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Construction Law and Strategy

Introduction

The description by Lord Diplock in the case of Modern Engineering (Bristol) Ltd v. Gilbert-Ash Northern [1974] of a construction contract as “‘an entire contract for the sale of goods and work and labour for a lump sum price payable by instalments as the goods are delivered and the work done”, seems to be the most sufficient description of a construction contract. Contracts have to deal with essential matters such as prime costs, time, variation orders e.t.c. Basically, there are two types of construction contracts; cost plus and fixed price contracts. The difference between the two arises out of the mode of payment and the period of cost determination. The latter have a pre-determined amount while the former is usually a net provision agreed in the contract.

Just like any ordinary contract, the construction contract has to satisfy the ingredient of a contract; offer and acceptance, formalities e.g. being in writing, capacity, intention to create legal relationship, and consideration. The contract however differs from simple contracts since most of its payment modes are complex, not all terms can be identified in the contract due to contingencies, inflation, unbudgeted materials e.t.c. (Adriaanse 2007). The issue of duration also comes in as a separating factor due to the complex nature of construction work. Most construction projects are in standard form and this helps to create business efficacy, certainty and uniformity across the construction industry as stated in Discain Project Services Ltd v. Opecprime Developments Ltd [2001].

Essential terms of a construction contract

In Diplock’s description, the use of the words “essential terms” surfaces as a characteristic of the construction contract. First, it is important to note that section 107 of the Construction Act (also known as the Housing Grants Construction and Regeneration Act 1996) requires that the construction contract be in writing thus, all these essential terms must appear in the contract. However, this requirement will change once the new Local Democracy, Economic Development and Construction Act (2009) commences in October of 2011.

The essential terms in the contract are; contract revenue, risk allocation, dispute resolution methods, time of completion, contractor’s responsibilities, project owner’s responsibilities, contract costs, indemnification clause and termination. It is notable that the law has allowed a wide discretion to parties when it comes to drafting construction contracts. As Lord Reid stated in Modern Engineering, there are no other overriding principles of contract outside the general principles of contract that govern construction contracts. I shall discuss the terms as follows;

Contract revenue

It is different from the contract costs or expenses in that it refers to the contractor’s consideration for the work and not the expenses incurred. It is normally a net amount of the total contract cost including variations, incentive payments and claims less the total expenses incurred. Normally, the amount is pre-determined and stipulated in the contract so as to give the contractor a sufficient ground for action if the project owner defaults in making payments.

Contract costs/expenses

These form a vital part of the contract. This is because construction projects are complex in nature and if expected costs and expenses are not factored in the contract, the owner runs a huge risk of giving the contractor a ‘blank cheque’ so to speak. On the other hand, the contractor needs to let the owner know which expenses he/she expects to incur which gives him/her a good ground for indemnification. Without stating contract cost or listing the expenses within the contract, construction contracts would be vague and would bring about so many disputes.

Contractor’s obligations

They are the requirements that the owner places on the contractor that bind him to the work. They may vary but there are some general obligations to be fulfilled by the contractor such as; obligation to produce quality work, disclosure of all relevant information, completion of work within reasonable time, acquiring all relevant permits and adhering to the laws on construction and the building code.

Owner’s obligations

The first obligation is to ensure that all approvals for the construction project have been acquired. Secondly, the owner has a duty to ensure that he has revealed all costs and conditions of the project having done a feasibility study and drawn up a budget. The owner also has a responsibility to ensure that he/she provides the contractor with the necessary support needed to complete a construction project of the same nature.

Indemnity

The contract must have a clause stipulating that the owner shall indemnify the contractor for all costs incurred outside the scope of the contract but which are incidental to the contractor. On the other hand, the contractor should indemnify the owner from all liabilities, costs and claims for injuries to property and persons that arise from his/her negligence and/omissions or those of his/her agent, subcontractor or officer in the course of performance of the contract. Similarly, the contractor needs to be indemnified from all liability arising from claims that arise out of his or her negligent acts or omissions that occur for actions taken under the owner’s written instructions.

Risk allocation

This is a major part of the contract and the parties must be very particular about this part lest they suffer serious losses. Construction comes with some risks such as; accidents during construction, unforeseen weather conditions, fire, floods, poor ground conditions, carelessness of contractors, poor workmanship, unreasonable delays in completion, overrunning costs e.t.c. it is imperative to the parties in the contract to agree on how to handle each of these categories of risk. Insurance must be taken for all insurable risks as a basic rule.

