UK: Contract Flash Points - Part 4: What To Look Out For As A Contractor. The Devil Is In The Detail!

Last Updated: 7 May 2009
Article by Simon Tolson

In the final article, in his series of 4, discussing key issues that arise when drafting and agreeing contracts, Simon Tolson examines what to look out for if you are the contractor.

To read Part 1 in the series click here
To read Part 2 in the series click here
To read Part 3 in the series click here

What to look out for as a contractor. The devil is in the detail!

This section will now look at a number of the most common amendments made to JCT. They are from a range of JCT contracts but since JCT has streamlined the drafting and clause numbering used throughout its suite of contracts you tend to find the same wording coming up in all JCT forms. You will likely recognise some of the changes.

Employers can often be won round by contractors being clever with alternative bids. It is surprising in my experience how often an alternative bid can get a contractor a better contract. If, when submitting your tender, you clearly write setting out how much of what is proposed you do not accept and give counter proposals, then if you find that your tender is accepted, without reservation, you will have a good chance that it will be deemed to be accepted on the terms which you specify. If you are being asked to tender only on the basis of lousy conditions the trick is to put in two prices, a high bid for the unreasonable conditions and a sensible bid if they are prepared to contract on fair terms.

Most of the big costs consultants are familiar with these practices and they are often "disappointed" when contractors do not seek to regain ground which the tender documents took away. Remember any large main contractor is not going to get much sympathy from a judge, arbitrator or adjudicator if he moans that the contract terms are unfair. Think of the Unfair Contract Terms Act as very much a last resort and then only where the clause or provision is an exclusion or limitation of liability clause. It is generally not going to be particularly helpful in commercial dealings associated with blue chip contractors.

In my experience, employers will listen to contractors who have comments on the amendments. A contractor who simply agrees to the contract should set alarm bells ringing. It is akin to the contractor who submits an unfeasibly low tender. Does he really know the extent of the works he is talking on? In contract terms, does he understand what he has to do and the scope of any potential liability on him?

One thing to bear in mind as contractor is that amendments are never made for your benefit. In fairness they may be made to clarify things, address the specifics of the contract but they're never for your real benefit.

Turning to some examples:

(i) Extensions of Time

An example of the most common amendment to extension of time clause is this:

"notwithstanding any other provision of this Contract the Contractor shall not be entitled to an extension of time to the extent that any delay in the progress of the Works or any Section is due to any breach of this Contract by the Contractor of any negligence or default of the Contractor, his subcontractors [etc]"

At first glance the amendment looks reasonable. In reading it you could quickly some to the conclusion that it is fine and move on. Why should the contractor be entitled to any extension of time if it is his own fault?

The sting in the tail to this amendment relates to insurance. Remember that Specified Perils (fire, flood etc) are a ground for an extension of time under JCT. Therefore, burst pipe caused by your sub-contractor which damages not only your works but inundates the downstairs tenant's premises would ordinarily entitle the contractor to an extension of time. The logic behind this is that Specified Perils are insured and so the damage caused by the flood is picked up by the insurer, the making good is instructed as a variation with the insurer picking up the tab. However, how does this amendment sit with the insurance clause? The fact is not very well at all. We have recently been involved in a case where the contract contained precisely that clause. The evening after turning the mains pressure back a valve blew causing extensive damage to raised floors and a tenant's premises on the floor below. Insurance option C applied and so the employer was required to insure the existing premises. The contract regime then says that remedial works are treated as a variation (so you get time and money). However, the client had failed to notify its building insurers and take out the joint names policy. Trying to cover-up its own failings it relied on the amendment which at first glance would seem to cover the point. It says the contractor gets no extension of time to the extent it's due its own default or its subcontractor's default. There was no doubt it was our subcontractor's fault. After a lengthy exchange of solicitors' letters we finally got the employer to treat the remedial works as a variation but this seemingly innocuous amendment caused all manner of problems.

The salutary lesson to contractors here is that if you are working on existing premises make sure that your employer has taken out the joint names policy it is required to do. Assume nothing. JCT is very good at giving you rights to ask to see evidence of the insurance and the rights to take out that insurance and send the bill to the client. However, it does not shed any light on what happens if he fails to do so. There plenty of case law on the point but what you want is a clause to point to. Simple solution, ask to see evidence of the insurance on day 1!

