Last edited 04 Feb 2016

Modifying clauses in standard forms of construction contract

Contents

[edit] Introduction

English law does not require a particular form to contracts, therefore the terms and ultimately the risk allocation is the choice of the parties involved. Standard Form Contracts (SFC) aim to minimise the time and cost of negotiating contracts.

Some professionals believe that parties should not amend SFCs through choice, as there is a complex interaction between many of the terms (Ndekurgi and Rycroft, 2009) and modification can change the balance of risk and create legal uncertainty. The Latham Report recommended the use of standard contracts without amendments (Latham, 1994) and amendment was also criticised by Lloyd QC in Royal Brompton Hospital National Health Trust v Hammond and Others:

“A standard form is supposed to be just that. It loses its value if those using it or, at tender stage those intending to use it, have to look outside it for deviations from the standard.”

However, some argue that no SFC could allow for all the varying specifics of every individual project (Ndekurgi and Rycroft, 2009). There are also situations where amendment is necessary; for example if certain clauses become obsolete or the industry shifts and requires the inclusion of new terms.

Any amendment of SFCs should be approached with reluctance and caution. SFCs are developed by industry representatives who have an understanding of common project problems. Amendments can disrupt the balance of risk and impact on the true purpose; which is to provide a fair contract framework that results in a successful project (Local Government Task Force, n.d.). The full scope of problems and impacts of modifying SFCs is very broad and so this article will just consider the main points.

Problems can be attributed to three main risks:

  1. The interaction between clauses.
  2. The interaction with common law.
  3. Implied terms.

[edit] The interaction between clauses

Many clauses are cross-referenced with others. In the case of Bramall & Ogden v Sheffield Council, the alteration of a liquidated and ascertained damages term (16e clause of JCT 63) rendered it inconsistent with other related terms. Thus the court interpreted this clause as unenforceable. Another alteration to a clause was revealed in Balfour Beatty v Docklands Light Railway Limited. Clause 66 of an ICE 5th edition Contract, dealing with the resolution of disputes, was omitted completely. Additionally, clauses relating to the certifier of payments and extensions of time was altered from the “Independent” engineer to the employer's representative. Disputes arose, but the deletion of Clause 66 meant an arbitrator had no power to “open up, review and revise” the decisions of the certifier. The court interpreted that it could only rule if there had been a breach of contract, as it was deemed that the parties’ intention was to omit this clause.

[edit] Interaction with common law

Interaction with common law was shown in Peak Construction v McKinne Foundations. In this case, the printed text of an extension clause was amended which resulted in the contractor being entitled to payment of inflation up to practical completion, even though he wasn’t entitled to an extension of time. Courts interpreted that deletion of this clause means, if there is no term in the contract to grant extension of time and the employer obstructs by act or omission, the contractor then has an obligation only to complete in a reasonable time. The employer therefore loses their right to recover liquidated damages (Au & Chan, 2010).

[edit] Implied terms

Interaction with common law is also seen with implied terms by law, by fact and by statute. Terms are only implied where there is no conflict with express terms and where considered the obvious norm; contracts silent on a particular matter can have terms implied.

[edit] Implied terms by law

Naturally SFCs cover a large array of detailed matters and resultantly, implied terms are usually irrelevant. However, the modification of SFC's may result in particular terms being implied. There are two main types, commonly referred to as obligations of employer and contractor. For example a contractor is expected to provide services at the level of care expected of an ordinarily competent member of their profession. Many international instruments further these obligations. One, the International Institute for the Unification of Private Law (UNIDROIT), implies the duty to cooperate (5th Chapter). This obligation (Article 5.1.3) is placed alongside other principles; obligations of good faith and fair dealing, reasonableness (Article 5.1.2) and performance (Article 5.1.6). Hence on an international level, both parties have an obligation to cooperate. However, interpreting which party has ultimately failed with this obligation is determined on each case by the corresponding national court. Judicial decisions consequently vary depending on the jurisdictional nation and hence interpretation of clauses can vary (Durand-Barthez, 2012; Klimas, 2011). The duty to cooperate is seen in English common law with the case of London Borough of Merton LBC v Stanley Hugh Leach Ltd. Modification of clauses may leave contracts open to common law interpretation which may not reflect the intended terms of the drafter.

