

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Nomination

Tender Stage


Clients do not normally subject main contract work to multiple tendering and dutch auctioning. A considerable investment is at stake and they want to be sure that they have a competent contractor. These arguments apply with equal force to the specialist work that creates the sophisticated engineering on which the building, as a functional unit, will depend. This work accounts for a large proportion of the original investment and the energy consuming systems account for an even larger proportion of the cost in use. Thus the quality, reliability and efficiency of the engineering are crucial to the effectiveness and operating costs of the building as a whole. It therefore makes sense for the client and his professional advisers to control the choice of the specialist, particularly when specialist engineering work is outside the knowledge, scope and competence of most building contractors. Domestic sub-contracting not only passes control to the builder but also produces a tendering climate which is ill-matched to the requirements of specialist engineering work. Instead of applying all of his technical and commercial energies to preparing a sound competitive estimate, the specialist is compelled constantly to look over his shoulder at unquantifiable risks and costs. It takes time to get quotations from suppliers and prepare a proper tender, but last minute invitations occur all too frequently and the time allowed for tendering varies. There is no forced marriage between the main contractor and the specialist. The main contractor has a specific right to object to the nomination of any particular subcontractor His tendering costs are high, - up to 1 per cent of the tender price - because of the technical content of the work and the multitude of different components. The need for selective tendering is obvious but he knows that multiple tendering goes hand in hand with domestic sub-contracting and that even where safeguards are attempted, the tender list tends to grow inexorably. He and his suppliers need drawings and specification to price properly. All he may receive is extracts from bills of quantities. Above all, the specialist wants to submit a technically competent value for money, tender against fair, competition and quantifiable risks. Under domestic sub-contracting, the dutch auctioning of a multiplicity of specialists tend to be the rule; one-off onerous trading conditions are imposed: provision of attendances is uncertain: and the specialist is required to conform to whatever the builder’s programme turns out to be. Thus, while all may seem well with domestic sub-contracting, the client is insulated from what goes on in practice. His interests are not served by forcing the specialist into a situation where contingency allowances for undesirable practices and unquantifiable risks overshadow the tender itself, nor by the fact that reputable specialists are deterred from tendering. Nomination enables the client to control the tender list and the final choice of the specialist under a tendering procedure which mirrors that for main contract work. •

full tender information is despatched simultaneously and directly to the competing specialists chosen by the client

•

all the tenderers have the same time for tendering

•

queries on the tender information are referred back to an authoritative source, namely the designer

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Chapter 23


Nomination •

technical qualifications to tenders are judged professionally by a competent engineer

•

there is a common date for the return of tenders

•

the adjudication of tenders is fair and impartial

Construction Stage The nature of specialist engineering work and its long lead times make it critical to the overall building programme. Co-ordination, both of design and construction, is vital. If co-ordination problems are to be resolved in a positive way, there must be mutual trust and co-operation between main contractor and specialist. Unfortunately, the undesirable practices generated by domestic sub-contracting can breed an atmosphere of suspicion and hostility. Nomination fosters the right relationships •

there is no forced marriage between the main contractor and the specialist. The main contractor has a specific right to object to the nomination of any particular sub-contractor

•

the balance between main contractor and nominated sub-contractor is fair

•

nomination allows the essential link between the engineering designer and the specialist engineering contractor whilst preserving the chain of command through the main contractor

•

under the nomination procedure, key issues such as programming and attendances can be agreed at the nomination stage, rather than left in a vacuum which, in the end, becomes a battleground over which claim and counter-claim are fought

•

use of fair conditions of sub-contract can be made mandatory

Time Specialist work can only be let on a truly domestic basis by completely severing design, from construction. Before the work can be included in the main contractor’s bill it has to await detailed design and the listing of quantities. No such constraints exist with nomination •

specialist work can be let on the basis of conceptual design plus a specification. Bills of quantities are not essential although in the interests of cost control, the tender price can be split into elements and a priced schedule of rates used as a basis for valuing variations

•

where necessary, the specialist can be appointed ahead of the main contractor to work with the professional team

•

conversely, specialist work can be let at a later stage without holding up the letting of the main contract

Nomination thus gives great flexibility and saves time.

Costs Nomination saves costs in a variety of ways, some of which have already been touched upon. It is the way to get a keen, competitive price with the assurance of quality and competence

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3

Nomination

Tender costs are saved because


(i) tenders are confined to the number necessary to secure effective competition (ii) proper tender documents are quite costly. Each competing specialist gets one set direct from the client: rather than several sets from a number of main contractors (iii) tenderers do not have to comb through different sets of contract conditions

Design costs are saved because (i) the drawings use established conventions which produce substantial savings in the designer’s drawing office costs (ii) the additional costs (sometimes abortive) of attempting to design in detail and produce bills of quantities are rendered unnecessary

Construction costs are saved because (i) specialists do not have to allow for unquantifiable risks over payment, programming and attendances. Nomination procedures and the use of mandatory sub-contract conditions create certainty (ii) nor do specialists have to allow for the post-tender hawking of bids by the successful main contractor to nobody’s benefit but his own. The client gets the full benefit of the specialists lowest price (iii) the lowest price for the specialist work can be married with the lowest price for the building work. This only happens by chance under domestic sub-contracting (iv) rates for variations are not subject to conflicting pressures. One set of rates applies, namely the specialist’s. Under domestic sub-contracting the main contractor may load the rates for his own benefit

There are savings on the final cost and cost-in-use As a pure “installer”, the domestic sub-contractor simply awaits instructions and does as he is told. But the specialist contractor, when nominated, is motivated to (i) apply his knowledge of design and technical matters in a positive and constructive way (ii) monitor and assist with the timely flow of essential information (iii) progress chase and double check to prevent delays and mistakes and to minimise the incidence of claims

The Delay Argument There is no disputing the advantages of nomination as a system which controls the selection of key specialists and saves time and money. Yet nomination frequently gets paraded as the root cause of delay and extra cost. If this were true, all contracts using nominated sub-contractors would be subject to delay and extra cost, and all contracts using domestic sub-contractors would proceed without difficulty. Patently this is not so. The underlying disquiet that delay is somehow linked to nomination arises from the contractual framework. Even here there are misunderstandings.

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Nominated sub-contractors are responsible to the main contractor. If they try to operate in an independent fashion the main contractor has all the power he needs to discipline them. Similarly, main contractors are responsible for the quality of work and timely progress of nominated sub-contractors. If they try to avoid these responsibilities, the client has only to point to the appropriate contractual obligations. The delay argument about nomination stems from the extension of time provisions in the JCT system for nomination. Under this system, the main contractor must take all practicable steps to avoid or reduce delay by a nominated sub-contractor. If despite these efforts, the nominated sub-contractor causes inexcusable delay, and the architect certifies to that effect, the main contractor becomes entitled to an extension of time. The main contractor then claims loss and expense from the defaulting nominated subcontractor on behalf of himself and other sub-contractors. The client recovers his own loss and expense from the defaulting nominated sub-contractor through the Form of Agreement. All parties have their remedies. But situations of delay can get muddied by the contractual provisions in the JCT system. They tempt the main contractor to get himself leeway by fabricating delay claims against nominated sub-contractors. Furthermore, the architect is required to exercise judgement on disputes between main contractor and nominated sub contractor about responsibility for delay and sometimes the client may become involved. These are the consequences of the elaborate extension of time provisions in the JCT system, of nomination. But there is an alternative. Under GC/Works/ 1, the contractual status of the nominated sub-contractor is virtually identical to that of a domestic sub-contractor. The client simply looks to the main contractor if there is delay, and the main contractor, in turn, recovers loss and expense from the defaulting nominated sub-contractor. Main contractors resist the GC/Works/1 system for nomination on the grounds that they should not be expected to take ultimate responsibility for a sub-contractor selected by someone else. This is not a convincing argument. Logically, the main contractor should exercise the same control over all sub-contractors, regardless of their status. He has all the power he needs to do this because he has fair rights of set-off and because payment flows through him. The JCT contractual framework for nomination would be cleaner if, like GC/Works, there were straightforward provisions for extensions of time. However, it is felt that in one respect the GC/ Works/1 contract goes too far by making the main contractor responsible for any extra cost arising as a result of the insolvency of a nominated sub-contractor. In fairness, it should be for the client to bear the cost of re-nomination in the event of the insolvency of his (the client’s) nominee.

Form of Agreement The Form of Agreement (NSC/W) protects the client in the event of a nominated subcontractor delaying the progress of the works or being untimely in the provision of information or failing to exercise reasonable skill and care in the provision of design services. Doubts have been expressed about the value and efficacy of the Form of Agreement. The criticism is that the client cannot set off damages and may be forced to go to court in order to collect them. Commercially, there is nothing unusual about this. Furthermore, nominated subcontractors have their reputations to protect and will not lightly fail to reach an accommodation with the client.

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Nomination


Incidentally, simplification of the extension of time provisions for nomination under JCT would also simplify the Form of Agreement since the main contract would then protect the client against inexcusable delay by a nominated sub-contractor and it would not be necessary for the Form to do so.

The Nomination Procedure The nomination procedure under JCT98 has been criticised as cumbersome. In fact, it represents no more than the formalisation of necessary good practice.

Insolvency Insolvencies among nominated sub-contractors should be rare provided the client chooses with care and any extra cost arising from an insolvency should be relatively small provided re-nomination takes place quickly. It has been acknowledged that it should be for the client to bear the cost of re-nomination. This may prompt the thought that the answer is to stop nominating and leave the risk with the main contractor. But the main contractor will have to price the risk so in the end the costs arising from the insolvency of sub-contractors, whether nominated or not, get passed on to the client. Furthermore, a move to domestic sub-contracting may increase insolvency because of the dutch auctioning. The best protection against insolvency is to use the nomination system to control the selection procedure. If a nominated sub-contractor becomes insolvent the fault lies with the selection process, not with the nomination system.

Co-ordination of Design Good co-ordination of both design and construction is vital to the building process. All too often the development of specialist engineering design suffers from a design gap the result of which is that the co-ordination drawings are not available in due time. Serious problems can then arise if the engineering services are in conflict with one another or with the basic structure. Delays become unavoidable. Nomination has an important role to play in securing proper co-ordination of the design of the engineering that goes into a building. This is because it fosters close working between the designer and the specialist engineering contractor who, if appointed early, can fill the design gap and ensure that the design co-ordination is done in good time.

