Aspects of Construction Contracts

Introduction

In this assignment the objective is to analyse the issues presented, provide recommendations and solutions on how to deal with them and most importantly give advice to the appropriate party. The following four scenarios will be examined:

• Scenario 1: Comment on the issues to be addressed by Pettit & Small;
• Scenario 2:Explain how the A/CA might deal with this;
• Scenario 3:Discuss from the viewpoint of Pettit & Small;
• Scenario 4: Delayed payments and options available to contractor;

By participating in this module, the following knowledge and skills have been acquired and parts of this knowledge will be demonstrated throughout this assignment:

• Applying basic legal principles to construction contracts (Cousins, 2015);
• Recognising the practical role of construction law and its relationship to the chosen procurement route (Thomas & Wright 2016);
• Identifying the key provisions in appropriate standard forms of contract;
• Reviewing how the risk is distributed within a selection of standard form contracts;

Scenario 1: Issues Arising from the Discovery of an Old Cellar

Pettit & Small is faced with a serious legal issue that may lead to serious loss of profits that it would have earned from the project. However, it is important to start by looking at the fundamental mistakes that Pettit & Small committed that may prove to be very costly going forward.

Fundamental Mistakes Committed by Pettit & Small

The following are critical the mistakes that were committed by the contractor which should not be repeated:

• Pettit & Small failed to conduct a proper survey of the site to determine the nature of work that was expected of in this project. As Thomas and Wright (2016) say, it is the responsibility of a contractor to assess the nature of work before issuing any acceptance to an offer. It also failed to ask the employer if the site needed any further clearance. The contractor was entitled to additional payment for the additional work as per the guidelines provided by JCT SBC/Q 2016 (Thomas & Wright 2016). The contractor should have made an offer to do the extra work and only proceeded after the employer accepted the offer.
• After discovering there was an additional work that was not part of the original agreement, Pettit &Small should have immediately contacted the employer or its agents to raise the issue. This firm failed to do so, opting to continue with the clearance, a work that was not part of the original contract.

The above issues are fundamental mistakes, which clearly show that Pettit & Small acted without following the provisions in JCT SBC/Q 2016. It is possible that it acted out of good faith, expecting that the employer will understand this provable issue and not only extend the deadline for the contract, but also consider paying for the additional work. However, it is clear that the employer is not keen on extending the deadline and neither is it ready to pay more for the additional work (Cousins, 2015). In fact, Pettit & Small must be ready for the deduction of liquidated damages in case the project is not completed in time, as stated in the only existing contract between the two parties.

Legal Basis upon which Pettit &Small Can Argue its Case

It is true that the contractor committed the above mistakes which may prove costly to the firm. However, on its part Pettit &Small can also point out the fundamental issues that may make the employer, HC Group, to be responsible in a way for the problems that arose in the project. The following is the fundamental issue that Pettit & Small should raise based on the JCT Standard Building Contract with Quantities 2016 upon which this contract was signed:

• The JCT 2016 Edition incorporates and updates the provisions from JCT Public Sector Supplement which relates to Fair Payment, transparency and BIM into JCT contracts as a whole (Hackett & Statham, 2016).

The primary argument of Pettit & Small should be that in the original contract, HC Group failed to be transparent. The law required HC Group to be exact with the nature of work that Pettit & Small was expected to undertake. In doing so, HC Group violated the law that required it to be transparent. The following are the fundamental legal arguments that Pettit & Small should hold in its favour:

• HC Group failed to act in good faith when it deliberately concealed the fact that a substantial amount of work had to be undertaken in terms of site clearance before the construction could begin.
• HC Group’s offer did not include the work of further clearance of the site. As such, the budget and timeline for the project would naturally be extended in line with the issues that arose.

The violation of JCT 2016 Edition, upon which the contract was based, is one of the ways through which Pettit & Small can demand justice to avoid the possible penalties and to get fair payment for the additional work of demolition that it had to undertake in this project. However, it is highly recommended that Pettit & Small should seek an out-of-court settlement. The problem can be solved through proper application of the provisions and clauses of the JCT contract.

Scenario 2: The Weather Problem and How A/CA Should Handle It

The contractor has issued a warning that the current weather is too cold for the concrete to set within the scheduled timeline. A/CA must remember that it has a responsibility to the employer. The interest of the employer must be protected in the following ways:

• The project must be completed as per the desired standards;
• The contractor should complete the project within the timeline desirable for the employer as per the agreement in the contract;
• The cost of the contract must remain as close to what was previously set as possible.

The first objective, as shown above, is to ensure that the building is completed in the best quality possible. As such, the issue raised by the contractor cannot be ignored. The basement of the building forms its foundation, and any rush or substandard work done at this stage may be disastrous to the entire building. A/CA must take an immediate action as discussed below.

