Episode 76:
Hello and Welcome to the Part3 with me podcast,
The show that helps part 3 students jump start into their careers as qualified architects and also to provide refresher episodes for practicing architects. I am your host Maria Skoutari and this week is Part 2 of the Intermediate Contract. Todays episode meets PC5 of the Part 3 Criteria.
Last week we covered the Contract Documents, Obligations of the Contractor, Possession and Completion and Control of the works. This week, I will be expanding on Sums properly due, Certification, Indemnity & Insurance, Termination and Dispute Resolution. Make sure to listen to both episodes to get the overall understanding of the form and how it operates.
5. Now lets dive into todays first section, Sums properly due:
Under IC, it recognises the fact that the contract sum will most possibly changed by the end of the contract and makes allowance for this to be amended as necessary, key item to highlight is that the contract sum itself doesn’t change but there can be provisions made for adding or subtracting amounts to or from the contract sum to reach an adjusted figure. IC contains ‘fluctuations’ provisions allowing for adjustments to be made in the event of changes in statutory charges.
Where bills of quantities are used but its not possible to provide sufficient information at the time of tender then a provisional sum may be inserted in the bills to cover different items. The CA must issue an instruction with regard to the expenditure of any provisional sums and the contractor can’t take any action until they receive the instruction. Another aspect to consider, is that IC makes reference to a provisional sum being for defined or undefined work, for defines work reference needs to be made of how and where the work fits into the building, the scope and extent of the work and any specific limitations on method or sequence or timing. So the description will need to be detailed enough for the contractor to make proper allowance for the work needed when driving and programming the works. If the information provided is not detailed as required, a corrective instruction will be required from the CA and this is to be treated as a variation and could give rise to a notice of delay and an application for reimbursement of direct loss and expense from the contractor.
In terms of undefined work, a provisional sum will be applicable where its not possible to supply the amount of information needed so the provisional sum provided should be sufficient to cover the net cost, take into account that there might be additions to preliminaries, attendance, and so on, as an allowance must be made when valuing the instruction. Unlike defines work, an instruction for the expenditure of a provisional sum for undefined work could be a relevant event and give rise to a loss and expense application to be made.
Now in terms of Valuing Variations, these can be either agreed between the contractor and employer or assessed by a QS.
Under reimbursement of direct loss and/or expense, the contract enables the contractor to be reimbursed for direct loss and/or expense suffered as a result of deferment of possession or disruption to progress. The contractor will have to apply in writing for the CA to consider and deal with the matter. The loss and expense award is an award of damages and the CA should approach its assessment on the same principles as a court would when assessing damages for breach of contract. The contractor will also have to demonstrate that they have taken reasonable steps to mitigate loss and the losses must have been reasonably foreseeable as resulting from the matter at the time the contract was entered into. The items claimed must be things the contractor could’t recover under any other term of the contract. Interest may also be recoverable but only if proven to have been a genuine loss.
Now under Fluctuations, in some instances it may be an advantage to insist on a ‘fixed’ or ‘guaranteed’ price, whereby the contractor accepts the risk of all changes in the cost of the works due to statutory revisions and market price fluctuations. This approach as a result may result in higher tender figures, therefore, in order to avoid inflated tenders, most contracts allow for some ‘fluctuations’ whereby the employer accepts some of these risks. Under IC fluctuations cover contributions, levy and tax changes and fluctuations to the contract sum in respect of the work of named subcontractors.
6. So that covers Sums properly due, lets move onto Certification:
Under IC, one of the most important duties of the CA is the issuing of certificates of payment, failure to carry out this duty will put the employer at considerable risk and amount to breach of duty to the employer. Payment provisions within IC comply with the Housing Grants Construction and Regeneration Act and interim payments are to be made by the employer to the contractor after issue of certificates by the CA. If no certificate is issued and an application is made by the contractor, then the amount within the application will become payable. If neither have been issued then the contractor can issue a payment notice which will be the amount payable.
