Construction contracts, an overview

What standard contract forms are used for construction and design? Must the language of the contract be the local language? Are there restrictions on choice of law and the venue for dispute resolution?

Standard forms

A number of standard form contracts have been created in an attempt to provide standardisation and as a means of addressing the risks and issues that may arise on a construction project. For the most part these will cover the same key issues, including obligations to carry out and make payment for the works; provisions relating to design development; the obtaining of approvals and consent; time for completion, delays and extensions of time; variations; insurance; price adjustments for changes in law, inflation, etc; commissioning, completion and handover; and the rectification of defects after completion.

Domestically, one of the more commonly used standard form contracts is the Joint Contracts Tribunal (JCT) suite of contracts. The JCT suite includes the design-and-build contract, standard form (traditional procurement), intermediate form and minor works contract together with suites for construction management and management contracting options. These standard forms are also often amended to reflect project-specific requirements and the agreed risk profiles of the parties. In addition, the NEC3 and now NEC4 suite of contracts are continuing to grow in popularity, particularly in the public sector.

Factors such as the nature, value and complexity of the project, the procurement model and the client’s drivers and desired outcomes will inform the choice of contract on a project.

There are a range of standard form professional appointments used by consultants: the Royal Institute of British Architects Agreements 2010, the Royal Institution of Chartered Surveyors Forms of Appointments, the NEC Professional Services Contract and the Association of Consulting Engineers Agreements. However, clients often prefer to use bespoke appointments to capture project-specific requirements and to ensure a degree of consistency across the project team.

Language

There is no legal requirement for English to be the language of the contract, but generally English is used.

Choice of law

The parties to a contract are free to select the governing law and venue for dispute resolution. If a contract does not state the governing law, the contract will be subject to the application of Rome I (Regulation (EC) No. 593/2008).

Payment methods

How are contractors, subcontractors, vendors and workers typically paid and is there a standard frequency for payments?

Contractors, subcontractors, vendors and workers are normally paid electronically. Frequency of payment will depend on the individual contract, but typically payment is made on a monthly or milestone basis.

Frequency of payment will also depend on whether the work being carried out falls within the ambit of the Housing Grants Construction and Regeneration Act 1996 (the Construction Act).

If a contract is a ‘construction contract’ as defined by the Construction Act, and if the work is over 45 days in duration (or the parties agree that it will be over this duration), then the contract payments must be made on a periodic basis. In other words, the parties cannot agree that one lump sum will be paid for the entire construction project. Apart from this proviso, the parties are free to agree the amounts of payment, the intervals between payments or the circumstances in which the payment is due.

If the contract fails to comply with the Construction Act then the Scheme for Construction Contracts (the Scheme) sets out a fallback payment regime. If a contract’s payment regime does not comply with the Construction Act then the provisions that do not comply will be void and the relevant Scheme provisions will be implied in their place. If the Scheme payment regime applies, payment must be made every 28 days during the project and the final payment will be due 30 days after completion of the work or the making of a claim by the payee (whichever is later).

Contractual matrix of international projects

What is the typical contractual matrix for a major project in your jurisdiction in terms of the contractual relationships among the various construction project participants?

The main options typically seen in construction projects are described below. However, these should not be considered as mutually exclusive, and often a hybrid or tailored solution will be adopted for complex projects.

Traditional (design, bid, build)

The developer engages a team of consultants to design and specify the works in detail, and separately appoints the contractor (commonly following a competitive tender process) to construct the works as designed for a lump-sum price. This option allows the developer to retain control over the quality of design, but it is a slow (sequential) process and may not be suitable where rapid delivery is critical. It can also lead to problems of coordination between team members and issues of split responsibility for late completion or defects.

Design and build

The developer produces outline requirements only and engages a contractor to design and construct a facility that meets those requirements. Otherwise known as turnkey construction or, especially in an international context, engineering, procurement and construction (EPC). This route is potentially faster (as it allows the overlapping of design and construction) and imposes ‘single point’ liability on the contractor, thus avoiding issues of coordination and split responsibility. However, in return, the developer may lose some elements of control over design quality, as the contractor can be motivated to deliver the cheapest solution that meets the brief. It can also be expensive to make changes to the developer’s requirements during construction.

Construction management

In an engineering or international context, construction management is often known as EPCm. Under this route, the developer enters into separate package contracts with each trade contractor and engages construction management on a fee basis as part of its consultant team. Construction management does not assume contractual responsibility for delivery of the works but helps to manage the process and provides advice in areas such as programming, cost planning, buildability and packaging of work. While construction management offers advantages in terms of speed and flexibility, it does not provide initial cost certainty and the developer retains the risk of default or insolvency by trade contractors. As a result, it is generally suitable only for developers with significant resources, expertise and buying power.

PPP and PFI

Is there a formal statutory and regulatory framework for PPP and PFI contracts?

While there is no formal or statutory regulatory framework for the PPP or PFI (now PF2) forms of contracting, the Infrastructure Projects Authority, an arm’s-length body within both HM Treasury and the Cabinet Office, is responsible for guidance and advice publication, and HM Treasury has a wide role in policy.

However, the government announced in October 2018 that the PF2 form of contracting would no longer be used as it was ‘inflexible and overly complex’ and that the Office for Budget Responsibility believed the schemes to be a ‘source of significant fiscal risk to government’. Existing contracts under the PFI and PF2 system are to be honoured but no new contracts will be signed. While there is currently no UK central government (or English local authority) model PPP contract, the non-profit distributing (NPD) PPP model still technically exists in Scotland and Wales has an NPD-variant called Mutual Investment Model PPP contract, which is currently in active use for school procurement.