Inspect the Facility

A/CA should inspect the site to ascertain the claims made by the contractor. It will be of interest to determine if indeed the current temperature affects the progress of the project as claimed by the contractor. If it is confirmed that the claims made by the contractor about the weather are not true, A/CA should write a letter warning the contractor against making false claims with the aim of delaying the project and inflating the costs. The letter should contain a reminder about deduction of liquidated damages. If it is confirmed that the environmental forces- beyond the control of the contractor- affects the project, then A/CA will need to take the following facts into consideration:

• Were there delays caused by the contractor, prior to the current predicament, that led to the state where concreting the basement car park foundation had to be done in January?
• Is it possible that if the above delays by the contactor were avoided the current issue might not have arisen?
• Is the current issue completely detached from other possible mistakes that might have been committed by the contractor?
• Is it that the current issue has just arisen without the contractor having made any mistake?

In case the first two questions are answered in the affirmative, then A/CA will write a letter to the contractor explaining that the current predicament was caused by the contractor’s inconveniences. A/CA should remind the contractor that the employer will not be held liable to the mistakes committed by the contractor. A/CA should also advice the contractor against speeding up the project in a way that may have negative impacts on the quality of the project. In case the last two questions are answered in the affirmative, then A/CA will have to get to the employer and explain the situation as discussed in the section below.

Make Recommendations to the Employer

It is true that one of the most important responsibilities of A/CA is to ensure that the project is completed in time and within the set budget. However, the most important thing is to have a building that can stand the test of time (Ross & Williams, 2012). The building must be as per the standards set and it must have the value desired by the employer. There are conventional procedures that must be followed and when it comes to issues of concreting, care must be taken because any mistake may result in a collapse of the building before or soon after completion. The resulting loss would be irredeemable. A/CA will need to inform the employer that indeed the current situation may have been foreseeable, but it was not factored in when signing the contract. The goal will be to convince the employer to give the extension and if possible, pay the additional cost as requested by the contractor. However, A/CA should remember that the employer may still refuse to grant the extension under the following conditions:

• In case the current weather condition is consistent with what has been the case, which means that it was something expected by both parties;
• The contractor never raised the issue when signing the contract knowing very well that such environmental forces were expected.

A/CA must ensure that its actions are keenly guided by the provisions of JCT SBC/Q 2016. The issues raised by the contractor cannot be ignored if they are in line with the provisions of this law. As a mediator between the contractor and employer, A/CA may try to convince the employer to come to a mutual agreement that would avoid any litigation in the future. Both parties must be reminded of their obligations and rights as outlined in the clauses of JCT.

Scenario 3: Changes Made Based on Instructions Given by M&E Consultant

M&E consultant has a mandate to give suggestions about the possible design changes and adjustments during the life of the project. The entity acts as expert representative of the employer and it is expected that before giving any directions about the desired changes, he must inform the employer. According to Ndekugri and Rycroft (2015), a contract can be verbal or written, and as such the verbal instructions will be considered new offers made by the employer and the contractor has the right to accept or reject them. However, there must be a witness to the verbal instructions and if possible, Pettit & Small should request the consultant to make the request in writing. Whenever a new suggestion about the design or structural issues is raised, the first factor that Pettit & Small should consider is whether it would result in inflation in the cost of the project and if it may lead to delays. When the contractor establishes that the proposals will have no effect on the cost and time, then a formal document should be issued confirming to the employer that the proposed changes are being implemented. The reason why the contractor should write a letter is to confirm that the employer approved the changes just in case a dispute may arise in future.

In case Pettit & Small determines that the proposed changes will result in additional expenditure, as is the case, then the contractor is legally required to inform the employer of the additional costs. This is so because the adjustments made to the initial contract are considered a new offer. It is upon the contractor to make a counter offer, explaining why the new changes will result into increased expenditure. Klee (2015) advises that if major changes are suggested when the project is underway, both parties (the employer and contractor) must be ready to deal with the new factors that will arise. The contractor must be ready to do more in the project while the employer must be prepared to pay more and extend the deadline for the project. The contractor is legally allowed to demand for any additional payments caused by the additional work if the issue is raised in time. It means that as soon as the changes are suggested, an immediate communication should be made to the employer to make them aware of the possible increase in the cost of the project. Their approval should be waited before investing additional resources into the project in line with the proposed changes. The contractor should be committed to the following:

• Completing the project within the set timeline;
• Completing the project based on the proposed changes if the contractor is willing to meet the additional costs;
• Completing the project based on the original agreements if the contractor is unwilling to meet the additional costs;
• Ensuring that the specialist sub-contractor is paid as per the original agreement and if extra work is introduced, then the agreed extra payment should be made.

Pettit & Small must understand that the approach that it will take when addressing the problem may act in or against its favour. Receiving verbal instructions and implementing them without raising any counter offer may be construed as accepting the offer made. Some of the recent cases may help understand the legal status that Pettit & Small finds itself in currently. The following case is a good example.

Case Study: Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd

Background of the Case

Mascareignes Sterling Company Limited (MSC) hired Chang Cheng Esquares Company Limited (CCE) to undertake a construction project. MSC also hired AJP as the quantity surveyor in the project to represent its interest during the period when the project is underway. When the project had begun, AJP made significant adjustments that completely changed the original design of the building. The contractor incurred additional costs in the project based on the proposed changes. However, the employer rejected the request of the contractor to pay for the additional costs of the project (Smith, 2016).

Facts

The following are the facts that were presented to Lord Hodge who was the presiding judge in this case:

• MSC and CCE entered into a contract that explained the design of the house, time and cost of the entire project;
• MSC, being the employer, hired AJP- a quantity surveyor- to represent its interest in the project and supervise various activities;
• AJP, acting on behalf of the employer, made changes in the project that completely changed the initial design;
• The changes introduced by the employer’s representative led to additional costs in the project;
• The employer rejected the request by the contractor to pay for the additional costs.

Issues

The two parties had a dispute over the issue of additional payment in the project. The contractor argued that the quantity surveyor knew about the additional costs and when acting on behalf of the employer, gave the approval for the new design to be implemented. It implied that the employer was going to meet the additional costs. On the other hand, the employer argued that the contractor did not make a timely request for the additional payments for the proposed changes, which implied that the contractor accepted to work on the proposed changes under the initial terms.

Order

Based on the above holding, the judge ordered MSC to pay the contractor the additional costs arising from the additional work in the project.

The contractor should remember that M&E consultant has no mandate to issue instructions on the changes needed in the project. According to the provisions in JCT, such instructions can only be issued by A/CA. It means that when M&E makes suggestions that may require significant changes to the original design, it is the responsibility of the contractor to contact the employer before introducing the changes. In case the contractor acts on the changes without the approval of A/CA, then there is a risk of it not being paid for the work done. It means that Pettit & Small can only benefit from the above precedent if the employer was duly informed and approved the changes.

Scenario 4: Delays in Interim Payments

Dealing with Delayed Payments

The cases of delays in interim payments are considered a direct breach of contract that affects the operations of the contractor and the contractor may be entitled to interests (Cartlidge, 2012). The contractor relies on these interim payments to undertake various activities in the project. When there is a delay in payment, the contractor may delay in paying the specialist sub-contractors or purchasing the needed materials for the project that may lead to further delays in the project. Based on the above trend, the contractor should expect to be receiving payments 8 to 10 days after making the formal request. The situation may affect the progress of the project. As such, the following are the viable options available for the contractor as it seeks to find a solution to the problem:

• JCT Clause 4.14 provides for an interim payment that should be made by the employer to facilitate activities of the contractor. The contractor should write a letter to the employer reminding them of their responsibility under the law.
• The contractor should start making the requests for interim payments 8-to10 days before the time that the money will be needed, but that will force it to complete each of the stages of the assignment earlier as provided for in JCT Clause 4.7.

The contractor should mostly use the first two options to avoid a possible legal battle with third parties in case the grant is not paid back in time. It is possible that the above options cannot be available for the contractor. In such a tight situation, the following are the actions that can be taken by the contractor:

• To make an agreement with the suppliers, sub-contractors, and employees working under this project, to accept a delay in payment by 8-20 days. If this option is not viable, then the following will be the only option for the contractor;
• To inform the employer that there will be a delay in the project in respect to the delays in interim payments. The contractor may expressly request the employer to make arrangements from other sources to avoid the delays.

Options Available to Compel Employer to Make Timely Payments

It is in the interest of both the employer and contractor to ensure that interim payments are made in a timely manner to avoid a possible delay in the project. Such delays not only affect the employer but also the contractor who will be stuck with the project for a longer time than is expected (Cartlidge, 2012). If the contractor is convinced that the employer is not taking the issue of delayed interim payments seriously, it can compel it to do so. The following are the ways the contractor can compel the employer to make timely payments:

• Contractor should remind HC Group that all possible costs resulting from such delays will be met fully by the employer.
• In case the set timeline for the project is not met because of such delays, the contractor will not be subject to deduction of liquidated damages.
• Engage a third-party (mediator or arbitrator) to compel the employer to make timely payments to avoid litigations in future.

Reference List

Cartlidge, D.(2012). Quantity surveyor’s pocket book, 2nd edn, Elsevier, New York, NY.

Cousins, M.(2015).Architect’s legal pocket book, Routledge, New York, NY.

Hackett, M & Statham, G. (2016).The Aqua Group guide to procurement, tendering and contract administration, 2nd edn, Springer, Toronto.

Klee, L.(2015).International construction contract law, Wiley & Sons Publishers, Hoboken, NJ.

Ndekugri, I & Rycroft, M 2015, The JCT 05 standard building contract, Oxford University Press, Oxford.

Ross, A & Williams, P (2012).Financial management in construction contracting, Wiley, Chicester.

Smith, N 2016, Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd (Mauritius) UKPC21. Web.

Thomas, R & Wright, M. (2016).Construction contract claims, 2nd edn, Palgrave Macmillan, London.