Self-harm for developers

Building contracts proffered by developers commonly incorporate clauses seeking to “step down” any obligations that they have entered into under other project documents – development agreements, leases and so on. The clause goes something like this:

“The contractor shall assume and perform under this contract all of the obligations of the employer under the project agreements to the extent that they relate to the design construction and completion of the works and shall at all times perform his obligations under this contract in such manner that no act, omission or default of the contractor in relation to the works shall constitute, cause or contribute to any breach of the employer’s obligations under the project agreements.”

This clause is frequently followed by an indemnity to the employer for breach of the project agreements. It is fair to say that these sort of provisions have floated around for some time and they are becoming almost institutionalised. But is this appropriate?

These clauses have their genesis in standard forms of subcontracts – to quote clause 2.4 of ICSub/D/C: “Insofar as the contractor’s obligations under the main contract … relate and apply to the subcontract works … the subcontractor shall observe, perform and comply with those obligations … and shall indemnify and hold harmless the contractor against and from … any breach … by the subcontractor … of any of the provisions of the main contract.”

Is there any substantive difference between these two clauses? I am not sure there is. So why do main contractors object to them?

What do such clauses achieve for the developers? The developers believe that they will insulate them against the risk of being “piggy in the middle” by having a liability under the project agreements that they have not passed down to the contractor.

To ensure that the contractor is on notice of the relevant provisions, the developers will then provide scrubby photocopies with so many omissions that the obligations are almost indecipherable.

The comfort that developers derive from these provisions is an illusion, and they frequently distract from a proper risk analysis

No developer wants to disclose to its contractor the “overage” arrangements, or its profit under the project agreements. To the extent that provisions are not disclosed or are incoherent because of the way in which they have been disclosed, it is hard to see the courts giving any effect to them.

In many cases, of course, even if the obligations have been disclosed, it is unclear what effect they have. If, for example, the developer has assumed an obligation under a project agreement to achieve practical completion by a certain date, which is subject to extensions of time and without liquidated damages, how will this be imported into a building contract that may have a different date of completion, different grounds for extensions and liquidated damages on the end date?

Since it is a fundamental rule in relation to liquidated and ascertained damages that the developer cannot recover an amount in excess of them for delay in completion, what then is the effect of the step-down from the project agreement? Who knows …

The project agreements contain matters relating to title issues and third-party agreements that plainly cannot sensibly be stepped down into the building contract. But what if the agreement for lease imposes on the developer a complete responsibility for any defect in the works, including a defect caused by defective design? How can this apply if it is incorporated into a traditional building contract in which the design team is not employed by the contractor but by the employer? Again, nothing but confusion can result.

So, the comfort that developers derive from these sort of provisions is an illusion. But because they seem to have gained such false credibility in some sections of the legal profession, they frequently distract from a proper analysis by the developer and its advisers of the risks that they have assumed under the project agreements, those which have been stepped down to the consultants and contractors, and most importantly, those that have not.

Proper risk assessment of the “gaps” suffers because the parties believe that this magic clause has cured the problem. It has not.