Contract Practice for Construction - Assignment Example

Contract practice for construction What is the legal position of both parties when a project has started on site under a letter of intent when the parties to the contract have not signed the contract? As per section 104 of Housing Grants, Construction and Regeneration Act 1996 (Construction Act), construction contract is an agreement with a person for carrying out construction operations among others. Section 107 of the Construction Act says that agreements must be in writing. Proviso (1) to section 107 states that it can be any other agreement between parties if it is writing. As per proviso (2) to section 107, the agreement need not be signed, it could arise out of exchange of communications, by reference to any terms that are in writing, at least if it is recorded by one of the parties or by a third party with the concurrence of parties to the contract, an exchange of written submissions in proceedings such as adjudications, arbitrations, or legal proceeding where in existence of an agreement otherwise than in writing is asserted by one party which the other party does not deny, and any thing in written form or recording of any other form. Following the dictum in the judgement by the court of appeal which reversed the TCC judgment in RJT Consulting Engineers Ltd v DM Engineering (NI) Ltd,(2002) a letter of intent can not constitute a contract as it would not evidence all the material provisions of a contract in writing as per the provisions of section 107 of Construction Act. The letter of intent said that “subject to contract” which meant there was not contract yet in existence. Though the subcontractor argued that the letter of intent contained every thing what a contract would, i.e scope of work, work programme, prices agreed, the appeal court rejected it saying the letter of intent did not contain any details of additional works instructed and the applicable prices for the additional work and that letter of intent did not contain records of meetings in which contained key matters which were modalities for payment, variations, insurance and health and safety. The recent case Bennett (Electrical Services Limited v Inviron Limited (2007) also followed the RJT case saying that section 107 would not give an adjudicator jurisdiction to decide on the issue as letter of intent is worded “subject to contract” However when another matter was taken up before the Technology and Construction court, the adjudicator’s rejection in respect of Allen Wilson Shoplifters v Mr Anthony Buckingham (2005) was reversed validating the letter of intent as a contract evidenced in writing. The four defenses of the Shopfitters were that there was no written form contract and the work was executed under a letter of intent, contract if nay was already terminated, the work concerned were connected to refurbishing of a house which was excluded from the adjudication under the construction contract and adjudication agreement was contrary to the Unfair Terms in Consumer Contracts. The letter of intent was worded as follows. (see appendix 1) The Judge conferred that there existed a contract because the Shopfitters returned the letter of intent duly signed and it had contained all the terms of JCT 1998. It therefore follows that mere wording of letter of intent itself would not obviate the writing requirements of contract entitled for adjudication unless it is devoid of all materials terms of contract. The employer as well as the contractor should ensure that terms of letter of intent should be wholesome enough not to omit any terms of the actual contract. In the case present case what evidences is the letter of intent based on which parties started negotiating with each other and it not clear whether they have finally signed the contract in March 2008. Even in the absence of the formal contract, the fact that there are so many transactions between parties would make both parties bound to the contract and they will have rights of adjudication under the Construction Act for any disputes arising there from. Absent such provisions not in the letter of intent, the parties to the contract can still seek arbitration that the contract may have provided for or in the worst case scenario, the TCC should be approached to decide whether there existed a contract or not. It would be futile to argue that the employer of the contract can avoid a contract merely by the absence of a written instrument if surrounding circumstances suggest that contract was executed. Part II The invocation of prepayment (advance payment) provision in the articles of agreement should be capable of being enforced even though neither the construction act provisions nor the scheme of construction act provisions explicitly provide for an prepayment (advance payment) The prepayment can be taken to mean bills payable before expiry of payment as provided for in the Act or as the case may be or as an advance payment even before the construction is delivered or commenced. In such cases, advance payments are given against bank guarantee or some form of secured bond furnished by the contractor who has to perform the contract of construction. This is usually resorted to guard against the employer of the contract becoming insolvent or overcome possibility of payment avoidance that may be resorted to by the employer of the contract. (O’Shea 2004 p 10) In the event of the contractor invoking pre payment (advance payment), JCT contract forms provide for it. JCT 98, clause 30.1.1.6 prescribes the procedure. The contractor willing, the employer may advance payment at the