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CONTRACTUAL HANDBOOK
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
for
Steelwork Contractors
and
Edited by
BCSA
The British Constructional Steelwork Association Ltd.
EVERSHEDS
Business Lawyers in Europe
Eversheds
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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 Associations 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 postroom@steelconstruction.org 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
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Chapter 1 ................................................................................................ Formation of Contracts Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 ..................................................................................................... Classes of Contract ....................................................................................... Standard Forms of Contract ................................................................................................... Tendering Procedures ........................................................................................... Onerous Contract Clauses ..................................................................................................................... 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
CHAPTER 1
FORMATION OF CONTRACTS
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A contract is an agreement between two parties which is legally enforceable.
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.
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.
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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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Formation of Contracts
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.
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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-contractors 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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Formation of Contracts
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.
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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. 5. The Steelwork Contractor acknowledges receipt of the order and begins work. (Acceptance of Counter-Offer). 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).
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In the above example, the Steelwork Contractor could have started work without tying himself to the main contractors 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 contractors terms. Main contractors 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 contractors 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 sides 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 buyers 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 buyers terms, notwithstanding the accompanying letter.
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Formation of Contracts
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 Sauters own terms and conditions had become part of the contract.
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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 Goodmans 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 employers or main contractors 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 writers 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.
Chapter 1
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.
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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 Contractors 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 Contractors 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.
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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 contractors 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 contractors or employers 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.
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Formation of Contracts
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.
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Chapter 1
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:
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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).
10
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Formation of Contracts
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 contractors 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.
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Chapter 1
11
CHAPTER 2
CLASSES OF CONTRACT
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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.
Chapter 2
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 contractors 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.
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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. Architects 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.
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.
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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:
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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.
Chapter 2
CHAPTER 3
Chapter 3
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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
Chapter 3
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Chapter 3
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Chapter 3
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Chapter 3
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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 Advanced payment to the Contractor
Option K Multiple currencies (not to be used with Options C,D,E and F) Option L Sectional Completion Option M Limitation on the Contractors 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 Retention (not to be used with Option F)
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
Chapter 3
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Chapter 3
CHAPTER 4
TENDERING PROCEDURES
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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.
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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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
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COMPILING TENDER LISTS 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.
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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.
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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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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-contractors 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.
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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.
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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 architects 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.
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Chapter 4
Tendering Procedures
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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 JCTs 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) (ii) Canteens, sanitary accommodation and first aid accommodation. 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) (vi) hoists and scaffolding for the general use of Works Contractors. 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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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 Contractors 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.
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Chapter 4
CHAPTER 5
Chapter 5
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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.
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 Contractors 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.
Chapter 5
Pay-When-Paid Clauses
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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-contractors own negligence. Under a standard form the sub-contractor is often protected by the main contractors 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-contractors 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-contractors 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
Chapter 5
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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.
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).
Chapter 5
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... 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 consultants 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.
Chapter 5
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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:
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.
Chapter 5
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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 contractors 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 persons (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) dont 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.
Chapter 5
CHAPTER 6
CERTIFICATES
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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.
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Certificates
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Certificates
event extend to the design obligation of the Contractor under the JCT (With Contractors Design) Form - see London Borough of Barking and Dagenham v Terrapin Construction Limited (2000).
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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.
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 contractors disadvantage for the certificate to be withheld, and to the Employers 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.
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Chapter 6
Certificates
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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 Engineers 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 contractors liability to liquidated damages and obligations to insure.
Chapter 6
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 contractors 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).
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Chapter 6
Certificates
the amount finally due under the contract and the balance outstanding, which balance shall be paid within 28 days. The Engineers 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.
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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 Contractors Delay
Under clause 24 of JCT98 it is a condition precedent to the Employers 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.
Chapter 6
CHAPTER 7
Chapter 7
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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.
Chapter 7
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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.
Chapter 7
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Chapter 7
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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 contractors 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.
Chapter 7
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(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.
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):
Chapter 7
Retention
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Since July 2000, BCSA members have not accepted deduction of cash retentions on any steelwork contracts. The BCSAs 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 Contractors 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.
Chapter 7
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There are two particular misconceptions: first, that the sub-contractors 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-contractors 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 architects 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
Chapter 7
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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 contractors 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 subcontractors 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.
Chapter 7
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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.
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Chapter 7
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.
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Chapter 7
11
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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.
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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Chapter 7
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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 Engineers 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.
