Jonathan Nugent, Managing Director of Arbicon, the leading construction contract claims consultant gives an insight and tips into 10 examples of typical onerous clauses that often appear in construction contracts. Jonathan considers the legal and practical consequences of their negative effect for the payee. Do you know what you have signed up to?
1. Payment Provisions
Where the contract is a construction contract (as defined by the Construction Act) then it must contain payment provisions that comply with the Construction Act.
To comply, the contract must (amongst other matters):
• Provide an adequate mechanism for determining what payments become due under the contract, and when.
• Provide for a final date for payment in relation to any sum which becomes due.
• Provide for the giving of a payment notice no later than five days after the due date.
A clause which fails to meet the above criteria will not satisfy the Construction Act. Furthermore, a non-complaint clause can often be vague and lead to confusion and disputes between the parties as to when applications are to be issued and when payment becomes due, or when payment is to be made.
For example, terms that simply state “30-day payment” is non-compliant and unclear as it is not clear from what date the 30 days is calculated from, when the due date arises, when the final date for payment arises, nor whether it is the payer, or the payee is required to issue a notice.
Where terms are inadequate like this, “the Scheme” is implied into the contract. The Scheme (The Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011) is in effect a statutory set of payment terms which defines the due date, payment period and final date for payment and any other payment terms such as, 7 days before the payment period end, for the service of a for a Payless Notice.
Contracts will also include condition precedents to payment, such a “sign this” or “complete this form or you will not be paid”. Such clauses are void as the Construction Act imposes an absolute right to payment.
Other well-known examples are “pay-when-paid” or “pay when certified under another contract” the Construction Act specifically makes such clauses void.
Also look out for extended and lengthy payment provisions. These can often be disguised. The unwary payee will often confuse the “due date” and the “final date for payment” or “the valuation date”. “Due Date” is a legal term, which means the start of the payment process period not the end of it. Stating the due date is 30 days after receipt of your application does not mean you get paid after 30 days! It means the payment process starts 30 days after the application goes in. Predictably, it will follow on to say the “Final date for Payment” is then 30 days later. Again, this is a legal term that means the day you actually get paid. What this type of clause means is 90-day terms; 30 days to the valuation date, then 30 days to the due date, then 30 days to the final date for payment. You can then guarantee that the Pay Less Notice provision is 1 day. So you can in theory work for 89 days and on day 89 you receive a Pay Less Notice stating you are not entitled to payment. It does not need to be said that such a clause is not palatable.
It is important to review payment provisions in the contract in detail to identify and understand what they actually are! It can be complex given the Construction Act rules. Identify onerous or non-compliant or vague payment provisions within contracts then care should be taken to negotiate amendments to the clauses to ensure clarity and compliance.
2. Defects and Retention
Following on from payment, consideration also needs to be given to the mechanisms for the release of retention. In addition to risk of vague terms set out above, bespoke or amended contracts may contain onerous retention mechanisms.
For example, it is not uncommon to see clauses in subcontracts that are drafted to only release retention to the subcontractor on completion of the main contract works or the issuing of the certificate of making good defects under the main contract. Such clauses are non-compliant to the Construction Act. It is prohibited to proffer a clause that makes payment conditional on performance under another contract, however many do not realise this, and money is wrongly withheld and the payee can rightfully force payment of their retention.
You should also look out for excessively long retention periods. Again, this is most common in sub-contracts, where the main contractor may release their retention after 12 months but the subcontractor is signed up to release in 24 months.
Often the contract does not contain retention provisions and 5% often is then taken anyway. There is no legal right or implied right to take retention, it must be agreed. If there is no provision and it is deducted there must be a protest by the payee every time it is taken otherwise it might be taken that it has been accepted, further it should not feature in any applications for payment, that makes the hill difficult to climb later when arguing retention was not agreed! Where there are no terms, how is it to be repaid or at all?
Again, ensure the contract and procedure is right from the start.
A set-off clause is one which allows the employer to make deductions for payments to the contractor for any money which the contractor owes to the employer.
Whilst set-off clauses are permissible, care should be taken to understand the extent of the rights and remedies that they afford to the employer, and likewise the risk placed on the contractor.
