It is common practice for the parties to a building contract, including JCT contracts, to agree a set of amendments to a standard form contract to reflect the particular bargain that is agreed between them.
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 minimize the time and cost of negotiating contracts.
Although its general approach and structure is desired by the parties, a standard form contract in its unamended form will often not be perfectly suited to the project, the rights and obligations of the parties and the risk matrix.
But what happens when making amendments to a SFC causes things to go wrong?
Even for those that adopt an unamended SFC, there are dangers in not paying enough attention to the precise terms of the contract and relying on standard terms or structures of the SFC, irrespective of the actual arrangement between the parties.
The recent Court of Appeal’s decision in Bennett (Construction) Ltd v CIMC MBS Ltd (formerly Verbus Systems Ltd)  EWCA Civ 1515 (“Bennett”) set some useful guidance on implying isolated payment provisions from the Construction Industry Scheme, thus making it useful to consider the wider implications of amendments to construction SFC, in particular assessing the purpose of JCT contracts and the potential pitfalls that can befall clients who use them.
Purpose of JCT contracts?
The JCT wide range of SFC caters for most forms of procurement, together with sub-contracts and associated documents such as warranties and bonds. There are several reasons why contract users in the construction industry benefit from the use of JCT SFC:
- They are devised by experienced practitioners to meet a specific procurement route and to apportion risk fairly between the parties;
- They aim to minimise the time and cost of negotiating contracts;
- They provide familiarity for contract administrators;
- There is an established body of case law involving standard forms of building contracts which can assist in the construction and interpretation of contracts;
- They provide a benchmark and their terms can become a market-accepted position.
Therefore, JCT contracts act as a platform for the construction industry to assist in reaching timely and cost-effective contracts that meet the desired standard of provisions for construction contracts.
However, despite these benefits, there are many significant problems with relying on JCT contracts without legal advice.
First, whilst the industry has clearly changed and JCT itself recognises through the use of its digital contracts that amendments sometimes need to be made, parties should do so with clear, well-defined and consistent terms.
JCT takes a similar view to that stated by RICS’s ISurv, namely, “take care to amend only what is completely necessary”.
That is sound advice because many disputes under construction contracts flow from amended provisions of a SFC.
The Court of Appeal decision in Bennett
Just such a situation arose in the case of Bennett, where the parties used a JCT SFC, but replaced the standard interim valuation payments with five milestone payments, three of which referred to a requirement for “sign-off”, although the term of “sign-off” was not specifically defined in the contract.
The term “sign-off” was applied inconsistently across the contractual documents, resulting in a dispute as to what this term meant. The dispute was whether “sign-off” meant actual signing-off of the items in question or simply the delivery of the items in accordance with the contractual agreement.
The parties could not rely on any definition of the term “sign-off” because one was not given in the contractual documents. Despite the ordinary meaning of the word, it was still judiciable as to the meaning of “sign-off” agreed between the parties.
As a matter of construction, Coulson LJ in the Court or Appeal’s decision said that sign-off was to be assessed objectively, not subjectively, such that the milestones would be paid on the completion of the relevant stage. He noted that there was no reference to actual sign-off being required, or any condition precedent to that effect, and that as such no actual sign-off was required. He also said that, even if actual sign-off was required, a failure to sign-off the relevant documents would not be a defence to Verbus’s claim to payment if the prototype or units were in a state in which they were capable of being signed-off.
Therefore, he concluded that the contract contained an adequate mechanism for determining what payments became due under the contract and when, and allowed the first ground of appeal.
Whilst it was ultimately held that no actual sign-off was required, it may have been the case that had the payment milestones been more clearly drafted, there would have been no litigation, saving the parties time and money.
The message from Bennett
The message here is that if parties intend to draft their own contractual terms, they must ensure such terms are clear and comply with the Construction Act.
If they do not, then they risk lengthy and costly litigation and for those terms being supplemented via the Scheme.
Secondly, parties may decide not to make amendments to the JCT SFC at all and agree to the standard form provided. Yet, the conduct of the parties or circumstances of the arrangements may be so different to what is stipulated in the JCT SFC that it does not properly represent the intention of the parties or what was actually agreed between the parties.
Should a dispute arise, it will cause significant difficultly with identifying what was agreed and trying to prove this via the contract.
The court, legal representatives and clients would then have to go through the arduous task of assessing what part of the contract, if any, truly represents the intention of the parties, and what part was agreed by conduct.
Conclusion – pay up or pay out?
Both situations mentioned above can damage professional relationships, cause delay to the construction works and lead to substantial legal costs.
Parties should seek legal advice and properly review the terms before entering an agreement, especially if amendments to the SFC have been made. Whilst it is recognised that this will inevitably incur upfront costs and take longer, in the long term it could alleviate any potential dispute hidden in the contract, where the subsequent costs and length of time/delays to works will be more significant.
Parties will still save time and money as they are not creating the contract from scratch.
Bennett is an important decision of the Court of Appeal clarifying the correct approach to implying the Scheme provisions as to payment where the payment provisions of a construction contract do not satisfy the requirements of the Construction Act.
Only in the rarest of cases will the contract provisions be replaced wholesale. Instead, the contractual payment mechanism will be preserved to the extent possible, and only deficient provisions of the payment regime should be replaced.
The Court’s findings as to the “sign off” requirement, may give rise to further argument in other cases.
Solicitors and other legal professionals should assess the circumstances of the arrangements between the parties, ensuring they will or can mirror what is in the contract.
This is not always possible as arrangements may subtly change over time, but at least a thorough check occurred from the commencement of the contract.
This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by Adriana Badescu.
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