UK: Contract Flash Points - Part 3 : Why Use A Standard Form?

Last Updated: 29 April 2009
Article by Simon Tolson
This article is part of a series: Click Contract Flash Points - Part 2 : Amending Standard Contracts – Why Do It for the previous article.

Click here to read Part 1 and here to read Part 2 in the series

In the third in a series of 4 articles looking at key issues that arise when drafting and agreeing contracts, Simon Tolson looks at the advantages and disadvantages of using the standard contract forms.

Why Use A Standard Form?

The issue of how to convert business deals into good contracts is perennial. Some of the text books focus upon how projects should be managed and some focus upon how contracts should be interpreted and applied, but the people bit, the biggest variable of all is sadly down more often than not to 'chemistry'.

With standard forms, it is often the devil you know that is top dog, the theory, of course, is that both client and contractor will be familiar with the creature. Banks funding projects also recognise them (although, as I mention below, they will often not accept them in their virgin unamended form). Those administering the contracts understand what it is they are supposed to do and by when. Contractors recognise the main differences and know how to price the different forms of contract (usually). All in all, everyone "knows the deal" if presented with a standard form. It should make the whole process of getting from the start of the project to final account a whole lot slicker, but as many of us have experienced, the process is often fairly painful just getting to contract in the first place.

The other significant advantage is that the wording of many standard forms has been subject to interpretation over the years by the courts. I can pick any number of clauses from JCT dating back to the 1963 version onwards and find a wealth of case law (The epic of which is London Borough of Merton v Stanley Hugh Leach Ltd, (1985) 35 BLR 51 the court considered a comprehensive list of preliminary issues arising under the JCT 63 contract) telling me what those clauses mean. Of course, it is this judicial interpretation which often drives new versions of the contract or further amendments by the lawyers.

Of course, the standard form is not for everyone. There are always those who wish to go down the bespoke route. However, even where you come across bespoke contracts you often recognise vast chunks of text taken straight from a standard form. Indeed, many bespoke forms seem to be nothing more than a standard form with the amendments incorporated in the text itself rather than in a schedule. I have even seen bespoke contracts where the clause numbers tally almost perfectly, margin notes, type setting, font etc so clauses 25 and 26 (time and loss and expense in JCT 98) appear as clauses 25 and 26 in the bespoke form. How convenient?

However, one of the main problems with the bespoke form for contractors is they prefer the comfort of the standard form; even though on most occasions what the standard form gives with one hand the amendments take back with the other. At least with standard forms both employers and contractors know roughly where they are starting from.

All in all then, this it appears is a clear endorsement for the standard form.

So we know that standard form is generally a good thing and that provided we have chosen the correct form in the first place – which I touch on later – why is it necessary to make so many amendments?

Why Make So Many Changes?

(i) The Contract Does Not Reflect Life On A Real Site

What happens on a real site is often quite a departure from what the contract says should happen.

A classic example of this is the snag list. I am not aware of a job where practical completion ("PC") has been granted without a snag list (but then equally the fact that I am aware of these jobs is usually because there are a whole host of other problems and the snagging may be the least of the parties' worries). I have seen snagging lists that run to three lever arch files (More than just usual staples: Check light bulb is fitted; Check light switch works properly; Check that switches and sockets are flush to the wall. Check ceiling light cover flush to ceiling; Check around smoke alarm. Check consumer unit (fuse box) if fitted in hall. Ceiling free from holes, dents, joints showing. Paint solid looking, not patchy.. By snag list, I mean a list that is issued at the same time or within 14 days after PC rather than a list that is issued prior to PC listing those snags that need to be completed before PC will actually be issued. From a contractual point of view, they are very different.

