Understanding the Unique Challenges of Construction Contracts: The Role of Risk and Uncertainty in JCT Standard Form Contracts

Introduction

Construction contracts may involve certain complexities that are not generally seen in ordinary contracts. Risk and uncertainty is more commonly associated with construction as an activity and this an important factor that must be weighed in at the time of entering into a contract.

Joint Contracts Tribunal (JCT) produces standard form contracts that are specifically made for construction contracts. If a contract is made under JCT terms, then the parties to the contract are bound by the particular provisions of JCT. The current JCT was issued in 2011.

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In this essay, the termination of contract with respect to JCT, 2011 is considered. The essay discusses the grounds for such termination, in particular, insolvency. The essay also discusses other relevant aspects of termination, such as the process to be followed under the JCT 2011 for the purpose of termination of contract.

General principles of law governing construction contracts

The general principles of law of contract are applicable to construction contracts as well, however, the complexities of a construction contract does require a specialized outlook for these contracts (Murdoch & Hughes, 2008). It is also important to note that risk and uncertainty are important factors to be considered in construction contracts (Loots & Charrett, 2009, p. 1).

In general, the principles governing construction contracts relate to: formation of contract, performance of contract and breach of contract.

For the formation of contract, there are three elements that are required: (a) and agreement between parties; (b) an intention to create legal relations; and (c) quid pro quo (Chappell, 2014, p. 3).

The agreement between parties is ensued when one party makes an offer to the other party and the other party accepts the offer (Poole, 2016). An intention to create legal relations is an important element here as this differentiates between a legal contract and moral promises made as between parties (Andrews, 2015). A quid pro quo is in the nature of ‘something in return for something’ (Andrews, 2015). Therefore, there must be a give and take as between parties as gratuitous promises on part of a person does not lead to a legally binding contract (Andrews, 2015).

If these conditions are met under a construction related contract or agreement, then the contract is a legally binding agreement between the two parties: contractor and employer. In the present case, the contract as between the contractor and employer is as per the JCT as explained below.

JCT contracts, which are made under the terms of JCT 2011 Standard Building Contract With Quantities (SBC/Q, hereinafter ‘JCT, 2011’), bind the employer and contractor to the specific terms of the JCT contract and enable each to have recourse to rights and remedies under the JCT, 2011.

Circumstances that warrant termination of the employment of the contractor in the JCT, 2011

There are certain circumstances that warrant the termination of contractor’s contract by the employer. These are the grounds of termination.

First, the contractor may have wholly or substantially suspending the carrying out of the works. Under the JCT (2011, clause 8.4.1.2), the employer may find that the contractor has either suspended work or substantially stopped the progress of the work. In such a situation, the employer gets a ground for terminating the employment of the contractor. It is however important that before giving the notice of termination, the employer must try to enquire into the reason why the contractor has ceased or slowed down work. If the contractor has reasonable grounds for suspending work, then the employer would be in the wrong with the serving of notice to the contractor (Chappell, 2014).

Second, the employer may find that the contractor has failed to proceed with the work in a regular and diligent manner (JCT, 2011, clause 8.4.1.3). Here it is important to note that a contractor’s programme is not really a contract, he is more or less expected to comply with the time line of the programme so as to show regularity of the work.

Third, the employer may find that the contractor had refused to neglected to comply with instructions given by the employer or the architect. Here, is important to note that every failure to comply with the instructions of the employer or architect does not entitle the employer to send the notice for termination. However, in such cases where the employer realizes that the non-compliance is of such a nature that it jeopardises the timely completion of the construction, the employer has a ground for termination of the contract.

Fourth, the employer may terminate the contract of the employment if he finds that the contractor has indulged in some corruption. Thus, if the contractor has either given or taken a bribe in relation to the contract, or the contractor commits an offence within the Bribery Act 2010. In case the employer is a local authority, then the employer may terminate the contract under the Local Government Act 1972, s.117(2).

Finally, in case of the insolvency of the contractor, the employer may terminate the contract of employment of the contractor.

There are some other neutral causes for termination of contract which apply to both the contractor as well as the employer. For instance, either the contractor as well as the employer may terminate the contract if the construction has been suspended for more that 2 months due to some force majeure or some other reason (Chappell, 2014).

Procedures set out in the JCT, 2011 contract that should be followed in terminating contractor’s employment

The JCT (2011) sets down some procedural norms for termination of contract. First, the employer must give a notice to the contractor for terminating the contract. The notice has to be for a period of 14 days. The notice itself should be given within 21 days of the cause of termination, that is, the default by the contractor.

If the contractor stops its default within 14 days of receiving the notice, then the employer cannot take further action against him.

It is important that the employer should not terminate the contract arbitrarily or in a vexatious manner. The term ‘vexatiously’ has been defined as an ulterior motive that is aimed at oppressing, harassing or annoying one party by the other (Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10, 2007). In case if insolvency, the question of vexatious or oppressive conduct of the employer does not arise because the test for insolvency is an objective one and even if the employer does not give a notice, his liability to pay the contractor and the contractor’s liability to carry on the work, is suspended after the insolvency of the contractor.

The process to be followed by the contracting firm in case of insolvency

The JCT (2011, clause 8.1) defines insolvency as an arrangement or a compromise in satisfaction of debts, resolution for winding up, bankruptcy order, etc.

Insolvency of the contractor may put the construction into jeopardy. One complication that arises out of insolvency of contractor is that the unpaid suppliers may attempt to recover the materials that are not yet fixed by the contractor (Chappell, 2014, p. 286). The suppliers may not actually be able to do so, however, the employer is definitely put in the position of uncertainty with respect to the project completion due to the insolvency of the contractor (Chappell, 2014, p. 286). The contractor must inform the employer immediately when he realizes that insolvency is likely. In this case, the employer heard a rumour of insolvency during week 18, however, the contractor did not inform him of the impending insolvency.

The employer may terminate the employment of the contractor at any time after he comes to know of the contractor’s insolvency (JCT, 2011, Clause 8.5.1). Such a termination must only be made with a written notice that is served on the contractor by a special delivery that is recorded signed for post or for hand delivery (Chappell, 2014).

It is important to note that even if no such notice has been given by the employer, there is an assumption that such a notice has been given and the provisions of 8.7 and 8.8 become applicable and the employer is not liable to make any further payments. The fact is that the consequences of contractor’s insolvency apply even if the employer has not given a notice to the contractor. Therefore, the consequences are triggered by the insolvency itself and not by the notice of the contractor (Chappell, 2014).

Here even if it is assumed that the contractor informed the employer about the insolvency, it is not a relevant fact as to the consequences, as the intention of the contractor is not relevant.

When the contractor becomes insolvent, the employer may terminate the contract or may even continue the contract. The matter is up to the employer (Chappell, 2014). In general, it is advisable for the employer to terminate the employment of an insolvent contractor because there are several complications that do arise due to insolvency of the contractor. In fact, even without the notice being given by the employer, the contractor may stop working towards the completion of the construction. Therefore, it is advisable for the employer to send a notice for termination of the employment of the insolvent contractor.

The options for completing the new railway station project by the employer

The employer may employ a new contractor in order to complete the railway project. This is permissible under the JCT, 2011. As the work of the employer should not suffer due to the insolvency of the contractor, the JCT, 2011 makes provisions that enable the employer to continue the project by employing a new contractor.

When the employer replaces the old contractor with the new contractor, he must hand over the work site to the other contractor (JCT, 2011, clause 8.7.1). Here, the previous contractor is legally obliged to vacate the premises of the employer and to not come in the way of the new contractor finishing the work of construction. It is generally advised that in order to limit the possibility of conflict with the previous contractor with respect to the work completed by the contractor and consequently any payment due to him, the employer may take the reasonable and prudent precaution of taking photographs of the work site and also conducting a full inspection of the work site in order to create a record of the work site as on the date of termination (Chappell, 2014).

