Studying the form

Joint Contracts Tribunal

An avalanche of change!

Neil Jones of Pinsent Masons casts an expert eye over the multiple revisions in the offing to the trusty and ‘traditional’ JCT.

“During the last couple of years the JCT has been extremely busy in revising contracts and producing new ones. The JCT Major Projects Form (published in June 2003) is an example. During the first half of 2005, we can expect an avalanche of new or revised contracts from the JCT stable. Many revisions arise from the decision to create a more consistent layout, but the other major development is a facility for imposing a design obligation on the contractor for specific portions of the work carried out under both the Intermediate and Minor Works forms of contract.

The main developments are as follows.

JCT Standard Form of Building Contract 98

This is to be re-styled as the ‘JCT Standard Building Contract 2005’. It will contain the following features:

• Some modernisation of the wording and cutting out of a certain amount of statutory material for a shorter contract.
• As an alternative to the use of separate collateral warranties from the contractor in favour of purchasers, tenants and funders linked to the development, options will be available to instead use the Contracts (Rights of Third Parties) Act 1999 which enables these rights to be given directly under the contract in favour of such third parties. The intention is to simplify this expensive and time-consuming area of contract administration and practice by reducing the extensive paperwork involved with separate warranty forms. In doing so it can cut the time taken to complete the process, enabling projects to start sooner and reducing legal bills.
• The previously separate private and local authority editions are combined.
• Because of the reduced use of the nomination provisions in connection with subcontractors, these have now been relegated to a supplement.
• Appropriate forms of matching subcontracts will be available.

It will take time for practitioners to get used to the new layout and provisions, but rest assured there has been no significant change to the risk allocation between client and contractor.

JCT Standard Form of Building Contract with Contractors’ Design

This is to be re-styled as the ‘Design and Build Contract 2005’. The following points are noteworthy:

The JCT suite has been around for 70 years, but we can expect an avalanche of revisions and a general tarting up in 2005. They have a connotation for old-style, adversarial relationships. Indeed, some see the JCT suite as stuck in the past. But their enduring popularity surely points to their basic effectiveness

• There will be a detailed design submission procedure enabling the client to take as much or as little interest in the contractor’s unfolding design as it wishes. Plus any comments the client should make will not reduce the contractor’s responsibility for its design.
• There will be some changes to the payment provisions so that even if the client does not object in writing to the contractor’s application, that will not, as it probably does now, mean that the contractor’s application is the proper amount payable. That will depend upon what is properly due under the contract rather than simply accepting what is in the contractor’s application.
• It will be made clearer that the contractor is not responsible for checking the employer’s consultant’s design in order to be sure that the contractor’s own design will work as intended.

Framework Agreement 2005

There will be a new Framework Agreement published with a guide. It will be in modern, simple language and will enable the client and contractor to enter into longer-term arrangements for a fixed period. The following can be noted:

• There is to be a legally binding version and also a non-binding version.
• The Framework Agreement will not cover the detailed conditions under which any ‘umbrella’ project called up under it operates. This will be governed by whichever appropriate JCT Contract Form is selected.
• It will cover such matters as working together, confidentiality and the relationship between the Framework Agreement and the underlying contract.

JCT Intermediate Form of Building Contract 1998 & Contract for Minor Building Works 1998

To be re-titled as the Intermediate Building Contract 2005 and the Minor Works Building Contract 2005, respectively. The first will allow the contractor to provide collateral warranties in favour of purchasers, tenants and funders. These extra changes are common to both:

• For the first time it will be possible to include a contractor’s design portion for part of the works within this contract. This should add flexibility to the scope of project for which the contract is suitable.
• Suitable subcontracts will be available.

The possibility of partnering?

The JCT is likely, in conjunction with Be (Collaboration for the Built Environment) to produce a form of collaborative working contract for early integration of the construction team. Some will call this a partnering contract. If it comes to pass, it is likely to be based upon the existing Be Contract.

The subcontract, in all its manifestations, has come under increasing scrutiny thanks to the Latham reforms. The subcontractor is often the more vulnerable party, but while “subbie-bashing” is still rife, things appear to be looking up for him!

This will provide brief contract conditions between a client and service provider at whatever level and, in so doing, reflect the way such contractual arrangements are found in, for instance, the car industry. It would be a radical change for the JCT.”