[edit] Implied terms by fact

Courts aim not to improve contracts as they believe parties should, on the whole, bear the consequences of their agreement (Furst et al, 2008). Courts regularly reiterate that implied terms must not contradict the express terms of a contract (Cooke, 2007). It must be noted however that certain instances occur where express terms may be determined as unjust or unenforceable, this is covered later. Courts will only imply terms by fact when it is obvious both parties meant for a clause to be included but unintentionally failed to accommodate it, or when a term is required to give business efficiency, as shown in Gulf Import and Export Co v Bunge SA. The business efficiency principle stems from the The Moorcock case (Wood et al, 2011).

[edit] Terms implied by statute

Modifying certain terms within a SFC may contradict legislation and terms may then be implied. We shall look at two main pieces of legislation that impact on modification of SFCs.

[edit] The Housing Grants, Construction and Regeneration Act (HGCRA) 1996.

The main purpose the HGRA is to ensure contracts include suitable provisions for payments and dispute resolution. If amendment to any SFC contravenes the act then the statutory instrument known as the Scheme for Construction Contracts defaults into place (Helps and Sheridan, 2008). The amendment of a dispute resolution clause in a JCT 05 trade contract, to transfer the cost of adjudication for both parties to the contractor, was deemed non-compliant with the HGCRA and the Scheme. The Yulanda (UK) Co Ltd v WW Gear Construction Ltd case saw the amended clause replaced with the provisions made by Part One of the Scheme.

[edit] Unfair Contracts Terms Act (UCTA) 1997

Generally, courts are reluctant to make a bad bargain good if there was consensus ad idem (Ndekurgi and Rycroft, 2009). UCTA can be misleading as it does not govern all unfairness within a contract but mainly concerns exemption and limitation clauses. Clauses that limit liability for death or personal injury, as a result of negligence, for example are unenforceable under the UCTA. Section 2(2) declares any clause attempting to limit loss or damage caused by negligence as unenforceable, except where a clause can pass a test for reasonableness, as shown in Regus Ltd v Epcot Solutions Ltd. (Chappell, 2012; Ndekurgi and Rycroft, 2009). Courts can therefore interpret ambiguous clauses by using the reasonableness test, and some clauses may not even comply with statutory requirements, and so may be interpreted as unenforceable.

[edit] Disputes

Disputes normally arise when parties have different interpretations of modified clauses stemming from contract negotiation. Courts seek to deal with interpretation of ambiguous modified clauses with previous case law, common law and statutory regulations, and at a last resort, may rely on the contra proferentem and reasonableness principles (Furst et al., 2008). The contra proferentem principle follows that, where a party modifies a clause it is their responsibility to make the wording clear and so they should lose out if there is ambiguity. This was shown in the case of Enterprise Inns Plc v Palmerston Associates Ltd (Taylor and Taylor, 2009).

Lord Justice Moore-Bick suggested how the courts attempt to interpret clauses in Ravennavi SpA v New Century Shipbuilding Co. Limited:

“... read the words in question fairly as a whole in the context of the document as a whole and in the light of the commercial and factual background known to both parties in order to ascertain what they were intending to achieve...”

This follows from the point raised in Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Bluementhal), where Lord Brightman stated:

“the Buyers to so conduct themselves as to entitle the sellers to assume ...”

From this we can deduce that a court would generally adopt the interpretation which a reasonable person, who is considered to have all the background knowledge available to both parties at the time of the contract, would understand the parties to mean (Jaegar and Hok, 2010). This is the stance that the Supreme Court took in Rainy Sky v Kookmin Bank.

[edit] Conclusion

There are a large array of different standard forms, drafted for a multitude of different construction and procurement types, hence there is high probability of one being suitable. SFCs can be valuable as they reduce the time and cost at the negotiation stage and provide a sound framework for project success. Modifications may be required to realign them with the constantly changing industry but any choice amendments should be considered thoroughly. Modifications can make clauses ambiguous or may be unenforceable. Modification can create legal uncertainty which may result in the courts interpreting terms in a unintended way. It is therefore important to consider the ramification of alterations, question whether changes are necessary and ensure that terms do not have a detrimental effect on other interlinked clauses or on the contract as a whole.