The employer in this situation is in a stronger position that the contractor because the latter’s insolvency implies an immediate right of the employer to suspend or terminate the contract of employment with the contractor. Therefore, he can take advantage of that in order to terminate the contract with immediate effect. This will allow the employer to ensure the appointment of new contractor who would finish the work on time.

The consequences of termination by the employer

The consequences of termination of employment are provided in JCT (2011). These consequences may be particular as well as general (Chappell, 2014). Particular consequences include the following.

First, the contractor’s obligation to complete the works is suspended and there is no assumption as to how long the suspension will last (JCT, 2011, clause 8.5.3.2). This is effective even without a notice of suspension given by the employer. Once the notice is actually given by the employer, the suspension is permanent in nature. However, in absence of the notice, if the contractor knows that he is insolvent, he may cease to work without receiving the notice from the employer (JCT 2011, clause 8.5.3.2).

Second, the employer can now take reasonable steps to secure the site of Works and the materials (JCT 2011, clause 8.5.3.3). The reason for this measure is that the contractor’s insolvency may attract measures from the suppliers, where the suppliers attempt to recover any materials that are as yet unfixed. The contractor must allow the employer to carry on with these measures and not to hinder them in any way (JCT 2011, clause 8.5.3.3).

Third, the clauses in the agreement related to payment or release of retention to the contractor does not apply anymore (JCT, 2011, clause 8.9). The consequence is that the employer may withhold payments from the contractor as he is not bound to pay as per the agreement once the contractor is known to be insolvent.

Other general consequences of termination of the employment are also discussed here.

First, the employer may employ another contractor to complete the works and hand over the work site to the other contractor (JCT, 2011, clause 8.7.1). The employer may take the reasonable and prudent precaution of taking photographs of the work site and also conducting a full inspection of the work site in order to create a record of the work site as on the date of termination (Chappell, 2014).

Second, the contractor must vacate the premises within a reasonable period of time after receiving the notice from the employer. In case, the contractor fails to vacate the premises within a reasonable period of time or within the time required, then the contractor becomes a trespasser on the premises and the employer may take action against the contractor (JCT, 2011, clause 8.7.2.1).

Third, the contractor in no longer liable for the insurance and the employer should take out the insurance at the time of terminating the employment (JCT, 2011, clause 8.7.2.1).

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Conclusion

The JCT, 2011 provides the procedure for termination of contract. In this case, the contractor is insolvent and therefore, there is a ground for termination of contract by the employer under the JCT, 2011, clause 8. The employer, which is this case is a local authority, can give a notice of termination of contract at any time when it has come to know of the insolvency of the contractor. Even if the employer does not serve such a notice, there is an assumption of termination of contract due to insolvency. Because of this assumption, the employer’s notice of termination is not the key to setting in motion the consequences of termination of contract.

The contractor may cease work immediately when he realizes that he is insolvent, irrespective of whether he has received a notice from the employer or not. The employer may give a notice for termination, employ another contractor in the place of the present contractor and ask the present contractor to vacate the Works site. In case, the contractor fails to vacate the Works site, the contractor is deemed to be trespassing on the property of the employer. For his part, the employer has to ensure that the notice of termination is given on time.

The JCT, 2011, is useful in laying down clear conditions that are applicable where the contractor is insolvent and it provides a clear and simple process for the termination of notice.

Bibliography

  • Andrews, N., 2015. Contract Law. Cambridge: Cambridge University Press.
  • Chappell, D., 2014. The JCT Standard Building Contract 2011. Sussex: John Wiley and Sons.
  • Loots, P. & Charrett, D., 2009. Practical Guide to Engineering and Construction Contracts. Sydney: CCH.
  • Murdoch, H. & Hughes, W., 2008. Construction contracts: law and management. 4 ed. London: Routledge .
  • Poole, J., 2016. Textbook on Contract Law. Oxford: Oxford University Press.
  • Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10 (2007).

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