Law of Contract – Construction Contracts

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Chapter One

To be in the position of having to deal with the concept of the Contractor Design Portion (CDP) one must be party to a binding construction contract. Therefore, it is opportune at this stage to outline in summary fashion, the Law of Contract as it applies in Scotland, offering some historical background and context, thus illuminating an understanding of the underpinning legal framework and principles applicable to a simple Building Contract, prior to more in-depth analysis of SBC/Q/Scot later in subsequent Chapters.

1.1 Scots Law – A Historical Perspective

Scots law is a unique and distinct facet of our national make-up and provides a legal framework that the nation should be proud of. Professors Hector McQueen and Joe Thomson note that the Law of Scotland, in relation to private law, is a leading example of what comparative lawyers call a ‘mixed’ legal system[1] which combines the major features from two legal traditions which gen0erally represent opposed ways of looking at law, these are:

The Civilian System – Common throughout Continental Europe and based on the Law of ancient Rome.

The Common Law System – First developed in England and introduced Worldwide as a result of the growth of the British Empire during the eighteenth and nineteenth centuries.

Scots Law has continued to develop over the years and draw on the characteristics of both traditions, the Law of Contract no exception with the introduction of the Scottish Parliament continuing this legal evolvement. Contract Law is included in the definition of Scottish private law in the Scotland Act 1998 (SA 1998)[2]. This act provides, under the law of obligations, the ability to enforce rights against persons and groups of persons, expressed via the Latin maxim jus in personam[3]. Clearly, this concept of obligation, in relation to construction contracts, relates to the links and ties between contracting parties and the rights and duties that flow in terms of performance, thus enabling a framework for enforcement and legal recourse.

1.2 The Definition and Formation of a Contract

A contract is an agreement which creates or is intended to create a legal obligation between the parties to it[4]. It will be in the form demanded by law, to perform, unilaterally or bilaterally, acts which are not trifling, indeterminate, impossible or illegal[5]. Agreement is usually analysed as an offer made by one party accepted by the other. The analysis is conducted on an objective basis, commercial contracts cannot be arranged by what people think in their inner most minds.

It may be said that Commercial contracts are made according to what people say. An excellent example of this is offered in the case of Mathieson Gee v Quigley [6] where Mathieson Gee noted thus “We are prepared to supply plant for removal of silt.”, Quigley responded “I accept offer to remove silt.” but their lordships held there to be me no contract. Mere agreement on terms, without proof of an intention to be bound by law, is not enough, see also the more recent case of W S Karoulias v Drambuie[7].

For the contract to be valid there will have to have been an expression of willingness to be bound in a contract, this subject to acceptance by the person to whom the offer is made. The Offers must have been distinguished from other pre contractual statements, it must invite acceptance and be capable of resulting in a contract.

The historically vital cases of the Harvela Investments v Royal Trust[8], Philp v Knoblauch[9], Carlill v Carbolic Smokeball Co[10] all allow clarity with regard what may or may not constitute an offer, in its simplest terms. While the case of Wolf and Wolf v Forfar Potato Co[11], delivers a simple understanding on the requirement for an indication of unconditional assent to the proposal contained in the offer. When this unconditional assent is communicated to the offeror, a contract is duly formed. If a purported acceptance does not meet the terms of the offer, it is a deemed to be a counter offer, and there is therefore no contract.

1.3 Implied Contract Terms

Implied terms will be implied into a contract in order to reflect either the presumed, though unexpressed intention, of the parties or which may be implied by statute or other rules of law whether the intention of the parties or not[12]. His Lordship Bowen LJ in The Moorcock[13] forwarded a test for implying terms, this test has become known in legal circles as the ‘business efficacy’ test, he noted thus:

�I believe if one were to take all the cases, and they are many, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have.”

In relation to a construction contract, many terms will be implied by acts such as the Housing Grants, Construction and Regeneration Act 1996 and the Sale and Supply of Goods Act 1994. In addition, many terms will be implied on a contractor in areas such as to the standard of work and fitness of purpose of materials, this will be discussed in more detail in later chapters with specific reference to SBC/Q/Scot though it may be argued that the use of standard forms renders the chance of implied terms unlikely as a result of proactively dealing with the ‘usual’ terms common to a construction contract.

1.4 The Definition of Construction and Building Contracts

It is the view of many academics and legal practitioners,[14] that the exact definition of a building contract is not a straightforward matter. However, Lord Diplock offered a simple definition thus: �A building contract is an entire contract for the sale of goods and work and labour for a lump sum price payable by installments as the goods are delivered and the work is done.”[15] This definition is useful but it is important to differentiate between the terms ‘building contract’ and ‘construction contract’. The importance of this has arisen since the introduction of the Housing Grants, Construction and Regeneration Act 1996[16] which gave statutory meaning to the term ‘construction contract’. In attempting to clearly differentiate it is useful to note that while, as a result of the 1996 Act, a construction contract must be in writing, a building contract need not and can be wholly oral. It is also important in the context of this dissertation to understand that while many contract terms may be expressed, there will indeed be many implied terms.

1.5 Parties to a Construction Contract

It is not necessary and within the scope of this work to deliver, in detail, any specific information on the parties to a construction contract at this stage, but it would be remiss not to outline the key disciplines that will be party to any construction contract, those who will ultimately ensure the success or not of any Contractor Design Portion (CDP) works.

One of the key players in any construction contract and one who is heavily involved in the CDP process is the Employer. While other terms are used such as client or owner of authority, it is the term Employer which is used in the many standard form building contracts and associated documentation. The Employer will generally assemble and appoint a team to advise him/her during the course of the contract, the terms of these appointments are crucial and each team member must have a clear understanding of his/her obligations the inter-relationships their obligations and actions may have on other team members. If obligations and team responsibilities and obligations are not clearly understood then problems may occur[17], this will clearly be a particular requirement of the successful management of CDP.

The other key construction team parties will include:

    • Architect
    • Quantity Surveyor
    • Engineers / Specialist Consultants
    • Project Manager
    • Clerk of Works
    • Planning Engineer
    • Contractor
    • Sub-contractors

All of those as noted above will play a key role in the CDP process however this will be discussed in greater detail in subsequent chapters.

1.6 The Standard Form of Contracts generally

Business transactions between two organisations will clearly cause demand to be placed on the fixed overhead resource of contracting parties. As such, commerce, and the business world in general, are ever eager to simplify and reduce administrative input utilised in the effort used to negotiate terms and to commit them to writing. Whether a companies transactions are numerous and simple or few and complicated they will do themselves good by developing their own personal trading terms, any contract setting terms out thus is generally known as a ‘standard form contract’.

For contracting parties faced with the prospect of contracting on another parties standard form terms there will always be suspicion and a belief that this unilateral approach will prove to be a bad experience, the usual way out being to insist on their own standard terms. This of course results in there being two sets of unilateral terms and the requirement to negotiate or take part in a ‘battle of the forms'[18] in relation to whose terms apply if obligations and performance have commenced. This ‘battle of the forms’ can end up messy and reliance on a ‘last shot'[19] policy or timing is perhaps not the most sensible manner of conducting business particularly as in many cases there will be a party in a stronger position to dictate the contract.

The alternative to this has been for certain industries to introduce a new type of standard form, one that the title standard is more befitting of, in essence an ‘industry standard form’. Ndekugri and Rycroft[20] suggest the following as the key virtues of an ‘industry standard form of contract’:

    • A device for allocating contingent risk whilst saving time and assisting bargaining at arms-length.
    • A device for avoiding writing terms for each transaction.
    • Providing understanding and familiarity by practical experience.
    • Not likely to protect the interests of only one party, having been negotiated by independent bodies.
    • Removal of unwanted discretion from individuals enabling a structured approach to negotiations.
    • Enabling the allocation of risk to be anticipated and provided for in calculations.
    • Provision of a familiar structure for payments, varying work, and dispute resolution.