For example, it would be reasonable if the set-off clause allows the employer to deduct money that the employer has evidenced to be due under the contract terms and requires the employer to issue a Payless Notice prior to recovery. Whereas it may be unreasonable to allow the employer to set-off and deduct sums without evidence based on an estimate of what might be due now, or in the future.
Care should also be taken with set-off clauses that not only allow deduction from sums due, but also require reimbursement to the Employer, such clauses could cause cashflow problems for the contractor.
Clauses which allow the Employer to set-off sums due under one contract against sums reimbursable under a different contract may also be problematic and should be treated with caution. It is likely that such clauses fall foul of the prohibitions on conditional payment as contained within the Construction Act.
4. Design Responsibility
Design responsibility can be a common point of contention and dispute.
If you are entering a contract where you do not intend to design the works, then ensure that the contract does not place design responsibility upon you.
Likewise, if you are contracting to undertake design, ensure that the contract is clear as to the full extent of your design scope and responsibility. Common issues include:
• A lack of clarity and dispute over the responsibility of interfacing between the contractor’s design portion and any design undertaken by others.
• The contract seeking to make the contractor responsible for accuracy and suitability of the design produced by or on behalf of the employer.
• “Fitness for purpose” obligations, requiring the contractor to guarantee the performance of the design as opposed to a requirement to use reasonable skill and care.
It is important to fully understand the extent of the design responsibility, as a failure to do so could leave you vulnerable to the unexpected cost, time and liability of being contractually required to undertake design over and above what you intended.
Be aware that the standard forms will often share certain aspects of design liability, it is commonplace for an amendment to be made to push all the design risks on to the contractor. You will need to review this with a professional such as Arbicon.
Consideration should also be given to your PI insurance cover, and whether you are insured for the full extent of the design responsibility required under the contract. For example, many policies will exclude cover for a “fitness for purpose” obligation and are more likely to instead only cover the less onerous obligation to use reasonable care and skill.
If you identify design responsibilities that you are unwilling to accept, then care should be taken to negotiate the responsibilities and ensure the contract is amended to accurately reflect the intentions of the parties.
5. The Right to Extension of Time and/or Loss and Expense
All standard forms of construction contract allow for an extension of time in the event of certain delaying events, and for loss and expense against certain matters. However, when considering amended or bespoke contracts, care should be taken to understand the extent of the events and matters which give rise to extended time or loss and the associated risk profile.
For example, the JCT form contains a comprehensive list of events that allow an extension of time. However, a bespoke form may contain significantly fewer events that permit an extension of time. So whilst the JCT allows an extension of time for certain events that are neither parties fault such as delays by statutory undertakers or exceptionally inclement weather, a bespoke form may not afford the same relief and in turn the contractor will be responsible for such delays (and the resulting costs and exposure to delay damages).
Similar consideration should be given to loss and expense provisions in bespoke or amended contracts which may be much more restrictive than those in standard forms.
Careful consideration of the implications or absent or amended clauses should be reviewed by a professional such as Arbicon.
6. Condition Precedent
A condition precedent is a clause that makes the rights under a contract clause pre-requisite on the fulfilment of a prior obligation. The most common examples are:
• A requirement to notify a variation within a specified timescale as a condition precedent to payment.
• A requirement to notify a delay within a specified timescale as a condition precedent to any extension of time.
• A requirement to carry out a specified administrative act prior to any payment.
It is important to identify conditions precedent within a contract, and to also understand the obligations that arise as a failure to comply could lead to your contractual rights being diminished or lost altogether. Using the examples above, the failure to notify in time, could result in complete loss of entitlement to claim the associated time and money.
The words “condition precedent” do not have to be used either, the wording just has to identify a process with the work “shall” be done in order for entitlement to payment or some other benefit. It is not straightforward.
If you identify condition precedents in contracts, care should be taken to consider whether you are able to comply with the requirement and the consequence of failing to comply. If you are unable to comply or unwilling to accept the commercial risk of failing to comply, then it would be prudent to negotiate amendments to the clause to either (a) make the clause less onerous in respect of timescales or consequence, or (b) have the condition precedent removed altogether. As noted in Payment Provisions above, condition precedents for payment are illegal. Condition precedent obligations are a source of dispute so professional advice from Arbicon is recommended to hunt down these onerous clauses.