[edit] Find out more

[edit] Related articles on Designing Buildings Wiki

[edit] External references

Case Law

  • Balfour Beatty v Docklands Light Railway Limited (1996) 49 CON LR 1
  • Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330 (Ch)
  • Bramall & Ogden v Sheffield Council (1985), 1 CON LR 30
  • Enterprise Inns Plc v Palmerston Associates Ltd [2011] EWHC 3165
  • Gulf Import and Export Co v Bunge SA [2008] 2 ALL E R (Comm)
  • London Borough of Merton LBC v Stanley Hugh Leach Ltd (1985) 32 BLR 51. The Moorcock (1889) 14 PD 164
  • Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Bluementhal) [1983] 1 All ER 34
  • Peak Construction v McKinney Foundations (1970) 1 BLR 111
  • Rainy Sky v Kookmin Bank [2010] EWCA Civ 582.
  • Ravennavi SpA v New Century Shipbuilding Co. Limited (2007) EWCA Civ 58
  • Regus (UK) Ltd v Epcot Solutions Ltd. [2008] EWCA Civ 38
  • Royal Brompton NHS Trust v. Hammond & Others (No. 9) [2002] EW HC 2037
  • The Yulanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720

Statutory Legislation

  • Housing Grants, Construction and Regeneration Act (HGCRA) 1996 Unfair Contracts Terms Act (UCTA) 1997

Other References

  • Au, Maria.C.Y. and Chan, Edwin.H.W. Construction Law Journal. Enforceability Consideration for Deleting the Extension of Time Provisions in Building Contracts, [e-journal] [Accessed 12th November 2012]
  • Craik, M. and Patten, B. 2007. Society of Cosntruction Law. Complex Construction Contracts: Who Needs Them? Who Benefits?
  • Durand-Barthez, P. 2012. International Business Law Journal: The “governing law” clause: Legal and Economic Consequences of the Choice of Law in International Contracts, [online] [Accessed 12th November 2012]
  • Helps, D. and Sheridan, P. 2008. Construction Law Journal: Construction Act Review (October), [online].
  • International Institute for the Unification of Private Law (UNIDROIT) UNIDROIT Principles of International Commercial Contracts 2004.
  • Klimas, E. 2010. International Journal of Law in the Built Environment. Emerald Article: A General Duty to Co-operate in Construction Contracts? An International Review. Vol. 3 Iss: 1 pp.83-96.
  • Latham, Sir M. 1994. Constructing the team, Review of Procurement and Contractual Arrangements in the United Kingdom Construction Industry, [online] Available at: <http:// www.ihsti.com/tempimg/504b15c-CIS888614800084343.pdf>
  • Local Government Task Force, n.d. Rethinking Construction. [pdf] Anon: Local Government Task Force. Available at: http://www.constructingexcellence.org.uk/sectorforums/constructionclientsgroup/downloads/standard_formsLGTF.pdf> [Accessed 14th November 2012].
  • Chappell, D. 2012. Understanding JCT Standard Building Contracts. 9th edn. Routledge: Oxon.
  • Cooke, J.R. 2007. Architects, Engineers and the Law. 3rd edn. The Federation Press: Sydney.
  • Furst et al. 2008. Keating on Construction Contracts: First Supplement to the Eighth Edition. Sweet & Maxwell: London.
  • Jaegar, A-V. and Hok, G-S. 2010. FIDIC: A Guide for Practioners. Springer: Berlin.
  • Ndekugri, I. and Rycroft, M. 2009. JCT 05 Standard Building Contract: Law and Administration. 2nd ed. Butterworth-Heinemann: Oxford.
  • Taylor, D. and Taylor, R. 2009. Contract Law: Directions. 2nd ed. Oxford University Press: New York.
  • Wood et al. 2011. Law and the Built Environment. 2nd ed. Wiley-Blackwell: West Sussex.
  • Construction Briefing, 2012. Risk Allocation. [online] Available at: http://www.cpradr.org/Resources/ALLCPRArticles/tabid/265/ID/639/Construction-Briefing-Risk-Allocation.aspx [Accessed 14th November 2012].

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