7 ISSUES REGARDING CONTRACTORS’ RIGHTS AND OBLIGATIONS UNDER STANDARD FORM AGREEMENTS
It often seems that there are as many standard forms of construction contract as there are builders – the Royal Institute of British Architects (RIBA), the Royal Institute of Chartered Surveyors (RICS), the Institution of Civil Engineers (ICE), and the International Federation of Consulting Engineers (FIDIC), just to name a few, have their forms, and the list continues to grow. The use of standard forms has many benefits, which include not having to negotiate individually each and every contract, along with a rather large amount of common knowledge about the contracts in the general construction public, the legal profession and the courts. Most importantly, the majority of standard forms have attempted to equalise the elements of risk between the employer and the contractor. A study1 by the Dispute Board Federation (Geneva) found that close to 95 per cent of the world’s infrastructure work, i.e. bridges, dams, highways, etc., used standard form agreements. Of the many forms of construction contract that are available the most widely used are the JCT, NEC and the FIDIC forms of contract. Generally, the various standard forms can be segregated into four main categories: (1) “build-only” forms, which are used for both building and civil work; (2) forms for “design and build” projects in both the building and civil areas; (3) forms for either mechanical, electrical and/or process facility projects; and (4) forms for small projects, which are sometimes referred to as “short forms”.2 The major forms of standard contract where the employer does the design and the contractor does the building3 are the “JCT Standard Building Contract”, the “JCT Intermediate Building Contract”, the “JCT Management Contract”, the “ICE Form” (7th Edition),4 the “FIDIC Red Book”, the “NEC3 Engineering and Construction Contract” and the “GC/Works/1 Building and Civil Engineering Form”. The other end of the spectrum includes the short forms for relatively small capital value building or engineering work. These “short form” contracts can also be used for larger projects, especially so if the work contemplated includes simple or repetitive work and/or work of short duration. In these forms, the contractor is typically given the design by the employer and then constructs the Works in accordance with that design. These can also be used for situations involving contractor-designed works. The short forms include: the “JCT Minor Works Building Contract”, which is used for building works only; the “ICE Short Form”, for civil engineering work only; and the “FIDIC Short Form”, also known as the Green Book, for building and/or civil engineering works. In addition to the major forms of standard contract for where the employer does the design and the contractor does the building,5 there are also mechanical, electrical and process plant forms where the Works are to be designed by or on behalf of the employer, but the Works may also include some elements of contractor-designed work. These forms include the “FIDIC Plant and Design-Build”, also known as the Yellow Book, and the form published by the Institution of Chemical Engineers, the “IChemE Lump Sum”, also known as the “Red Book”, (not to be confused with the FIDIC Red Book). Here, the contractor both designs and constructs plant or other works such as civil and/or mechanical or electrical works. Most formats of design-build contract provide that, while the employer will provide its ideas and requirements regarding the finished project, it is the contractor who will develop this into the actual detailed design upon which the project will be constructed. Thus, it is the contractor who assumes the risk and design responsibility, and this is usually in return for a lump sum. With the design comes responsibility, which carries with it the requirement that the contractor uses reasonable care generally, especially in the design, and that the finished project is fit for the purpose intended by the employer. This applies to “turnkey” types of project and EPC (“engineer, procure and construct”) contracts. Here, the contractor, with little or no involvement by the employer, takes full responsibility to determine the necessary elements of the project, completes the design (or has it completed), and finally procures, installs and commissions the plant thus leaving the employer with a fully equipped and operational facility ready to commence operations. The issue that arises in this context relates to the level of care that the contractor is required to adhere to. As mentioned earlier in this book, “reasonable care and skill” is the duty imposed by the court on professional designers such as architects and engineers. Whether this level has been met is subject to proof and is based upon what a reasonable designer in the same position would have done in similar circumstances. If such a “reasonable third-party designer” would not have acted in the same way, then the designer has committed professional negligence. Only if “professional negligence” can be proven is the consultant liable for breach of duty. As mentioned earlier, the difference between professional negligence for failing