There is also an optional provision for advance payment to be made to the contractor and this should be entered in the contract particulars to show if it applies and the amount is to be entered as either a fixed sum or percentage of the contract sum alongside when it is to be paid to the contractor and reimbursed to the employer.
Now in terms of interim payments, there are two methods by which the amount due to the contractor can be assessed, one is through acceptance of the figure stated in a contractors application or second through valuation by the QS but ultimately the CA will decide the figure to be shown on the certificate.
The CA should only certify after having carried out an inspection to a diligent standard and they should not include any work that appears to not have been properly executed. The value of the work will be calculated using the rates shown in the priced documents with any work resulting from variations valued as set out under the valuation rules. Interim certificates should also include materials which have been delivered to the site but are not yet incorporated in the works. A retention of title clause for the materials states that the goods sold do not become the property of the purchaser until they have been paid for even if they are in the possession of the employer. IC attempts to deal with the issues surrounding ownership of materials in a number of ways:
Under IC, the CA is obliged to include unfixed materials in an interim certificate.
In terms of materials and goods provided by subcontractors, the main contract requires that all subcontracts include a clause regarding non-removal from site and ownership passing upon payment so once materials and goods have been certified and paid for under the main contract they become the property of the employer.
Now when it comes to Listed Items, a list of them must be attached to the bills of quantities provided to the contractor at tender. The listed items may be ‘uniquely identified’ or not and the value of the items must included in an interim certificate prior to delivery on site. The CA has no power to certify any off-site items other than those listed.
When it comes to costs and expenses due to suspension, if the contractor exercises his right of suspension, they will be entitled to a reasonable amount in respect of costs and expenses reasonably incurred by him and these amounts should be included in an interim valuation.
In terms of payment, the employer has the right to make certain deductions from the certified sums due to the contractor and should send them a Pay Less Notice to that extent but only if they have not already been accounted for under the certificate. The employer can also make the case for withholding payment if the certificate included work which was defective and must again issue a Pay Less Notice.
IC makes several provisions to also protect the contractor if the employer fails to pay amounts due and are entitled to apply interest until the amount is paid, unless the employer has issued a Pay Less Notice meaning that the interest would not be due on that amount. The contractor also has the right of suspension if the employer fails to pay by the final date for payment and they have a right to suspend performance of all their obligations under the contract, but if a pay less notice has been issued by the employer, then the contractor may not suspend work. Initially, the contractor is expected to give the employer written notice of their intention to suspend work and state the reasons for doing so. Once payment has been made, the contractor must resume work. The contractor also has a right to terminate their employment if the employer fails to pay amounts due.
And then we have the Final Certificate which is to be issued following the issue of interim certificates, the practical completion certificate, interim certificate following practical completion including release of half of the retention, certificates during the rectification period and issue of the certificate of making good. The final certificate must then be issued within the specific time period set out in the contract and state the contract sum as adjusted due to any loss and expense amounts or other variations elements, it is possible for the final certificate, similarly to interim certificates, to be for a negative amount meaning the contractor owes the client payment. If a final certificate is not issued within the required period, the contractor may send a final payment notice to the employer stating what amount they deem to be due and the basis on which the sum has been calculated. If the employer disagrees with this amount, they may issue a pay less notice and they are obliged to pay the amount shown in the pay less notice.
The final certificate is conclusive evidence that proper adjustments have been made to the contract sum and the contractor is prevented from seeking to raise any further claims for extensions of time or for reimbursement of direct loss and/or expense and is also conclusive evidence that the works are approved by the CA. Both the contractor and employer have the right to challenge the issue of the final certificate, if dispute proceedings start before issue of the final certificate it then will not conclude matters until the proceedings have concluded. If proceedings start after the issue of the final certificate then its only conclusive with respect to matters not challenged in the proceedings.
7. Now lets move onto the next section, Indemnity and Insurance:
A key aspect of a building contract is establishing clear allocation of liability. Under IC, the specific events for which the contractor is liable are set out requiring the contractor to indemnify the employer in respect of the resultant losses, claims for injury to or death of persons, or damage to neighbouring property caused by the contractors negligence. The indemnity protects the employer from an injured party claiming against the employer rather than the contractor but the contractor covers the insurance to cover the claim.