While there are some criticisms of industry standard forms there are few and it is difficult to argue against the advantages as noted above, in particular with regard to building contracts.

1.7 The Standard Form of Building Contract

While it is not a necessary requirement of any building project procurement process to appoint on a standard form, it is fairly common practice these days. In fact the Banwell Report (1964) recommended that the building industry develop and begin to utilise a single standard form contract for all construction projects. The Latham report of 1994 promoted the universal application and use of the New Engineering Contract for the entire construction industry, Murdoch & Hughes[21] argue that this was indeed a step too far due to the complexity of the construction of the industry.

In appreciation of this argument one also suggests that within the context of this dissertation it is necessary to now focus upon the Standard Building Contract with Quantities for use in Scotland (Revised May 2006), which introduced the concept of the CDP via the JCT suite of Contracts introduced in 2005.

1.8 The Standard Building Contract with Quantities for use in Scotland (Revised May 2006) (SBC/Q/Scot)

It is essential to understand that this (SBC/Q/Scot) is based upon the JCT 05 Standard Building Contract as issued by the Joint Contracts Tribunal. The JCT’s Memorandum of Association states that the main object of the company is: �To develop, publish, procure the publication, revise and disseminate in both paper and electronic form suites of standard forms of contract and tender documentation and practice notes……”

However, in Scotland most building contracts are entered into on the Scottish Building Contract Committee (SBCC) standard forms. The SBCC produce Scottish versions of the majority of the JCT standard forms, including the contract that heads this section. These days the SBCC versions are not published as Scottish Supplements to be read into the JCT form, they are now stand-alone contract documents[22].

The SBCC mirror the earlier JCT statement for the production of Scottish Contracts and is made up of a similar group of building industry stakeholder members as follows:

    • Association of Consultancy and Engineering
    • The Association of Scottish Chamber of Commerce
    • The Convention of Scottish Local Authorities
    • The National Specialist Contractors Council – Scottish Committee
    • The Royal Incorporation of Architects in Scotland
    • The Royal Institution of Chartered Surveyors in Scotland
    • Scottish Building
    • Scottish Casec
    • The Scottish Executive – Building Division
    • The Law Society of Scotland

The fact that each of the members of JCT will always have competing interests and viewpoints encourages the production of contracts by JCT, and subsequently SBCC, that are acceptable to Architects, Contractors and Employers. As detailed earlier Scots Law has its own peculiarities, as such the SBCC make changes to JCT contracts in order to bring them into line with Scots Law and Legal Process with all clause numbering remaining common through equivalent SBCC and JCT contract forms. The main areas of difference are brought about because of the Scots Law third party rights (common law) concept of jus quaesitum tertio and also Arbitration provision.

1.9 Chapter Conclusion

While this chapter is more of an information zone, it also provides some background with regard Scots Law and the Law of Contract. It also reinforces the advantages of using standard forms of contract within the construction industry and the varied industry stakeholders who contribute to their development. It may be argued that standard for contracts are a necessary evil and that contractors should be fully conversant with all aspects of the beast with which they must earn their living.

Chapter Two

Design Liability – Common Law / Contractual Comparison

2.0 Introduction

If one is to fully understand the obligations of contracting parties operating under the CDP option of SBC/Q/Scot then it is essential to understand where liability should lie in the event of design failure. Architects, Engineers and of course Contractors hold common law obligations with regard design duties many of which will vary from that as prescribed by the CDP process, therefore this chapter will attempt to provide contrast and significant detail on the standard of care and professional standards expected in the delivery of construction design.

In essence SBC/Q/Scot, even with its optional CDP recital, is a traditional procurement methodology. This would mean that the standard of care to be observed by the any design team would be that of ‘reasonable skill and care’, similarly contractors would be expected to carry out works with due skill and care while using good quality materials. It is therefore useful to look at this in more depth and compare to other standard form contractual obligations with regard to design with comparison to those obligations that clearly exist at a common law level.

Contractors who deliver design will unavoidably be faced with being judged against one of three standards:

    • An obligation to deliver a design that is fit for purpose
    • An obligation to deliver a design using reasonable skill and care
    • An obligation to deliver a design to a standard specified in the contract.