to use reasonable care and skill and fitness for purpose is that, under fitness for purpose, the standard required to prove professional negligence is only that the final product built by the contractor is not fit for what the employer originally wanted and what the contractor so understood. The standard design-build forms also provide different standards of care on the part of the contractor. So, for example, while “fitness for purpose” is imposed upon the contractor in the “FIDIC Plant and Design-Build Yellow” book and in the “FIDIC Turnkey Silver” book.6 This has now changed, and whilst the old FIDIC Yellow Book (the 1999 edition) contained an express fitness for purpose provision (Sub-Clause 4.1), the 2017 edition of the FIDIC Suite of Contracts has retained and modified this so that the “purpose” must be set out in the Employer’s Requirements (as compared to just anywhere in the contract) and adds the additional requirement that if no such purposes are set out then the Works must be “fit for their ordinary purposes”. As to the other two new versions of the FIDIC Red and Silver Books, you find a similar provision in only the Silver Book but not the Red Book, which keeps its former language dealing with any design work, with the requirement that fitness for purpose shall be “as specified in the Contract”. This more specific obligation for fitness for purpose is now in the Yellow and Silver books, and is dealt with by the addition of the need for the contractor to indemnify the employer for any failures of either the Works or any item of plant not being fit for purpose (see Sub-Clause 17.4). As to the other forms of standard contract the standard of “reasonable care and skill” is imposed in several of the JCT contracts, such as the Major Projects form contract and the Design-Build contract. This standard is also imposed in the ICE Design and Construct form. Indeed, many of the form contracts provide that the architect/engineer is the one who prepares the design drawings and specifications under the employer’s direction, with the result that the contractor has no responsibility for the design of the Works save for those matters dealing with selection of materials, where the materials selected must be fit for their purpose – thus, the contractor is to build only what is delineated in the contract documents. In Rotherham v Haslam,7 Haslam was a sub-structure contractor for different phases of the new civic offices for Rotherham and was to provide imported fill material to the level approximately of the underside of the ground floor slab. The specification dictated that “granular hard-core shall be graded or uncrushed gravel, stone rockfill, crushed concrete or slag or natural sand or a combination of any of these”. Years later, damage to the building was found to have been caused by the expansion of the underlying imported fill materials resulting in cracking of the reinforced concrete slabs. It was logical here for the subcontractor to use the local steel slag produced in Rotherham as it was a steel-producing area, but what the parties did not know at the time was that such fill would be entirely unsuitable in a confined location under a concrete slab. Only later was it made known to the industry that steel slag could expand when wet and that it was not to be recommended for fill or hard-core purposes. The lower court took the position that the bill items left unspecified matters regarding the suitability of fill materials. Accordingly, such unspecified matters, such as the expansive or inert qualities of a proposed material, were thus left to the judgment, skill and knowledge of the contractor and it became the contractor’s responsibility to select and supply the most suitable material for use as fill material in the confined conditions beneath the ground floor slab. The court’s position was that whenever there were gaps to be found in a specification, the employer relied upon the skill, care and judgment of the contractor and, accordingly, the contractor, by implication, warranted the fitness for purpose of the finished item. The problem is that, while this may be the case where the contractor is hired for the design, here it was the employer and its professional designers who designed and specified the product(s) to be used. On appeal the Court of Appeal looked at this critical question as to whether Rotherham was entitled to rely on the contractors’ skill and judgment. The Court of Appeal found that the Bills of Quantities contained all the stipulations that the architect thought necessary to ensure the provision of suitable fill material. To the extent that there were no stipulations and the supplier was free to choose, the freedom was accorded not in order to enable the supplier to exercise some supposed skill and judgment but because the architect believed that no further stipulations were necessary. In his judgment the extent of the contractors’ obligation was to provide hard-core answering to the description in the Bills of Quantities. The court further held that the contractors were not designers, and as such the employer was not justified in relying on their skill and judgment and no term was to be implied into the contract that they should