Construction Contracts: Freedom of Contract - Dissertation Example

Construction Contracts: Freedom of Contract? Introduction The presumption that parties are free to draft construction contracts in whatever form they wish and that there are no controls over the terms they wish to include in their contracts under English law, is misconceived. This misconception arises out of the fact that the drafting of construction contracts is often characterized by the flexibility permitted in contract form choices with respect to meeting the aims and objectives of the construction relationship.1 However, construction contracts, like any other business or commercial contract are subject to the ordinary contract law regime.2 As a result freedom of contract is not an absolute right to the extent that parties are only at liberty to agree to terms and conditions that are lawful and consistent with the law of contract, construction law and practices. Similarly, parties to a construction contract may only draft contracts that comply with the court’s expectations by reference to contract law, construction law and practices. Contract Forms The basic aim of any commercial agreement is for defining the business terms and conditions of the agreement.3 In this regard, the parties to a construction contract are constrained by this basic aim of business contract drafting so that they are not free to incorporate whatever terms and conditions they desire. Nor may the parties use any form whatsoever. There are three basic approaches to drafting that are calculated to meet the basic purpose of commercial contract drafting. First the parties may, in drafting the construction contract, take an approach that reflects an objective to set out the management process and the manner in which the work is to be administrated. Another option is to take a more adversarial approach which reflects that the contract is drafted with a view to eventually litigating disputes arising out of the contract. Yet another approach to construction contract drafting is to simply use national standard forms which typically set out the parties’ responsibilities.4 Even where standard contract forms are used there are typically specific terms and conditions included in the contract which set out the service contracted for, the price for that service and the time for delivery of that service.5 The latest version of the New Engineering Contract (NEC3) provides a system of standard form construction contracts which indicate that the specific nature of the construction contract, although flexible is subject to a comprehensive form. The NEC3 construction contract is confined to the specific conditions and terms of the construction agreement. NEC3 standard form contracts also set out those incidents and situations that may reasonably be expected to arise in the course of any construction project.6 The standard NEC form which is a creature of the Legal Affairs Committee of the Institution of Civil Engineers was initially formulated as a means of providing a “fundamental review of alternative contract strategies for” all construction and civil engineering contracts focused on generating “good practice” among the relevant practitioners.7 In this regard, the standard NEC form, which is widely used in the UK can be regarded as a trend setter which ensures that constraints against freedom of contract in the construction industry in England does not support the free and uncontrolled incorporation of terms and conditions. Neither are the parties to a construction contracts at liberty to draft the contract any way that they wish. These contracts are required to reflect good practice and are subject to the general laws of contract. Another standard form of contract used in England is the Joint Contract Tribunal (JCT) which was created by the Construction Confederation.8 JCT standard form contracts also provide for both specific and general terms of the construction contract. For instance the 2005 JCT contract provides for a section in the standard form for “particulars of contract”.9 The special provisions for entering the specific details of construction contracts are indicative of the fact that only those terms and conditions are freely negotiated between the parties. Even then, those negotiations are subject to general contract laws, so freedom to negotiate is not absolute. The general purpose of these standard forms of contract are not merely to set professional construction standards, but to overcome the difficulties that typically arise out of the practice of permitting ad hoc construction contracts. In general non-standard forms of contract can give way to a number of substantive and procedural difficulties which alone testify to the fact that parties to construction contracts are far from free to adopt whatever form of contract they want. Contract forms are entirely important to the construction contract and the courts require some measure of clarity, indicating that construction contracts cannot be drafted in any manner the parties wish. Those who provide standard contract forms such as the NEC and the JCT have learned from the harsh criticisms of the courts in the past. For instance in Bickerton v North West Metropolitan Regional Hospital Board [1969] 1 All ER 977 a standard form construction contract was described by the court as: Unnecessary, amorphous and tortuous…it seems lamentable that such a form…should be so deviously crafted with what in parts can only be as calculated lack of forthright clarity.10 The court’s comments in the Bickerton case provide a convincing argument against the perception that construction contracts may be drafted by the parties in any way they wish. It is apparent that the courts will not tolerate a contract that lacks clarity. Terms and Conditions of Construction Contracts Lord Diplock’s definition of a construction contract in Modern Engineering v Gilbert Ash [1974] AC 689 speaks clearly to the nature of the terms and conditions that are required to be included in the construction contract. Lord Diplock defined the construction contract as follows: A building Contract is an entire contract for the sale of goods and work