200 Contractual Problems and their Solutions

J. Roger Knowles

• Publisher: Wiley-Blackwell
• Year: 2012
• ISBN:
  9781118257043
• Edition: 3
• Topic: Droit
• Subtopic: Droit de la construction

200 Contractual Problems and their Solutions

This book examines 200 contractual problems which regularly arise on building and engineering projects and provides a detailed explanation of their solutions, citing standard contract conditions and key parts of legal judgements as authority. A succinct summary is provided at the end of each detailed solution.

It covers problems together with their solutions in respect of:

• Procurement matters
• Tenders and bidding
• Design issues
• Letters of intent
• Contractor's programme
• Contractor's float
• Delays
• Concurrent Delays
• Extensions of time
• Liquidated/delay damages
• Unliquidated damages
• Variations
• Loss and expense/additional cost claims
• Acceleration
• Global claims
• Payment
• Damage to the works
• Exclusion clauses
• Retention of title
• Practical completion
• Defect correction
• Adjudication

This book deals with a broad range of construction contracts including JCT Standard Form and Design and Build, New Engineering Contract NEC3, ICE and GC/Works/1.

This book was first published under the title of One Hundred Contractual Problems and Their Solutions, with a second edition entitled One Hundred and Fifty Contractual Problems and their Solutions. This third edition adds 50 new problems and replaces 15 of those in the last edition. Of the remainder half have been the subject of revision.

"Deserves a place on every site and in every office as the standard handbook on contractual problems"
Construction Law Digest

Chapter 1

Procurement

1.1. What Are ‘Entire Contracts’ and How Relevant Are They in the Construction Industry?

1.1.1.

Those for whom construction work is undertaken usually require the contract price to be fixed at the outset and not to change throughout the construction of the project. This is to ensure that the final sum paid equates to the contract price. This is often referred to as a ‘lump sum fixed price’, or in legal circles ‘entire contracts’. Most major construction projects are let employing one of the standard forms of contract, which in the main do not provide for the contract price to be a fixed price. Construction work is bedevilled with uncertainties: for example, in many cases some of the work is constructed below ground, where surprises are often encountered during the construction phase. Who, therefore, takes the risk of ground conditions which are more difficult to work with than anticipated at the time the contract was let? The contract, if properly drafted, should provide the answer. If the contractor is expected to take the risk, then it is not unreasonable for a sum to be included in the contract price to cover the risk. Some standard forms of contract, for example the ICE 6th and 7th Editions and FIDIC, make it clear that the contractor’s price only includes conditions which could have been reasonably foreseen by an experienced contractor. Therefore, if ground conditions which are met during the construction process are more onerous to work with than could reasonably have been expected to have occurred, then any resultant additional cost incurred by the contractor will be added to the contract price. Some conditions of contract, for example JCT 2011 Standard Building Contract With Quantities, includes for the design to be undertaken by an architect or contract administrator appointed by the employer. Any additional cost incurred by the contractor in overcoming errors in the design will be added to the contract sum. Almost without exception, the standard forms of contract include a clause to the effect that the contract price will be adjusted if additional cost is incurred by the contractor because of changes in legislation which were unknown at the time the contract was entered into. The standard forms of contract in general use therefore cannot be classed as ‘entire’ contracts.

1.1.2.

Contracts which do not provide for any change in the price and are thus fixed-price, are sometimes referred to as entire contracts, which encompass the inclusive price principle. This principle has been expounded in the 11th Edition of Hudson’s Building and Engineering Contracts and states that on a construction project the contractor is entitled to be paid for the work defined in the contract, which is deemed to include all work that is both indispensably and contingently necessary. Indispensable work is all work which, by implication or as a matter of interpretation of the contract as a whole, has to be carried out in order that the final work should comply with the express requirements or descriptions in the contract documents. Contingent work is all work that is necessary to achieve completion of that described, irrespective of the difficulties which may be encountered. According to this principle, any additional work necessary to achieve completion of the work described in the contract documents must be done at the expense of the contractor. This is the situation unless the contract states otherwise.

1.1.3.

The inclusive price principle came to the fore in the case of Safe Homes Ltd v. Mr and Mrs Massingham (2007). Mr Dale, representing Safe Homes Ltd, undertook to construct a new house for the lump sum of £130,000 and to complete it in 17 weeks. The drawings were provided by Mr and Mrs Massingham’s architect. Safe Homes claimed an entitlement to extra payment for additional and varied work owing to inadequately defined work, necessary but ill-defined work and compliance with building regulations and other statutory requirements. These claims were rejected by the court on the basis that the contract was an entire lump sum inclusive-price contract. Such contracts are subject to two over-riding principles that are applicable unless varied by the express terms of the contract. These principles are that contractors must, without additional payment, carry out all work necessary to enable the overall scope of work to be completed, even if that work has not been defined in the contract documents, and undertake all work needed to overcome any obstruction or unforeseen eventuality that must be overcome to complete their work.

1.1.4.