Dispute resolution

Most parties opt for arbitration as the best method to solve risks. Hibberd and Newman (1999) state that “‘if risk is an essential ingredient of the system which generates your profit, it is inevitable that there must be a structure for resolving disputes. It brings the relationship of the disputants back into balance so that life can resume its normal course.” Indeed construction contracts need to have a dispute resolution mechanism due to its complex nature and the careful balance between cost, time and quality.

Time of completion

There is need for a provision for time in the construction contract so as to ensure that the contract like all others has an end. The main consideration here is the reasonability of the completion date.

Termination

A clause for termination should be inserted in the construction clause to ensure that there is certainty and also procedural mechanisms such that one party is not ambushed or unfairly treated.

Justification for essential terms

A contract that does not make provisions for essential terms stands the risk of not fulfilling its purpose. According to Rosenberg (2007), these essential terms ensure that disputes are kept at a minimum and that there is a sense of orderliness and flow of work. Terms such as contract revenue and contract price protect the parties from financial exploitation and also serves to give them grounds to enforce payment or indemnity. Clauses such as those for termination and completion give certainty and time value to the construction work. Another reason is that the law requires that construction contracts contain terms such as risk allocation (Construction Act).

NEC Engineering and Construction Contract

Standard form contracts are the most common types of contract in the construction industry. They have a general outline and contain uniform clauses especially on essential terms. The NEC contract is just one example of a form contract that provides a guide as to how construction contracts should be drafted. The NEC contract is a product of the Institution of Civil Engineers (ICE) which is based in London. It is widely used across the UK and internationally. The NEC has been revised thrice with NEC3 being the latest form contract having been released in 2006.

The advantage of the NEC contract is that it is very simple-it uses understandable language and is well structured for use by practically anyone. It is also very flexible and can be used for most commercial contracts. Thirdly, the contract is inclusive of all the essential terms and properly articulates the contractual relationship between the parties. Finally, it follows the Achieving Excellence in Construction (AEC) principles and is recommended by the Office of Government Commerce (OGC).

Sample contract for a construction project

Appropriation No:

LONDON BOROUGH COUNCIL

SMALL CONSTRUCTION PROJECT CONTRACT (Use when contract value is less than 10,000 Pounds)

CONTRACT entered into the 15th day of April, 2011 by and between the London Borough Council through the Burton Department hereinafter called the Owner and Sweetvine Contractors Ltd hereinafter called the Contractor.

Agency Project No.: 124265

For the following Project: Construction of Culverts at Kensington Street, London.

Brief Scope of Work:

(A detailed description of the work is provided as “Attachment A”)

The Owner and Contractor agree as follows:

Article 1: Payments and Compensation to the Contractor

  • § 1.1 Subject to additions and deductions provided by approved change orders, the Contract Sum to furnish all labour, equipment, materials and incidentals necessary for the construction of the work described in “Attachment A” shall be the net firm amount of 9, 892 pounds.
  • § 1.2 Contracts based on a not-to-exceed amount and specifies the hourly rates, unit prices and/or allowances in “Attachment B”.
  • § 1.3 Changes in the work to be performed must be approved by Owner and Contractor prior to proceeding with the work. Change orders shall be recorded on a standard NEC3 form.
  • § 1.4 Payments are due and payable thirty (30) days from the date of receipt of the Contractor’s invoice. Amounts due that are unpaid thirty (30) days after receipt of the invoice shall bear interest at the rate of eight percent (8%) per annum.

Article 2: Time of Completion

§ 2.1 The work to be performed under this Contract shall be completed on or before the 18th of December, 2011.

Article 3: Contractor’s Responsibilities

  • § 3.1 The Contractor shall acquire all permits applicable for the work not specifically identified as provided by the Owner. Costs for Contractor-provided permits shall be included in the Contract Sum identified in Section 1.1 above.
  • § 3.2 The Contractor shall comply with all laws applicable to this work.
  • § 3.3 The Contractor shall remain an independent agent during the duration of this Contract, shall not become an employee of the Council, and assures that no Council employee shall be compensated by or otherwise benefit from this Contract.

Article 4: Owner’s Responsibilities

  • § 4.1 The Owner shall provide full information about the objectives, schedule, constraints and existing conditions of the project. The Owner has established a budget with reasonable contingencies that meets the project requirements.
  • § 4.2 The Owner attests that all legal procurement requirements have been met, including the approval of this project and the solicitation of a minimum of three quotations for the work described in this contract.

Article 5: Termination

§ 5.1 Both parties may terminate the contract upon the issuance of a written notice within seven days.

Article 6: Indemnification

  • § 6.1. The contractor shall indemnify the owner from all liabilities, costs and claims for injuries to property and persons that arise from his/her negligence and/omissions or those of his/her agent, subcontractor or officer in the course of performance of the contract.
  • § 6.2 The Contractor shall not be liable for claims arising out of the negligent acts or omissions of the Owner or for actions taken in reasonable reliance on written instructions of the Owner. The Contractor shall notify the Owner promptly of all claims arising out of the performance of work under this Contract by the Contractor its employees or agents, officers or subcontractors.

This indemnity provision shall survive the termination of the Contract, completion of the project or the expiration of the term of the Contract.

Article 7: Insurance Requirements

  • § 7.1 Certificates of insurance shall reflect the Owner’s name. The terms of insurance shall not be varied by the Contractor without a ten (10) day notice to the Council and the Owner subject to which they shall give their consent or deny it as they may deem fit.
  • § 7.2 The Contractor shall procure and maintain insurance for the duration of the Project and, if written on a claims made basis, shall maintain such insurance for the duration of time that the claims insured against may be brought within the applicable statute of repose. The Contractor shall ensure that all Subcontractors the Contractor engages or employs carry and maintain similar insurance in form and amount acceptable to the Owner. The insurance shall be of the types and limits set forth herein as “attachment C” and such insurance as will protect the Contractor from claims which may result from the Contractor’s execution of the Work, whether such execution be by the Contractor or by those employed by the Contractor or by those for whose acts they may be liable. The insurance coverage provided by the Contractor will be primary coverage. There must be workmen’s compensation, general liability insurance and third party insurance as is the requirement in statute. All required insurance coverage shall be placed with carriers authorized to conduct business in London.

Article 8: Dispute Resolution

  • § 8.1. Mediation
    • § 8.1.1 In the event of a dispute between the parties which arises under this Contract and the dispute cannot be resolved through informal negotiation, the dispute shall be submitted to a neutral mediator jointly selected by the parties.
    • Either party may file suit before or during mediation if the party in good faith deems it to be necessary to avoid losing the right to sue due to a statute of limitations. If suit is filed before good faith mediation efforts are completed, the party filing suit shall agree to stay all proceedings in the lawsuit pending completion of the mediation process, provided such stay is without prejudice
  • § 8.2 Arbitration
    • § 8.2.1 If the dispute is not resolved through mediation, the dispute shall be settled by arbitration.

The arbitration shall be conducted before a panel of three (3) arbitrators. Each party shall select one arbitrator; the third arbitrator shall be appointed by the arbitrators selected by the parties.

The arbitration shall be conducted in accordance with the Arbitration Act

The decision of the arbitrators shall be final and binding upon all parties. The decision may be entered in court as provided in the Act.

Arbitration costs shall be met equally by the parties and in any arbitration between the Owner and the Contractor, the Owner shall have the right to consolidate related claims between Owner and Architect.

Article 9: Other Provisions

  • § 9.1 The contractor binds itself that it shall adhere to all the relevant laws, rules and regulations and shall carry out the work with the diligence of a reasonable contractor.
  • § 9.2 There are no other provisions

This Contract entered into as of the 6th of April 2011 as first written above.

Owner Contractor

(Signature) (Date) (Signature) (Date)

(Printed name and title) (Printed name and title)

(Department, Agency) (Company Name)

References

Adriaanse, J. (2007) Construction Contract Law. Hampshire: Macmillan, Print.

Discain Project Services Ltd v. Opecprime Developments Ltd [2001] EWHC Technology 450.

Hibberd, P and Newman, P. (1999) ADR and Adjudication in Construction Disputes. London: Wiley –Blackwell, Print.

Modern Engineering (Bristol) Ltd v. Gilbert-Ash Northern [1974] AC 689.

Rosenberg, T.L. (2007) Essential Construction Contract Terms: Avoiding Future Problems by Addressing Key Issues. Real Estate Finance Journal, 6 (3), 45-59. Print.

The Housing Grants Construction and Regeneration Act 1996.

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