Category: News

When signing a contract – What should subcontractors be wary of?

There are a number of clauses or elements of a contract that subcontractors need to be specifically aware of.

1.  Claims and Compensation Events and Time bar clauses

In NEC there is only a single mechanism that subcontractors will be paid additional monies :- and that is through notification of a compensation event (CEN). The fact that an event has been discussed and even minuted in an early warning meeting or subcontractor has received an Instruction (PMI) does not mean that the subcontractor will receive entitlement in time or money. A compensation event must be notified; and beware the timebar clauses in NEC4 61.3 “if the Contractor does not notify a compensation event within 7 weeks” ………. they may lose this entitlement. Furthermore clause 61.3 is often the subject of a z clause and is even more onerous than the standard 7  weeks,  and 4 weeks or even less and it is not unheard of to have only 7 days;- so don’t take a holiday!

• What period of time is a Contractor/ Subcontractor  liable for?

Most construction contracts contain clauses regarding defects liability period, which typically run from 12-24 months after completion. The contractor or subcontractor is required to attend to defects which arise during that period.

The subcontractor is not released from liability entirely however as within UK law the Limitation Act 1980 applies, and so a negligence claim for example in tort or contract can be brought up to 6 years for a simple contract or 12 years for a deed and the majority of UK construction contracts are written as deeds.  (The difference being that a deed requires two directors’ signatures.) The date of accrual by which it is known is the date the act or omission occurred and that is when the clock starts. In addition the Latent Damage Act 1986 the time limit is subject to an overall limit of 15 years. (Latent defect is one which is unknown rather than a patent defect which is identified during the works or identified during the defects liability period.) Shorter limitation periods can be agreed between the parties and included in the contract as an express term if the parties agree.

• Acceleration

Within NEC3 and NEC4 there is provision for the acceleration of the works. However acceleration cannot be instructed, merely a quotation for acceleration to be submitted and if this is agreed it can be implemented. So subcontractors need to be wary of the inclusion of Z clauses which require compliance to accelerate following instructions. Evaluation of acceleration needs to include additional costs due to overtime, losses due to inefficiencies, higher rates for additional labour and potential additional mobilisation or de.mob. costs.

• Indemnities and Liability

Beware any clause which includes terms such as “shall be liable and indemnify …against liability whatsoever” Or “ indirect, consequential of nay default of the Sub-Contractor”. This widens the liability to cover indirect or consequential loses. To limit this look at the Limitation of Liability clauses, which are to be found in NEC4 in X18, normally inserted as percentage of the contract sum.

• Completion

It is common for Main Contractors to link the obligations from the Main Contract to the contract formed with the subcontractor. With regard to completion, in the event of breach due to subcontract work being incomplete then any delay damages being incurred by the Main Contractor are passed on. Hence the clause the inclusion of the clause “subcontract works will not be considered to be complete until the main contract works have been accepted by the client”. This clause means that groundworks, or foundation work undertaken early in the project may not be complete until many months after actual completion of the subcontractor’s work on the site. This then leads to potential liability of loss or damage to the subcontract works after the works are actually complete, and lack of payment due on completion until all other works are also complete.

Builder in dispute with client over late payment

LCCL was approached recently by a local builder who had taken on a project for a client who was known to him. Due to the prior knowledge between the parties there was a level of trust and so neither thought a “formal” contract was necessary as they had an understanding. The work consisted of construction of a major extension to the existing property and the builder had experience in this field so hadn’t been particularly diligent in checking all the specifications. An e-mail trail of correspondence was available along with estimates, however there was no formal contract signed by the parties. This inevitably led to misunderstandings, delays and disagreement and dispute over what was included:

• the client claiming that the work was defective and not fit for purpose
• the builder claiming that some of the work was never included in the original price and this should have been “obvious”.

This situation is unfortunately all too common in the building or construction areas. The builder claimed that the client was not sure what they wanted and did not define it accurately in a scope of work and so this led to misunderstandings; this being further complicated as subcontracted tradesmen were also involved.

So how is this viewed in English law?

Any adjudicator must try and determine what the liabilities and obligations of the parties are within the contract formed.

There is some form of contract or agreement in place as even if there was no formal contract there is an agreement to carry out work, evidenced by the conduct of the parties; by the builder carrying out some work and the client paying; at least initially.

Without a written contract in place, it becomes difficult for an adjudicator or any tribunal to determine what has been agreed, but that is the task in hand. Referring to the case of. Dacy vs IDM, where the adjudicator had to decide whether there was a contract in place even if it was a verbal contract (at a meeting made at a bus stop!) and if so when did it come into being and what that contract consisted of. The fact that Dacy had engaged subcontractors following that meeting reinforced the decision that a contract had been formed during that meeting.

When the re-design was finally agreed the project progressed, but this was not without dispute and professionals becoming involved and inevitably led to delays and disruption to the project. So the lesson to be learned is quite a simple one: – both parties need to sign a formal contract which contains expresses exactly what is required from each.

It was a phrase stemming from a statement: “fitness for use” coined by Quality guru Joseph Juran when determining a definition of quality. “Fit for purpose” also appears in the Consumer Rights Act 2015 (2.10, along with “reasonable skill and care”. However when we look deeper into Juran’s definition of “fitness for use” he also identifies that quality can be “conformance to requirements”.