Chapter 7
13
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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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Chapter 7
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(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.
Chapter 7
15
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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
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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Chapter 7
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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 Architects 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-contractors 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
Chapter 7
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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.
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CHAPTER 8
FLUCTUATIONS
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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.
1. Formula Fluctuations
Formulae to measure fluctuations were first developed in the mid-1970s 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
Chapter 8
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).
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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.
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Fluctuations
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: Employers Liability Insurance; National Insurance; annual holidays and public holidays; Sick Pay; and EITB Levy.
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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).
Chapter 8
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The rate must not exceed 10% and no deduction should be made where the Employer is not a local authority.
(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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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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
(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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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.
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(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.
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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-contractors 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.
(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 contractors or sub-contractors applications for an extensions of time.
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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 Users 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.
Chapter 8
CHAPTER 9
VARIATIONS
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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 Architects or Engineers 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).
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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 Architects 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 contractors 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 Architects 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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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.
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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
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Architects 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 Architects instructions passed on by the main contractor or the contractors 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-contractors 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 contractors directions as nominated sub-contractors have to object to Architects instructions.
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Variations
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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.
Works Contract/2
Works Contract/2 provides for two types of instructions to be given to the Works Contractor:(i) instructions, which are Architects 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 Contractors 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.
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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 Contractors 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.
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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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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.
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It is executed under similar conditions; and it does not significantly change the quantity.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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 valuers perception of a fair rate rarely coincides with the sub-contractors. 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.
(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 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.
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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;
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(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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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).
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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
10
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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.
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11
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.
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Works Contract/2
Works Contract/2 provides for payments to be made to Works Contractors under Architects 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.
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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.
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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 Contractors 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- contractors 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.
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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
Chapter 10
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Programme
There is often considerable confusion over the status of programmes - particularly the main contractors 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 contractors 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 contractors 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 employers 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 employers rights to claim liquidated damages by preventing time from becoming at large.
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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 Contractors 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.
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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.
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 subcontractors negligence, as it is a proviso to the sub-contractors 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
Chapter 10
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5. Architects Instructions
If the contractor is delayed by complying with architects 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.
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 contractors 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.
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9. Employers 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.
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12. Access
The employer is obliged to provide access to the site for the contractor over any land which is in the employers 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.
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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:
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Architects Instructions
If compliance with an architects 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.
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 architects 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.
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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).
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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; Engineers 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.
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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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 contractors 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.
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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 Contractors 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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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
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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.
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-contractors 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 contractors 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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Costs of Delay
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 contractors 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 subcontractors 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-contractors 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.
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Costs of Delay
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.
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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.
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 Contractors 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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Costs of Delay
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 Contractors obligations in respect of liquidated damages.
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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-contractors 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 contractors 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 contractors 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.
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Costs of Delay
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.
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(v)
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.
(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 contractors 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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Costs of Delay
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(x)
This right to recover loss and expense applies only to sub-contracts, not main contracts, as it is consequent upon the sub-contractors 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.
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Costs of Delay
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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.
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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.
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.
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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 Engineers 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-contractors risk.
10
Chapter 11
CHAPTER 12
CLAIMS
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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.
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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 contractors 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.
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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 contractors 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 contractors 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 contractors need for the notice or information - although ignorance
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of the terms of the contract will be no excuse, only ignorance of facts which triggered the requirement for a notice or claim.
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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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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.
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.
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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.
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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 claimants business as whole rather than simply to the contract in question. The Emden formula is: h 100 where: h c = the head office percentage, normally arrived at by dividing the total costs of the organisation as a whole by the total turnover = the contract sum x c cp x pd
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).
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In general, an overhead percentage based on detailed costs and an auditors 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.
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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(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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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.
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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)
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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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.
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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
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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.
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The Architects 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.
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The domestic sub-contractors 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:
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(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 contractors 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.
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modify it on receipt of the Contractors objection. The Contractors 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.
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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 contractors advantage.
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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 contractors 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 Employers 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.
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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 Engineers 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.
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(ii)
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.
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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-contractors liability to remedy defects in his work will not end until the main contract defects liability period has expired.
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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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The effect of the final certificate on liability for defects and related contractual provisions are discussed below in relation to the standard forms.
JCT Sub-Contracts
Sub-contractors liability under the JCT forms is the same as the main contractors, 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.
CECA Sub-Contract
The sub-contractors 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)
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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10
Chapter 13
CHAPTER 14
DESIGN LIABILITY
Introduction
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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.