The minimum cover required is to be entered in the contract particulars and they must also be able to provide evidence that the insurance has been taken out. The contractors liability in respect of personal injury or death of employees is met by an employers liability policy, now in respect of third party injuries the contractors liability is met by their public liability policy.
In respect of damage to a property, the contractor is only liable to the extent that the damage is caused by negligence or breach of statutory duty or other default of the contractor or their workers. Now if the damage was not caused due to negligence to cover such circumstances it may be wise to take out a special policy for the benefit of the employer. IC has an optional provision for this type of insurance and the cost of the policy is added to the contract sum. This policy will have to be in joint names and placed with insurers approved by the employer.
In terms of the insurance required for the works overall, IC allows for three alternative options, whichever chosen all require for the policy to be in joint names and cover to be maintained until practical completion of the works, or termination.
Insurance Option A and B cover the insurance of new building work and require ‘all risks’ cover under joint names policies and ‘all risks’ policy refers to any physical loss or damage to work executed and Site Materials and against the reasonable cost of the removal and disposal of debris.
Insurance Option A is taken out by the contractor and is to be for the full reinstatement value of the works, including professional fees to the extent entered in the contract particulars. The contractor is responsible for keeping the works fully covered and must provide evidence as required that the insurance has been taken out. If the contractor fails to take out the insurance, the employer may do so and deduct the cost from monies due to the contractor.
Insurance Option B is taken out by the employer and is for the full reinstatement value of the works including professional fees. The employer will be responsible for keeping the works fully covered and provide evidence that the policy has been taken out, except where the employer is a Local Authority. If the employer defaults, the contractor may take out the policy and the amount is added to the contract sum.
And Insurance Option C is applicable where work is being carried out to existing buildings and it includes 2 insurances, both taken out by the employer. The existing structure and contents must be insured against ‘Specified Perils’ and new works by an ‘All Risks’ insurance policy.
Under Option B & C, the rebuilding of work is treated as a variation and the contractor will be entitled to an extension of time for delay caused by loss or damage due to one or more of the specified perils.
If damage occurs to the property, under any option, the contractor must notify the CA and the employer of the details of the damage immediately. Although not required, it is recommended that the contractor or employer, whoever has taken out the insurance, to inform the insurers of the damage immediately. After the insurers inspect the damage the contractor is then obliged to make good the damage and continue with the works. Under all three clauses, the contractor authorises the payment of all monies due under the insurance policy to be made directly to the employer.
The Contractor (where insurance option A applies) to the employer (where insurance options B & C apply) is required to take out Terrorism Covers and can be done as either an extension to the joint names policy or as a separate joint names policy and must be taken out in the same amount and for the required period of the joint names policy.
Under ICD, the contractor is also required to carry professional indemnity insurance and the level and amount of cover must be inserted in the contract particulars, if no level is inserted it will be the aggregate amount for any one period of insurance and if no amount is stated then no insurance will be required. If the expiry period is to be 12 years from practical completion, this should be stated otherwise the period will be 6 years. This insurance must be taken out immediately following the execution of the contract and maintained until the end of the stipulated expiry period.
8. That covers Insurance processes, now lets look at Termination processes:
So where the behaviour of one party makes it difficult or impossible for the other to carry out its contractual obligations, the injured party might allege prevention of performance and sue either for damages or a quantum meruit. Where its impossible to expect further performance for the party then the injured party may claim that the contract has been repudiated which occurs when one party makes it clear that it no longer intends to be bound by the provisions of the contract.
The termination clauses within IC make allowance for the contractors employment to be terminated but not termination of the contract itself meaning that parties remain bound by its provisions. If repudiation occurs its not necessary to invoke a termination clause because the injured party can accept the repudiation and bring the contract to an end. If the termination provisions are unjustifiably carried out by either party, this in itself can amount to repudiation of the contract, meaning the other party might have the right to treat the contract as terminated and claim damages.