So what are these requirements and how do these requirements evolve into a product?
It requires (forgive the pun) that the client or end user knows what they want, and once these requirements are identified this is translated into a specification, clear, detailed and without ambiguity – and this is often where the difficulty lies. Frequently the client does not know exactly what they want or are unable to communicate this effectively and so the “specification is subjective and open to interpretation”, and this is where disputes can occur. This not only occurs on small projects. The client only sees the final product once complete and it may not be what they had in mind.

Let me quote an article from the Association of Project Management (APM) with the title: ‘Understanding requirements, the basis of delivering quality’ (APM 2021). “Requirements drive the process, the specifications result from it”, so if a customer specifies a solution that is not fit for purpose the liability lies with them, not the supplier.

There are many examples where products have been built to specification and yet are not fit for purpose – The Millenium Bridge In London being a classic example. It complied with the specification and was wonderfully aesthetic but was not fit for use. As soon as it was walked on it swayed laterally even though bridges resonating due to natural frequency was well known by then; in fact as far back as 1873 the Albert Bridge in London carried a warning notice The Millenium Bridge was closed after one day and for a further two years while work was done to reduce the swaying.

So clients, make sure you express your requirements clearly and without ambiguity or you remain liable for the fact that the product is not fit for purpose. Builders and Construction Companies if you are involved in dispute then please get in touch for assistance with any claims.

Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security. John Allen Paulos

Certainty is what we strive for in our contracts, we read them carefully, we interpret them, we have them reviewed by experts or we certainly should do so before we sign them and we take them seriously. We know that we are entering legally binding agreement and have obligations and liabilities on both sides.

But what if in these uncertain times certainty is proving difficult? What if our interpretation is different from the other party on an issue neither party anticipated? Our standard forms of contracts generally have a force majeure or an unforeseeable event clause in them which we think covers us sufficiently. However, it is only when an event happens that both parties rightly turn to the contract to determine liability and obligations and in the case of Contractors inevitably look for extensions of time (EOT) and recovery of losses and expenses incurred.

Obviously Covid 19 had wide ranging implications in many different ways, but it was not so much the Covid outbreak itself but the responses and constraints imposed by the government following the outbreak that caused the issues. It was this uncertainty as to how we could manage to carry on as “much as normal”, and if we could not what would be the impact? How would we be able to carry and would it delay the works? Would it cost us more and if so, is this expense recoverable? In other words who is liable for this delay and /or cost?

So what do we know?

Parties have argued that to some degree an outbreak such as Covid 19 was foreseeable, – Ebola, Bird Flu, Swine Flu, there have been a few. So some argue that it was foreseeable, but it was the far reaching restrictions put in place that were not foreseeable. Never have the UK government or other governments around the world introduced such wide ranging measures.  So we need to look to the wording in our contracts:

• NEC cl. 60.1(19) an event.an experienced contractor….to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it”.

It looks like within NEC3 standard contract then the assertion that as the lockdown measures had not occurred before it was unreasonable for a Contractor to have allowed for it. However there are other clauses which need to be considered to understand the whole picture: for example have PM’s instructions been issued regarding access restrictions? Or has the flow of information been hindered? 

• The 2016 JCT SBC cl. 2.29(14) states “force majeure”, without further definition as a Relevant Event leading to entitlement of extra time but difficulty may arise due to force majeure not being a principle of English common law. cl 29.2 (12) refers to “changes of law” which were brought in which certainly affected work patterns but remember Relevant Events are different to Relevant Matters cl. 4.22. As force majeure is a Relevant Event there is a potential entitlement to extra time. However for loss and expense it may be necessary to look elsewhere, for example: has a variation been issued which means a restriction of access to the site or a requirement to implement the work in a different manner (cl 2.29.(1)?.
• Within the FIDIC 1999 forms the force majeure clause was replaced in the 2017 form  with ”Exceptional Event”  however the non-exhaustive list of events remained fundamentally the same.  “If either party is prevented from performance obligations by force majeure, it may be excused performance of those obligations……. And Contractor may be entitled an extension of time and cost, and  force majeure is defined further in cl 19.1 as

There are four conditions where force majeure is defined.

(a) which is beyond a Party’s control;
(b) which such Party could not reasonably have provided against before entering into the Contract;
(c) which, having arisen, such Party could not reasonably have avoided or overcome, and
(d) which is not substantially attributable to the other Party.

The definition does not require that the event be unforeseeable by the parties at the time of the contract and the non-exhaustive list that does not mention pandemic does not preclude the possibility of a claim. Cl 19.4 (1999) entitles Contractors to an extension of time but only to cost in case of certain events or circumstance “of the kind” as described in the list. However the pandemic and consequences thereof may well be treated as a neutral delaying event where the Contractor is entitled to an extension of time only.

In all of these instances it is important that the Contractor has a

• An obligation to perform the works (as frustration or impossibility is unlikely to succeed)
• A duty to mitigate costs
• To use reasonable endeavours to minimise delay in the performance of the Contract.

And most importantly the Contractor must ensure that records are kept which then provide evidence of disruption and or delay. Whatever the Contract requires in the form of Notices (FIDIC cl. 19.2, JCT 1.7 and NEC3 Early Warning 16.3) this notification should be done promptly so as not fall foul of any time bar clauses.  

This blog is intended to provide general information and does not constitute legal advice.