This case worked in favour of the building owner, as the contractor was required to undertake work which had not been foreseen at tender stage, for no additional payment, on the basis that the contract was a fixed-price entire contract. The case of SWI v. P&I Data Services (2007) provided the opposite result, where a subcontractor was paid for work which was not undertaken. SWI submitted a quotation to provide work for P&I at the GlaxoSmithKline site in Stevenage for £337,243, in accordance with drawings provided by P&I and tender record sheets produced by SWI. Some of the work was not required to be undertaken, and P&I reduced the price to be paid to reflect the reduced volume of work. It was agreed by both parties that the value of work which was not undertaken amounted to £40,000. The Court of Appeal, however, held that SWI was entitled to payment in full, with no reduction for the work which was not carried out. The contract was a fixed-price lump sum entire contract, with no provision for variations, and therefore the Court of Appeal ordered that the contract price be paid in full, even though some of the work had not been carried out.

1.1.5.

Whether the contract is let on a fixed-price basis or one which is subject to price change will depend upon the wording in the contract. To ensure that the rights and obligations of the parties are confined within the wording of the contract, some contracts include an entire agreement clause, also known as ‘entire understanding’ clauses, ‘four corners’ clauses or ‘zipper’ clauses. This clause usually states that the contractor’s obligations are fully set out in the contract and no supplementary evidence based upon correspondence, discussions and the like is admissible. The purpose of this type of clause is to eliminate any opportunity for introducing evidence in the form of other documents which may be at variance with the wording of the contract, as a means of enhancing payments.

SUMMARY

Entire contracts are not the norm on major construction projects. Whilst employers like a price which is fixed at the outset and does not fluctuate, most major projects are let using one of the standard forms of contract. These contracts contain a sharing of the risks between the contractor and employer. If one or more of the employer’s risks becomes a reality, the contractor may become entitled to an additional payment. For example, unforeseen bad ground conditions on civil engineering contracts; architect or engineer design errors where employer design applies; and changes in legislation usually result in the contractor receiving additional payment.

There are examples of contracts where the inclusive price principle applies, referred to as ‘entire contracts’. These contracts are fixed-price in every sense of the word. Where they apply, the contractor is required to undertake all necessary work to ensure practical completion in accordance with the work as described in the contract documents. Any additional work necessary to achieve completion must be carried out at the contractor’s expense.

1.2. Do Projects Where the Parties Enter into Partnership Arrangements Require a Formal Contract to Be Agreed?

1.2.1.

Sir John Egan created quite a stir when, in Rethinking Construction, he suggested that where parties to a construction project operate on a partnering basis, a formal contract is unnecessary. The exact words Sir John used are:

Effective partnering does not rest on contracts. Contracts can add significantly to the cost of a project and often add no value to the client. If the relationship between a constructor and employer is soundly based and the parties recognise their mutual dependence then formal contract documents should gradually become obsolete.

What he probably meant by this statement was that on partnering projects agreements reached between the parties do not require to be legally enforceable. There is no doubt that where collaborative working arrangements exist, formal disputes are a rarity. Disputes do arise, but they are usually resolved amicably by representatives of the parties without any involvement by lawyers or other external consultants.

1.2.2.

Despite the good relationships which are fostered by partnering, there are examples of disagreements which have been referred to court. In the case of Baird Textiles Holdings Ltd v. Marks and Spencer PLC (2001), Baird claimed it had lost a sum of £50m as a result of Marks and Spencer breaching a partnering arrangement. Baird had been a supplier of garments to Marks and Spencer for more than 30 years, which represented between 30% and 40% of Baird’s annual turnover. There was no guarantee of the number of garments which would be ordered, but over the years there had been a steady but varying amount of business. The parties worked together to ensure that what was not selling well could be returned and new designs jointly developed. The chairman and chief executive of Marks and Spencer stated that for over 70 years the relationship between Marks and Spencer and its suppliers was governed by the principles of partnership. Baird considered that their relationship with Marks and Spencer was a partnership.

1.2.3.

Without giving any prior warning, Marks and Spencer gave notice to Baird that, following the end of the current production run, it would not be placing any more business with them. Baird commenced proceedings, claiming that the termination was a breach of an implied contract arising from the manner in which the parties had conducted their business over many years. On the basis of their past relationship, Baird considered it was entitled to be given a minimum of three years’ notice if Marks and Spencer intended to terminate the arrangement. The court rejected the arguments made by Baird. It would only recognise an implied contract if it was necessary to do so. Courts are reluctant to make a bargain between the parties which they had not made for themselves.

1.2.4.

There have been other cases where the parties have entered into a partnering arrangement, which have ended in disputes which have been referred to the courts. In the case of BP Exploration Operating Co Ltd v. Kvaerner Oil Field Products Ltd (2004), reliance was placed upon negotiations to establish a partnering relationship. This was not accepted by the courts as evidence for the interpretation of the parties’ obligations to procure insurance. The case of Birse Construction Ltd v. St David Ltd (2000) involved a dispute arising from a contract on which a partnering relationship existed. The matter was referred to the Court of Appeal, as the parties could not agree the terms which applied to the contract. No doubt the parties, in view of the relaxed atmosphere which existed relating to contractual matters, did not see any urgent requirement to enter into a formal contract before work commenced.

1.2.5.

The CIC Guide to Project Team Partnering provides the following advice concerning the use of a formal contract on schemes where partnering applies:

An effective contract can play a central role in partnering, it sets out the common and agreed rules; it states the agreed mechanism for managing the risk and the reward; it lays down the guidelines for resolving disputes. But the central thrust of the new thinking is that the contract should not encourage a self-serving or adversarial state or a battle with other team members for the benefit of one party.

1.2.6.

Some contracts have been designed to accommodate partnering and include:

• PPC 20...