warrant the fitness for purpose of the hard-core fill they had imported for the project. Thus, the issue of whose “risk” it was as to any post-contract design depends upon whether the contract is a design-build form and whether any further design development falls to the contractor or whether it remains a change to the employer’s requirements, and thus a variation. In Skanska v Egger,8 the issue was whether steelwork, which was later constructed, was simply a design development on which Egger was entitled to provide information. Further, if this was the case, the issue became whether this instruction given by the employer later in the process, showing a change in its requirements, was a risk the contractor took. The Court of Appeal held that the additional process plant steelwork required due to this later drawing provided by the employer was further design development on which the employer was entitled to provide information. Here, it appeared that the tender drawings indicated that the possibility existed for the employer to further develop its requirements and that this risk was accepted by the contractor, i.e. that the employer’s requirements would be perfected at a later stage. The new FIDIC Forms (2017) have also made changes to the need for the contractor to scrutinise the employer’s requirements for errors – see Sub-Clause 1.9 of the Yellow Book. Where the payment provisions applicable if an “experienced contractor would not have found those errors at the relevant time” have been changed and the variation provisions applicable to the measures the contractor is required to take to deal with the error along with the fact that the contractor will also be able to claim ‘Cost Plus Profit’ if it incurs cost as a result of such error is a significant change. Extension of time (EOT) clauses are common in most standard form contracts. The reason for this is that if there were no mechanism in the contract to extend time and a delay occurred which was the employer’s fault, or at least not the contractor’s fault, then time would be at large. When time is “at large” the contractor would then have a reasonable time to carry out its works and the employer would not be entitled to any resulting or liquidated damages. The FIDIC contracts, for example Sub-Clause 8.4 of the FIDIC Red Book, provide that the contractor is entitled to an EOT if completion is adversely affected by numerous factors such as a variation or other substantial change in quantity, or exceptional adverse climatic conditions, or other occurrences which include unforeseen shortages in personnel or goods caused by epidemic or government actions; or even such all-encompassing wording as any delay, impediment or prevention caused by or attributable to the employer, the employer’s personnel or the employer’s other contractors on site. This is important because it is with the extension of time that the contractor avoids liability for liquidated and ascertained damages also sometimes referred to as “LAD”. However, most standard form contracts provide no indication as to the circumstances in which the contractor can be given more time or be compensated for events caused by the employer or other conditions. Worse yet, some forms give only a brief list of such situations or have a single clause that, in effect, cross-references all the circumstances which can make up provisions changing the terms of the duties under the contract. Thus, in the JCT Minor Works Building Contract there is no list as to all the circumstances that would allow the contractor to be excused, or compensated, for change other than language to the effect that the contractor is generally excused for any cause beyond its control. The new FIDIC 2017 editions have EOT issues as to when a contractor can claim an extension of time. These are now set out in Sub-Clause 8.5, and other than some new material relating to “exceptionally adverse climatic conditions” and providing an “extension of time for delays caused by private utility companies as well as public authorities” are basically the same as the earlier versions. However, an additional paragraph has now been added at the conclusion of that sub-clause which provides for concurrent delays, i.e. that if there are any delays caused by matters for which the employer is responsible, which are concurrent with delays caused by matters for which the contractor is responsible, they are to be dealt with in accordance with the rules and procedures set out in the Particular Conditions or, if there are no relevant Particular Conditions, “as appropriate taking due regard of all relevant circumstances”. Additionally there are now new “advance warning” provisions included in Sub-Clause 8.4 which mandate that each party notify the other and the engineer of any known or probable future events which could adversely the work of the contractor’s personnel or the performance of the Works once completed, or increase the contract price, or delay completion. The engineer can then request the contractor to submit a proposal for a variation to avoid or minimise the effect of any such event. It should be noted that this is similar to what is contained in the NEC suite of contracts, i.e. the “early warning” provisions found therein, but unlike the NEC contracts FIDIC does not set out any provisions as to what happens as a result of the contractor’s failure to comply nor what the impact would be of any requested additional payment. One solution used in many standard form contracts is that, rather than listing specific events or giving a short list of events, there is a “sweeping-up” clause that attempts to incorporate any possible scenario and is usually worded “… and any other cause referred to in these conditions”. An example of this type provision can be found in the ICE Form (7th edition) at Clause 44(1), which allows the contractor an EOT if the Works cannot be completed on time due to any cause of delay referred to in the conditions of contract or any variation order, any increased quantities, bad weather that is exceptional, any delay, impediment, prevention or default and it then goes on to add the usual type of “sweeping-up” provision which states: “… other special circumstances of any kind whatsoever which may occur”. Before discussing the various differences and similarities between the major standard forms, a review of the recent changes to the JCT forms of contract is in order. In the United Kingdom, the most prevalent set of standard form construction contracts are those produced by the Joint Contracts Tribunal, which are known as the JCT forms of contract. Prior to 1998, the JCT was an umbrella organisation for 11 industry bodies that operated by way of unanimity in their approach to drafting the suite of JCT contracts. The JCT, as an umbrella organisation, was established in 1931 and over the past 70 years has produced standard forms of contract, guidance notes and other standard documentation for use in the construction industry. The current constituent bodies of the JCT are: the British Property Federation; Build UK Group Limited; the Contractors Legal Grp Limited; the Local Government Association; the Royal Institute of British Architects; the Royal Institution of Chartered Surveyors; and the Scottish Building Contract Committee Limited. Modern-day JCT contracts came into existence when the 1963 Standard Form of Building Contract was published. The 1980 edition followed this, and the consolidated current version is contained in the 1998 edition. The JCT has now published the JCT 05 suite, which largely supersedes the 1998 forms. The JCT forms currently include the: Standard Building Contract Intermediate Building Contract Minor Works Building Contract Design and Build Contract Major Project Construction Contract Adjudication Agreement9 Framework Agreement 2007 Pre-Construction Services Agreement10 Consultancy Agreement (Public Sector) Standard Building Sub-Contracts Intermediate Building Sub-Contracts Major Project Sub-Contract Design and Build Sub-Contract Collateral Warranties Home Owner Contracts11 Prime Cost Building Contract Management Building Contract Repair and Maintenance Contract Measured Term Contract JCT – Constructing Excellence Contract Construction Management Contract. It should be noted, also, that the most recent edition of the various JCT forms is the 2016 edition. Previous editions include the 2011, 2005 (as amended in 2009, via Revision 2) and 1998 editions. This means that the Construction (Design and Management) Regulations 2015 and RICS New Rules of Measurement are now incorporated into the JCT forms. Of these forms the most commonly used forms within the JCT family of contracts is the JCT 05 Standard Building Contract, which has superseded the JCT 98 Standard Form of Building Contract and is intended for larger projects where the employer has engaged a professional consultant to advise on, and to administer, its terms. Then there is the JCT 05 Major Project Construction Contract that has superseded the JCT 98 Major Projects Form and is intended for larger projects being carried out by experienced users, and knowledgeable contractors who require limited procedural provisions. This is followed by the JCT 05 Design and Build Contract, which has superseded the JCT WCD 98 Standard Form of Building Contract With Contractor’s Design and is intended for projects where the contractor designs and builds the works for an agreed lump sum. Other forms of the JCT contracts include the JCT 05 Intermediate Building Contract, which has superseded the IFC 98 Intermediate Form of Building Contract and is intended for projects in the range between those for which the JCT 05 Standard Form of Building Contract and those for which the JCT 05 Agreement for Minor Building Works Contract would be used. It should be noted that this particular form is most suitable for simple content works without any building service installations of a complex nature. Then there are the JCT 05 Intermediate Building Contract with Contractor’s Design, which is intended for use where specific portions of the work are to be designed by the contractor; and the JCT 05 Minor Works Building Contract, which superseded the JCT 98 Agreement for Minor Building Works and is intended for smaller projects of a relatively simple nature. It should also be noted that there is also a version with contractor’s design. These new contracts also include two “Framework Agreements”, which are to be used for the procurement of both construction and engineering works and are for use with a series of individual contracts, which may be entered into between the client and contractor or “service provider” and which contain clauses covering framework objectives such as teamwork, decision-making, risk assessment, structure of the organisation and other matters.12 Some of the forms have been renamed, for example, the Standard Form of Building Contract with Contractor’s Design is now the Design and Build Contract, and the Major Project Form is now the Major Project Construction Contract, while the Construction Management Documentation is the Construction Management Contract and the Standard Form of Management Contract is the Management Building Contract. The JCT is also publishing a wide range of subcontracts and warranties. Included among them is a Standard Building Contract with Subcontractor’s Design, for use with SBC05 where the subcontractor undertakes design, and the Design and Build Sub-Contract, for use with the Design and Build Contract. Of all of the JCT form contracts the most used has always been the Standard Form of Building Contract and thus a more in-depth analysis of the differences between the old “98” JCT contract and the “05” version is in order. This was the core non-design and build contract produced by the JCT and was available in a number of forms including the Private Version (for use by the private sector) and Local Authorities Version. It was produced in a “With Quantities” option, a “With Approximate Quantities” option (thus making it a remeasurement contract) and a “Without Quantities” option, which in effect was a specification and drawings contract. The “Private With Quantities” version was a traditional lump sum contract where the employer was responsible for producing the design and providing it to the contractor . This particular contract required the preparation of a full bill of quantities, which set out detailed breakdowns of the various equipment, materials, plant and labour required, which was then priced by the contractor thus arriving at a lump sum which then became the contract sum. Here, the contractor had no design responsibility unless the parties chose to use what was called the “Contractor’s Design Portion Supplement” (CDP) which provided for specific areas of design responsibility to be passed to the contractor, such as where the contractor either designs certain mechanical and/or electrical parts of the Works or subcontracts these to others. In the “05” version, the major change has been in the removal of the nominated subcontractor and nominated subcontractor provisions. The JCT took the position that: “… there appears to have been little use of the provisions for Nominated Sub-contractors and little appropriate use of the Nominated Supplier Provisions. The provisions of JCT98 for listing of sub-contractors have been retained and, in the JCT’s view, the specifying of a supplier is a matter generally better dealt with in the Contract Bills or other Contract Documents.”13 In the old “98” version these listing provisions were set out in Clause 19.3, but under the “05” version they are now contained in Clause 3.8. Now, the employer can provide a list of subcontractors in the bills and mandate that the contractor select from this list subcontractors who can then carry out work that has been “measured or otherwise described” in the bills and priced by the contractor, thus making the contractor responsible for the subcontractor’s performance. It should be noted that now the employer has to list a minimum of three subcontractor firms, after which the contractor is entitled to add to the list and then go back to the employer who can also add more. A problem arises in this scenario if the contractor wants to make any additions and/or refusals as any such refusal must be justified, as the form clearly states that such suggested additions by the contractor “shall not be unreasonably delayed or withheld”.14 Additional matters in the “05” include two subcontracts which are specifically for use with SBC05, the Standard Building Sub-Contract, and the Standard Building Sub-Contract with Sub-contractor’s Design, although there is no requirement in the main form for the contractor to sublet on these terms.15 The “98” version contained a statement that said: “… provided where and to the extent that approval of the quality of materials or of the standard of workmanship is a matter for the opinion of the Architect, such quality and standards shall be to the reasonable satisfaction of the Architect”. This statement has been combined with the obligation to carry out and complete the Works into a new Clause 2.3.1, which notes: “Where and to the extent that the quality of materials or goods or of the standard of workmanship are a matter for the opinion of the architect, such quality and standards shall be to his reasonable satisfaction. To the extent that the quality of materials and goods or standards of workmanship are neither described … nor stated to be a matter for such opinion or satisfaction they shall in the case of the Contractor’s Designed Portion be of a standard appropriate to it and shall in any other case be a standard appropriate to the Works.” Thus, in the “98” version the requirement to achieve a standard “appropriate to the Works”, in the absence of any specified standard, applied only to workmanship16 but this has now been broadened to include both materials and goods. In many instances the obligation to provide something “fit for purpose” might have been implied but, as a result of the change, it will no longer be necessary to argue for an implied term in cases where, for example, the specification of the particular material or good is (inadvertently or deliberately) incomplete. Another area of difference in the “05” is that the Works the contractor must carry out and complete includes “the design and construction of the Contractor’s Designed Portion” which arises from the assumption, in the new form, that the contractor submitted design solution(s) as part of its tender under the category “Contractor’s Proposals” in response to the “Employer’s Requirements”. A procedure for this has also been developed which allows for the fact that, at the tender stage, the design element on the contractor’s part may not be fully developed but the administrator of the contract must have a way to ensure that the employer’s requirements will be met. As a result, when the contractor provides the contract administrator with its design documents, the contract administrator has to give the contractor a response within 14 days. This can be either by returning the documents marked “A”, without comments, which allows the contractor to proceed with the designed work or they can be returned marked “B”, with comments. If marked “B”, the contractor may proceed but the contractor must then incorporate these comments into the design and the work. The contract administrator can also mark the documents “C”, which requires the contractor to restudy and resubmit the proposed design – it cannot proceed until it receives either an “A” or a “B” on the resubmitted work. If the contract administrator does not give the design an “A” it must then identify, by means of written comments, why it considers the design not to be in accordance with the contract.17 It should be noted that the contractor may object to the comments and, if it does, must explain why their incorporation would give rise to a variation. Thus, the contract administrator has the ability to monitor and comment on a developing design but other than this it has no ability to influence the development of the design without issuing a variation to the requirements. Clause 2.19.1, in setting liability for design states: “Where there is a Designed Portion … insofar as the design is Comprised in the Contractor’s Proposals and in what the Contractor is to complete in accordance with the Employers Requirements and these Conditions … the Contractor shall in respect of any inadequacy in such design have the like liability to the Employer, whether under statute or otherwise, as would an architect or, as the case may be, other appropriate professional designer.” It would appear that the contractor’s designed portion requires only “reasonable skill and care” instead of the more onerous requirement of providing a finished product which is “fit for purpose”. Thus, the issue of design liability for any other contractor designs remains open. In the “05” version, the “Performance Specified Work” provisions have been removed for, as the JCT stated in its Guide, “… they were seldom used, and where they were used it was often where the Contractor’s Designed Portion provisions would have been more appropriate”. It should be noted, however, that despite the removal of the Performance Specified Work provisions, the contract specification or bills containing performance specification requirements can be easily added to the contract. However, if a performance-specified element has not been described as part of the contractor’s designed portion with regard to the reworded clauses above, the argument arises as to whether the contractor’s obligation to provide this work falls under the concept of strict liability or is limited to the use of reasonable skill and care.18 It should be noted that whilst the changes made to the JCT Standard Form of Building Contract by the move from the 1998 edition to the 2005 edition are detailed above, there have been some significant additional changes made by the 2016 edition to the 2011 edition. The goal of the most recent changes was to make the contracts more straightforward and user-friendly.19 The principal changes were: introduction of common “Interim Valuation Dates” which will apply throughout the contract chain including at subcontract and sub-subcontract tiers; introduction of a procedure for prompt assessment of loss and expense claims; consolidation in a single subsection of the payment notice requirements of the Construction Act;
CHAPTER 7
Issues regarding contractors’ rights and obligations under standard form agreements
Design-build form contracts
Particular provisions: contractor to scrutinise employer’s requirements for errors
Extension of time clauses
EOT “sweeping-up” clauses
The other major forms of contract
The JCT forms of contract
JCT 98 Standard Form of Building Contract (JCT 98 SFBC)
The changes made in the SBC05