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Design Liability
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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.
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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)
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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Design Liability
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 employers 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.
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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 employers 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:
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liability for all of the design (even where the majority of it was actually carried out by the employers 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.
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 subcontractors negligence.
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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 elses 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. <Body texThe solution which has been adopted to this problem by employers, purchasers, tenants and funders, who may not have a contract with the designers and contractors, is to require a collateral warranty to create the vital contractual link which will allow them to recover economic loss if any aspect of the building proves to be defective. The character of these warranties, and some of the drawbacks of providing them, has been discussed above.
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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 elses 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 partys 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.
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CHAPTER 15
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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.
Chapter 15
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Chapter 15
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One important factor in a buyers 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.
Chapter 16
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Chapter 15
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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.
Chapter 15
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Chapter 15
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Chapter 15
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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 Employers 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.
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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.
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
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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. <Body texThe Act sets out rules for calculating limitation periods in actions for negligence where the damage is latent (i.e. hidden) and does not involve personal injury. When setting limitation periods, it is important to strike a fair and reasonable balance between the rights of the injured party to redress and the need for finite legal liability. The Latent Damage Act has been criticised both for failing to strike this balance and for the complexity of its provisions. Under the Act, the limitation period for actions in negligence involving latent damage is: whichever expires the later of six years from the date the damage occurred to the building (described in the Act as "the date the cause of action accrued) or three years from the date the person who has the right to sue had knowledge of the material facts relating to the damage or should have been aware of those facts subject to a 15 year long stop provision, which runs from the date of the negligent act after which no legal action may be taken. Knowledge in this context includes that which might reasonably have been acquired from observable or ascertainable facts, including facts ascertainable by an appropriate expert provided it was reasonable to expect the injured party to employ an expert. The rules are perhaps best understood by applying them to practical examples. The facts set out below are based on a leading case on limitation periods, Pirelli v Oscar Faber & Partners (1983) Oscar Faber, a firm of consulting engineers, were engaged by Pirelli to design a new chimney, the chimney was built in July 1969. In August 1970, damage in the form of cracks in the inner lining of the chimney appeared, but the damage was not discovered by Pirelli until November 1977. Applying the rules under the Act, (which was not then in force) Pirelli would have had six years from the date the damage occurred to the building in which to bring legal proceedings against Oscar Faber - in other words, they would have had until August 1976 to issue a writ. However, assuming they could not with reasonable diligence have discovered that there were cracks in the inner lining of the chimney until they actually did so, in November 1977, under the Act Pirelli would have had a further three year period beginning in November 1977. Accordingly, they would have been able to sue or arbitrate until November 1980.
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Limitation Periods
However, Oscar Fabers 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 Fabers 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.
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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.
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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.
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Summary
The effect of expiry of limitation period The expiry of a limitation marks the end of a persons 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.
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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
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Two types of insurance relevant to building and civil engineering contracts are liability insurance (which covers the insureds legal liability to pay damages for personal injury or damage to other peoples 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 Employers 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
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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).
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 contractors 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 policys 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 contractors obligation under Clause 22A. 1 to keep the policy in force until that date.
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Where the contractors 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.
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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.
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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 Employers 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 contractors 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-contractors own negligence. The Specified Perils are:
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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: or the date of determination of the employment of the contractor whether or not the validity of that determination is contested. the date of practical completion of the sub-contract works (as defined in the relevant clause),
After the terminal dates, damage to the works by a specified peril caused by the sub-contractors negligence will be a third party risk which should be covered by the nominated sub-contractors 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).
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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 Employers or contractors 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.
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-contractors 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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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-contractors 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.
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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 contractors 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 BTs property. Thomson argued that BTs 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-Ops insurers, acting through rights of subrogation, could not pursue (in the Co-Ops 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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(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.
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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 contractors 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 Employers 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-contractors 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.
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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.
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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 Contractors 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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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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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 contractors 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 companys 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 contractors account with the sum they have paid under the bond. Banks treat bonds as an extension of the contractors overdraft facility, and therefore the bond effectively ties up a proportion of the contractors overdraft facility until it is released.
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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.
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 contractors liability over a certain period to remedy defects in the work.
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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 Employers 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 subsidiarys 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 contractors 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 NJCCs 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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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 solicitors 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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Barristers advise on any particularly difficult areas of law (through the medium of a Counsels 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 Queens 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.