The subcontract

Good times ahead for the put-upon subbie

John McGuinness of Knowles argues that while firms still try to squirm out of paying subcontractors, the legislation at last is shifting in their favour.

“Speak to a director of any leading construction company and he’ll say he’s not one to abuse subcontractors. Yet there are very few construction companies out there prepared to subcontract on the un-amended terms of a standard form.

Fortunately, the Late Payments Act 1998 and the Construction Act 1996 both helped subcontractors. Take the former. Traditionally, damages have been limited to actual loss, so the requirement (implied into all commercial contracts since August 2002), to pay an initial lump sum for any late payment, however small, with a high rate of interest (currently 12.5%) is a major step toward justice. Still, contractors frequently seek to oust these provisions, which only indicate that they have no intention of paying on time.

The Construction Act, which took effect in 1998, has allowed relatively small disputes to be resolved both quickly and economically through adjudication.

Some recent cases have spelled good news for the subcontractor, too. Clients of mine often seek help when a contractor counter claims on grounds of work completed late. But the 1993 decision in the case of Pigott v Shepherd (67 BLR 53) saw an end to contractors’ habit of forcing subcontractors to complete in a fixed period without ensuring that supporting conditions are in place to allow them to do the work. Now, a subcontractor must have the time stated for its work and may plan and organise its work as it pleases. Who wants all its subcontractors to be entitled to work to their own sequence?

Yet this is exactly the way most subcontracts are let!

More recent cases have made it harder for contractors to claim without solid proof of loss. In the 2002 case of Weldmarc v Cubitt, the contractor (Cubitt) demonstrated that Weldmarc caused the project to over-run, so Cubitt claimed a sum equal to two weeks’ cost of its site team. No, said the judge. Sure, you’ve been delayed but there is no evidence that you had to employ others or even suffered loss as a result.

Love it or loathe it, the Private Finance Initiative (PFI) has sent huge chunks of business our way. It is a complex form of procurement, though, and the waters will get even muddier in 2005 with new requirements coming from all directions

The next case shows a measure of sympathetic analytical rigour subcontractors are not used to enjoying. A window specialist had £35,500 withheld from its account for being late. The contractor said the windows were a critical activity. Not an unreasonable proposition, one might say. But to demonstrate that the specialist was late, the contractor submitted progress photographs and the last one, taken from within the building, showed an empty window opening. However, as all the finishes, including the decoration and permanent lighting, were complete the contractor had in fact demonstrated that the windows were not critical. So the adjudicator awarded him only £300!

Adjudication enables subcontractors to have their disputes considered and decided by a third party at reasonable cost and the minimum of resentment. This has led to a more detailed analysis of subcontract terms. Hopefully this will help contractors understand that successful subcontracting will not be achieved by writing onerous amendments to standard forms, but rather by considering very carefully what is required of subcontractors, trade by trade, and obtaining their agreement to those requirements.”

PFI

Things to watch in 2005

Helen Garthwaite of Taylor Wessing analyses the impact of a welter of new legislation on PFI deals.

“The new EC Public Contracts Directive adopted on 2 February 2004 gives less scope for post-tender negotiations between PFI bidders and public authorities. The new directive introduces a ‘competitive dialogue’ procedure for complex projects where an authority cannot precisely define its requirements (previously it could, using the ‘negotiated procedure’ involving one-to-one negotiations with a preferred bidder).

Competitive dialogue permits post-tender discussion (with a minimum of three selected bidders) but only to ‘clarify, specify and fine-tune’ submitted tenders; changes to the basic features of a tender are outlawed. Be warned - if the Commission becomes willing to accept use of the negotiated procedure, bid costs are likely to rise and accurate tender pricing will be key.

Is knowledge power?

In effect from last month, the Freedom of Information Act 2000 (FIA) is a double-edged sword for PFI project companies. New rights say that public authorities receiving requests for specified information must provide it within four weeks. Although wide-ranging exemptions apply (including for ‘confidential information’ or ‘sensitive information where disclosure would prejudice commercial interests’), the FIA creates a ‘right-to-know’ culture, opening the door to useful information about other projects and PFI participants.

There is a downside, however. The very information you can request about competitors can be requested about you. Care needs to be taken when disclosing information to authorities to ensure that information falling within one of the exemptions is clearly identifiable.