and labour for a lump sum price payable be installments as the goods are delivered and the work done.11 In this regard, the construction contract is required to include terms and conditions that set forth the work to be done, the price to paid and upon agreed terms. Whether or not the contract is non-standard or standard, the courts require certain specificity in determining whether or not a party has failed to live up to his or her obligations under the contract. It other words, to say that there is no control over the terms to be included in a construction contract is palpably false. For instance in HW Nevile (Sunblest) Limited v William Press & Son Limited HHJ, Newey QC placed his own definition on the term “practically complete” suggesting that parties should pay closer attention to the term when using it in contract for condition of payment.12 Newey QC explained that the terms “practically complete” meant that the construction obligations could only be regarded as properly discharged if there were only minor incomplete work, but not if there had been patent defects.13 Newey QC’s decision indicates that the parties’ freedom to devise their own terms and conditions are subject to the court’s approval and interpretation of those terms. In this regard, the law as applied by the courts, exercise control over the terms and conditions provided for in a construction contract as they do in any other contract. To illustrate the residual control exercised by courts over the terms and conditions in a construction contract, Viscount Dilhorne said in City of Westminster v Jarvis: The contract does not define what is meant by “practically complete.” One would normally say that a task was practically completed when it was almost but not entirely finished; but “Practical Completion” suggests that that is not the intended meaning and that what is mean is the completion of all the construction work that had to be done.14 Essentially, the courts will interpret the meaning and application of specific terms and conditions in a construction contract where parties neglect to do so themselves. This judicial practice is a manifestation of the fact that the terms and conditions used in a contract are not only controlled by the law, but are subject to interpretation and application in accordance with the law. In attempting to interpret and apply the terms and conditions contained in a construction contract, the courts will also take account of the general trade practices and specific conditions within the construction site. For instance, in Emson Eastern Ltd V. EME Developments Ltd [1991] 55 BLR 114, the court in ascertaining how to interpret the term “practical completion” as used in a construction contract, took account of the nature of construction sites.15 The court considered that the size of construction sites, the deployment of a variety of material and the various functions carried on at the construction site made it almost impossible for completion to be perfect.16 The courts have also insisted that the construction contract state its terms and conditions in clearly defined terms.17 In the event no fixed date is imported in the contract the parties will be bound by the provisions contained in the Supply of Goods and Services Act 1982 which basically provides that contractors are required to complete their obligations within a reasonable time.18 This is further evidence that the parties’ freedom to negotiate and include terms and conditions into a construction contract in the absence of control is an entirely false representation of reality. Legal constraints in the form of both statutory and case law exist and function to exercise control over the terms and conditions that are used and applied in all contracts without exception. The courts have even gone further to state that for the purpose of business efficacy, all commercial contracts should include a term for completion with a fixed date. This, according to the court in Bruno Zornow (Builders) Ltd. v Beechcroft Developments Ltd. [1990] 51 BLR 16 was also necessary for ascertaining the intentions of the parties.19 Even so, the courts are predisposed to defer to the Supply of Goods and Services Act 1982 when no fixed date appears in the contract’s terms and conditions. Applying the 1982 Act requires looking at the specific circumstances applicable to the case at issue and to determine what amounts to a reasonable time. In Pantland Hick v Raymond & Reid [1893] AC 22 the court set out the principles that were to be taken into account when ascertaining what amounted to a reasonable time for completion. In this regard, account must be taken of the circumstances existing at the time of performance of the contractual obligations, but not those circumstances that the contractor had under his or her control.20 Lord Goff applied these principles in British Steel Corporation v Cleveland Bridge Engineering Company Limited [1981] 24 BLR 100. Fixing a time for completion is entirely important for the injured party. The fact is, the terms and conditions of a contract have legal consequences for both the injured and offending party. Ultimately, parties are required to subscribe to this legal technique for controlling the way that parties to a construction contract draft the contract and the description of the terms and conditions that are incorporated into the contract. The consequences of breaching terms and conditions of a contract alone demonstrates that parties are required to pay careful attention to the manner in which they draft their construction contracts and define their terms and conditions. For instance the court said in Wickman Machine Tools v Schuler [1972] 2 All ER 1173: If a term is described as a “condition” there is a strong indication that the parties intended any breach, however small, to be repudiatory, but the description is not conclusive and yields to the discovery of the parties’ intentions as disclosed by the contract read as whole. Conversely the use of the word “warranty” to describe a term is not conclusive that that term is not a condition.21 The rules of interpretation with respect to the terms and conditions of a contract dictate