Any risk allocation regime in a construction contract needs to be defined as clearly as possible. Contractors should not assume that, because the contract provides that the employer will take out insurance in joint names, they will automatically be immune from subrogated claims brought in the names of their co-insureds and contractually disentitling contractors to time for negligent acts one such case that might otherwise be insured perils.

Therefore if it is intended that liability will be excluded to the extent the joint names insurance responds to the loss, this must be set out in clear terms and care taken to ensure that the insurance and indemnity provisions are consistent with each other. The contract should also specify how losses other than those covered by the joint names insurance will be dealt with.

Further, it calls into question whether the existence of a joint names insurance policy overrides a contractor's liability to an employer for damage caused by the contractor's negligence.

(ii) Deleting or Amending Relevant Events

The most common changes to the actual "events" themselves are usually just to delete them outright. The most common deletions are weather, strikes, shortage of labour, government action etc. It is purely a commercial decision on the part of the contractor as to what he wants to accept. Putting a commercial hat on I cannot remember the last time I came across a claim based on strikes for example. However, weather becomes a much more complicated issue particularly where groundworks are concerned. I have recently been involved in a project in Wolverhampton for the construction of industrial tin sheds. The summer of 2007 was the wettest for some 300 years and so the contractor was delighted that the particular event was kept back in the contract.

It is worth recollection as a contractor that many employers will be open minded to compromise positions in respect of any relevant event that has been deleted outright. Wherever there is an out-and-out deletion there is usually a way to sell a compromise to a client. Take strikes for example. Under a standard JCT there is a fairly wide basis for claiming which many employers will not accept. For example, the compromise position is that strike should be left in as a relevant event but you carve out those strikes which are restricted purely to employees of the contractor or any subcontractor. This achieves more of a balance in the clause and is usually still acceptable to most employers. There are also deals to be done in statutory powers so that any changes are only those which are not reasonably foreseeable by a competent contractor.

(iii) Entire Agreement Clauses

Watch out for these types of clause which are designed to cut out what in the past Lord Hoffmann stated about precontractual negotiations being inadmissible but went on as if after a pregnant pause to say that "the boundaries of this exception were in some respects unclear".

Here are some examples of clauses to avert the 'mischief':

"(A) This Agreement comprises the entire agreement between the parties and there are not any agreements, understanding, promises or conditions, oral or written, express or implied concerning the subject matter which are not merged into this Agreement and superseded thereby.


(B) Each party acknowledges that it has not been induced to enter into this Agreement by any representation or warranty othernot than those contained in this Agreement and, having negotiated and freely entered into this Agreement, agrees that it shall have no remedy in respect of any other such representation or warranty."

The purpose of an entire agreement clause is to prevent a party relying on statements and representations being made other than those that are expressly set out in the contract. Lightman J summed them up pretty concisely: (Inntreprenneur Pub Co v East Crown Ltd [2000] 2 Lloyds Rep 611)

"...to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten about or difficult to recall or explain) on which to found a claim..."

The relevance to construction contracts is that they can have a relatively long tender process which can compromise vast quantities of correspondence and meetings. At these meetings things are mentioned, assurances given. If these issues do not end up being accurately recorded in the contract documents this type of clause may well come back to bite you. Parties including an entire agreement clause in their contracts need to be aware of its implications, not only at the time of entering into the original contract, but also at the date of any subsequent variation of the contract.

The point to bear in mind of course is that they can bite both contractor and employer. These types of clause are never drafted as a one way street (or at least I have never seen them drafted that way). They are probably not subject to UCTA as a rule as not an exclusion clause as such.

The clauses can be overcome but it is not easy. You could bring a claim for rectification but remember that the burden will be on you to show that there is a mistake in the document and that it does not capture the deal accurately, it is an equitable remedy and in the discretion of the court only. This is a tough hurdle to clear. If you suspect fraud, then you could also get around the clause but again, fraud is not an easy hurdle to clear and tends to be a bit of a last chance saloon (bit like relying on force majeure for your EOT claim).

