We frequently see standard terms and conditions that cause parties problems because they include certain terms or fail to include others. This article will identify some of those problems to help you avoid them.
Exposure to ‘smash and grab’ adjudications
This issue can arise where a contract contains an inadequate payment mechanism, or no payment mechanism. For example, it is common to find wording like “Payment terms: 30 days” on a simple order form, without reference to any other payment terms.
The Housing Grants, Construction and Regeneration Act 1996 (as amended) sets minimum standards for payment terms in construction contracts. Among other things, these terms must:
- Allow for payment by instalments, stage payments or other periodic payments where the duration of the work is more than 45 days.
- Include a payment process with a due date and a final date for payment.
- Require the payer to issue a payment notice not later than 5 days after the due date.
- Where payment terms do not meet these minimum standards, provisions from the Scheme for Construction Contracts are implied into the contract instead, which require payment and pay less notices to be given.
Crucially, this means that payment or pay less notices must be issued within the relevant time periods, whether or not the contract says they must be issued.
If they are not issued then the payee can become entitled to payment of their payment application in full, whether or not the paying party agrees with the valuation and whether or not it is correct. The payee is likely to be able to recover this money via a ‘smash and grab’ adjudication, even if the true value of the account is substantially lower than applied for.
Parties unintentionally holding themselves to a higher standard
It is very easy to include everyday language in a construction contract that has a specific legal meaning which is different from what it was intended to mean. This can have very serious consequences. For example:
“We shall ensure that all our works are completed in a good and workmanlike manner and are fit for purpose.”
The intention of such wording is likely to be reasonable, but the difficulty is that the inclusion of the phrase “and are fit for purpose” has a specific meaning that means that the works must achieve a specified result.
This can be especially problematic if a specification reaches a long way into the future. For instance, if it is specified that a design and build contractor must install “foundations that last for 20 years” and the contract states the works shall be fit for purpose, the foundations must last 20 years or the contractor may be liable for their repair. It does not matter that the foundations were installed properly at the time, using state of the art materials and techniques.
This can create unexpected liabilities that are hard to quantify. Most significantly, professional indemnity insurance policies generally do not cover construction claims relating to ‘fit for purpose’ obligations. They will only provide cover for design obligations to use reasonable care and skill.
Risks of contracts not being back-to-back
This can arise when a contractor signs up to a contract with an employer based on a standard set of terms such as the JCT contracts, but which have been amended by the Employer. The contractor then enters into a sub-contract based on an equivalent JCT sub-contract, but fails to make equivalent amendments to the sub-contract or does not make them correctly.
The contractor is then on a more onerous set of terms with the employer than the sub-contractor is on with the contractor. For example, the main contract might have been amended to remove the Relevant Event for “exceptionally adverse weather conditions” so the contractor cannot claim an extension of time if that causes delay. If the contractor does not include an equivalent amendment in its sub-contract, the sub-contractor would be entitled to additional time for such weather, but the contractor would not.
This can be prevented by ensuring that any main contract amendments are dropped down into sub-contracts, so that they are sufficiently back to back with the main contract.
No entitlement to withhold retention
For a party to withhold retention, there must be a valid retention clause. Where there is no retention clause or a retention clause is invalid, then all of the retention money is payable immediately.
Sometimes we see terms or order forms that simply state a retention percentage with no accompanying terms explaining how it is to be held or released. That creates ambiguity and arguments about whether retention can be held and there may be no entitlement to hold it at all.
Additional works are invalid because of a lack of written instructions
Contractors sometimes include terms in their sub-contracts requiring an instruction to be given in writing by the contractor before there is any entitlement to payment for a variation. This can be helpful for avoiding unwanted claims, but contractors sometimes include similar provisions in their contract with the employer, which means that great care needs to be taken.
If the contractor accepts a verbal instruction for extra work from the employer then that clause means the instruction is likely to be invalid, so the contractor would not be entitled to payment for the variation from the employer and, even worse, the contractor may be required to put the work back in accordance with the original scope of the contract!
How CCC can help
There are many ways in which pitfalls such as those described in this article can arise and their financial implications can be significant. We can prepare standard terms and conditions which are designed to avoid these pitfalls and give you better protection. We can assist you so that your terms and conditions:
- Are up to date with the current law.
- Are drafted to specifically target problems that you have experienced on projects previously so that they can be avoided in the future.
- Address major areas of risk that are impacting profits. For example, we can include fluctuation clauses to give you a route to claim for changes in material and/or labour costs.
- Give you better protection in the event of non-payment. This could include clauses enabling you to terminate a contract in the event of non-payment of a sum due and other remedies that will enable you to take more proactive action if payments are not made.
- Limit your liability so that your risk and exposure is not limitless.
We can provide bespoke terms and conditions with fees typically starting from £950 + VAT.