A Building Contract may be more than it seems

General papers and articles

A building contract, like any other contract, is, to an extent, whatever the parties to it want it to be. It is a “whole” contract in the sense that the contractor has an obligation to complete the works in accordance with the terms of the contract, but that is not to say that it is complete. There are many outside influences that shape and direct the terms of the contract and affect the parties’ agreement. Indeed, a building contract is not even complete and self-contained in accordance with its own express terms.

Express terms

All building contracts will contain clauses that allow for changes in design, changes in the cost of the works and changes in the time those works are expected to take.

Time is a good example of this. There is nearly always a completion date written in to the contract, either in the body of the contract or in an appendix, or more usually in the contract particulars. Sometimes, in more simple contracts, it is expressed as the end of a given period of time from commencement, but it is nearly always there.

If there is no completion date, however, the contractor cannot take as long as he likes; he has to complete the works within a reasonable time.

If there is a specified completion date in the contract, the usual obligation on a contractor is to “carry out and complete the Works” in accordance with the contract. That is actually the JCT wording; NEC3 says “The Contractor…does the work so that Completion is on or before the Completion Date”. In either case, if the contractor fails to complete by the completion date, it is a breach of contract entitling the employer to damages.

However, not all delays are the contractor’s fault. Delays often occur on a project that are nothing to do with the contractor, for example if the employer does not hand over the site on time or asks the contractor to perform additional works as a variation to the original scope of works.

It does not seem right, in those circumstances, for the contractor to be in breach and liable for damages if he fails to complete on time and, indeed, he is not…because of the “prevention principle”. What the “prevention principle” says is that no party can require the other party to comply with a contractual obligation in circumstances where that party has itself prevented compliance. What happens then is that the original completion date falls away and time is said to be “at large”. That is not to say that the contractor can take as long as he likes to complete the works, he just has to complete them within a reasonable time. The way round this uncertainty is to introduce a contractual mechanism that allows the employer to move the completion date and preserve it for use later, rather than letting it fall away. Such extension of time clauses can be found in both JCT and NEC3 and other standard forms of building contract.

Similarly, in relation to cost, all standard forms of building contract contain clauses allowing the contract sum to be changed upon the happening of certain events, called “Relevant Matters” in the JCT and “Compensation Events” in the NEC.

Thus, building contracts are not designed to be complete, even on their own express terms, still less in respect of outside influences, such as pre-contractual representations, or terms implied by law or otherwise.

Representations

The parties to a building contract often include what is known as an “entire agreement” clause. The following is an example:

The Employer and the Contractor respectively acknowledge that this Contract and the documentation referred to within the Conditions form the entire contract between the Employer and the Contractor in relation to the Works to the exclusivity of any antecedent statement, agreement or representation.

The purpose of such a clause is primarily to exclude any pre-contractual representations and to prevent either party from relying on them; the idea being to provide more certainty for the contracting parties. Without such a clause, there is a risk that either party could rescind the contract if it could show that it had entered into the contract in reliance on representations of fact by the other party which were untrue, and the other party could also find itself liable for damages to the extent that the representations were made negligently.

Another way in which pre-contractual representations can find their way into a construction contract is by way of actual knowledge of special circumstances, which might give rise to a loss on breach of the contract, and which was communicated by one party to the other (Hadley v Baxendale [1854] EWHC Exch J70)

Parties often attempt to exclude these representations as well, in an attempt to limit the extent of their liability on breach. One such limitation of liability clause was relied upon by Eco-Tec in the case of McCain Foods (GB) Ltd v Eco-Tec (Europe) Ltd [2011] EWHC 66 (TCC).

In that case, McCain owned a waste water treatment plant that produced biogas. They decided to buy a system for removing hydrogen sulphide from the biogas, so that they could use it as fuel to generate heat and electricity in a combined heat and power plant. Their contract with Eco-Tec excluded liability for “indirect, special, incidental and consequential damages”. The system was defective and proved impossible to commission. McCain claimed damages for breach of contract, including:

1) the cost of buying another system to replace the defective one,

2) the extra cost of buying electricity instead of generating it from their own biogas,

3) loss of revenue from the system,

4) the cost of contractors, site managers and health and safety personnel, together with the cost of staff time in resolving the problems, reasonable attempts to mitigate the loss, independent experts and laboratory testing, and buying more equipment and civil works.

Eco-Tec accepted that the cost of replacing the system was direct loss, but argued that all the other losses were indirect and therefore excluded by the contract.

The judge decided that all of the losses claimed by McCain were direct losses arising naturally from the breach. The exclusion clause did not reduce McCain’s claim at all.