The approach should always be to make sure that your whole 'deal' is properly reduced to writing. The is really the case whether or not there is an entire agreement clause. There are only three things that are important in construction disputes and that is the contract, the contract and the contract.

(iv) Site/Existing Building Risk

How often have you seen an amendment to this effect?

The Contractor acknowledges that he has had an opportunity to inspect and carry out tests of the physical and other conditions (including the sub-surface conditions) of or affecting the site on or any existing buildings or structures within which the Works are to be carried out and shall be deemed to have obtained all necessary information and to have fully satisfied himself as to such conditions and as to any risks, contingencies and other circumstances in relation thereto which may influence or affect the carrying out of the Works. No failure on the part of the Contractor to discover or foresee any such condition, risk, contingency or circumstance, whether or not the same ought reasonably to have been discovered or foreseen by a competent and careful contractor, shall entitle the Contractor to an adjustment of the Contract Sum nor to any extension of time. The Contractor shall not and shall not be entitled to rely on any drawing, survey, report or other document prepared or provided by or on behalf of the Employer regarding any matter referred to in this clause 2.44 and the Employer makes no representation or warranty as to the accuracy or completeness of any such drawing, survey, report or document.

This clause more or less does what it says. It would be a difficult one to defeat. Clearly if accepted the risk needs to be priced but in my job I tend to see the ones who get that arithmetic wrong.

However, there are compromises that can be reached. A compromise often acceptable to employers is:

"Unless the Contractor's Proposals provide otherwise, the Contractor shall be deemed to have allowed in the Contractor's Proposals and the Contract Sum for the physical and other conditions of or affecting the site and the existing structures (including all services) ("Site Conditions") only insofar as an experienced contractor would or might reasonably be expected to allow for the Site Conditions having only undertaken a visual inspection at the time of tender and not having the benefit of any survey or report in relation to the Site Conditions. The Contractor shall be entitled to an addition to the Contract Sum and/or adjustment to the Completion Date to the extent that the Site Conditions have not been allowed for pursuant to this clause."

The only JCT form that deals expressly with ground conditions is the Major Projects Form. The others remain silent on the issue.

An Amendment worth considering

There are occasions when amending a standard form is necessary for clarification. It may be that in striving to achieve a fair balance between the employer and the contractor the drafting is not as clear as it could be. By way of example, the following wording dealing with the defects appears in the GC/Works two stage design and build contract: (GC/Works/1 Two Stage Design & Build (1999))

"21(1) The Contractor shall without delay make good at its own cost any defects in the Works, resulting from what the Employer considers to be default by the Contractor or his agent or subcontractors or suppliers, which appear during the relevant Maintenance Period.

21(2) After completion of the remedial works by the Contractor, the Employer shall reimburse the Contractor for any cost the Contractor has incurred to the extent that the Contractor demonstrates that any defects were not caused by-

  1. the Contractor's neglect or default, or the neglect or default of any agent or subcontractor of his; or
  2. by any circumstance within his or their control."

Clause 21(1) adopts a fairly standard approach with regards defects (although leaves the decision as to what constitutes a defect firmly with the Employer). However, it is clause 21(2), and in particular paragraph (b), that requires further consideration. Having remedied the defects at his own cost this gives the contractor an opportunity to argue that the cause of the defect was not within his control or the control of his subcontractors. The guidance notes give no examples of when this provision may be relied upon by the contractor but it is potentially very wide reaching. (GC/Works/1 Model Forms & Commentary at page 80.) It seems more sensible to delete 21(2) and rely on whether or not something is, in fact, a defect for which the contractor is responsible (although in this case, the compromise position is for a defect to be an objective determination and not the subjective view of the employer).

Conclusions

To those litigating construction disputes today standardised contracts are a mixed blessing. On the positive side, contractual terms at issue may have been interpreted in prior cases. These precedents should make the litigation outcome more predictable. Standard contracts also provide evidence of industry custom. On the negative side, however, parties commonly fail to follow the procedures specified in a standardised contract and unfortunately amend them badly.

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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