Construction Contract Law

Definition of Terms
 Procurement

This term has already been defined in previous sessions

 Letter of intent

• Interim agreement that summarizes the main points of a proposed

deal, or confirms that a certain course of action is going to be taken.
Normally, it does not constitute a definitive contract but signifies a
genuine interest in reaching the final agreement subject to due
diligence, additional information, or fulfillment of certain conditions.
The language used in writing a letter of intent is of vital importance,
and determines whether it is only an expression of intent or an
enforceable undertaking. Also called 'memorandum of understanding'
or 'precontract'.
Read more: http://www.businessdictionary.com/definition/letter-of-
intent-LOI.html
 Tenders and Bidding

This term has already been defined in previous sessions

 Subject to contract

• Subject to contract" is used when the parties do not intend any legal
consequences to flow from the communications. It is often used during
contract negotiations, such as when negotiating heads of terms, to ensure
no legally binding contract is created inadvertently.
• It seems clear that the term ‘Subject to Contract’, in terms of the sale of
land, traditionally meant that, in the absence of a formal contract, no
binding agreement arises. The use of this wording in construction projects,
however, does not ensure the same degree of certainty. From the legal
cases referred to, it is not clear that whether a letter which is headed
‘Subject to Contract’ does or does not constitute a binding contract
depends upon the wording in the letter.
 Due diligence
Due diligence is referred to in a construction contract, placing an
obligation on the contractor to complete the works with care and the
'requisite effort'. A similar term may refer to 'ordinary care', that is, the
care that a reasonable person would take to avoid harm to other
persons or property.
• https://www.designingbuildings.co.uk/wiki/Due_diligence_when_sel
ecting_contractors_or_subcontractors

• https://www.designingbuildings.co.uk/wiki/Due_diligence
 Programme

• Most construction contracts require the contractor to produce a programme of works.

This can be a non-contractual reference point for how work will be carried out or it can
impose obligations to deliver the works in a certain way and by certain dates.
• If the programme of works is included in the list of contract documents it will become
binding on the parties. There are benefits and risks associated with doing that.

• Incorporating the programme as a contract document

• There is no set form that a construction programme must take. As a minimum the
programme should specify the commencement date, the order in which the contractor
plans to carry out the contract works and the planned completion date. The contract may
stipulate other information to be included in the programme.

https://www.out-law.com/topics/projects/projects-procurement-and-
contracts/programmes-of-works-and-construction-contracts/
 Delays and Delay Analysis