The employer can initiate termination in the event of specified defaults by the contractor prior to practical completion, such as suspending the works or failing to comply with the CDM Regulations or due to the insolvency of the contractor or corruption. If default occurs, the CA should issue a warning notice of ‘specified defaults’ and if this continues over 14 days then the employer may terminate the employment of the contractor by issuing a further notice and the grounds for termination by the employer must be clearly established and expressed.
Now in the event of insolvency by the contractor, the situation can be dealt with in a number of ways, either through voluntary liquidation, compulsory liquidation, administrative receivership, an administration order or voluntary arrangement. Under IC, the contractor must notify the employer in writing in the event of liquidation or insolvency. The employer the has the option to terminate or to consider another approach. The second approach gives the insolvent party time to come up with a rescue package, during this period if no termination notice is given, the employer is under no obligation to make further payments and the contractors obligation to ‘carry out and complete the works’ is suspended and the employer may take reasonable measures to determine the site and works are protected.
So there are 3 options for completing the project in such circumstances, either the contractor continues and completes the works, unless they were able to arrange resource backing, or another contractor may be novated to complete the works, on a ‘true novation’ the new contractor takes over all the original obligations and benefits or the third option is ‘conditional novation’ whereby the contractor completion date and so on would be subject to renegotiation and the new contractor would want to disclaim liability for the parts of the works undertaken by the original contractor.
If the employer decides to exercise their right to terminate, then they can employ others to complete the works and in the event of the ICD, they can complete the contractors designed portion. If the employer decides not to continue with the construction of the works after termination, they must notify the contractor in writing within 6 months of that notice and the employer must send the contractor a statement of the value of the works and losses suffered.
Now, termination can also be initiated by the contractor in the event of specified defaults by the employers, such as failure to pay the amount due on a certificate or where specified events result in the suspension of work beyond the period entered in the contract particulars or in the case of insolvency of the employer. In the case of specified defaults, a notice is required specifying the default or event and if this continues following receipt of the notice, the contractor may terminate the employment. The contractor may also terminate if the works are suspended through delay by persons engaged directly by the employer or failure by the employer to give access to and from the site. Termination by the contractor is optional in the case of the employers bankruptcy or insolvency. Following termination, no further sums become due to the contractor and they are required to remove all tools, plant, etc from site and provide the employer with a copy of the documents and the contractor is indemnified against any damages that may be caused as a result of termination.
Both parties have the right to terminate if the carrying out of the works is wholly or substantially suspended for a continuous period due to certain events stated in the contract particulars. These events include force majeure, loss or damage to the works cause by specified perils, civil commotion or terrorism, or Government statutory power, or CA instruction issued as a result of negligence or default of a Local Authority or statutory undertaker. Notice may be given by either party in such circumstances and the employment of the contractor will be terminated 7 days after receipt of the notice.
When it comes to named subcontractors, the contractor is responsible for terminating their employment. The contractor is to advise the CA of any events that may give rise to termination of the named sub-contractor and also inform them once the contract has been terminated. The CA must then issue an instruction to either name another person to execute the works, require the contractor to complete the work, or omit the outstanding work. If the sub-contractor was originally names in the tender documents, then their replacement will give rise for an extension of time and the contract sum is to be adjusted by the difference between the price of the first named sub contractor for the outstanding work and the price of the replacement. The contractor still remains responsible, however, for any defective work carried out by the original named subcontractor. If the termination related to a sub contractor named under an instruction relating to a provisional sum, then the contract sum will need to be adjusted, give rise to an extension of time granted and an award of direct loss and/or expense.
9. And lastly is Dispute Resolution:
IC refers to 5 methods of dispute resolution, negotiation, mediation, adjudication, arbitration and legal proceedings/litigation. Adjudication is a statutory right so if one party wishes to use this method, the other must agree. Negotiation and mediation are voluntary processes and depend on the cooperation of the parties. If neither of these three processes satisfy either party, then the dispute will have to be resolved by arbitration or litigation.