Co-ordination of Construction Specialist engineering and other work would not be sub-contracted if it did not save time and money. Inevitably, however, sub-contracting adds extra elements to the management and decision making chain. It therefore has to be “managed” and the whole building programme has to be co-ordinated. An unnecessary multiplicity of sub-contractors should always be avoided. But the solution to any difficulties over programme co-ordination will not be found in reducing the amount of sub-contracting per se. If the main contractor is incapable of co-ordinating his sub-contractors, he will be even more incapable of trying to do the whole work himself. The 2.5 per cent discount that the main contractor receives for paying his nominated subcontractors on time, is sometimes seen as his reward for co-ordinating them. This is incorrect.

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Nomination


The programme co-ordination issue must be faced head on. At the very least, the contract documents should define the co-ordination function that the main contractor is expected to fulfil. Where appropriate, there should be a separate co-ordination fee. And on the larger and more complex contracts, there is a case for placing the co-ordination function in independent hands.

Teamwork Good building comes from teamwork. The need is to create a building team operating in mutual trust and co-operation with the object of integrating and co-ordinating all aspects of design and construction and resolving difficulties in a positive way. Clients, particularly regular clients, have great power. After all, they control the membership of their next professional team and the composition of future tender lists. Steps which the client should be encouraged to take to get the best out of the building team include the follow”: (i) insist that the top management of the main contractor and his sub-contractors, get to know one another with the object of creating good working relationships (ii) insist that the professional team and the main contractor, in consultation with the sub-contractors, set up clear channels of communication so that all parties are kept properly informed (iii) insist that there is a clear division of responsibilities and a clear chain of command (iv) insist that the main contractor sets up a sound site management and co-ordination system (v) appoint the specialist engineering contractors early where this will help to resolve co-ordination of design and construction (vi) refrain from starting work on site before design and pre-planning is sufficiently complete and programming is sufficiently advanced

Major Cases on Nomination Several cases on nomination have come before the Courts in recent years. Of particular importance are the following:

North-West Regional Hospital Board v Bickerton (1970) This case involved a contract let under the JCT 63 form of main contract. A firm of nominated sub-contractors went into liquidation and the liquidator refused to complete the sub-contract. The main contractors completed the work at their own expense and requested payment from the Board for the extra costs of doing so, but the Board refused. The House of Lords held that where a nominated sub-contractor goes into liquidation or repudiates his contract, the Employer is under a duty to renominate. If he fails to do so and the main contractor completes the sub-contract at his own expense, he is entitled to be reimbursed any extra costs by the Employer. This principle was slightly modified in the case of Fairclough Building Ltd v Rhuddlan Borough Council (1985). A contract for the construction of a leisure complex was let on the basis of JCT63. During the course of the work, a nominated sub-contractor (Gunite) stopped work and repudiated its sub-contract which was then terminated by the main contractor. The Architect did not nominate

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Nomination a new sub-contractor until some five months later, and the renomination did not cover the cost of the remedial work required.


As a result of the decision of that case, JCT98 now provides: (i) where a nominated sub-contractor’s employment has been determined, the Architect must fulfil his obligation to renominate within a reasonable time; (ii) the work for which a replacement nominated sub-contractor is appointed must include the rectification of defective work executed by the departed nominated subcontractor, (iii) however, the Employer is allowed a credit for the amount he has paid to the main contractor for any such defective work; (iv) if the original nominated sub-contractor’s employment was determined due to the main contractor’s default, the main contractor bears the financial burden. The Employer is therefore entitled to deduct or claim any sum over and above that which would have been payable to the original nominated sub-contractor.

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CHAPTER 24

COMPETITION LAW


Introduction Competition law is concerned with protecting the interests of the consumer. It seeks to enforce rules which encourage competition which is open, genuine and fair, so that the consumer will get the best choice of product and services and the lowest prices. UK competition law is currently undergoing a major transformation following the introduction of the Competition Act 1998 (the Act) which became law on 1 March 2000. The Act significantly strengthens the powers of the Office of Fair Trading (the OFT) to investigate and punish companies which infringe the rules. The Act repeals the Restrictive Trade Practices Act 1976, which previously governed restrictive agreements. The approach of the Act is significantly different from that of the Restrictive Trade Practices Act, in that it introduces a prohibition-based approach into UK competition law. According to this, certain agreements and conduct will automatically be deemed to infringe its provisions. In addition, for the first time the OFT will have the power to levy fines on companies which break the rules. UK companies are already subject to EU competition law which imposes similar prohibitions to those contained in the Act. The Competition Act regulates trade between companies in different states in the EU, and UK competition law deals with trade within the UK. After 1 March 2000, anti-competitive activity such as price fixing cartels could result in: •

Fines of up to 10% of the UK Group turnover. These can be imposed on companies which infringe the provisions of the Act, for each year during which anti-competitive activity is conducted, up to a maximum of three years. The Director General of the OFT has threatened “fines to make your eyes water”. Under equivalent EU law, fines of millions of pounds have been levied on companies participating in the most serious infringements.

•

Restrictive agreements being void and unenforceable.

•

Justified complaints could lead to Court actions for compensation for affected parties.

What laws are relevant? •

The Restrictive Trade Practices Act 1976 The Restrictive Trade Practices Act 1976 (“the RTPA”) is repealed by the Act. However, agreements that were subject to a section 21(2) direction under the RTPA - in common parlance ‘registered’ - retain permanent exemption from the provisions of the Competition Act.

•

The Fair Trading Act 1973 The Fair Trading Act 1973 (the FTA) is applicable to monopolies which may operate against the public interest. For this purpose, a monopoly is deemed to arise where one company has a 25% or greater share of a particular product or service market in the UK, or two or more companies conduct their businesses in such a way as to prevent, restrict, or distort competition. In such case the OFT may open an initial investigation, which may lead to a further inquiry by the Competition Commission. If at the end of this the monopoly is found to operate against the public interest,

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Competition Law


the Secretary of State for Trade and Industry has wide-ranging powers to make order to require the company or companies concerned to modify their conduct and/or sell off parts of their businesses. In many cases inquiries which would previously have been carried out under the FTA will now be conducted further to the Chapter II prohibition (see below).

•

The Competition Act 1998 The Act introduces two prohibitions which are based on European competition law: The Chapter I prohibition outlaws anti-competitive agreements, and the Chapter II prohibition covers the abuse of a dominant position. •

The Chapter I Prohibition The Chapter I prohibition outlaws agreements between undertakings, decisions of associations and undertakings or concerted practices which may affect trade within the UK and which have as their object or effect the prevention, restriction or distortion of competition within the UK. In order to be caught by the Chapter I prohibition, an agreement must have an appreciable effect on competition in the UK or part of it. The Director General of Fair Trading has indicated that an agreement to which the parties’ aggregate market share is less than 25% is unlikely to have an appreciable effect on competition. However, for the most serious types of infringement, for example where an agreement fixes prices or shares markets, an appreciable effect may be found with much lower market shares. An agreement which is subject to the Chapter I prohibition may be regarded as an individual exemption by the OFT if it meets certain criteria (relating, essentially, to the wider interest benefits which the agreement will provide and which is notified under certain procedures). Legal advice will be required to determine whether any given agreement meet reach this criteria. The Secretary of State also has the power to make “block exemptions” which exempt a specified category of agreements. There are a number of exclusions from the Chapter I prohibition, including an exclusion for vertical agreements (for example agreement between a manufacturer and a sub-contractor). A vertical agreement will benefit from the exclusion unless it contains a price fixing restriction.

•

The Chapter II Prohibition The Chapter II prohibition prohibits conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market and which may affect trade in the UK. The application of the Chapter II prohibition involves a two stage test: firstly, the business concerned must be in a dominant position. As a general rule, dominance is unlikely to arise with a market share of below 40%. Where the market share is above 40%, the OFT will assess market power in the light of all relevant factors including whether there are any existing competitors with market power, whether there are significant barriers to entry for potential competitors, and buying power from customers. Dominance only exists in relation to a specific market. It is therefore necessary to define a market, and this normally requires an assessment of the product or service market and its geographic scope. •

2

The product market is defined with reference to the concept of “substitutability”: if the prices of the product or service were increased by 5-10%, would customers switch to other products? If the answer is yes, the substitute products or services are part of the

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Competition Law relevant market. It is also relevant to ask whether other suppliers would switch to manufacture of the product or supply the service if there was a price increase, and whether they could do so relatively quickly and economically.


•

As regards the geographic market, dominance can exist in relation to a local market such as a town, or a wider area such as the whole of the UK.

Dominance itself is not bad. It is only where the dominant company abuses its position in the market that infringement will take place. There are no exemptions from the Chapter II prohibition although limited exclusions can apply.

EU competition law Articles 81 and 82 are the two EU prohibitions dealing with anti-competitive agreements and abuses of dominance respectively. With certain exceptions they prohibit the same kind of agreements and conduct as the Chapter I and Chapter II prohibitions. In order for either to apply it must be shown that the agreement or abuse in question has, or could have, an effect on trade between EU Member states.

Chapter I prohibition/Article 81 There is no set list of agreements which may infringe the law, but the following are examples of agreements which will infringe: •

agreements with competitors to fix purchase or selling prices or other trading conditions. These are one of the most serious infringements of competition law;

•

agreeing with competitors not to tender for particular jobs, or agreeing to tender at a particular price, and any arrangement which “fixes” in advance the outcome of what should be a competitive tender;

•

agreeing with competitors to limit or control production, markets, investments;

•

agreeing with competitors to share markets or supply sources;

•

exchanging competitively sensitive information with competitors (even informally) such as prices, trading terms, and discounts;

•

agreeing with competitors discounts, credit terms, promotional allowances, rebates or any elements of price or terms of trade, terms of sale;

•

understandings between competitors which have the effect of stabilising or raising prices or profit margins.

The OFT has indicated that it will concentrate its resources on cartels, i.e. agreements between competitors, and in particular those which fix prices. Heavy fines are likely to be imposed on companies which are found to have engaged in such agreements.

The Chapter II Prohibition/Article 82 A company commits an offence where it holds a dominant market position and abuses that position. The following conduct may constitute an abuse: •

imposing unfair prices. This might involve either excessively high prices or very low prices whose purpose was to drive competitors out of the market;

•

unjustifiably refusing to supply;

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Competition Law •

forcing the customer to buy unrelated goods or services as a condition of sale;

•

limiting production, markets, or technical development to the detriment of consumers;

•

applying different trading conditions to equivalent transactions, i.e. putting certain customers at an unfair disadvantage.

Enforcement The Act gives the OFT substantial powers to investigate suspected infringements. These include powers to require production of relevant documents or information (including diaries, minutes of meetings, invoices or computer records), and to make copies of any document produced. In addition, OFT officials have the power to require an oral explanation of any document which is produced, and can make further written requests for information. The Act also provides for officials to obtain a warrant, in which case they have additional powers to use reasonable force to enter premises, to search premises and seize documents. Obstructing the OFT in an investigation, either by destroying or falsifying a document, or otherwise obstructing an official is a criminal offence which could lead to a prison sentence.

Conclusion The Act gives the OFT significant new powers to investigate and prosecute infringements of the competition rules. Non-compliance is not a realistic option given the potential penalties involved. The OFT will focus its efforts in particular on price fixing and market sharing by competitors. It is aware that there has been anti-competitive conduct in the construction sector in the past, and will almost certainly use its new powers if there is any evidence that it is continuing. Companies which wish to minimise their exposure should consider putting in place compliance programmes to ensure that staff understand how the competition law rules work and what the risks are of infringing them.

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CHAPTER 25

CHECK LIST


Tenders Enquiries Invitations to tender for work are normally preceded by enquiries to ascertain whether firms are prepared to tender, frequently many months before the actual invitation to tender. Most firms say yes’ at this stage with the reasonable point in mind that by the time the actual invitation is received they may be needing the work.

Invitations When the specific invitation to tender arrives, firms sometimes find themselves unable to tender because of either overload on the Estimating Department or because of forward fabrication/erection commitments. Few firms are prepared to return the tender documents promptly with a polite refusal to quote because they fear they win not be invited by that particular client next time; many prefer to ‘phone through the day before the date for return of tenders to say that ‘due to an exceptional short-term workload our keen intention to quote has been defeated by circumstances quite outside or control’ etc., and earnestly requesting that they will not be prejudiced by this on future occasions. Clients or their professional advisers react to this all too frequent event by inviting far too many firms to tender in the hope that if they ask twelve firms they might get six tenders. The consequence is that selective tendering procedures go by the board, which is in nobody’s interests. CHECK:

Do we, as a Company, have in operation an appraisal procedure which enables decisions as to whether to tender or not to be made promptly, and if so, is it functioning efficiently?

Sub-Contract Tenders and Enquiries for Materials Of course it is not always quite so simple; many jobs require invitations to tender to be put out to sub-sub-contractors; some will require expansion of the labour force; all jobs demand enquiries concerning availability of materials. Nevertheless the aim - in everyone’s interest - should be to advance the decision-day to the earliest practicable date consistent with commercial prudence and good management. CHECK:

Does our system for obtaining answers from sub-contractors, suppliers etc. ensure: (a) that the sub-contractors and suppliers have in their possession at the earliest possible moment all relevant information which we are able to provide on such matters as programme, site conditions, etc.; and (b) that our own ‘critical path’ for responding to invitations to tender is not disrupted by sub-contractors’ and suppliers’ delays?

Time for Tendering The Construction Industry Board Code of Practice for the Selection of Subcontractors recommends a 6 week period for construct only jobs, 3 weeks for design only and 10 weeks for design and construct,

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Check List although it acknowledges that shorter periods may be appropriate for small or less complex projects, and longer periods if a bank or industry holiday falls in the period. It is a general complaint in the construction industry that tendering periods allowed are inadequate, and this frequently leads to last minute requests for extra time. It is clearly far better for extensions to be applied for as early as possible so that all tenderers benefit from any extension granted and so as to ensure that the same date for the return of tenders is observed by all. CHECK:

Do we attempt to assess at the earliest possible date whether the period for submitting tenders is adequate; and to request a longer time, where necessary, as early as we can?

Tender Documents Many reports on the construction industry’s procedures have emphasised the desirability of a standardised basis for the obtaining of tenders, and the need for tender documents to line up, and not conflict, with forms of contract and sub-contract. To a considerable degree, improvements in this area are outside the control of contractors, since tender documents are initiated by clients and their professional advisers. However, there are occasions when it is possible for contractors and sub-contractors to urge the use of standard documents, particularly at enquiry/preliminary tender stage. CHECK:

Do we take every opportunity to press for standard tender documents to be used and to avoid whenever possible the use of ‘ad hoc’ documents which frequently conflict with the standard forms of contract and sub-contract?

Qualifications to Tender One further desirable consequence of the use of standard tender documents is that all firms are invited to tender on the same basis. Invitations to tender frequently state that qualifications introduced by the tenderer shall invalidate the tender, the objective being to avoid difficulties over adjudication of tenders where those received are not on an identical basis. However, there are occasions (e.g. in times of shortages of labour) when commercial prudence requires that firms exempt themselves from possible heavy liability because the risk is great and therefore qualifications to tender are necessary. The same applies where the tender documents insist upon the acceptance of some very onerous provision being allowed for; it is not always possible to price realistically such provisions. There is another type of tender qualification, however, whose use is deplored by architects and engineers; this is where, for example, a specification lacks clarity or omits some important particular. They feel that contractors should request clarification of such matters as soon as discovered so that all tenderers can be notified at the same time and thereby comparability of tenders is preserved. CHECK:

(a) Do we have on the file a standard set of tender qualifications in those situations where we may be seriously at risk? (b) Do we apply for clarification of specifications, where necessary, as early as possible in the tendering period so as to avoid unnecessary qualifications? (c) Have we considered, in a particularly bad case, submitting two separate tenders to the client: one entirely ‘clean’ tender, precisely in accordance with the tender documents, necessarily with a higher price, the other, qualified as necessary, accompanying a lower price? This would enable clients to see the true cost of onerous terms etc.

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Acceptance of Tenders Reports on the construction industry have recommended the prompt acceptance of tenders. Steelwork Contractors frequently agree to hold their tenders open for acceptance for one, two, three months, or even longer; fail to re-appraise them after the requisite period has expired: and are then dismayed to receive an order ‘accepting’ a price which has become inadequate.

CHECK: Do we have a routine whereby we look again at those submitted tenders which have not yet been accepted, and withdraw them or indicate our wish to revise them, where appropriate? Note: For Steelwork Contractors in Scotland, a tender cannot be withdrawn under Scots’ Law during the period in which the contractor has agreed to hold it open for acceptance.

Notification of Tender Results The CIB Code of Practice recommends that formal notification should be sent to the preferred tenderer once it has been decided to accept the tender and that all unsuccessful tenderers should be informed.

CHECK: (a) Do we press clients to notify us at all times of the result of tendering competitions? (b) Do we then take the opportunity of appraising on the job in question the margin by which we secured the order or the reasons we failed to secure it?

Tendering to Main Contractors In much of the above it has been assumed that the Steelwork Contractor is tendering directly to the client or his professional advisers either with a view to a direct contract or a nominated sub-contract being placed in due course. Where tenders are submitted to main contractors for domestic sub-contract work, the same principles of good practice should apply. However, the situation is frequently different in that more than one main contractor may be seeking tenders for the same work, the information available for tendering purposes is often less helpful: and there are occasions - particularly when work is short - when pressure is brought to bear, pre-tender and/or post-tender, for (downward) revisions to subcontract prices - the practice which is variously described as Dutch-Auctioning’, ‘bid peddling’ or ‘pencil-sharpening’.

CHECK: (a) Do we submit the same prices to all main contractors inviting tenders for the same work, or do we assess their credit worthiness, quality of management (particularly surveying staff) and competence to carry out the main contract works, thereby varying our price according to our judgement of the firm as much as according to the job in question? (b) Do we insist on adequate information for tendering purposes (a few sheets torn form the main contract Bill of Quantities is hardly adequate on jobs involving framed steelwork), sight of main contract conditions and proper notification of site conditions? (c) Do we, as a matter of policy, look sceptically at requests for downward revisions of price based on suggestions of, for example, 1.25% off your price will secure us (i.e. the main contractor) the job or changes to our programme of works will involve you in less site visits and therefore a reduction will not lose you money?

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Check List

Making the Contract


Letters of Intent A contract is formed by the making of an offer by one party (in the construction industry the offer takes the form of a tender) and its acceptance by another party (in construction: acceptance takes the form of an order for work), (See Chapter 1). However, it is common practice in structural steelwork for the Steelwork Contractor to be launched by the client or architect/ engineer into purchasing of materials and carrying out detailing on the basis that an order for work will be forthcoming when the main contractor is appointed. That launching process is normally done by means of a ‘letter of intent’ which is not a valid acceptance of the tender. merely an Indication of intention that an order will be placed in due course. Unless the letter of intent incorporates a clear instruction to proceed, and an undertaking to pay for any abortive costs incurred, the Steelwork Contractor runs the danger of having no recourse against the employer if no order for the work ensues.

CHECK: Do we, as a matter of routine, respond to letters of intent (a) acknowledging receipt thereof., (b) requesting an instruction to proceed with necessary preliminary work; (c) asking for confirmation that we will be indemnified by the employer in respect of any expenditure incurred as a result of so proceeding in the event that an order does not ensue; and (d) pointing out that failure by the employer to confirm (b) and (c) above will render us unable to accept responsibility for any delay in commencement of erection or any consequential delay to other trades?

Identity of Main Contractor As structural steelwork is an ‘early’ trade on most jobs. It is often the case that the identity of the main contractor is unknown at the time the Steelwork Contractor submits his tender. Unless his tender is qualified to the effect that he reserves the right to withdraw the tender (or revise the price) if the identify of the main contractor, when known, is unacceptable, the Steelwork Contractor runs the risk that a contract could be formed with a party who is unacceptable to him. A tender not qualified in this way is capable of acceptance by any main contractor chosen by the client for the main contract since a tender to a client is otherwise ‘at large’. If a Steelwork Contractor wishes to preserve his rights in this regard, he would also be well-advised to reemphasis the point in responding to any letter of intent from the client or his professional advisers.

CHECK: Do we, on every job for which we tender where the main contractor is unknown at the time we tender, seriously consider tactfully pointing out that we have no control over the appointment of the main contractor, and that therefore the right to withdraw, without incurring any liability. has to be reserved pending notification of the main contractor’s identity?

Warranties Most contracts will require you to give warranties; these will typically be to the client, a funder, tenants and purchasers. When the Contracts (Rights of Third Parties) Act 1999 was passed (allowing contracts to provide that third parties could enforce the terms of the contract) many people felt that this would take the place of warranties, but unfortunately, this has not yet proved to be the case.

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Warranties can place significant extra obligations onto Steelwork Contractors and need to be carefully checked. Often, they seek to impose obligations far outweighing those of the subcontract, and it is not infrequent for Sub Contractors to be expected to agree to be responsible for matters pertaining to the whole development.

CHECK: (a) Do we know how many warranties we are expected to give, and who they are to? (b) Are the liabilities imposed upon us ‘due skill and care’, not ‘fitness for purpose’? (c) If there is a list of banned ‘deleterious materials’, does the warranty make us liable not to ‘specify’ them, insofar as we are responsible for specification, not to not ‘use’ them? (d) Are our liabilities restricted to matters for which we are liable (i.e., to the Sub Contract Works)? (e) If we are required to give a licence to the other party to use our designs, and we are using an outside designer, does our agreement with the outside designer allow us to give the licence? And are we only liable for the designs for the purposes for which they were originally prepared? (f) If there are ‘step in’ rights, are these limited to clients and funders? Are the time periods short? Does the other party agree to pay all sums already due at the date it takes over? (g) Have your insurers confirmed that the insurance and assignment provisions are acceptable? (h) Are third party rights excluded except where expressly provided for?

Main Contractors’ Conditions of Contract It is well-known that many main contractors do not like the standard forms of subcontract - they prefer to use their own (invariably more onerous) sub-contract documents, Steelwork Contractors frequently tender to employers and/or architects/engineers on the basis either of their own tender conditions or the Standard Form of Tender or some other like document; are then notified that their tender is ‘approved’: and then later receive an ‘order’ from a main contractor Incorporating a string of unacceptable terms and conditions. The question then arises: what is the Steelwork Contractor to do? Can he reject the terms of the order? Or is he bound to accept them? The legal point is that the acceptance of the tender has to be in the same terms as the offer unless the tenderer is prepared to accept different terms. If this is not so, the ‘order’ is not an acceptance but a ‘counter-offer‘ to the tenderer by the main contractor which the tenderer may accept or reject as he sees fit. He cannot be forced to accept the terms of the order, although he may, of course, indicate his willingness to accept them In return for a higher price: nor can he be forced to forego his own tender conditions, especially if he feels that they incorporate certain matters which were crucial to his tender price. Unfortunately. Steelwork Contractors sometimes feel that they are obliged - albeit unwillingly - to capitulate to the main contractor’s demands: the important point to note, however, is that this need only be done, if at all, for ‘commercial’ reasons and not for legal reasons.

CHECK: (a) Do we always ensure, on receipt of an order, that any terms and conditions incorporated in it are in accordance with those on which we tendered? (b) Do we reject any new and onerous terms and insist on any crucial conditions/ qualifications which we put forward with our tender?

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Check List


‘Implied’ Contracts There is another important aspect affecting the formation of contracts. Say a subcontractor receives an order from a main contractor, and discovers that he is being asked to accept terms and conditions of contract (especially, for example, programme requirements) which are at variance with those on which he tendered. Nevertheless he commences and continues to carry out the work. He then runs the danger - if a dispute over terms later ensues, e.g. that the job should have been finished within the time on the main contractor’s order, not that in his own tender - that an arbitrator or court may find that by carrying out the job he had impliedly accepted the main contractor’s terms and conditions. Acceptance of a contract can, in certain circumstances, be implied from the conduct of one of the parties even in the absence of express agreement.

CHECK: If we receive no response from a main contractor to our rejection of the terms of his order within a reasonable time, do we advise him that we shall be forced to stop work and to notify the architect/ engineer we have done so - without incurring any liability, and that we shall not resume work until agreed terms are settled?

Onerous Clauses Standard Documents Preferred Of course, the use of standard negotiated documents is always to be preferred. Where tenders have been invited in accordance with standard conditions, any attempts made later to impose different (and invariably more onerous) conditions can be resisted with equanimity. The acceptance of an offer must “match” the terms of the offer otherwise the “acceptance” is a counter-offer which the tenderer is free to agree or throw out or re-price as he wishes. Even the standard documents are sometimes amended, and it should be a matter of routine to check all contract forms page by page (including the Appendix entries) before signing them. This is important, as ‘look alike’ documents are easily prepared on the computer - contract forms which look like standard forms, but have been amended.

Onerous Contract Clauses A list of all possible unfair conditions which Steelwork Contractors may come across would be both lengthy and not very helpful. It is also the case that since many main contractors (and suppliers for that matter) argue that their conditions are merely intended as “fall back. protection for use only in extreme cases, business is done in a perfectly fair and reasonable way on documents which, taken literally, are very onerous. Nevertheless, the unintended and unforeseen happens uncomfortably frequently in construction contracts; and assurances of goodwill quickly evaporate if expensive difficulties arise. Although a various protection provisions have been put in place by the ‘Construction Act’ (Part II of the Housing Grants, Construction and Regeneration Act 1996), there are some common ways by which main contractors try to avoid these provisions. There is, therefore, a certain minimum of matters to which attention should always be given and these are set out below. The commonest types of onerous clauses are as follows:-

•

Incorporation of Main Contract Terms This often appears in a single and apparently innocuous sentence. It makes it necessary to check the main contract document to be safe.

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Check List


•

Payment Pay-when-paid in the event of client insolvency provisions. These are allowed by the Construction Act, but they are onerous. Some main contractor appear to believe that in the event of client insolvency, the Construction Act grants an automatic right to for them to pay when they are paid - it does not, there must be a clause to that effect in the contract. Also onerous are provisions which allow a main contractor the right to always deduct cash discount (even when payment is not made promptly or within a specified time) and provisions which specify that fluctuations are not to be paid until after final account.

• Retention Clause allowing deduction of cash retention (BCSA policy is not to accept this).

•

Set-Off Right to deduct sums in anticipation of default. Right to deduct sums owed under any contract between the same two parties. Right to withhold payment without serving a notice complying with s. 111 of the Construction Act.

•

Damages for Delay Completion dates simply stated as being lo meet main contractor’s programme requirements” or the like. Incorporation by reference of main contract rate of liquidated damages.

•

Insurance Broad indemnity (including any costs of legal proceedings) of main contractor against liabilities not within the sub-contractor’s control.

•

Site Attendance Clauses imposing on the sub-contractor responsibility for making available, and paying the cost of, site facilities for which the main contractor is in any event being paid under the main contract, e.g. provision of crane.

• Adjudication Clauses providing for procedures which must be followed before adjudication can take place. Clauses making the referring party responsible for all costs, whatever the outcome of the adjudication. Making certificates/decisions ‘final and conclusive’. Adjudicator required to deposit monies in a trustee/stakeholder account. Payment of an adjudicator’s decision deferred to a later date. •

Arbitration A clause making the client, his professional adviser, or even the main contractor, final and conclusive arbiter in any dispute arising from the contract.

So much for contract documents. But tender documents also require scrutiny, since it is not unknown for architects and engineers to attempt to impose additional obligations on contractors and sub-contractors through the tender conditions. Among the favourite types of clauses of this nature to look out for are those affecting design and drawings. For example, clauses making the contractor responsible for the designer’s errors or omissions: or stating that the contractor is to include in his

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Check List price sufficient to cover “everything needed” to turn the design into a viable structure; or rendering the contractor liable if he fails to point out any discrepancies between drawings and specification.

CHECK: (a) Do we as a company attempt to secure contracts on the basis of the standard contract


and sub-contract forms wherever possible? (b) Do we scrupulously check tender and contract documents when received, both for onerous clauses and for any important matter omitted? Do we ensure that the provisions of the Contracts (Rights of Third Parties) Act 1999 are excluded except insofar as we expressly agree to give certain third parties rights? (c) When contracts are placed on standard documents, are we no less diligent in checking them for ‘ad hoc’ amendments and to ensure that the Appendix entries are in accordance with our tender? Do we also ensure that handwritten amendments which we have agreed are initialled by both parties? (d) When a sub-contract incorporates by reference the terms of a main contract, do we insist on sight of the main contract document? (and not just a reference copy but the actual document for the particular contract): (e) Are our staff aware that if lack of time (or lack of knowledge) prevents a detailed scrutiny of all documents on every occasion, there is no excuse for at the very least not scanning the clauses dealing with payment: set-off, completion, extension and damages: insurances, and site attendance?

Contract Prices and Payment Terms Categories of Contract It is the normal practice in the construction industry for there to be forms of contract which incorporate the contract price(s) and set out terms for regulating changes in the price(s). There are, in broad terms, two main categories of construction contracts between which there is a clear distinction as to the nature of the price(s). First, there is the type of contract where the extent of the work to be carried out is not fully known at the time the contract is entered into: the basis for pricing for this type of job is against a schedule of rates or on a cost-plus (or daywork) basis. Second, there are those contracts where the extent of the work is sufficiently well-known at the time of tender for a lump-sum price to be applied to the contract. Such contracts are usually subject to a description of the work in the form of a specification or to an itemising of the work in Bills of Quantities. On lump sum contracts, the contract price is the total of the tender sum accepted and incorporated In the contract; the value of any variations ordered under the contract: the cost of any allowable fluctuations in labour costs. material prices or taxes: plus any other valid contractual claims. In all other respects the cost of all work necessary under a lump-sum contract is deemed to be included in the contract sum. Variations are to be valued at the rates in the Bill of Quantities or (on specification contracts) against a schedule of rates for variations. Fluctuations, where applicable under the contract, are normally limited in their effect: labour increases are only payable within the permissible limits of the clauses in question, materials’ increases are normally only applicable where the materials in question have been listed in the contract on a schedule of basic prices. It is a common mistake made by contractors In tendering for construction work to assume that the contract provisions, taken as a whole, will allow recovery of the actual costs of the job, but this is rarely so. However, the use of index-linked formulae for fluctuations in the industry gives a more realistic recovery of cost increases.