Implied terms

Insufficient thought is often given to implied terms when parties enter into building contracts. So much time and effort is put into ensuring that all the necessary express terms are incorporated that parties often neglect the fact that many terms are implied anyway and that some of those implied terms cannot be contracted out of.

Generally speaking, there are two ways in which terms can be implied by law into a contract: either by statute or by common law.

Terms implied by statute

The following terms are implied by statute:

1. The Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009, implies into a construction contract the payment provisions from The Scheme for Construction Contracts (England and Wales) Regulations 1998 unless it already contains an “adequate mechanism” for determining what payments become due and when. Likewise the right to refer a dispute arising under the contract to adjudication.

A “construction contract”, for these purposes, is defined as

An agreement with a person for…the carrying out of construction operations

The Act goes on to list the sort of things that are construction operations and the sort of things that are not. There are various exclusions relating to the oil, gas and nuclear sectors and in relation to the manufacture and delivery to site of building or engineering components or equipment. The Act does not apply to contracts with residential occupiers.

2. The Late Payment of Commercial Debts (Interest) Act 1998 implies into a contract the right to interest on late payments at the rate of 8% over base unless it already contains a “substantial contractual remedy for late payment”.

3. The Contracts (Rights of Third Parties) Act 1999 implies into a contract a right for a third party to enforce a contractual term provided that the contract expressly provides for this or the contract purports to cater a benefit.

4. The Supply of Goods and Services Act 1982 implies into a contract terms that goods supplied will be of satisfactory quality, and that services will be provided with reasonable skill and care and within a reasonable time. Similar terms are also implied by common law.

5. The Defective Premises Act 1972 implies into a contract for the provision of a new dwelling a term that the dwelling, when completed, will be reasonably fit for human habitation, as follows:

A person taking on work for or in connection with the provision of a dwelling…owes a duty…to see that the work which he takes on is done in a workmanlike or, as the case may be, professional manner, with proper materials and so that, as regards that work, the dwelling will be fit for habitation when completed.

Terms implied by common law

The following terms have been found to be implied by common law:

1. That a supplier of professional services will use the care and skill to be expected of an ordinarily competent and experienced member of his profession.

2. That goods and materials supplied will be of good quality and reasonably fit for their purpose.

3. That the employer will give the contractor possession of the site within a reasonable time.

4. That the employer will cooperate so as to enable the contractor to carry out the works in a regular and orderly manner and not hinder or prevent him from so doing.

5. That the contractor will carry out the works in a good and workmanlike manner.

In addition, even if there is no defects liability period in the contract, such that the contractor has no right to return to site to rectify defects following completion, the employer still has a duty to take reasonable steps to mitigate his loss. If the contractor could have come round and rectified any defects at no expense, the employer will not be able to recover the cost of having the work done by others. That was the decision of the Court of Appeal in the case of Woodlands Oak Ltd v Conwell and another [2011] EWCA Civ 254.

Terms implied ad hoc to specific contracts

In addition to implied terms of general application, the courts can also imply terms into specific contracts if it is necessary to give them “business efficacy”, in other words to make them work. In general, the courts will assume that the parties to a contract have expressed every material term which they intended to express. They will not imply additional terms simply because the contract would be better if they did, or because it would be reasonable to do so.

The most commonly cited test for implying terms into a contract was proposed by Lord Hoffman in Attorney General of Belize and others v Belize Telecom Ltd [2009] UKPC 10. This test requires:

– that the term to be implied must be necessary to make the contract work and to give business efficacy to the contract; and
– that if an officious bystander were to suggest that the term be included in the contract, that the parties would agree that it was so obvious that it goes without saying.

Also, the proposed implied term must be capable of clear expression and it must not contradict any existing express term of the contract.

The leading case on this point was called The Moorcock [1886-1890] All ER Rep 530. In that case, the owners of The Moorcock, a cargo boat, contracted with the owners of a jetty on the Thames to moor there for the purpose of unloading. When the tide went out, The Moorcock struck a stone ridge on the river bottom and was damaged. The contract made no mention of the state of the river bottom. Nevertheless, the Court of Appeal found in favour of the owners of The Moorcock. They decided that it was an implied term of the contract that the jetty owners would take reasonable care to ensure that the mooring was safe and would warn boat owners if it was not.

Conclusion

Therefore, while, at first sight, it might seem that your building contract is complete, that perception is swiftly challenged by not only the contract’s own express terms as to time and cost, but also by the law relating to pre-contractual representations and implied terms. Watch out; when entering into a building contract, you may be taking on more than you had bargained for (or thought you had bargained for…).

By John Starr, Consultant, Stepien Lake. A version of this article has previously appeared in the Property Law Journal, published by Legalease Ltd