7. Acceleration Omission and Supplementation of Labour/Resources
It is commonplace to see bespoke contracts or bespoke clauses that allow the employer to alter the scope of the works and programme to suit their own requirements. Such examples include clauses that permit the employer to:
• Instruct the contractor to accelerate the works without compensation.
• Omit any part of the works and have these works completed by others without compensation.
• Supplement the contractors labour if they consider the contractor is in delay and contra charge the contractor for doing so.
The above clauses are very unfavourable and if identified in a contract then care should be taken to consider whether you are willing to accept such commercial risk. Generally, if unacceptable to you, it would be prudent to negotiate amendments to the clauses to either (a) allow the employer to take such actions, but to allow the contractor to be compensated as a result, or (b) have the clauses removed. Without the clauses the Employer is likely to be in breach or repudiatory breach so again Arbicon can advise.
8. Termination Provisions
Termination provisions are common in contracts. However, care should be taken to review the provisions and understand what rights and remedies they provide the parties. In many bespoke forms it is not uncommon to see clauses that permit the employer to terminate for any reason they like, and also restrict the contractors’ rights to claim any damages in the event they are terminated.
It is also not uncommon for bespoke forms to contain provisions that provide the Employer with the contractual right to terminate but do not containing any provisions affording the same contractual rights to the contractor.
Care should be taken to identify and understand the rights, and risks associated with such clauses. For example a clause that allows the employer to terminate for convenience coupled with a clause the prevents the contractor claiming loss of profit following termination, would allow the employer to terminate the contractor on a whim and with no financial consequences. Whereas the contractor could be left with no workflow, idle resources, and with no financial right to claim for the loss that they incur as a result.
It is also commonplace for contractors to walk out or abandon the site, this in absence of a valid 7-day suspension notice will amount to repudiatory breach and damages will flow to the Employer. Arbicon often see cases where notices have been wrongly served and actions are detrimental on both sides, and this can give rise to complex disputes as to who is to blame. Procedure and contract are paramount to avoiding self-inflicted damage. It is recommended that Arbicon assist in the process where the parties want to part company.
9. Conclusivity Provisions
Many forms of contracts will include clauses that provide that a certificate or decision will become final and binding on the parties if it is not challenged within a certain period of time. Examples include the final certificate becoming binding under a JCT if dispute resolution proceedings are not commenced within 28 days.
A conclusively clause is designed to provide finality and certainty and to prevent disputes from being prolonged for an extended period.
Care should be taken to identify such conditions within a contract, and to understand the timescales that apply and the risk for failure to comply. Consideration should be given to any conclusivity provision that provides a very short period of time to challenge the certificate or decision. There can be a substantial risk if for example, you dispute a final certificate but the contract provides insufficient time for you to properly compile your claim and commence dispute proceedings.
If you identify such clauses and are concerned as to the ability to comply, then it would be prudent to negotiate amendments to the clause to either (a) provide a longer timescale prior to the matter becoming final and binding, or (b) have the conclusivity provision removed.
Arbicon have seen examples where a claim for £250,000 could not be pursued as the account was concluded on a £90,000 final certificate that was not challenged. Take care!
10. The Particulars
You may think that is goes without saying, but in addition to onerous clause it is important to check that the particulars of the contract are accurate as basic errors, vagueness, or ambiguity can often creep into the contract and lead to significant issues. For example, how often does one party argue that works are a variation for the other to argue they are included in the scope of works?
Below are just a few examples of the points that need to checked and verified for accuracy before entering the contract:
• Who are the parties – for example, are the names, addresses and company numbers correct?
• What is the scope of works – for example, does the contract accurately reflect what the parties intend the contract to do?
• What are the contract documents – for example, does the contract refer to the correct drawing revisions? Are all the design documents included?
• What is the programme – for example, is it agreed and achievable?
• What is the price - for example, is the contract price correct?
These types of scenarios are common sources of dispute, it is important to have an effective commercial department and grasp of the contract and contract procedures so that when it goes wrong you have a low-risk position. The problem is losing £100,000 when you know you should have spent £3,000 at the start is great in hindsight!
Arbicon is a firm of construction contract, dispute resolution and adjudication specialists with almost a 100% track record last year in resolving, prosecuting and defending construction claims.