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Firm Price Contracts It is common practice for firm (or fixed) prices to be required in the construction Industry for jobs of relatively short duration. It is important to understand that, generally. ‘firm price’ means what it says and that delay and disruption on the contract does not ‘frustrate, it but merely renders it more onerous. An important example of this arose in the case of Davis Contractors Ltd v Fareham Urban District Council (1956). Here a contractor entered into a contract to build 78 houses within an 8-month period, but attached to his Form of Tender a letter stating that it was subject to adequate supplies of labour being available. In the event, labour was short, and the contractor took 22 months to complete the contract, incurring extra expense because of the prolongation of the contract period. The contractor contended that the contract price was conditional upon adequate supplies of labour being available; that because the labour was not available the contract had been frustrated: and that he should be entitled to recover his extra expense. The court held that the letter attached to the Form of Tender had not been incorporated in the contract and that the contract had not only not been frustrated, but that the contractor was not entitled to his extra costs. This is not to say that there are no circumstances in which the contract price of a firm price contract can be increased: but it does underline the fact that the mere overrunning of the contract period does not of Itself entitle a contractor to claim for extra costs. If therefore a Steelwork Contractor wishes to hold a price firm for a specified period only, and wishes to recover any increased costs taking place thereafter, it will be necessary for a specific provision to be incorporated in the contract document entitling him to charge cost increases arising after the expiry of the stated fixed price period.

CHECK: Do we, as a matter of tendering policy, attempt to assess and allow for the probable ‘shortfall’ in recovery of actual cost increases under the terms of the contract? On fluctuations jobs, in particular, do we allow for the shortfall in labour cost increases; on firm price jobs, is an adequate allowance made for labour and materials increases; on all jobs, is adequate provision made for overhead increases.

Payment Terms Cash flow, it has been said, is the life-blood of the construction industry. Today, with high interest rates on borrowings, and with overhead charges escalating, it is even more necessary than in the past for Steelwork Contractors rigorously to enforce the payment terms in their contracts. The aim at all times should be for Steelwork Contractors themselves to finance their contracts to the minimum possible extent. It has always been of course a common feature of construction contracts that provision is made for payment by instalments to contractors, normally monthly, and this is now enshrined in the ‘Construction Act’ for all contracts lasting 45 days or more. Traditionally, a percentage has been retained against default by the contractor in certain specified respects, but it is BCSA policy that its members no longer accept this. The Construction Act has given important extra rights with regard to payment and adjudication throughout the course of the contract, and Steelwork Contractors should be prepared to use them wherever necessary.

CHECK: Do we, as a key aspect of management policy, ensure that our staff attend diligently to the detail of cash flow from our clients and, In the event of default, rigorously enforce our contractual and legal rights on payment? In particular do we: (a) Reject inordinately long payment periods in contracts. (b) Secure ‘advance’ payments on receiving orders for work or on delivery to our works of ‘black’ steel whenever possible. (c) Ensure that there are no retentions on our contracts.

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(d) Rigorously ensure that payment and withholding notices are properly issued on time and challenge any wrong or undervalued notice. (e) Make application to the Architect/Engineer to exercise his discretion to certify for payment for fabricated materials off-site, where the contract conditions allow, offering an indemnity regarding passing of ownership if necessary. (f) Reject a’ pay-when-paid in the event of client insolvency’ provision in contract documents. (g) Strictly enforce monthly payment terms (fortnightly on large Government jobs) and ensure that the value of work executed and of materials delivered to site is properly certified for payment. (h) Strictly enforce any right to interest on late payments given in the contract or by the Late Payment of Commercial Debts (Interest) Act 1998. (i) Require notification of issue of certificates by the Architect including amounts due to us where employed as a nominated sub-contractor, insist on payment of the amount due by main contractor within the relevant period of receipt by him of the Architect’s certificate; and apply for direct payment if the main contractor defaults. (j) Disallow any cash discount where the main contractor is late in making payment, and ensure that retention is deducted from the certified amounts first and cash discount deducted only on the reduced amount. (k) Claim the value of all authorised variations and, where appropriate, any fluctuations which take place in interim applications for payment and not in one ‘job lot’ at the end of the contract. (l) Claim any extra costs for disturbance of regular progress of the works wherever possible and any increased rates for variations where appropriate. (m) Ensure retention bonds are default based, not ‘on demand’. Where there is cash retention, secure release of first half of retention money on practical completion of the works or section of the works where appropriate; apply for early release of retention money on nominated subcontracts under JCT 98 (offering if necessary an indemnity against the appearance of any latent defects in the works); in all cases, apply for release of second half of retention money at the end of the defects liability period, i.e. not in the final account. (n) Submit our final account as soon as possible after completion of the works and keep pressing for early settlement of all amounts not subject to dispute.

Changing the Contract Alterations to Contracts Once a contract has been made, i.e. when a tender has been submitted and a formal order for the work placed, it may be altered only by agreement between the parties to the contract. Such agreement can take place ‘ad hoc’, or it can be allowed under the terms of the original contract. This latter is usually the case in construction contracts since most forms of contract allow for ‘variations’ to be ordered which are deemed not to vitiate the contract and which are to be valued on a stated basis; this question is dealt with below under the heading ‘Contract Variations’.

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Where there is no variations clause in the contract, or where changes are sought inside the terms of a variations clause, Steelwork Contractors are entitled to agree or to refuse changes to obligations entered into at the time of making the contract, if changes are agreed, Steelwork Contractors are permitted to charge the extra cost involved. Generally it is unwise to agree by word-of-mouth only to change a written contract: this frequently leads to argument about payment after the work has been done, when the contractor is in a weak position to enforce his rights without recourse to arbitration or the courts. Exchange of letters is the most common means whereby contract obligations are altered, and it is important to ensure that correspondence during the course of a contract is properly handled if changes to the terms of a contract are to be valid. Where a formal contract document purports to incorporate all the terms of that contract (as is frequently the case in the construction Industry) correspondence will normally only be treated as of binding force if it is made entirely clear that it is intended to amend earlier contractual rights/ obligations: the best way to validate this is to attach the relevant correspondence, initialled by the parties, to the contract document. Programme alterations are perhaps the most common and most important respect in which an informal approach to correspondence can lead to considerable difficulties. The test is: is the correspondence concerned with matters of detail and clarification (in which case informality may be acceptable) ; or is it concerned with key matters of principle intended to be legally binding (in which case the more formal approach is essential)?

CHECK: (a) Do we always ensure that any alterations to our contracts are agreed in writing: and do we instruct our staff to insist on any verbal changes being immediately confirmed in writing (particularly if they arise at Site Meetings)? (b) Have we a procedure which enables key matters, e.g. programme changes, altered by correspondence to be formally incorporated in the relevant contract documents where appropriate? (c) Are we sure that, where different persons handle formal contract documentation from those who deal with day-to-day contract correspondence, all are aware of the need for a co-ordinated and consistent approach to alterations?

Contract Variations As mentioned above, contract variations, as such, fall into a different category of contract changes. Standard forms of contract and sub-contract allow, by express terms, changes to be made without any formal amendment to the contract being required. A Variation Order issued under the Conditions of Contract is legally valid because of the contractor’s initial agreement to a variations clause in the contract. In most standard forms there is no specific limit on the power of the architect/engineer to order variations, although it would not normally be possible for the entire scope of the works to be altered by means of A1s, whether by addition or omission. The important issue from Steelwork Contractors points of view is that variation instructions should be issued as prescribed in the Conditions of Contract and in writing; further, they should be issued as nearly as possible contemporaneously with the carrying out of the altered work so as to minimise the possibility of later argument as to the fact of an instruction, its proper valuation, or both. The basis for valuing variations is much the same in most standard contract documents. The rates in the Bills of Quantities/ Schedule of Bates are to determine the value of similar work executed under similar conditions, for work not of similar character not executed under similar conditions, the

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Check List Rates are to be used as the basis so far as is reasonable, failing which a fair valuation is to be made: and work which cannot be properly measured and valued is to be paid for at Daywork Rates. In practice, of course, Bill/Schedule Rates normally apply unless the contractor makes out a strong case for a varied rate. There is, in fact, considerable scope for the enterprising contractor to obtain better than Bill/Schedule Rate. Further, some contract documents allow the contractor to claim for any direct loss and/or expense not covered by the valuation of any variation. Recovering the true cost of carrying out variations is a matter for detailed application, and a high level of negotiating expertise is required.

CHECK: (a) Do we, as a Company, do all we can to insist that AIs are issued in writing as closely as possible to the time varied work is to be carried out? (b) Do we urge that the variations are valued when carried out (rather than in one ‘Job-lot’ at the end of the contract) and claim payment for them in Interim (rather than final) applications? (c) Have we a system for fully recording all variation instructions and their consequences (e.g. lifting details from correspondence onto work progress schedule)? (d) Have we a procedure for vetting all variation instructions to establish whether we are entitled to a higher level of reimbursement than at Tender Rates? (e) Are we careful to distinguish between claims for extra costs arising from variations (with reference to the appropriate contract clause) and claims for extras arising from general delay and disruption (usually covered by a separate provision in the contract)?

Fluctuations Fluctuations clauses in contracts fall, in the main, into two categories:1. Those allowing contractors and sub-contractors to recover increases in the cost of labour, materials, taxes, etc.. which they actually incur, but rarely the whole of such increases; and 2. Those allowing contract price adjustment In accordance with an index-linked formula method, based on indices of average cost movements, but which may be subject to a non-adjustable element

Conventional Fluctuations Clause Chapter 8 of this Handbook deals in detail with the conventional “net increase” type of fluctuations clause which normally covers increase in labour, materials and taxation. There are a number of constraints normally built into such clauses: labour increases are linked to changes in national wage rates and are payable only in respect of employees covered by national agreements; known future labour increases are frequently not recoverable, to permit fluctuations on materials, the basic prices of materials must be listed in the contract (although known future increases in materials are usually recoverable): overheads are rarely recoverable: profit on fluctuations is never recoverable. Most conventional fluctuations clauses require contractors and sub-contractors to give notice as soon as possible after claimable fluctuations take place, and to keep necessary records. Reimbursement of increases is normally to be made in interim certificates and need not be left to be claimed in one job-lot’ at the end of the contract. Changes in the rates of VAT are quite separate from any tax fluctuations and should not be treated as a fluctuations matter. Under most forms of contract, the contractor is not entitled to claim any fluctuations taking place after the date of authorized completion of the works has passed, but where he has not yet finished the job due to culpable delay on his part.