that specific attention to the drafting of the construction contract and the definition of terms and conditions require close and careful attention on the part of those drafting the construction contract. The case of GLC v Cleveland Bridge Engineering Company Limited [1984] 34 BLR 50 illustrates the point. In this case it was held that in the event the construction contract provides a fixed date for completion, no terms will be implied indicating that the contractor is at liberty to conduct the work diligently and regularly. However, if a term is not fixed for completion, the contractor is at liberty to conduct the work regularly and diligently, provided that he completes the work in a manner consistent with the contract.22 The consequences for failing to fix a time for completion in the construction contract can have unpleasant consequences for the aggrieved party. For instance, the aggrieved party will have the onerous task of proving to the court’s satisfaction that the contractor was proceeding with the work in a manner that was hindering progress.23 Similarly, the contractor can be disadvantaged by the insertion of a term that provides for the contractor to complete the work by a specific time and that he carries out the work diligently and regularly. Although the contractor might complete the work on time, but it can be shown that he did not conduct the work regularly and diligently he will be liable for any damages the employer suffers.24 The freedom to draft the construction contract and to incorporate terms and conditions are therefore the subject of legal control in a variety of ways. Terms and conditions providing for regular and diligent construction works can have unpleasant consequences for both parties to a construction contract. In West Faulkner Associates v The London Borough of Newham [1992] 1 B LR 6, the court ruled that a term providing for the contractor to proceed diligently and regularly means that the contractor proceed “continuously, industriously and efficiently”.25 Moreover, the work is required to be such that it proceeds steadily toward completion in a manner consistent with the requirements of the contract in terms of time, quality and sequence.26 Complicating matters for the contractor, if the work is moving to completion at a fast pace and it is obvious that completion will be ahead of the fixed date, the contractor may not slow his work down if he is under an obligation to proceed diligently and regularly.27 Aside from the interpretation of specific terms and conditions in the contract, the Housing Grants, Construction and Regeneration Act 1996 may also have implications for the manner in which the Construction contract is framed with respect to the nature of the terms and conditions contained in the contract. Section 108(1) of the Housing Grants, Construction and Regeneration Act 1996 confers upon all parties to a contract a statutory right to adjudication. Section 108(1) reads as follows: A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section. 28 In other words, the statutory right to adjudication is one that must be taken into account when drafting the terms and conditions of a construction contract. If the right to adjudication is not properly negotiated as a term and condition of the contract it might cause problems later on. For instance, an agreement to mediate might require the parties to surrender the statutory right to adjudicate under specific terms and conditions. If it is not properly negotiated it might cause delays in the mediation process or might result in a number of interlocutory proceedings delaying the dispute resolution process if one party insists on asserting the statutory right to adjudication. Conclusion Construction practices and laws together with the general law of contract are such that the drafting of the construction contract and implementation of terms and condition require careful analysis and attention. There is a danger that the contract may leave one or both of the parties vulnerable to unforeseen consequences if the contract and its terms and conditions are inconsistent with the law. Many of the laws developed by the courts with respect to the drafting efficiency are derived from commonly used terms and customs in the construction trade. If certain terms and conditions are unclear or are imprecise, the courts will interpret those terms and conditions. In all the circumstances, parties to a construction contract are far from free to draft contracts any way they deem fit. Similarly, the incorporation of terms and conditions into a contract are subject to control by the law and statutory provisions. In this regard, construction contracts like any other contract are only permitted freedom of contract within the confines of an exhaustive body of a contract law. Bibliography Bickerton v North West Metropolitan Regional Hospital Board [1969] 1 All ER 977. Bradgate, R. and White, F. (2007) Commercial Law. Oxford University Press. British Steel Corporation v Cleveland Bridge Engineering Company Limited [1981] 24 BLR 100. Bruno Zornow (Builders) Ltd. v Beechcroft Developments Ltd. [1990] 51 BLR 16. City of Westminster v Jarvis [1970] 1 All ER 943. Eggleston, B. (2006) The NEC3 Engineering and Construction Contract: A Commentary. Blackwell Publishing Company. Emson Eastern Ltd V. EME Developments Ltd [1991] 55 BLR 114. Gerrard, R. (2005) “Relational Contracts – NEC in Perspective”. Lean Construction Journal Vol. 2(1): 80-86. GLC v Cleveland Bridge Engineering Company Limited [1984] 34 BLR 50. Hounslow V Twickenham Garden Developments [1970] 7 BLR 89. Housing Grants, Construction and Regeneration Act 1996. HW Nevile (Sunblest) Limited v William Press & Son Limited HHJ, [1981] 20 BLR 78. Modern Engineering v Gilbert Ash [1974] AC 689. Murdoch, J. and Hughes, W. (2008) Construction Contracts: Law and Management. Routledge, Taylor and Francis. Pantland Hick v Raymond & Reid [1893] AC 22. Ramsey, V. (2007) Construction Law Handbook. Thomas Telford. Supply of Goods and Services Act 1982. West Faulkner Associates v The London Borough of Newham [1992] 1 B LR 6. Wickman Machine Tools v Schuler [1972] 2 All ER 1173. Read More