2.1 What is Design?

It would be silly not to attempt to firstly define what would be considered design within a construction context and Hudson offers the following description: �In a construction context, the essential element of design is choice, that is, the selection of the appropriate work processes and materials to meet the indicated or presumed requirements of the owner. The discharge of the design obligation, therefore, will depend upon and be measured by the suitability of the work and materials for their required purposes once completed and in place.”[23] In this statement it would appear that Hudson is identifying that both materials and the works will contain an element of fitness for purpose with respect to design.

2.2 Liability for Design – Fitness for Purpose explained

As outlined above, a contractor will have a common law obligation to produce designs that are fit for purpose. He will also have an identical liability for both workmanship and materials. If a contractor designs and constructs under contract then the standard of care to observed by the contractor would be raised to the standard of ‘fitness for purpose’ in the absence of any clause expressing the contrary, it must be reasonably fit for the intended purpose previously made known to him by the Employer[24].

The case of Greaves & Co Ltd (Contractors) v Baynham Meikle & Partners[25] offers some insight into the upgrading of liability from reasonable skill and care to that of fitness for purpose. Lord Denning, when commenting on the relationship between the contractor and the building owner, said (Obiter):

�Now, as between the building owner and the contractors, it is plain that the owners made known�the purpose for which the building was required�It was therefore, the duty of the contractors to see that the finished work was reasonably fit for purpose�.It was not merely an obligation to use reasonable care. The contractors were obliged to ensure that the finished work was reasonably fit for purpose.”

This case is a particularly good example with regard the application of strict liability and ‘fitness for purpose’ and is also the strongest legal authority. The case involved a ‘package deal’ contractor making claim against their sub-contracted designer for the failure of a warehouse concrete floor which was not fit for purpose, their claim being that it was an implied term of their sub-contractors contract for the design to be fit for purpose, it was held by the Court of Appeal that the defendant had been guilty of negligence and thus liability existed.

The importance of this case does not lie in the defendant being held as being negligent, but more in the fact that the court ruled that even if negligence hadn’t been proven then the defendants would still have remained liable for the design. This was due to the defendant always being clearly aware that their brief was to design a warehouse for a particular purpose.

It is worth noting that the courts willingness to imply strict liability in design and build contracts, therefore it is vital that contractors fully appreciate the applicable standard of design liability and are aware that this is not a new concept. In actual fact, it dates back to the case of Francis v Cockerill (1870) where their Lordships stated:

��.when one man engages with another man to supply him with a particular article or thing, to be applied to a certain use and purpose, in consideration of a pecuniary payment, he enters into an implied contract that the article or thing shall be reasonably fit for the purpose for which it is to be used and to which it is to be applied.”

Direct application of this, with regard to design & build, came in the case of Viking Grain Storage v TH White Installations Ltd [26] with the end product, a grain storage and drying facility, failing to meet the standard of fitness for its intended purpose.

While the case of Independent Broadcasting Authority v EMI Electronics Ltd and BICC Construction Ltd[27] illuminates our understanding further in respect of a strict liability obligation, even in the case of a nominated sub-contractor. This should be kept in mind if the patent glazing at the shopping mall was designed and installed by a nominated sub-contractor

2.3 Liability for Design – Fitness for Purpose, Contractual Comparison.

The debate and discussion that has preceded this section is fairly meaningless if any contract contains any contrary express terms. This is because while it will be fairly easy for a court to imply the higher standard of obligation into any package deal contract, this will not over-rule any contrary express terms and one must be clear that both current JCT and SBCC Design & Build contracts hold specific contrary express term at clause 2.17.1. This clause makes it clear that any main contractor’s liability goes no further than that which would be incurred by �an architect or�.other appropriate professional designer holding himself out as competent to take on work for such design”.