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an element of shortfall in cost increase recovery which must be covered wherever possible elsewhere in our tenders? (b) Do we allow in our tenders for all known future national wage increases where necessary? (c) Do we ensure that the basic prices of all materials are listed in the tender/contract so as to ensure recovery of materials increases? (d) Do we scrupulously observe any requirement to give notice of fluctuations claims as soon as they arise: and always apply for payment of such increases during the course of the contract rather than at the end? (e) Before quoting for a conventional fluctuations job, do we fully consider whether it might be in our best interest to persuade the client to accept instead a fluctuations formula arrangement?

Fluctuations Formulae There are a number of formulae appropriate for application to structural steelwork jobs, but basically these break down into one type for ordinary building steelwork and another for civil engineering steelwork. Under the steelwork formulae, the contractor is required to declare in his tender rates per tonne for materials and erection: the price for fabrication and delivery is calculated for each valuation (where relevant) by deducting the value of materials and the value of erection from the total value of work included in the valuation. The base month is to be stated in the tender documents (on building steelwork contracts it will normally be the month before the month in which tenders are to be returned). It is important to remember that the formula arrangements disregard the actual increased costs incurred by individual contractors and sub-contractors: the indices reflect national averages and adjustments to “value” (i.e. selling prices including variations) are made in monthly valuations against movements in the indices. Such adjustment is automatic and no proof of claim by the contractor is necessary. Although payment under the formulae is not normally made until deliveries to site commence, cash flow should be considerably more advantageous than under the conventional arrangements. Overheads (and even profit) are subject to adjustment although this benefit may be eliminated by the incorporation of a non-adjustable element in the formula. Other possible constraints inherent in formula methods are inadequacy of index movements and incorrect valuation of work.

CHECK: (a) Do we, as a company, when invited to tender for a job incorporating a fluctuations formula, carefully investigate the particular type of formula proposed for our work to ascertain whether it is the most appropriate in the circumstances’, and, if need be, do we propose to the client a formula more suitable both for the job and for us? (b) Do we always do a calculation of any possible shortfall in recovery under the particular formula to be applied on each job and make allowance accordingly in our tenders (especially in respect of any non-adjustable element or any materials not covered in the weightings in the materials index which are required for the job and which we anticipate may well increase in price at a greater rate than the items in the Index weightings)?

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(c) Do we carefully monitor both the quantity surveyors’ valuations and payments made to us to ensure that the right amount of formula adjustment is made and included in payments promptly, remembering that variations, where appropriate, are also to be included? (d) Where there is a considerable sub-contract element in our contract, e.g. sheeting, do we ensure that the method of any cost recovery is sorted out at tender stage and, if need be, agreement reached with the client for some separate method of reimbursement for the sub contractor?

Extensions of Contract Time Performance to Time Construction Industry Contracts normally have specified completion dates written in, and the remedy for failure by the Contractor to complete on time lies in Damages. Today, the time for completion can be as important to clients as the Contract Price, and most contracts incorporate provisions entitling the client to Damages (whether liquidated or general) for culpable, delay; but they also normally have provisions for extending the contract time where the client (or his professional agents) is the cause of the delay and, in specific circumstances, where the delay arises for reasons outside the Contractor’s control. It is probably true to say that today more disputes surround the time element of Construction Contracts than any other single aspect, and it is just as true that steelwork contractors disregard at their peril the various contract provisions concerning performance to time.

Programme A ‘Programme of Works’ is a helpful indicative management document, but - unless formally made a specific Term of the Contract along with Commencement and Completion dates - it is not normal for the Programme to be legally binding. However, agreed changes to a Programme, frequently made verbally or only recorded in Site Minutes or informal correspondence, can harm a later application for an extension, and it is unwise to rely on informal expressions of good intent. A correct record made at the time Programme changes are agreed can save much time and dispute.

Extensions of Time The basic purpose of an Extension of Time Clause is to postpone the date(s) on which the Contractor is due to complete the work and thereby defer his liability to pay Damages for breach of Contract. There are differences between the clauses in use in Standard Forms of Contract and Sub-Contract, but there are two common and important factors: first that the Contractor must forthwith notify the architect/engineer that delay is being, (or will be) experienced, and give notice of Its cause; second, the Contractor must use his best endeavours to prevent or overcome the delay and maintain the progress of the works. Appropriate documentation of the reasons for and effect of delays is essential, and the telephone should not be used for notification of delays unless immediately followed up by written confirmation. Applications for extensions should be carefully worded; it is simply not enough to say ‘Delays by the Mills’ or ‘Reasons beyond our control’ and leave it at that. The relevant clause number in the Extensions Clause should be referred to; an indication of the likely extent of the delay given: and any relevant supporting evidence submitted at the same time. Further, if the application is being made through a Main Contractor, the prudent nominated Sub-Contractor will ensure that the architect

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has a copy of the Notification: it is important that the architect has before him the Sub-Contractor’s ‘case’ as well as the Main Contractor’s when deciding on the appropriate extension. One particular ‘cause’ of delay to be avoided is a general reference to ‘heavy work-load on the fabricating works’ or ‘giving priority to other jobs’. The Contractor in taking on work implies that he has the capacity to carry it out.

CHECK: (a) Do we, as a Company, have suitable office procedures which call for itemised records of the progress of contracts and the reasons for any delay? (b) Do we require a similar standard of diligence of ‘housekeeping’ from our own Sub-Contractors (for whose defaults we are liable, as though they were our own)? (c) Do all relevant members of our staff appreciate the need for prompt notification of delays, with reasons and in writing, and for applications for extensions to be adequately supported by written evidence (with copies to the other interested parties)? (d) Are we sure that all relevant members of our staff understand that there is a general duty incumbent on the parties to a contract to take steps to minimise any delay, and that failure to do so can affect our entitlement to an extension of time? (e) If we are reluctant in certain cases to apply for extensions because in so doing we expose to the client the shortcomings of a ‘friendly’ architect or engineer, do we first consider whether we, in turn, will be exposed to a claim against us by the Main Contractor? (f) Do we exercise great care in agreeing changes to ‘Programmes’, and do we scrupulously monitor Site Minutes and correspondence to ensure that we are not wrongly quoted as undertaking to do/not do certain things affecting progress and completion?

Delays and Extra Costs There are three possible financial consequences for contractors where a job is delayed: first, where he is entitled to extended time and has the right to claim his extra costs because the delay is not only outside his own control but is within the control of his client; second, where he has no such right to claim even though he is entitled to an extension of time, e.g. in a force majeure situation; and third, where because he is culpably late he is not entitled to an extension, but is liable to pay his clients’ extra costs by way of damages. The first and second circumstances are dealt with here; the third will be dealt with under ‘Damages’.

Entitlement to Extra Costs The right to extra costs due to delay and disruption arises, in the absence of specific terms in the contract document, because at Common Law the usual remedy for a breach of contract lies in a money payment (damages). In fact, many contract documents in common use in the construction industry specify the circumstances leading to a right to claim. It is important to understand that not only does the granting of an extension not automatically lead to the right to recover extra costs, but also that the circumstances in which those costs are claimable are considerably fewer in number than those in which an extension can be obtained. In the main, the entitlement to extra costs where delay is neither within the contractor’s control nor arises from ‘neutral’ circumstances (such as force majeure), but can be laid, wholly at the door of the client or his architect/ engineer e.g. Site not available for possession by contractor at the due date,

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Check List late delivery of drawings, details, instructions, etc: testing of work which is actually found to comply with the contract; variations; and instruction to postpone work. In these circumstances the client cannot escape financial liability provided the contractor has observed the prerequisites of the contract such as giving notice in due time that the work is being disrupted and that he is thereby incurring direct loss or expense. In short, the right to claim is normally dependent on some act. Omission, or default by the client or his professional advisors, which is the direct cause of loss or expense to the contractor. It is, of course, incumbent on the contractor to take all reasonable steps to minimise any such loss.

No Entitlement to Extra Costs There are many grounds for extensions of time which do not entitle the contractor to claim extra costs from his client. Of particular importance in this category are force majeure; strikes affecting the works or the supply of materials for the works: and abnormal weather conditions. Although these factors may be wholly beyond the contractor’s control any direct loss or expense caused to him by them must be absorbed by the contractor: ‘the damage lies where it falls’, as the lawyers say. Similarly, on contracts which have a clause allowing extensions due to the inability of the contractor for reasons beyond his control to obtain materials in due time, no claim can arise.

NOTE:

References above to ‘extra costs’ do not simply mean ‘fluctuations’ - they embrace all additional costs which would become payable as damages for breach of contract if the contractor sued successfully in the Courts. Indeed, the right to claim extra costs can arise even on firm price contracts where there is a clear breach by the client (although settling the claim is normally no easy matter, particularly for a sub-contractor).

CHECK: (a) Do we, as a Company, record and promptly notify in writing reasons for delays on contracts, including those for which we are not ourselves responsible, distinguishing between those which have a financial Implication for the client and those which do not? (b) Do we quantify, record, notify and justify extra costs being incurred due to circumstances on which a right to claim can be validly based as closely in time as possible to the event causing the delay and avoid wherever possible making one all-embracing claim at the end of the job? (c) Do our staff understand that the best policy for pursuing claims – as adopted by good claims consultants - is to first establish and agree the fact of delay and the reasonableness of the money claim and only then enter into discussion about the apportionment of the respective liabilities for the delay and disruption? (The point being that otherwise arguments about liabilities tend to blur issues, to lead to the taking up of entrenched points of view, and thereby to postpone indefinitely agreement as to the facts). (d) In order to demonstrate our own reasonableness do we make clear early in any negotiations that no money claim is sought for those aspects of a period of delay where the cause of that delay is either ‘neutral’ or our own responsibility? (e) Do we also keep clearly distinct contractual claims, i.e. those based on specific rights granted in the contract document, and ‘ex gratia’ claims, i.e. those to which we are not legally entitled but for which we feel that the client has some moral responsibility.