https://www.lexisnexis.com/uk/lexispsl/construction/synopsis/93690:9
6249/Issues-in-construction-contracts/Delay-and-
disruption?wa_origin=gnb
 Loss and Expense/Additional Cost
• Loss and expense is a wider term that refers to matters which are the responsibility of the client that materially affect the progress
of the works. This includes matters that disrupt, rather than delay the progress of the works, but still entitle the contractor to make
a claim for additional costs incurred.
• Construction contracts will generally provide for the contractor to claim direct loss and/or expense as a result of the progress of
the works being materially affected by relevant matters for which the client is responsible, such as:
• Failure to give the contractor possession of the site.
• Failure to give the contractor access to and from the site.
• Delays in receiving instructions.
• Opening up works or testing works that then prove to have been carried out in accordance with the contract.
• Discrepancies in the contract documents.
• Disruption caused by works being carried out by the client.
• Failure by the client to supply goods or materials.
• Instructions relating to variations and expenditure of provisional sums.
• Inaccurate forecasting of works described by approximate quantities.
• Issues relating to CDM.
• Claims may comprise costs resulting from disruption to the works or from
delays to the works (prolongation).
• The contractor must give written notice of a claim as soon as it becomes
reasonably apparent that the regular progress of the works is being
materially affected. This need not necessarily result in a delay to the
completion date, and so claims for loss and expense and claims for
extensions of time do not necessarily always run together.
• Claims are restricted to 'direct' loss and expense and so 'consequential
losses' (such as lost production) are generally excluded. Direct losses are
those that 'flow naturally' from the breach of contract.
 Extension of Time
• Extension of time EOT in construction contracts. Construction
contracts generally allow the construction period to be extended
where there is a delay that is not the contractor's fault. This is
described as an extension of time (EOT).
• When it becomes reasonably apparent that there is, or that there is
likely to be, a delay that could merit an extension of time, the
contractor gives written notice to the contract administrator
identifying the relevant event that has caused the delay.
• If the contract administrator accepts that the delay was caused by a
relevant event, then they may grant an extension of time and the
completion date is adjusted.
 Time at large
https://www.designingbuildings.co.uk/wiki/Time_at_large
Q. What is meant by ‘time at large’? How does it affect the employer’s
entitlement to levy liquidated damages for late completion?
Time is at large when a contract is entered into with no period of time fixed
for completion. Where this occurs, the contractor’s obligation is to complete
work within a reasonable time. There may also be circumstances which arise,
rendering a completion period fixed by the contract as no longer operable,
again rendering time at large. An example is where a delay is caused by the
employer and the terms of the contract make no provision for extending the
completion date due to delays by the employer. A failure on the part of the
architect, contract administrator or engineer to administer the extension of
time clause as required by the contract, or interference on the part of the
employer in the extension of time process, to the detriment of the
contractor, would also render time at large. Where time becomes at large,
the contractor’s obligation is to complete the work within a reasonable time.
 Fit for purpose
• The problem may stem from the wording in the Supply of Goods and
Services Act which provides that where an employer either expressly
or by implication makes known to a contractor any particular purpose
for which the building is to be built, there will be an implied term the
building will be reasonably fit for that ...
• http://www.buckles-
law.co.uk/site/library/new_construction_news_section/fit_for_purpo
se.html
• https://www.designingbuildings.co.uk/wiki/Fitness_for_purpose_in_c
onstruction
 Variations and/or additional work
• A variation (sometimes referred to as a variation instruction, variation order or change order) is an alteration
to the scope of works in a construction contract in the form of an addition, substitution or omission from the
original scope of works.
• Almost all construction projects vary from the original design, scope and definition. Whether small or large,
construction projects will inevitably depart from the original tender design, specifications and drawings
prepared by the design team.
• This can be because of technological advancement, statutory changes or enforcement, change in conditions,
geological anomalies, non-availability of specified materials, or simply because of the continued
development of the design after the contract has been awarded. In large civil engineering projects variations
can be very significant, whereas on small building contracts they may be relatively minor.
• Variations may include:
• Alterations to the design.
• Alterations to quantities.
• Alterations to quality.
• Alterations to working conditions.
• Alterations to the sequence of work.
 Breach of contract

• If one of the parties to a contract fails to perform as required by the

contract, this may constitute a breach of contract. A breach of contract
may entitle the innocent party to make a claim for damages for the losses it
has suffered.
• If the breach of contract is serious (a material breach), then the innocent
party may also consider that it is discharged from any further obligations
under the contract.
• If the breach is less serious, (a non-material breach, sometimes referred to
as a default) the innocent party may make a claim for damages, but may
not consider it is discharged from any further obligations under the
contract. This prevents the innocent party from excusing their performance
because of a minor breach of just one part of the contract.
 Interpretations

• Where there has not been a clear mistake in a contract, things become
more complex. A very literal reading might give one particular meaning to a
clause, but another party might say that this meaning was obviously not
the one which both sides had meant to achieve during negotiations or
when they signed the contract. A court's first point of reference will be the
Golden Rule: words should be interpreted in line with everyday usage and
given their natural and ordinary meaning. This should apply unless it
results in an absurdity or inconsistency with the rest of the contract. In this
case, the grammar and ordinary sense of the words can be modified as far
as is needed to resolve the absurdity or make business common sense of
the contract if it is clear what the parties must have meant, but no further.
 Errors
• It is a Clear cut mistake !!
• In contract law, a mistake is an erroneous belief, at contracting, that
certain facts are true. It can be argued as a defense, and if raised
successfully can lead to the agreement in question being found void
ab initio or voidable, or alternatively an equitable remedy may be
provided by the courts. Common law has identified three different
types of mistake in contract: the 'unilateral mistake', the 'mutual
mistake' and the 'common mistake'. The distinction between the
'common mistake' and the 'mutual mistake' is important.
 Misrepresentation

• The law of misrepresentation concerns liability for making untrue

statements of fact before a contract is signed. Such statements may
be made innocently, negligently or fraudulently. A claim arises where
the false statement was made in order to induce the other party to
enter into a contract and the other party was influenced by and relied
on the statement when deciding to enter into the contract.
 Insolvency / Liquidation
• United Kingdom insolvency law regulates companies in the United
Kingdom which are unable to repay their debts. While UK bankruptcy
law concerns the rules for natural persons, the term insolvency is
generally used for companies formed under the Companies Act 2006.
"Insolvency" means being unable to pay debts.
• If a company cannot be saved it is "liquidated", so that the assets are
sold off to repay creditors according to their priority.
 Collateral warranty