Joint ventures

Are all members of consortia jointly liable for the entire project or may they allocate liability and responsibility among them?

The liability of the consortia members will depend upon how they have allocated liability and responsibility among themselves as part of their commercial arrangement. However, it is often the preference of the contracting authority that all parties to the consortia are jointly and severally liable.

Tort claims and indemnity

Do local laws permit a contracting party to be indemnified against all acts, errors and omissions arising from the work of the other party, even when the first party is negligent?

Although local laws permit indemnities, the reality is that they are very rarely used in English contracts. Where they are used, they tend to be limited to circumstances of damage to or theft of third-party property, and in such cases are linked to breach of contract or negligence.

Certain losses cannot be indemnified; for example, losses caused by fraud, crimes or deliberate acts.

Liability to third parties

Where a contractor constructs a building that will be sold or leased to a third party, does the contractor bear any potential responsibility to the third party? May the third party pursue a claim against the contractor despite the lack of contractual privity?

Under English law, only parties to a contract may bring a claim under it. As a result, third parties with an interest in a building project cannot point to a breach of the building contract and use it as the basis for an action against the contractor, in respect of defects in the building. They must find another legal basis on which to bring a claim.

Collateral warranties and third-party rights are the two key vehicles that have been developed to provide third parties with a legal basis to make a claim for breach of a contract to which they are not a party.

A collateral warranty is simply a contract that is ‘collateral’ to the primary contract between a supplier and an employer under which the supplier acknowledges that it owes the same duties to the third party as it owes to the employer. Though the concept of collateral warranties is very simple, they have been a contentious subject from the outset. Suppliers (and their insurers) objected to extending rights to third parties, thus creating a potential legal liability that would not otherwise exist.

Partly in a bid to address these problems, the Contracts (Rights of Third Parties) Act 1999 was introduced. This Act creates an exception to the privity of contract rule by allowing identified third parties to bring a claim under the primary contract against a supplier that is responsible for a defect. The third party must be specified in the primary contract (either by name or class) as someone who is to obtain the benefit of the Act. The third party’s right to claim will be no greater than, and will be subject to the same defences as, a claim brought by the employer against the supplier.

The alternative is for the third party to pursue a claim in tort, most likely the tort of negligence. However, there is only a very limited ability to claim in tort in instances of defects to a building and often only in exceptional circumstances.

Insurance

To what extent do available insurance products afford a contractor coverage for: damage to the property of third parties; injury to workers or third parties; delay damages; and damages due to environmental hazards. Does the local law limit contractors’ liability for damages?

Types of insurance commonly required on a construction project include the following.

• All-risks insurance: covering against physical loss or damage to the work executed and site materials and against the reasonable cost of removal and disposal of debris, shoring and propping of the works that results from the physical loss or damage. This is typically maintained by the contractor for a new building until practical completion, and by the employer for refurbishments and on some major projects.
• Public liability insurance: covering liability for death or personal injury to third parties (other than the insured’s own employees) and liability for damage to property belonging to third parties. This is typically required from consultants and design and build contractors and must be renewed for the duration of their liability.
• Professional indemnity insurance: covering claims made against the insured professional arising from the conduct of the insured’s professional activities and duties. This is normally taken out by any professional providing design services and must be maintained throughout the insured professional’s period of liability.
• Employers’ liability insurance: covering an employer against claims from its employees for death, injury or disease arising out of their employment. This is maintained by the employer throughout the period of employment and is the only insurance required by statute (Employer’s Liability (Compulsory Insurance) Act 1969). Unless it is exempt from this Act, a party must maintain insurance cover of not less than £5 million for each occurrence.
• Non-negligent insurance: covering liability that the employer may incur or sustain as a result of injury or damage to neighbouring property caused by collapse, subsidence, heave, vibration, weakening or removal of support or lowering of groundwater, arising out of the course or because of the works. The contractor typically maintains this insurance in its and the employer’s name.
• Product liability insurance: covering liability for injury to people or damage to property, arising out of products supplied by a business. This is typically taken out by manufacturers and contractors.
• Latent defects insurance: (also known as decennial insurance) protects the building owner or occupier from material fault or damage to the building. This is usually taken out when a building is constructed or altered and will typically last 10 years from the completion of those works. To call on the policy the building owner or occupier does not have to prove fault. Policies tend to cover structural defects or defects in the building envelope but will only cover other defects (such as in mechanical and electrical systems or plant) where specifically added to a policy.
• Delay in start-up insurance (DSU): typically covers a scenario where there has been physical loss or damage that delays the start of the income stream that would have arisen from a completed project. DSU is similar in nature to business interruption insurance, which applies where a building is complete and operational but then a fault arises that interrupts the income stream.

Insurance against liquidated damages is not generally available in the UK insurance market.

Various environmental insurance products are available that afford coverage for losses such as historical contamination, loss from contamination caused by ongoing operations, loss arising from cost overruns during remediation, loss arising from contractors operating on third-party sites, and pollution and environmental liabilities arising from the business activities.

Limitation of liability

There are no statutory or legal provisions that impose mandatory limits on a contractor’s liability. However, it is open to the parties, subject to the constraints of the Unfair Contract Terms Act 1977, to agree limitations on liability.

Source: Lexology