Construction law knowhow by David Lewis

The dangers to clients of using JCT forms of contract unamended

29/05/2010 15:18

It is not always a good idea for clients to use JCT building contracts unamended.

Non-contentious construction lawyers will be familiar with the necessary amendments, which in some cases differ depending on which form of contract is used.

Site conditions

JCT contracts say little or nothing about which party is responsible for unforeseen ground conditions, which obviously can cause a great deal of additional expense.

So what is the position where the contract is silent? If the contract is “traditional”, it is probably the client who takes the risk because the contractor’s role is “execution only”. But with design and build contracts the risk is usually borne by the contractor because he has agreed to produce a finished product, whatever the circumstances (more or less).

These prima facie indications can be reversed by an express provision in the contract. They can also be put in doubt if a ground engineer’s report is annexed to the contract, because by providing such a report the client may be representing or warranting that the site conditions are in accordance with it.

A suitable amendment to the standard form of contract can make it clear that the risk lies with the contractor (or, of course, with the client if that is preferred).

Novation of designers’ appointments

In design and build contracts it is a common arrangement for an architect or engineer who has been appointed by the client to “switch sides” and start working for the contractor after the contract has been signed. This process is called “novation”, which is the legal terminology used to describe the replacement of a contracting party by another person. Though not an essential part of novation, the arrangement usually involves the contractor taking responsibility for the Employer’s Requirements document which the novated designers earlier prepared for the client.

A number of commentators have criticised design novation for sound reasons which are outside the limited scope of this paper. But the practice is extremely popular with clients because it tends to increase the contractor’s risk.

Whatever its rights and wrongs, novation of design and build contracts seems here to stay for the foreseeable future. But the JCT design and build contract does not cater for it, so novation requires suitable amendment of the standard form, together with the preparation of a deed of novation.

Contract Particulars

The Contract Particulars are the part of a JCT building contract where the parties write in the date of possession, the date for completion, the amount of liquidated and ascertained damages, and many other parameters applying to the project in question. They must also be completed appropriately where the client wants to give third parties – lenders, buyers and tenants – a right to sue the contractor for defective work.

In theory it should be possible for clients and their technical advisers to complete the Contract Particulars without legal help, and with some exceptions this is true.

But it would be very difficult for a person who is not legally trained and familiar with collateral warranties and third party rights to complete correctly Parts 2 and 3 of the Contract Particulars, which relate to third party rights. Though not strictly speaking about amending the form of contract, it will rapidly become clear to most people reading those parts of the Contract Particulars that they are going to need some legal help if they want to give effective rights to lenders, buyers or tenants.

Other desirable amendments

Lawyers’ amendments to JCT standard forms also changes which –

• clarify the contractor’s duty to work to a suitable quality of design, workmanship and materials;
• require the contractor to prepare a programme for the works; and
• correct a number of drafting errors or inadequacies in the standard forms.

Can risks be covered in the contract preliminaries?

Contract Preliminaries can certainly deal with all the risks mentioned but, unless they have been prepared by an experienced lawyer who has taken the particular circumstances of the project into account, they may not succeed in avoiding the risk.

Summary of risks

By not amending the contract, or by relying on contract preliminaries which may not be legally adequate, clients run numerous risks including:

1. Leaving client at risk if the site is contaminated or ground conditions are not suitable for the works
2. Leaving pre-contract design risk with the client under a design and build contract
3. Errors in the Contract Particulars affecting the client in numerous ways
4. Failure to obtain a performance bond, parent company guarantee or director’s guarantee
5. Failure to obtain collateral warranties or third party rights for lenders, purchasers or tenants, thereby reducing marketability of property or putting client in breach of loan facility or funding agreement
6. Inability to require contractor to prepare a programme for the works
7. Miscellaneous risks to do with poor drafting

Conclusion

Clients and contractors sometimes complain bitterly about the length of lawyers’ amendments, which often run to many pages.

These complaints are not without justification, but most of the lawyers’ amendments result from inadequacies in the standard forms themselves. These forms are over-long and over-complicated; they often deal in great detail with situations that hardly ever arise (such as bonds to secure advance payments and payment for off-site materials), while making no provision for common events such as bonds to secure the performance of the works. Moreover, the sheer number of different forms of JCT contract, many of which have several variants, adds another dimension of complexity.

While the JCT has done much to improve and simplify its standard forms in the 2005 editions, it is still not enough. And, while it is tempting for lawyers to use alternative forms of contract such as NEC or FIDIC, the JCT forms of building contract remain the most commonly used in the industry and are still “best practice” for lawyers and consultants advising on projects in the United Kingdom.

So for the time being, it remains in clients’ best interests to engage lawyers to amend JCT forms of contract.
 

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