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Breach of Performance Obligation Most construction contracts specify a date for completion of the work, and failure by the contractor to complete by the due date (as properly extended under the terms of the contract where appropriate) exposes him to a claim for damages for delay by the client. This right to damages arises because of the breach of the undertaking given by the contractor as to performance to time given on entering into the contract. The effect of an extension of time is to postpone but not to totally eliminate the date from which damages for delay become payable.

Liquidated and Unliquidated Damages Damages for delay can take one of two quite distinct forms. Liquidated damages are a genuine pre-estimate of the damage likely to occur in the event of delay, and they are agreed between the parties at the time of entering into the contract (e.g. £1000 per week of delay). In the case of liquidated damages, there is no need for the client or main contractor to prove that he has actually incurred loss - the fact of the delay is sufficient to trigger payment of the damages. Unliquidated damages are an amount to be ascertained after the delay has occurred, and in the light of the actual provable loss or expense which the delay has caused. A claim for unliquidated damages must be both ‘bona fide’ and quantified - a vague general statement that a certain sum has been incurred is not sufficient. Particular care is needed in regard to liquidated damages because of the fact that they become payable in the event of delay if the client suffers no loss (unless of course the form of contract specifically provides otherwise). Further, it is usually the case that the main contractors attempt to impose on sub-contractors the main contract rate of liquidated damages which may be out of all proportion to the sub-contractor’s stake in the contract. Although from the main contractor’s point of view, limitation of sub-contract liquidated damages to a reasonable relationship with the sub-contractor’s financial involvement in the contract is illogical, any other basis can be unfair and cause severe hardship. Similarly, a potential obligation to pay liquidated damages for an unlimited period of time can be unduly onerous. In sub-contracting generally, unliquidated damages are the most common form of damages for delay. Here the main problem is the practice of some main contractors of presenting specious and unquantified claims based on alleged delays and for sums of money to be arbitrarily withheld in satisfaction of vague ‘disruption’ costs. Wrongful withholding of damages on the basis of specious and generalised claims should be strenuously resisted by sub-contractors. If a claim is neither genuine nor properly quantified, the sub-contractor remains entitled to payment in accordance with the terms of the contract. Further, under the nominated Sub-Contract Form NSC/C, a claim for damages for delay against a nominated subcontractor cannot ‘stick’ unless the Architect has issued a Certificate of Delay. The main contractor will have to quantify his actual loss under two main headings: first any liquidated damages which he has to pay his client as a result of the sub-contractor being late, and/or second, his own disruption costs, e.g. idle plant time, Inefficient use of work force, etc. This second head is frequently abused by main contractors who attempt to charge defaulting sub-contractors with alleged extra site costs which would have been expended in any case for their own purposes.

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CHECK: (a) Do we, as a company, carefully scrutinise all tender and contract documents to establish our potential liability for damages if we should delay the job? In particular, do we take special care about main contractors’ own and usually more onerous forms of subcontract which frequently give extensive rights to the main contractor to claim against the sub-contractor? (b) Do we scrupulously observe all the requirements in the contract regarding applications for extensions of time where appropriate, so as to minimise arguments about default and our potential loss? (c) If there are liquidated damages in our contracts do we do all we can to ensure that the rate of damages bears a reasonable relationship to the value of our contract and is subject to an upper limit if we are in default? (d) If the damages in the contract are unliquidated do we: (i) insist that any claim against us is both ‘bona fide’ (true and genuine) and properly quantified? (ii) on sub-contracts under NSC/C, point out that the absence of an Architect’s Certificate of Delay negates any right to claim by the main contractor based on delay? (iii) reject outright any trumped-up attempt by a main contractor to use money to which we are entitled as a means of ‘cheap credit’? (iv) whenever we can, keep records of site progress when we are culpably late so as to establish that alleged idle or unproductive time is genuine? (v) insist that any amount withheld against a claim which we acknowledge to be valid is a reasonable figure in relation to the disruption caused, and insist on immediate payment of any amount above that figure which has been additionally held up ‘in terrorem’?

Insolvency of Main Contractor The word ‘bankruptcy’ is often used to cover two possible situations: liquidation and receivership. The two should not be confused. A liquidator is appointed with the job of winding up a company and terminating its existence: a receiver, on the other hand, has a duty to secure the company’s assets - he may later be paid off and the company resume its normal business. If, however, the company is wound up, the receiver’s authority to carry on its business is revoked. In the construction industry, we are primarily concerned with the situation which arises from the total failure of main contractors. While it is true that the ultimate client does sometimes 90 into liquidation with serious consequences for main contractors, nevertheless, the principal source of liquidations in the industry is main contractors, and the organisations must hurt are normally sub-contractors.

Avoiding the Consequences Once a main contractor has gone into liquidation, there is comparatively little the subcontractor can do to help himself. However, there is a certain amount that he can do to ensure that his loss is kept to a minimum if the worst happens. He can avoid taking up too much business with any one main contractor at any particular time. He can take up the usual trade credit references; and credit insurance is available although it is expensive. Where the identity of the main contractor is unknown at the time of tendering to an architect, consulting engineer, or Government Department the tender can be

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qualified to the effect that the sub-contractor reserves the right to amend his tender or withdraw it altogether if the identity of the main contractor (when known) is unacceptable. Then there is the question of the terms of the sub-contract once an order has been received. Although the protections are limited, the nominated sub-contractor is always more secure under the Standard Form of Sub-Contract NSC/C than under a main contractor’s own subcontract document. This Form offers some security for retention money for example; and above all its payment terms - if properly implemented - should ensure proper cash flow to the sub-contractor with a minimum of money in the main contractor’s hands, if and when he becomes insolvent. Payment terms should be scrupulously observed and there should never be more than one certificate outstanding on a contract. On high-value jobs, request wherever possible fortnightly rather than monthly certificates. On small-value jobs involving only one application for payment, press for part-payment in advance. In any event, insist on notification of the issue of certificates where the contract so provides. Cash discount should be disallowed if payment is not made within the requisite time; in serious cases work may be suspended or even terminated after due notice of non-payment. Finally, direct payment by the client on default by the main contractor should be requested where the contract so provides. The last steps to minimise the impact of liquidation involve getting in as much of the outstanding money as possible after the work is complete, and thus when most of the ,sanctions’ are no longer available to the sub-contractor. Application should be made wherever appropriate for early release of retention money, particularly on nominated subcontracts. If there is delay over final settlement of the contract, press for payment of all outstanding monies which are not in dispute.

CHECK: (a) Do we as a company observe normal commercial prudence and check out the credit status of main contractors whose identity is disclosed to us at time of tender? (b) If the main contractor is unknown when we tender, do we qualify the tender to the effect that if the main contractor, when appointed, is unacceptable to us, we reserve the right to withdraw? (c) Do we ensure that the standard negotiated forms of sub-contract are used wherever possible? (d) Do we rigorously enforce the payment terms during the course of the contract (e.g. disallowing cash discount where relevant); and where appropriate insist on notification of the issue of payment certificates? (e) Once the contract is over, do we use every argument open to us to secure as much of the balance owing to us at the earliest possible date, particularly release of retentions?

When Liquidation Occurs Once the worst has happened and the main contractor has gone Into liquidation, the subcontractor’s rights are severely limited: he is an ordinary creditor of the bankrupt firm and as such strictly ranks for dividend along with all the other unsecured creditors. Thus the first step regardless of any other action taken is to register with the liquidator all monies owing on the job. Where the sub-contract is not yet complete, the client will normally wish to retain the present sub-contractor to complete the remaining work. At this stage the sub-contractor is in a strong position to re-negotiate the contract on advantageous terms (he is now no longer bound by the original price, nor obliged to do any further work), and to ask for a direct contract for completion of the work. There is, thus, an opportunity to recoup at least some of the money which may have been lost as a result of

Chapter 25

19

Check List the liquidation - an advantage which obviously does not wash where the sub-contract has been completed at the time of liquidation.

CHECK: (a) When a liquidation occurs, do we immediately register a claim as a creditor with the


liquidator? (b) If asked by the client to complete the sub-contract do we re-negotiate the price on as favourable terms as possible and request a direct contract with direct payment for the remainder of the work?

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Chapter 25

APPENDIX A


Amendments to JCT 80 Thirteen amendments were made to JCT 80. These were:

Amendment 1 This was made in 1983 and dealt with passing of property. It was made following the decision in the case of Dawber Williamson v Humberside County Council (1979) and provided that where the employer has paid the main contractor for goods and materials on site before they are fixed, property in those goods and materials passed to the employer, and the sub-contractor expressly undertook not to deny the employees title. A similar clause appeared in both the nominated and domestic sub-contract forms. The result of this was that if the main contractor went into liquidation before he pays the sub-contractor, the subcontractor bears the loss, and the employer does not have to pay twice for the goods. Amendment 2 issued on November 1986 is a comprehensive redrafting of the insurance provisions. taking them from a traditional “fire and special perils” basis to the more normal “all risks” basis. It also tightens up the drafting to make it absolutely clear that contractors and sub-contractors are not responsible for damage due to the “Specified Perils” even if caused by their own negligence. Amendment 3 published in March 1987, applies to the without quantities versions of JCT 80 only. It introduces schedules of work and a contract sum analysis as new methods of pricing. Amendment 4 was issued in July 1987, and makes some twenty-three miscellaneous amendments to the contract. A number of these are minor drafting matters. The most significant changes are: 1.

In the Local Authorities versions. the Introduction of the term “Contract Administrator” in place of “Supervising Officer”.

2. A new right for the employer to defer giving possession of the site for up to six weeks. Exercise of this power entitles the contractor to an extension of time, and loss and expense. 3. A new timetable for the calculation of the final account. Amendment 5 was published in March 1988, and gives the employer through his architect radical new powers to deal with defective work. They include free opening up and testing of similar work where a defect has already been revealed, the power to allow defective work to remain, and the power to order free variations consequent on either removing or retaining defective work. Amendment 6 issued in September 1988 introduces a new set of JCT arbitration rules, and provides that all arbitrations under the JCT forms must be conducted in accordance with them. The new rules provide for three types of arbitration: full arbitration. arbitration on the basis of documents only and arbitration on the basis of oral evidence. Amendment 7. also published in September 1988, provides for the use of the new standard method of measurement SMM7. It makes a number of changes to the valuation provisions necessitated by the introduction of two new concepts: provisional sums for defined work and approximate quantities in an otherwise firm bill. Amendment 8 was published in April 1989, and introduces a new. optional method of dealing with VAT, whereby the Employer pays a single figure inclusive of VAT in respect of each interim certificate. The new procedure was introduced in the light of the imposition of VAT on all non-domestic new

Appendix A

1

Appendix A


buildings in April 1989. which meant that many more contracts would be wholly standard rated for VAT. Amendment 9, issued in July 1990 makes seven minor drafting amendments to the contract. the most significant of which is to take account of the decision in Greater Nottingham Co-operative Society Ltd v Cementation. Amendment 9 makes it clear that the contractor must carry out his work in a proper and workmanlike manner. If he does not, the Architect has the power to order free variations which are reasonably necessary as a consequence of that failure. Amendment 10, issued in March 1991, completely revises the procedure for the nomination of sub-contractors, although it does not change the liabilities of the various parties which arise out of a nomination. As well as amending the nomination procedure in clause 35 of JCT 80, new forms for use on nominated sub-contracts were also issued as part of Amendment 10, namely: N S C / T – a standard form of tender NSC/A – articles of agreement NSC/C – nominated sub-contract conditions NSC/W – an employer/nominated sub-contractor agreement NSC/N –

nomination instruction.

Amendment 11, issued in July 1992, amends the clauses dealing with determination. The JCT intends to use these revised provisions as a model for the determination clauses in the other JCT forms. Although there are a large number of changes in the drafting, Amendment 11 introduces only one major change of principle. This is the replacement of the automatic determination of the contractor’s employment in the event of insolvency proceedings which may result in the survival of the company (e.g. receivership. the appointment of an administrator or a composition with his creditors) by an option for the employer to determine. Amendment 12 was published in July 1993 and adds a new clause 42 to the contract dealing with ‘performance specified work’, which is work designed by the contractor to meet a performance specification. Amendment 13, issued in January 1994, introduces new arrangements for the pre-agreement of the valuation of variations. A new clause 13A permits the architect to state in his instruction that he requires a quotation for the varied work before it is carried out, which will include not only the value of the varied work itself, but also the extension of time the contractor requires and any loss and expense. The contractor has an absolute right to refuse to provide a quotation if he would prefer the variation to be valued in the conventional manner after the work has been carried out.

Amendments to JCT 80 - Sub-Contracts Nominated Sub-Contracts When JCT 80 was produced, it was accompanied for the first time by a comprehensive set of JCT documents for use on nominated sub-contracts. Previously, such documents had been produced by the builders’ and sub-contractors’ representative bodies. Prior to the issue of Amendment 10 to JCT 80, there were two methods of nomination: the basic method and the alternative method.

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Appendix A

Appendix A Where a sub-contractor was nominated under the basic method. the use of the following documents was mandatory:


NSC/1: the standard form of tender NSC/2: a standard Employer/sub-contractor agreement NSC/3: a standard form of nomination instruction NSC/4: the standard form of nominated sub-contract Where a sub-contractor was nominated under the alternative method, the following documents could be used (with the exception of the sub-contract NSC/4A, which was mandatory). NSC/1a: standard form of tender NSC/2a: standard form of Employer/sub-contractor agreement NSC/3a: nomination instruction NSC/4a: standard form of sub-contract Several amendments were made to the standard forms of nominated sub-contract. NSC/4 and NSC/ 4a to take account of the amendments to the main form. As the numbering sequence is slightly different from the main form amendments. they are listed below. Amendment 1, published in April 1983. provides for sectional completion where appropriate. Amendment 2 was also made in 1983 and steps down the amendment described above. Amendment 3, issued in November 1986, passes down the insurance amendments made to JCT 80 by Amendment 2. These provisions are described in detail in Chapter 17. Amendment 4 was published in July 1987 and steps down the relevant parts of the miscellaneous changes introduced by Amendment 4 to JCT 80. It also substantially redrafts the set-off and adjudication clauses in the sub-contracts. Amendment 5 came into effect In March 1988, and steps down Amendment 5 to the main form giving the architect radical new powers to issue instructions regarding defective work. Amendment 6, issued in September, 1988 introduces the new JCT Arbitration Rules. Amendment 7, also published in September 1988, provides for the use of SMM7. Amendment 8 was made in April 1989 and introduces the new optional VAT clause. Amendment 9, issued in July 1990 steps down the relevant aspects of the miscellaneous amendments made to JCT 80 by Amendment 9. As mentioned above, the nominated sub-contract documents were re-issued in a new format and with new titles as part of Amendment 10 to JCT 80. Clause 35 of JCT 80, as amended by Amendment 10, now makes the use of the following documents mandatory whenever a nominated sub-contractor is appointed: NSC/T: standard form of tender NSC/A: articles of agreement NSC/C: standard sub-contract conditions. which are incorporated by reference into NSC/A NSC/W: standard form of employer/sub-contractor agreement NSC/N: nomination instruction.

Appendix A

3

Appendix A NSC/A and NSC/C taken together replace the forms of sub-contract NSC/4 and NSC/4A.


They reflect amendments 1 to 9 which were made to those contracts. Although their content is virtually identical to NSC/4, the conditions in NSC/C have been reorganised into a section - headed format, and therefore all of the clause numbers have changed. Since it was first published in 1991. the nominated sub-contract conditions NSC/C have been amended twice: Amendment 1 published in July 1992 amends the determination provisions and steps down. where relevant, Amendment 11 to JCT 80. Amendment 2 published in January 1994 steps down Amendment 13 to JCT 80 by providing for the pre-agreement of the time and cost consequences of variation instructions.

Amendments to DOM/1 DOM/1 has also been amended to take account of the main form amendments, although at the time of writing these have rather fallen behind the main form changes. To date, the following amendments have been made: Amendment 1 is the “Dawber Williamson” amendment. Amendment 2 reflects the changes to the insurance clauses in the main form. Amendment 3 steps down the miscellaneous changes in Amendment 4 to the main form, and like NSC/4 also amends the set-off and adjudication clauses. Amendment 4 provides for the incorporation of schedules of work and a contract sum analysis for use where the main contract is the Without Quantities version of JCT 80 incorporating Amendment 3. Amendment 5 steps down Amendment 5 to the main form by giving radical new powers in the event of the sub-contractor executing defective work. Amendment 6 provides for the introduction of the JCT Arbitration Rules. Amendment 7 provides for the use of SMM7. Amendment 8 introduces the new optional VAT provisions. Amendment 9 steps down the miscellaneous amendments in Amendment 9 to the main form.

Amendments to JCT 84 - Intermediate Form Several amendments have also been made to the Intermediate Form since 1984. They may be summarised as follows: Amendment 1 issued in November 1986 amends the insurance provisions along the same lines as Amendment 2 to JCT 80. Amendment 2 was published in September 1987 and made some very minor amendments to the arbitration and determination clauses. Amendment 3, issued in July 1988, made a number of miscellaneous amendments similar to those made to JCT 80 by Amendment 4 and incorporated the JCT Arbitration Rules. Amendment 4 was made in September 1988, and provides for the use of SMM7. Amendment 5, published in April 1989 introduced the new optional VAT arrangements.

4

Appendix A

Appendix A Amendment 6 was published in July 1991 and adds the miscellaneous drafting changes made to JCT 80 by Amendment 9 to JCT 80.


Amendment 7, published in April 1994 introduces the new model determination clauses into IFC 84.

Amendments to JCT 84 - Intermediate Form - Named Sub-Contracts Unlike NSC/4, the amendments to NAM/SC follow precisely the amendments made to the IM 84 main form save that Amendment 5 amends the set-off and adjudication provisions which. of course, only apply to the sub-contract, so they are not separately scheduled here.

Domestic Sub-Contracts Five amendments have been issued to IN/SC: Amendment 1 reflects the changes to the insurance clauses in the main form. Amendment 2 introduces minor amendments to provisions relating to arbitration and determination. Amendment 3 steps down the relevant miscellaneous changes in Amendment 3 to IFC 84. Amendment 4 allows for the use of SMM7. Amendment 5 amends the VAT provisions.

Amendments to JCT 81 - With Contractor’s Design The following amendments have been made to JCT 81 since its publication: Amendment 1 issued in November 1986 incorporates the insurance amendments. Amendment 2 published July 1987 sets out the relevant miscellaneous amendments which were made to JCT98 by Amendment 4. Amendment 3 made in February 1988 extended the powers of the Employer in relation to defective work along similar lines to Amendment 5 to JCT98. This amendment also includes seven optional supplementary provisions which were drafted at the instigation of the British Property Federation. They include provision for instant adjudication on certain matters, give the Employer the power to name a sub-contractor in his requirements. and require the contractor to submit estimates of the cost and time implications of changes. Amendment 4 issued July 1988 omits the “Fair Wages” clause, makes minor amendments to the payment provisions and provides for the use of the JCT Arbitration Rules. Amendment 5 made in April 1989 incorporates the new optional VAT clause. Amendment 6 issued November 1990 introduces amendments similar to those made by Amendment 9 to JC7 80. Amendment 7 was published in January 1994 and incorporates the new model determination clauses into JCT 81.

Amendments to DOM/2 DOM/2 has been amended six times since it was originally published: Amendment 1 reflects the changes to the insurance clauses in the main form.

Appendix A

5

Appendix A Amendment 2 steps down the relevant changes made to JCT 81 by Amendment 2.


Amendment 3 steps down the clauses extending the powers of the Employer if defective work is executed. Amendment 4 omits the fair wages clauses. Amendment 5 introduces clauses allowing for the use of SMM7. Amendment 6 amends the VAT clauses.

Amendments to JCT Management Contract The Management Contract has been amended three times since publication: Amendment 1 in July 1988 provides for the use of the JCT Arbitration Rules. Amendment 1a issued September 1988 allows for the use of SMM7. Amendment 2 published in April 1989 includes the new optional VAT clause and omits the “Fair Wages” provision.

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Appendix A

Contractual Hand Book

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