commencement of the contract which the contractor repays in periodic instalments during the execution of contract. The contract’s appendix must state that clause 30.1.1.6 applies. It should also state the amount payable by the employer along with mode of reimbursement by the contractor. In doing so, the employer will require a bond from the contractor as a pre-condition for advance payment. The standard form of bond is already agreed to between the British Bankers Association and the JCT. If any other form is preferred by the employer, the contactor should be supplied with copies of the terms at the tendering stage itself. If the employer has accepted the bond attached to the contract, seventh recital in the JCT should be struck out. In case the contractor defaults after receiving advance payment, JCT has provided for a sample form of notice to be sent to the surety. The reimbursement to the employer should be supported by the architect’s certificate. Clause 30.2 of the JCT should list down the amount of part due of advance payment, which the architect will deduct from his valuation. (Chappell 2002 p169, 170) About the pros and cons of prepayment (advance payment) provision, if the advance payment making party whether it is the employer or the contractor run the risk of losing it fully or partly if either party defaults. In a recent decision in respect of Mirimskaya v Evans & Anor [2007], the advance payment making party, the claimant herein had to lose her two instalments of advance for repudiatory breach of contract. The claimant a Russian national claimed refund of money she allegedly overpaid to the second defendant who is the construction contractor. On the other hand, the second defendant made counterclaim of £ 641,200 plus VAT from the claimant which she had declined to pay as payment due for several invoices. TCC concluded that claimant repudiated the agreements with the defendant firm in April 2006 when she by mistake accepted defendant’s alleged breach of contract as a repudiatory breach. The defendant was not actually in breach since they had sent their solicitor’s letter o 30th March 2006. Therefore the claimant ad foregone her advance payment by failing to pay second instalment under the two contracts. Court also ruled that the defendant was entitled to recover damages. In the present case the articles of agreement do not require an advance payment bond. As the contract has been stated as completed by the contractor, obviously his money minus the £50,000 advance payment is with the employer. Hence there is no risk of contractor disappearing with money. On the other hand, the contractor is fully at the mercy of the employer for settlement of his bills without being able to retain any advance payment in case of employer’s default. Advantage of the advance payment provision is a blessing for the contractor since he need not invest his own money for execution of the contract. Waiver of advance payment bond by the employer is not well advised for the employer since the contractor can at any time be tempted to make a repudiatory breach under some pretext of default by the employer. Hence it would be in the interests of the employer to encourage contractor with advance payment duly secured by a bond/guarantee of a bank so that the contractor can not take the plea that for want of resources or delay in payment by the employer that contract could not be execute at all or in time. References Allen Wilson Shopfitters v Mr Anthony Buckingham [2005] EWHC 1165 (TCC) Always-associates “Letters of Intent” and Consumer rights in Adjudication revisited” accessed 10 February 2008 < http://www.alway-associates.co.uk/legal-update/article.asp?id=90> Bennett (Electrical) Services Ltd v Inviron Ltd [2007] EWHC 49 (TCC) (19 January 2007) Case No HT 06 351 accessed 10 February 2008 http://www.bailii.org/ew/cases/EWHC/TCC/2007/49.html Chappell David 2002 Parris’s Standard Form of Building Contract: JCT 98 p 169,179 Blackwell Publishing Mirimskaya v Evans & Anor [2007] EWHC B11 (TCC) (05 September 2007) accessed 11 February 2008 http://www.bailii.org/ew/cases/EWHC/TCC/2007/B11.html O’Shea T.Maria 2004 Trapped between the Map and Reality Routledge p 10 RJT Consulting Engineers Ltd v DM Engineering Ltd 2002 WLR 2344 CA Appendix 1 “On behalf of our client … we are issuing the letter of intent to your company for refurbishment works at ….. based on the following: 1. Works to be carried out under the terms and conditions of the JCT 1998 Private Without Quantities 1998 edition. 2. The scope of works will be Preliminary Internal Demolition and Alteration works as detailed in the agreed schedule of works and costs agreed at the meeting on 14th July 2004, as follows:- (a) Schedule No. 3 (amended) and to include the complete demolition and rebuilding the fireplace and chimney stack in the kitchen. In the sum of £51,535. (b) Schedule 4 works (preparatory stripping out works) to include only …. In the sum of £16,965. 6. Please accept this letter as our instruction to commence the Works in accordance with the terms and conditions of the Contract, pending execution of the formal Contract documents. In the event that no formal Contract is entered into then the terms of this letter will apply to the whole of the works carried out by you. The Employer will pay for you any work so completed in accordance with the payment provisions of the Contract. 10. ….. We enclose a duplicate copy of this letter of intent which you are required to sign in confirmation of your agreement to the contents of this letter, which, upon signing, should be returned to …”.(Alway-Associates) Read More