• Collateral warranties are used as a supporting document to a primary

contract where an agreement needs to be put in place with a third
party outside of the primary contract. Sometimes an architect,
contractor, or sub-contractor will need to warrant to a funder, tenant
or purchaser that it has fulfilled its duties under a building contract.
• Collateral warranties often contain obligations that affect the
consultant or contractor, such as using materials of an appropriate
quality, and carrying out work in a professional, workmanlike manner.
It can also provide the third-party contractual rights enabling it
to claim for losses which would not otherwise be recoverable.
 Insurance

• If the work is being carried out under a JCT contract then this will
specify how the project is to be insured.

• These clauses of the JCT contract require the property owner

(employer) to insure both the existing structure and the works in
joint names with the contractor.

• It is very important to know the types of insurances as part of

Contract Administration
 Bonds

• Bonds are a means of protection against the non-performance of the

contractor. They are an undertaking by a bondsman or surety to make
a payment to the client in the event of non-performance of the
contractor. The cost of the bond is usually borne by the contractor,
albeit, this is likely to be reflected in the contractor's tender price.
• Bonds can be 'on demand' or 'conditional', with conditional bonds
requiring that the client provides evidence that the contractor has not
performed their obligations under the contract and that they have
suffered a loss as a consequence.
 Liability
• Liability for Defects in Construction Contracts - who pays and how
much? Unsurprisingly, defects are one of the major causes of dispute
and in construction litigation. Dealing with construction failures
requires various degrees of familiarity with law, building technology
and practice.
• https://www.fenwickelliott.com/sites/default/files/Liability%20for%2
0Defects%20in%20Construction%20Contracts.pdf
 Tort, Negligence and nuisance
• The law of tort is defined as a body of rights, obligations and
remedies that is applied by courts in civil proceedings to provide relief
for individuals or victims (claimant or plaintiff) who have suffered
harm from the wrongful acts of others (defendant).
• English tort law is the law governing implicit civil responsibilities that
people have to one another, as opposed to those responsibilities laid
out in contracts. It provides legal remedies, often the payment of
money, to those who have been damaged by someone else's failure
to meet these implicit responsibilities. Other countries' tort laws can
work quite differently.
 The tort of negligence

• The most common form of tort law is that of negligence. For liability
in negligence to be founded, four key ingredients must be present:
• • duty of care
• • breach of that duty
• • damage (which is caused by the breach)
• • foreseeability of such damage
 Liquidated/Delay Damages
• Contracts generally include a provision for the contractor to pay
liquidated damages (or liquidated and ascertained damages,
sometimes referred to as LAD's) to the client in the event that the
contract is breached. In building contracts, liquidated damages
usually relate to the contractor failing to achieve practical completion
(ie completing the works so they can handover the site to the client)
by the completion date set out in the contract.
• Liquidated damages are not penalties, they are pre-determined
damages set at the time that a contract is entered into, based on a
calculation of the actual loss the client is likely to incur if the
contractor fails to meet the completion date. They might include, rent
on temporary accommodation, removal costs, extra running costs and
so on. They are generally set as a fixed daily or weekly sum. There
may be a more complicated formulae where the works are phased, or
where there will be partial possession. It is important that the
method of calculation is formally documented.
• If the contract prevents the client claiming liquidated damages, or if
actual losses are significantly different to those that were estimated
at the time the contract was entered into, then the client may pursue
a claim for unliquidated (i.e. actual) damages through the courts. This
would require them to prove that an actual loss had been incurred
and that loss was not too 'remote'.
• As liquidated damages are not a penalty, they must have been based
on a genuine calculation of damages when they were set.
 Certificates and payment

• Document verified by an architect, engineer, or owner of a

construction project that the noted work has been completed and is
approved for payment by the general contractor.
 Conditions and warranties
• Conditions
• A condition is a major term of the contract which goes to the root of
the contract. If a condition is breached the innocent party is entitled
to repudiate (end) the contract and claim damages:

• Warranties

• Warranties are minor terms of a contract which are not central to the
existence of the contract. If a warranty is breached the innocent party
may claim damages but can not end the contract:
 Dispute and resolution
ADR
• Alternative dispute resolution (ADR) refers to a range of techniques for resolving disputes
without seeking redress from the courts.
• Choosing ADR can help avoid lengthy and expensive litigation. It is flexible and cost effective and
can bring a speedy conclusion to a problem.
• Techniques include:
• Adjudication involves the appointment of an independent adjudicator who considers the
evidence and makes a decision which is binding to all parties. It is widely used within the
construction industry.
• Arbitration involves the parties agreeing to refer the dispute to a third party (the arbitrator) and
agree to be bound by the arbitrator’s decision.
• Mediation involves the appointment of an independent third party (the mediator) whose role is
to help all parties to a dispute to come to an agreement. It is a voluntary process and all parties
have to agree for mediation to go ahead. Mediation is not binding.
• Negotiation is the process of getting parties together with a view to reconcile differences and
establish areas of agreement, settlement or compromise.
 Adjudication

• JCT’s Adjudication Agreement is designed for use where an

adjudicator is to be appointed as a result of a construction dispute
arising under a JCT main contract, sub-contract, or agreement.
• Adjudication is a contractual or statutory procedure for swift interim
dispute resolution. Adjudication is provided by a third party
adjudicator selected by the parties to the dispute. Adjuducation is
often is subject to a strict timetable and may be based purely on
documentary submissions (see for example NEC Engineering and
Construction Contract, option W2). Adjudicators can adopt an
inquisitorial role which may involve taking the initiative in
ascertaining facts and law.
 Party wall

• The Party Wall etc Act 1996 provides a framework for preventing and
resolving disputes in relation to party walls, boundary walls and
excavations near neighbouring buildings. A building owner proposing
to start work covered by the Act must give adjoining owners notice of
their intentions in the way set down in the Act.18 Jun 2013
• A Party Wall Agreement (technically called an “award”) is the
document produced by the two party wall surveyors (or the “agreed
surveyor”) acting for the respective owners.
• It will usually consist of three parts:
•
• The award itself i.e. a set of guidelines governing how the proposed
works should progress
• A “schedule of condition” of the adjoining property, often supported
by a set of photographs
• Drawing(s) showing the details of the proposed works
• The award will normally be based upon a draft document, the most popular of which is produced
by the RICS, which is then amended according to the details of the specific work. It should clearly
state details of the two properties, their owners and their owners' addresses. It should also
contain full details of the two surveyors (or agreed surveyor) and the “Third Surveyor” (if an
“agreed surveyor” is used there will be no Third Surveyor).
• Other items covered include:
• Brief details of the proposed works
• Working hours; normally 8am to 5.30pm weekdays only of residential work
• Assurances regarding the contractor’s public liability insurance
• Indemnities by the building owner in favour of the adjoining owner
• Access arrangement for the surveyors