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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the mediator is an independent third party, preferably trained and experienced in mediation. the mediators 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
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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 adjudicators 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 Schemes 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 adjudicators 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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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 adjudicators 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 adjudicators 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 adjudicators 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 contractors 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 adjudicators 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 adjudicators 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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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 Adjudicators decision under the Scheme The deadline for the adjudicators 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.
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Advantages of adjudication
Speed Should be cheaper than arbitration or litigation In practice, the parties often will accept the adjudicators decision as resolving their dispute.
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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 Arbitrators 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.
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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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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 Courts 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: v The early identification of issues. 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 Courts control of the parties dispute resolution is much greater. Once proceedings have been issued, the Court will
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Fast track:
Multi-track
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 Queens 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.
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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 adjudicators 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 partys 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.
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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 Defendants 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 Defendants 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
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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 arbitrators 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
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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 contractors 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.
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 companys affairs.
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Winding up - Liquidation
Liquidation is the situation in which a companys 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)
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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 companys property. (b) Cost of the Winding Up These will be all the expenses of the winding up, including the liquidators 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).
(i)
Determination
Under the determination provision in JCT98, the main contractors 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 employers obligation to make further payments are suspended.
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(ii)
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 subcontractors 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-contractors 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-contractors plant and equipment he will have to obtain the sub-contractors 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 contractors 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.
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(iv)
The employer is not bound to pay the insolvent main contractor anything at all until the works are completed.
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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.
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 Contractors administrator, this did not invalidate the Employers right to retain possession of the plant and materials and use them to complete the works.
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(i)
Determination
Under NSC/C and NAM/SC the sub-contractors 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-contractors employment will determine only when the main contractors 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-contractors 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.
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CHAPTER 21
Contract Documents
As well as the contract conditions themselves, there are three sets of documents which must be produced by the parties: the Employers Requirements, the Contractors Proposals and the Contract Sum Analysis.
Design Obligations
The contractors 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 Employers 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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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.
Employers 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 Employers 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 Employers 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 Employers 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 Employers 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 contractors 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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Extensions of Time
The rules relating to extensions of time in WCD98 are the same as those in JCT98, with two important modifications:
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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 Employers 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 Employers Requirements will indicate to the contractor which of these alternatives is to be adopted.
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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 contractors 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.
An undertaking by the sub-contractor that he will not challenge the employers 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
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The following bodies are members of the SBCC: v 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 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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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.
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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).
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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Chapter 22
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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.
Chapter 22
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Chapter 22
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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.
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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 designers 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.
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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 builders 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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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
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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 contractors 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
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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Nomination
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Chapter 23
Nomination
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 clients) nominee.
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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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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.
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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.
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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
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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:
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(i) where a nominated sub-contractors 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-contractors employment was determined due to the main contractors 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.
Chapter 23
CHAPTER 24
COMPETITION LAW
Introduction
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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.
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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).
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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. 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
Chapter 24
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.
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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.
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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.
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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.
Chapter 24
CHAPTER 25
CHECK LIST
Tenders
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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 nobodys 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?
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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?
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Tender Documents
Many reports on the construction industrys 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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Check List
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.
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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.
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?
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
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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 contractors 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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Check List
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.
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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?
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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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 contractors 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 contractors 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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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.
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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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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.
Insurance
Broad indemnity (including any costs of legal proceedings) of main contractor against liabilities not within the sub-contractors 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 adjudicators 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 designers errors or omissions: or stating that the contractor is to include in his
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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?
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
(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?
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Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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 Architects 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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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 contractors 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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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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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
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Check List CHECK: (a) Are we as a company aware that under all conventional fluctuations clauses there is
an element of shortfall in cost increase recovery which must be covered wherever possible elsewhere in our tenders?
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
(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?
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
(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?
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-Contractors case as well as the Main Contractors 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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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?
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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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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). 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.
CHECK: (a) Do we, as a Company, record and promptly notify in writing reasons for delays on
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Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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Check List 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 Architects 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?
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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 contractors 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 contractors 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.
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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?
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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?
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
(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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APPENDIX A
Amendments to JCT 80
Licensed copy from CIS: edmundn, BAM Nuttall Limited, 29/06/2012, Uncontrolled Copy.
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
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.
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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 contractors 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.
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
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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
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.
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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.
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.
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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 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
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.
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Amendment 4 omits the fair wages clauses. Amendment 5 introduces clauses allowing for the use of SMM7. Amendment 6 amends the VAT clauses.
Appendix A