Ahh, partnering! Everything’s going to be okay. Everything is lovely now. Fed up with the old, adversarial ways of contracting, enthusiastic experts are coming up with new forms that promote cooperation, openness and mutual trust. Old hands feel this is naive, but the partnering contract is here, and evolving

Tips from the treasury

However, new Treasury guidance makes allowances for contractors participating in PFI. The latest issue of HM Treasury Guidance on the Standardisation of PFI Contracts (version 3) stipulates that contracts should provide relief for the following parties:

• Project companies. These will be protected from the risk of termination or deduction of unitary charge payments through the performance points accrual system, where subcontractors perform poorly and are substituted;
• The public sector. This will be protected against insured risks which become uninsurable. Self-insurance by the authority is now permitted, allowing the project to continue. Having said that, project companies should check that the authority concerned is not acting outside its delegated authority.

There are New FSA Rules...

Under new UK Regulations1 companies participating in PFI projects and obtaining multi-party project insurance, or transferable latent defects insurance, ‘by way of business’ will be regulated by the Financial Services Authority (FSA). Companies typically engaged in these ‘regulated activities’, but not authorised by the FSA, will commit a criminal offence and risk their agreements being held unenforceable.

A partial solution may be available. FSA has indicated that in its view, a risk-bearing participant in a joint venture (receiving no more than a recovery of costs in return for the regulated insurance activities) may not be regarded as remunerated for the purpose of new regime. This is their view. Other typical activities (ie administration of insurance contracts and claims handling for others) may still fall foul of the new rules. Until further guidance is given, play safe and avoid direct financial benefits in return for taking out project insurance.

...and more red tape

A new order on Fire Safety, which imposes a duty on anyone responsible for occupants of buildings to maintain adequate fire protection, is awaiting parliamentary approval. The previous system of fire safety certification, which could be outdated by changes to a building’s use, will cease in favour of regular assessments by fire authorities. Regular testing, enforced by the insurance market, will help to ensure that equipment and safety methods are kept up to date at all times. However, this need to be factored into PFI project costs.”

1. Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2003. In force on 14 January 2005 (implementing Insurance Mediation Directive 2002/92/EC).

Major projects cannot leave their particpants contractually isolated from Each other

David Mosey, Trowers & Hamlins

Partnering

The procurement chameleon

David Mosey of Trowers & Hamlins sees new directives fundamentally altering the way we view our working relationships.

“Partnering, a word now firmly planted in the construction industry’s consciousness, seems to defy clear definition. To some, it suggests a mixture of cosy long-term commitments, recycled common sense and wishful thinking - so how does partnering affect your projects?

As to long-term relationships, these are certainly being promoted through major national initiatives such as NHS LIFT, Decent Homes and Building Schools for the Future, but these relationships are anything but cosy under recent changes in the law.

Firstly, there is the new EU Consolidated Directive, which limits contractual frameworks to a maximum of four years. This has led clients and their lawyers to look for alternatives (such as term contracts) that allow the longer contract duration often necessary for the industry to make the expected improvements in performance (ie reductions in time, accidents and defects).

Meanwhile, projects involving recovery of financial contributions from leaseholders are now subject to Section 151 of the Commonhold and Leasehold Reform Act - allowing such recovery under ‘qualifying long-term agreements’ of over 12 months’ duration, but only if these are properly structured in line with a system of successive notices and appropriate consultation.

Turning to partnering contracts, there continues to be increasing take-up on the NEC and PPC2000 forms (such as £8bn of projects under PPC2000). These contracts link partnering values and objectives to programmed procurement activities so that ‘feel good’ promises made in the early stages of a project can be tested when the going gets tough - for example, through commitment to contractual programmes, advance evaluation of change, early warning of problems and non-adversarial resolution of disputes.

But does this work for every project? The Constructing Excellence demonstration projects suggest commitment from both the public and private sectors, but there remains a question as to whether, for example, a commercial developer building units for sale has any wish to share its supply chain best practice with competitors or to collaborate closely with local authorities and registered social landlords.

Yet this traditional independence is now subject to challenge. Major regeneration projects that focus on building integrated communities cannot leave their participants contractually isolated from each other. Integrated programmes are required to ensure that regeneration teams achieve their goals, likewise joint risk management, change control and dispute avoidance - and all this looks a lot like partnering.

This snapshot of the construction market-place and current legal change suggests that partnering has a role to play - and recent results, such as the Government’s Job Centre Plus refurbishment programme achieving 22% savings, seem to bear this out.”