On many jobs, both the contractor and employer will be screaming out for PC to be granted. The contractor wants PC for obvious reasons (it stops LADs and insurance obligations, it starts the defects period, half retention is due for release etc). However, employers are also frequently looking for PC to be achieved prior to all the works being complete as was evident on Westfield's White City. For a developer handing over space to tenants it is often the trigger for rent or a rent free period to start. Shop fit outs in the lead up to Christmas are another classic case of works being certified as PC despite long lists of snagging and incomplete work. Once a major retailer has announced an opening date for a new store there is no going back. Often dignitaries are booked long in advance on drop date dates, I recall well Prince Charles opening of Lakeside Shopping Centre in 1990, a lot was achieved in the 7 days up to the opening! It has to open on that day regardless - within reason - of the state of completeness of those works.

However, despite there being a general misconception in the industry to the contrary, JCT does not expressly provide for a snag list. (Other standard forms deal with snagging as follows: GC/Works 1998 (Without Quantities) makes no reference to snagging (see clause 39). MF/1 2001 (Revision 4) expressly allows for a Taking Over Certificate to be issued where there are minor outstanding works and the contractor is under an obligation to remedy those within the time period stated in the Taking Over Certificate (see clause 29). ICE 7th Edition (Measurement Edition) allows for a Certificate of Substantial Completion to be given despite minor items of outstanding works and the contractor is required to give an undertaking to complete those works in a timescale agreed with the Engineer (see clauses 48 and 49). It does allow for defects, which appear during the defects period to be rectified, but this is not the same as defects (or incomplete work) which are known to exist at PC. On this basis, there is no shortage of jobs that are being certified practically complete subject to a snag list which the contract does not recognise as a proviso or as conditionality.

On this basis, one of the most frequent amendments is for the contract to expressly include snag list provisions. If a contract administrator certifies PC when there is substantial incomplete or defective work then they had better be sure they have the client's agreement and then an undertaking on the part of the contractor to remedy that snagging. Whilst the client consent probably poses few issues in practice the undertaking by the contractor could be more problematic. How is it documented? It is most likely to take the form of an email from the contractor confirming he will remedy the snags within a certain period of time. However, is it effective? What are the sanctions if the contractor does not? How does this breach link in with the other conditions in the contract such as termination or the right to engage others to do the work? The fact is that commercial reality probably trumps the contract. In practice, whilst half retention is due at PC this is unlikely to be released until the snags are put right. However, it is a classic example of where the standard form contract and real life on a construction site part company.

A further example is practical completion itself. As I mention above this is crucial for a number of reasons and yet is not defined. The reasoning, of course, is that it is a matter of professional opinion for the architect. (This is not the case under the Design and Build contract where practical completion is a question of fact and not opinion. Note the difference in wording between clause 2.30 in the JCT 2005 Standard Building Contract and clause 2.27 in the JCT 2005 Design and Build Contract.) The contract gives some guidance as to what is required (For example, under standard JCT the contractor is required to provide as-built drawings, O&M manuals (clause 2.40) and to provide such information as the CDM-Co-ordinator reasonably requires for the preparation of the health and safety file (clause 3.25.4)) but on the whole is it simply the architect's professional opinion. The Courts have given us various guidance as to what it means and from this it is possible to draw some conclusions:

  • the works can be practically complete even though there are latent defects;
  • a Certificate of Practical Completion cannot be issued if there are patent defects; (Jarvis & Sons v Westminster Cor. [1979] 1 WLR and HW Nevill (Sunblest) v William Press (1981) 20 BLR 78)
  • the architect does have a discretion to certify practical completion where there is very minor outstanding items work on a de minimis principle.

However, is not the point that as an employer you should have more of a say in whether what you asked for in the contract (and have paid for) is actually complete? For this reason it is not uncommon for amendments (and often the specification itself) to list the hurdles that need to be cleared before practical completion can be achieved. These frequently include:

  • the provision of all fire, gas, electrical safety certificates;
  • as-built drawings in a particular format (at least in draft form with final versions being issued within a specified time after practical completion); (Standard JCT provides for this (see, for example, clause 2.30 and 2.40 in the Standard Building Contract), but the obligation is often amended further)
  • on larger projects, compliance with specific requirements e.g. the Green Guide which deals with safety requirements of sports stadia. (Guide to Safety at Sports Grounds, The Football Licensing Authority (commissioned by the Department for Culture, Media and Sport). This can be particularly onerous for contractors. For example, a large football stadium cannot be operated until all safety licences have been granted. These will inevitably involve a certain amount of discretion on the part of the authority granting the licence and the person in charge of safety at the particular stadium. This can be a major sticking point; the contractor has designed and built the stadium in accordance with the contract and yet the stadium cannot operate and generate revenue for the employer until it has all the requisite operating licences. A brief reference to all licences being in place as a pre-condition to practical completion could prove expensive for the contractor if LDs are running.
  • completion of all tests/commissioning. As buildings become increasingly hi-tech and sustainably constructed there is a greater need to commission the various systems. In many respects is a modern hi-tech office building (the domain of standard building contracts) any different to a process plant? It needs to "perform" as required by the contract and the only way this is verified is by way of complicated commissioning tests. For many years those building process plants have used specific forms of contract which contain all these testing provisions, see, for example clause 9 of the FIDIC Silver book or Conditions of Contract for EPC/Turnkey Projects. The FIDC Conditions of Contract for Building and Engineering Works Designed by the Employer ("Red Book") also contains extensive provisions even though, as the name suggests, it is aimed more at traditional building projects rather than process plant.) It is for this reason that is it not uncommon for an amendment to be made so as to define practical completion as having been achieved only where the tests referred to in the contract documents have been passed.

Obviously, contractors should be extremely wary of these pre-conditions to practical completion which strain the Eleatic Paradox. The contractor is not going to want liquidated damages clocking up simply because he is missing "one tick in the box" on the list of conditions for practical completion and no time more than now in this recession.

(ii) The Contract Does Not Reflect The Particulars Of This Project

No standard contract could ever reflect all the specifics of a project and some changes inevitably need to be made. Of course standard contracts do not eliminate the need for individual bargaining over variable terms, such as scope of services, time, and compensation. Nevertheless, the complexity of the construction project requires many additional terms, which a good standard contract provides. All parties should be grateful that many details have been worked out in advance and need not be negotiated. In addition, a standardised contract that is accepted in the industry makes performance more efficient. Familiarity makes compliance easier. Clearly, those who plan construction transactions benefit greatly from standardised contracts.

The skill, of course, is amending only those parts which are relevant. There is rarely any point in having extensive amendments dealing with ground conditions when the works comprise the fit out of the 30th floor of an office skyscraper and yet I commonly see these types of amendment. All this demonstrates is that someone has located the firm's precedent, added the parties' details, and clicked "print".

(iii) The Contract Does Not Reflect The Commercial Bargaining Strength Of The Parties.

This, of course, is one of the main drivers in amending contracts. Standard forms seek to achieve a balance (The following are for example Members of JCT: British Property Federation Limited; Construction Confederation; Local Government Association; National Specialist Contractors Council Limited; Royal Institute of British Architects; The Royal Institution of Chartered Surveyors; Scottish Building Contract Committee Limited and JCT Council is comprised of five Colleges representing: employers/clients (including local authorities); consultants; contractors; specialists and sub-contractors Scottish building industry interests) between the parties but rarely is there a true balance in the bargaining strength of those parties. For the last few years some contractors have been able to pick and choose jobs in certain niche areas. This was particularly the case in high-end residential refurbishment where, if acting for employers, you would be lucky to get away with half a dozen amendments to a standard form. I suspect that if this has not already changed then it will do so over the coming months. However, I have yet to see a day where the contractor is in such a good position that he actually wishes to amend standard forms in his favour but those times may come.

(iv) The Bank Won't Accept An Unamended Standard Form

Again, another key driver in amending the contracts is the bank's requirements. To a certain degree banks have always been able to dictate terms and a convenient excuse for lawyers acting for employers is to say that the amendment is bank-driven and therefore non-negotiable. In the current climate this is unlikely to change.

To see further articles by Simon Tolson please visit www.fenwickelliott.co.uk.

To see further articles on matters relating to construction, engineering and energy projects, please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Contract Flash Points - Part 2 : Amending Standard Contracts – Why Do It for the previous article.
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