Cut to the quick

If you only have time for a “quick and dirty” review of a contract, what are some of the most important provisions? This week, we have six crucial issues you can’t afford to ignore:

Liquidated and ascertained damages

Are you signing up to liquidate damages clause or a penalty? The essence of liquidated damages clauses-, or LADs as they are known, is that they must be a genuine pre-estimate of loss. A LAD clause will be construed as a penalty if the sum specified far exceeds the greatest loss that could ever have been proved as a result of the breach. Where a clause is deemed to constitute a penalty, it will be unenforceable, and the employer will be able to claim only general damages.

Although unpopular with contractors, LAD clauses do provide some protection in that liability is capped at the outset of the project. The recent Bath Spa case (Bath & NE Somerset District Council vs Mowlem) shows that even though they replace general damages, the employer may still be entitled to other remedies from the court, such as an injunction.

LADs and sectional completion

If you have a LAD clause combined with sectional completion, particular care is needed to ensure that the dates for completion and rates of LADs are apportioned between the different sections of work.

If using a JCT sectional completion supplement, the information required is identified for you, but remember to fill it in; with non-standard contracts you should remember to include it. You also need to deal with the consequences of partial possession, for example, the contract needs a mechanism for reducing the LADs to take account of any parts of the completed works taken over early by the employer.

Professional indemnity insurance

As discussed in the last article, you need to check that you are covered for the work you are going to carry out. A contractor’s policy normally defines a list of “professional activities” or makes stipulations as to the level of experience of suitably qualified staff. If a trainee is carrying out one of the defined activities, chances are you are not covered.

Defective workmanship is not covered, nor is the negligent selection of materials. Contrast this with the situation where you seek guidance from a consultant on the selection of materials. Any mistake by the consultant is likely to be covered under his policy.

Try and limit your financial exposure by adding in a cap on how much you have to spend, or better still a clause providing that best endeavours does not mean, in this contract, that you have to incur any costs

Best endeavours

“Best endeavours” apply to the performance of some or all of a party’s contractual obligations, depending on the contract. In the past it was thought to be an onerous obligation, falling just short of an absolute obligation. After a series of cases in the 1980s and 1990s, it is now regarded as less onerous than that, but still more onerous than “reasonable endeavours”. Reasonable endeavours means you have to take action only to the extent that you are not disadvantaged. Best endeavours could result in your taking action that leaves you out of pocket. Therefore if you are forced to sign up to best endeavours, try and limit your financial exposure by adding in a cap on how much you have to spend, or better still a clause providing that best endeavours does not mean that you have to incur any costs.

Back-to-back

This simple concept, in the caring, sharing world of construction is: “my risk is your risk”, and it applies to any two documents that have equivalent provisions. But it is never that simple. Attempts to incorporate all the terms of, for example, a main contract into a subcontract by a single provision rarely works. The scope of work needs to be separately agreed, as do time limits, in order to allow time for action (notice, certificate, and so on) both up and down the contractual chain.

If a main contract contains non-specific deadlines, such as “within a reasonable time”, the importation of these into subcontracts will increase uncertainty, and therefore specific deadlines should be agreed.

Executing contracts

After you have reach the end of your review, but before you have put a large tick in the “contract approved” box, have you thought about how the contract is to be executed? A contract can be executed either “under hand” or “under seal” (which means it is executed as a deed). Contracts under hand are merely signed by an authorised person. With such contracts, the limitation period for claims is six years, and accordingly you may only want to use them for projects that are low risk or low value.

If a contract is executed as a deed the limitation period is 12 years. Companies executing deeds no longer have to put their seal on it, but it must be signed by two directors, or a director and the company secretary, and be clear it is executed as a deed.