• A time limit for commencement of the works, usually 12 months

• The adjoining owner’s surveyor’s fee
 Practical Completion and Defects
• Practical completion is not defined in the standard JCT suite of
building contracts but the works are generally considered to be
practically complete when there are no outstanding defects (except
for minor items or snagging) and the building can be put to its
intended use.
• The contract administrator certifies practical completion when all the
works described in the contract have been carried out. Practical
completion is referred to as 'substantial completion' on some forms
of contract.
• Certifying practical completion has the effect of:
• Releasing half of the retention (an amount retained from payments
due to the contractor to ensure that they complete the works).
• Ending the contractor's liability for liquidated damages (damages that become
payable to the client in the event that there is a breach of contract by the
contractor - generally by failing to complete the works by the completion date).
• Signifying the beginning of the defects liability period.
• Documentation that should be issued to the client on certification of practical
completion might include:
• A draft building owner's manual.
• A building user's guide.
• The health and safety file.
• The building log book.
• A construction stage report.
• Once the certificate of practical completion has been issued, the
client takes possession of the works for occupation.
• There is no absolute definition of practical completion, and case law
is very complex. There is some debate about when practical
completion can be certified and whether it can be certified where
there are very minor (de minimis) items 'not affecting beneficial
occupancy' that remain incomplete.
• It is important to note however, that the defects liability period,
which follows certification of practical completion, is not a chance to
correct problems apparent at practical completion, it is the period
during which the contractor may be recalled to rectify defects which
appear following practical completion. If there are defects apparent
before practical completion, then these should be rectified before a
certificate of practical completion is issued.
• This can put the contract administrator in a difficult position, as both
the contractor and the client may be keen to issue the certificate (so
the building can be handed over) and yet defects (more than a de
minimis) are still apparent in the works. Issuing the certificate could
render the contract administrator liable for problems that this causes,
for example in the calculation of liquidated damages, the position in
relation to performance bonds and the release of retention when it is
not certain that the works will be completed.
• If the contract administrator is put under pressure to certify practical
completion even though the works are not complete, they might
consider informing the client in writing of the potential problems of
doing so, obtaining written consent from the client to certify practical
completion and obtaining agreement from the contractor that they
will complete the works and rectify any defects. If the contract
administrator is not confident about the potential problems, they
may advise the client to seek legal advice.
• On construction management contracts, a separate certificate of
practical completion must be issued for each trade contract. Once all
trade contracts (or all trade contracts for a particular section of the
works) have been issued, the construction manager issues a
certificate or project completion (or sectional completion). The same
is true on management contracts, where each works contract must be
certified individually. completion has actually been achieved.
• Practical completion is not a term recognised in some recently
developed contracts such as PPC 2000 and other partnering contracts
which simply refer to 'completion'. This can put the contract
administrator in a difficult position as to when the project becomes
'useable' by the client.
• If the project reaches a stage when the intended use by the client
(either immediate use, such as installing furniture or fitting-out, or
actual occupation by the end users) is possible, safely and without
affecting warranties, then the project may be deemed 'complete'.
The size and extent of the list of outstanding works and defects
requiring rectification will be the measure on which the contract
administrator judges whether
• If practical completion is not certified by the most recently agreed
completion date, then the contractor may be liable to pay liquidated
and ascertained damages to the client. These are pre-determined
damages set at the time that the contract is entered into, based on a
calculation of the actual loss that the client is likely to incur if the
contractor fails to meet the completion date. Some contracts require
that a certificate of non-completion is issued as a pre-requisite to
deducting liquidated and ascertained damages.
• NB: Sectional completion refers to a provision within construction
contracts allowing different completion dates for different sections of
the works. This is common on large projects that are completed in
sections, allowing the client to take possession of the completed parts
whilst construction continues on others. Sectional completion differs
from partial possession in that it is pre-planned and defined in the
contract documents.
 Implied and Express Terms of Contracts
• When two parties enter into a contract it is often assumed that the
only terms of the agreement are those written down or discussed.
Wrong. Behind the express terms are hidden terms, implied into the
agreement waiting to trip up the unwary.
• There are three ways in which a term may be implied into a contract:
• 1) Terms implied by Statute
• Increasingly terms which are implied by statute can take precedence
over the express terms of a contract. The factors which influence
whether a valid express term excluding the terms which would
otherwise be implied by statue include the relationship between the
parties, their relative bargaining power and the term sought to
exclude.
• The most significant provisions to be implied into construction
contracts in the last few years have been those from the Housing
Grants, Construction and Regeneration Act 1996 and Local
Democracy, Economic Development and Construction Act 2009. The
key terms implied being the right to interim payments and
adjudication under the Scheme for Construction Contracts. Everyone
entering into construction related contracts needs to know about
these terms.
• Other relevant implied terms include the Unfair Contract Terms Act
1977 which limits the applicability of disclaimers of liability and the
Sale of Goods and Services Act 1982 which implies obligations into
contracts for services for reasonable care and skill, completing within
a reasonable time and reasonable payment. These are all very useful
grounds to make claims if there is a dispute. In addition under and
Sale of Goods Act 1979 all goods sold in the course of business must
be of satisfactory quality.
• 2) Terms implied by custom
• In certain areas of business there are standard practices common to
all contracts of that nature. Therefore, even if the contract does not
include an express term that those practices apply, they may be
implied. However, the parties can avoid such terms by including an
express term to exclude them and getting their contract drafted
correctly in the first place.
• 3) Terms implied by the Courts
• Judgments often imply terms into contracts to give the agreement business
efficacy. An example of this is that in construction contracts there is an
implied term that a party must not prevent or hinder another party from
undertaking its contractual obligations otherwise this represents a breach
of contract. A contractor or subcontractor on the other hand, has an
implied obligation to proceed regularly and diligently with its works and to
mitigate any delays and will be in breach of an implied term if it fails to do
so.
• Ultimately, managing the risk of implied terms is best done at the pre-
contract stage by taking good legal advice on the terms to be incorporated
into the contract.
Rights and Remedies