It is important the CA understands and is able to advise on these methods and should be careful when advising on methods to be used. The CA has no authority to negotiate amendments to the terms of the contract or make ad hoc agreements on behalf of the employer during negotiations, even if the employer gives the CA authority to do so, a lawyer would be best to deal with such matters. If negotiations fail, the parties may submit the dispute to ‘alternative dispute resolution’ a term used to cover conciliation, mediation and the mini-trial methods.
If mediation is pursued, a mediator will be appointed jointly by the parties and will meet the parties together and separately to resolve their differences. The outcome is often in the form of a recommendation and if accepted is signed as a legally binding agreement and it would then as result be enforced. However if its not accepted, it can’t be imposed by law and the parties will need to seek alternatives processes. Unlike adjudication, arbitration or litigation, mediation is a non-advesarial process and tends to forge good relationships between parties.
So if mediation fails, parties can choose to go down the route of Adjudication which under the Housing Grants, Construction and Regeneration Act 1996 requires parties to construction contracts to refer any dispute to adjudication. Under SBC the adjudicator may either be named in the contract particulars or nominated by the nominated body identified in the contract particulars. The party wishing to refer the dispute to adjudication must give notice stating the dispute or difference, give details of where and when it has arise, set out the redress sought and include names and addresses of the parties. If no adjudicator is named, the parties can either agree on one or either party may apply to the ‘nominator’ identified in the contract particulars. The adjudicator should not be an employee of either of the parties and be an individual with appropriate expertise and experience, they are also expected to act impartially and will set out the procedure to be followed and send it to both parties. The party that didn’t initiate the process will be required to respond by a stipulated deadline. The adjudicator is then likely to hold a short hearing at which parties can put forward further arguments and evidence. The adjudicator has the power ti obtain the facts and the law, the right to issue directions, the right to revise decisions and certificates of the CA, the right to carry out tests and to obtain from others necessary information and advice. The decision must then be given to the parties and the adjudicator may not retain it pending payment of the fee. Parties will have to meet their own costs unless the adjudicator has the power to award costs. The adjudicators decision will be final and binding until the dispute is finally determined by legal proceedings, arbitration, or agreement between the parties. If either party doesn’t agree with the decision, they can raise the dispute again in arbitration or litigation.
So if Arbitration is followed, the arbitrator has power derived from a written agreement between the parties to a contract and is subject to the Arbitration Act 1996. Arbitration awards are enforceable by law and can be subject to appeal on limited grounds. The party wishing to refer the dispute to arbitration must give notice identifying briefly the dispute and requiring the party to agree to the appointment of an arbitrator. If they fail to agree either party may then apply to the ‘appointor’ selected in the contract particulars. The arbitrator has the right and duty to decide all procedural matters, subject the parties right to agree any matter. Within 14 days of appointment, the parties must each send the arbitrator and each other a note indicating the nature of the dispute and amounts in issue, the estimated length of the hearing and the procedures to be followed. The arbitrator must hold a preliminary meeting within 21 days of appointment to discuss the matters at hand and the first decision is wether a short hearing, documents only or a full procedure is to apply. Under the documents process, the arbitrator makes the award based on the documentary evidence only, under the full procedure process the arbitrator will hold a hearing where the parties or their representatives can put forward further arguments and evidence. Under the hearing process, a hearing is held within 21 days of the date when the process is chosen and the parties must exchange documents not later than 7 days prior to the hearing. And then the arbitrator published the award within 1 month of the hearing. Costs normally are based on whoever wins, the losing party pays and the proceedings are kept private, unlike litigation.
There is also an option under SBC for disputes to be referred to litigation and the choice has to be made before the tender documents are sent out. Litigation cases involve claims for amounts greater than £25,000 and are heard in the High Court and construction cases are usually heard in the Technology and Construction Court. Under this process, the timetable and other detailed arrangements are determined by the court. A judge will hear the case and the court has the power to order that actions regarding related matters are joined, e.g between employer and contractor and contractor with sub-contractor on same issues. Litigation makes the case public and is a much lengthier process than the others.
So to sum up what I discussed today: