Article 1 – Agreeing the Contract.

In this series of 9 articles, Blake Newport sets out good practice and provides the benefit of 40 years’ expertise in supporting our clients negotiate the commercial contract minefield across all construction sectors in the UK and overseas.

 In the first article in the series, Gary Bone considers what contracting parties can do when agreeing the contract to help avoid disputes occurring from the outset.

Amendments and careful drafting

There is a reason why standard form contracts are so heavily used in the construction industry. They represent decades of established legal principles, and are tried, tested and revised following use by experienced practitioners. Even where Employers and Contractors use bespoke forms of contract, they often adopt terms that are familiar to the parties.

Standard form contracts are drafted by committee. They seek to fairly apportion risk and obligation between the parties and there are no conflicting clauses – thousands of words of legally challenged text sitting harmoniously together to form a reliable agreement.

For the awarding party, the temptation to amend the clauses to stack the chips in its favour may be tempting. Sometimes there is a governance necessity, for example certain timescales for agreeing change cannot be adhered to because of internal processes. It is also fairly commonplace to have standard schedules of amendments that outweigh the standard form. This should work in most cases because it is likely to have also been the subject of legal scrutiny and regular contracting parties will be just as familiar with such amendments.

The potential for disputes can arise when further amendments are made at project level. It is unrealistic to think that project-level amendments can be prevented entirely but innocent amendments can inadvertently lead to conflicts between clauses which result in certain commercial processes becoming inoperable.

Consider whether an amendment is really necessary; if it is and the parties arrive at a draft contract which includes non-standard/project level amendments, seek advice from an experienced practitioner who has not been involved in the process to review it.

It is advised that a ‘clean’ copy of the contract is produced – that is, one where the amendments are incorporated directly into the text which can assist all involved in understanding the terms and how they all sit together.

Completing the contract data / articles etc correctly, unambiguously and completely

Standard form contracts usually have certain details which must be completed (e.g. liquidated damages amounts, sectional completion dates) because the standard clauses refer to them. Some contracts expect more text than others. These details are required for the contract to operate correctly. It is important that whoever drafts these particulars does so with recognition of the clauses which refer to them and understands why the detail is important.

The parties may have to later refer to these when agreeing the basis and valuation of change/delay and if it is open to interpretation it can lead to a dispute. Millions of pounds have been known to turn on the interpretation of a small number of clumsily drafted words in the particulars. If there is not enough space to capture the exact agreement in the particulars, it should be written somewhere else and cross-referenced.

On occasion I have seen particulars struck through because the drafter thought that they didn’t apply, despite a clause referring to them. I have seen blank spaces where crucial information is required. A particular bugbear is when ‘To Be Agreed’ is written – this contract IS the agreement! How often are items stated as being  ‘TBA’ successfully agreed after the contract is agreed? It might be more accurate to write ‘Too difficult to answer’ rather than ‘TBA’.

This contract itself  is the place to express the deal that the parties have struck and to place it in context with the standard clauses. It is advised that the draft contract particulars are reviewed and if the drafter is struggling to capture the deal within the framework – i.e. if it is genuinely too difficult – seek assistance. 

Consider clear cost/fee delineation

For those involved in target cost or cost plus fee contracts, the subject of what is part of the fee and what is included in the fee percentage to be added to the base cost may well be a familiar tale of woe. I am currently working with a multidisciplinary steering group where we are aiming to improve and standardise cost assurance and audit protocols across infrastructure projects where this is an issue that requires attention.

Often there is a list of costs in the contract that the party receiving payment will incur in the course of its business which are considered to be included in the fee% added to the base cost. This list may sometimes run to more than a hundred items and each item has just a few words describing it. The base cost is intended to capture the costs incurred in order to deliver the project. Inevitably there will be a grey area which sits between and quite often gets struck out in interim payments assessments, paid ‘on account’ or something in between – effectively kicked into the long grass. This difference can grow very quickly and lead to a dispute.

Particular attention must therefore be given to this grey area, especially where the project is a joint venture or alliance where different businesses have different accounting principles and cost allocation processes. One of the ideas of the steering group is provide a standard in order to avoid the grey area and allow businesses to align their practices and to give the list of standard fee items some added clarity. But in the meantime, experience of those that have lived the tale of woe helps to identify grey areas at contract formation stage. 

Hierarchy of documents – avoid conflicts

Most standard form contracts do not contain a hierarchy of which documents take precedence in the event there is a conflict between them. This is because they are drafted so that there are no conflicts. It is only when the parties refer to other documents rather than incorporate them directly into the contract and its particulars is there scope for conflicting information. A blunt tool is to list which documents take precedence in the event of any conflict.

In complex projects the base agreement will invariably contain masses of information so an order of precedence may be the best way to deal with any conflict. Standard form contracts often include a clause which seeks to give the benefit of the doubt to the party which didn’t draft the contract but often this can lead directly to a dispute and is often subject to amendment in any case.

Contracting parties are advised to give careful consideration to the structure of the hierarchy and if necessary, to break documents down into constituent parts because otherwise there may be a single document that has conflicts and discrepancies within it, particularly if it is large and multifaceted.

Have an executed contract in place and avoid letters of intent

One particular source of dispute can be a rush to start – get materials ordered, designers solving technical problems and boots on the ground as a show of visible progress. Often, there is no time to go through a robust contract formation process, scope cannot be clearly defined, and long lead items and scarce resource must be secured.

Often parties set out with good intentions with letters of intent but in the event that the works do not go so well the parties will have limited contractual recourse and the Scheme for Construction Contracts and other statutory procedures may be required to step in to fill the blanks. Having to rely on implied terms and statutory instruments is not usually a place where either party wants to be in the event of a dispute due to the uncertainty it creates.

It is advised that parties get into contract as soon as possible and seek to avoid letters of intent altogether.