Contract Documents ? be aware of the pitfalls

30th May 2007

Construction contracts are all about defining the rules under which any project is created and allocating the risk and responsibility for its constituent parts, for doing the design, ensuring the building is built on time, the building is in the right pla

The perception is that building contracts are complicated things which, of course, to the untrained eye they most certainly are and without due care and attention can be full of nasty little surprises and create unwanted liabilities.

Essentially in any contracting situation the key is to be aware of the pitfalls, to read the contract in detail and to try and avoid taking on risks over and above that which you and your project can bear. Inevitably, in any contracting situation there are going to be risks, even if the contract is followed to the letter, simply as the result of the allocation of risk, but at least you can be forewarned of those potential pitfalls. There will, however, be more pitfalls and more risk for you if you do not read the contract in detail or do not follow the wording of the contract.

In any contract negotiation the ultimate aim of both parties is to have as little risk as possible, as much certainty as possible for the best price possible. In any situation there will be commercial decisions to be taken in order to balance these three objectives.

If you are presented with a set of contract documents the most important thing to do at the outset is read the documents ? not just once quickly but thoroughly and methodically. If it is not a standard form contract you may be inclined to do this anyway. Frequently the danger lies when the parties use standard form contracts. Parties may think they know what they contain but unless you read the wording carefully it may come back to bite you. If one party has a specialist construction advisor amendments will be made to that party?s advantage.

Back in the 1930s the construction industry was introduced to the concept of standard form contracts, the first being the JCT Building Contract published in 1931. Since that date we now have a complete library of standard forms covering every single type of project and design team appointment. If you are a developer/employer be aware that the industry standard forms are drafted to favour the contractor or consultant. Signing up to these standard forms is absolutely fine but if things start to go wrong and the letter of the contract is followed the outcome may be more favourable to the contractor/consultant than to the client. If you are a contractor or a consultant and are using a standard form take care if it has been amended at all by your client. Inevitably, those amendments will be in the client?s favour and will seek to swing the balance of power away from you.

So what areas should employers and contractors be looking out for? When questioned, any developer, contractor or consultant will list four principal areas of concern connected with any project. They are design liability, time, money and ground conditions. There are many others but these are the four principal areas which repeatedly crop up.

Here are some points to watch out for:

Design: It is a common misconception that design obligations only arise in design and build contracts. Design obligations are not always obvious and sometimes they will be implied wherever a contractor has agreed to do something that involves an element of professional judgment. What constitutes design is very widely drawn, it is not only calculations and drawings but also choice of materials for particular functions or choice of a particular work process ? these all involve a design element.

Contractors entering into a design and build contract should take care in the actual level of design responsibility being assumed. A wise client will try to offload responsibility for design onto a contractor, even where he retained the design team at the outset. The new JCT 2005 Design and Build form makes it very clear that the contractor is not responsible or liable to check the design contained within the employer?s requirements. A cute employer may amend this.

Ground Conditions: Clients often seek to transfer liability and responsibility for the ground onto their contractor. If you are a contractor, watch out for this. Take care if you are taking on information supplied by others and are not actually the author of an investigation report or survey. Have you obtained any assurance from the author?

Time and Money: Most contracts contain pre-conditions to the contractor?s entitlement to claim time and additional money as a result of delay. A lot of standard forms and bespoke forms of contract contain provisions giving contractors only one bite of the cherry, meaning that if they do not do exactly what the contract requires at the exact time then they will lose their chance to claim. Clients will be looking to tighten up the requirement for the provision of notices and pre-conditions to the recovery of loss and expense and may try to exclude the recovery of financing charges, making time and money claims subject to the benchmarks provided by the contract programme.

Other areas that parties should be looking out for are in connection with the potential expansion of liability and risk in the granting of a duty of care deed or collateral warranty. Take care how the contract is executed; is it under hand or as a deed, i.e. does it have a six year or twelve year liability period? Does the contract contain a limitation of liability clause? What insurance requirements are there?

As the above hopefully demonstrates, there are a plethora of issues to be considered by both employer/contractor/consultant alike. There is no ?one size fits all? scenario and as a result of this care should be taken when signing up to any form of contractual undertaking without first considering the risks

Author: Bryan Hoare