SBC/Q/Scot deals with this at clause 2.19.1 and replicates this for CDP works which will of course be discussed in more detail throughout this dissertation. In addition, both ICE 7 and GC/Works/1 have similar terms and it should be noted that these terms reduce or limit the contractors design duties to ‘reasonable skill and care’ and furthermore does not extend to a warrant that the completed works will be fit for their intended purpose. In complete contrast, the concept of Partnering and the ACA standard form at Clause 3.1 guarantees fitness for purpose.

2.4 Liability for Design – Reasonable Skill and Care

It will be unusual these days for any contract to be silent with regard to the design liability obligations applicable to any contractor. If however this was the case then a duty to use reasonable skill and care will be implied into any contract via the Supply of Goods and Services Act 1982[28] and although it does not specifically identify the standard to be applied, the courts have made considered and made important decisions that are relevant, in relation to negligence cases.

The case of Bolam v Friern Hospital Management Committee[29] offers some descriptive definition via the comments of McNair J:

�Where you get a situation which involves the use of some special skill or competence, then the test as to whether there has been negligence or not�.is the standard of the ordinary skilled man exercising and professing to have that skill. A man need not possess the highest expert skill�.it is sufficient if he exercises the ordinary skill of an ordinary competent man exercising that particular art.”

Thus for any designer contractor, or architect, who holds an obligation to use reasonable skill and care, it will not result in a failure of this should he have evidence that he has acted in a manner that his peers would have also done in comparable circumstances. His Lordship Bingham LJ outlines this rather more eloquently and profoundly in the case of Eckersley v Binnie[30]:

�The law does not require of a professional man that he is a paragon combining the qualities of polymath and prophet.”

In essence, this means that if the majority of architects or designer/ contractors would, under the same set of circumstances, have done things the same way then he any defendant will have the makings of a positive defence as Maugham L.J pointed out in the case of Marshall v Lindsay County Council[31]:

�a defendant charged with negligence can clear himself if he shows that he acted in accord with general and approved practice.”

In the absence of any approved or accepted practice or procedure then any designer will not be deemed to have been negligent if he has acted in accordance with a practice accepted as a proper by a responsible body of architects[32], even if another body of competent professional opinion believes that the practice is incorrect[33].

Many will be surprised that this standard will not rise even if a client specifically engages with and pays for evidenced higher skills[34]. However, one must forward a cautionary note in that the cases of both Conoco Phillips Petroleum Co Ltd v Snamprogetti Ltd[35] and Rolls Royce Power Engineering Ltd v Allen Power Engineering Ltd[36] it was demonstrated that an express term allocating specific contractual obligation to deliver works of a first class quality would be held to be more onerous than a duty to exercise reasonable skill and care.

While these cases generally refer specifically to architects they become directly applicable to contractors under contracts such as SBC/Q/Scot as already discussed. Therefore unless there are unusual or special provisions, as detailed above, the normal measure for a designing contractor will be that of an ordinarily skilled architect[37]. With this in mind they must also consider if, out of the ordinary course, they are employed on a novel process of which they are unable to profess any significant experience, then its failure may be consistent with proper skill on their part[38]. Indeed, by not refusing the job it may be that he is professing experience and not making his client aware of his lack of experience[39], Lord Edmund-Davies provides conclusion on this matter thus:

�The graver the foreseeable consequences of failure to take care, the greater the necessity for special circumspection�..The law requires even pioneers to be prudent.”[40]

Of course the requirement to exercise a standard of care will also apply in areas such as the carrying out of designs within the law in that the works will not contravene Building Regulations, planning law or other relevant legal requirements. The law, as with all other aspects of design liability, differentiates between one who merely designs or one who operates under a design and build contract.

Whereas a contractor under a Design & Build contract will be strictly liable for any breach of Building Regulations as in the case of Newham LBC v Taylor Woodrow (Anglian) Ltd[41] which arose from the infamous collapse of a block of flats at Ronan Point, under a traditional contract it is the designer who will normally fall liable at the final analysis. At SBC/Q/Scot clause 2.1 general responsibility is placed on the contractor to ensure that all statutory rules are complied with. However, contractors who have only carried out works in accordance with bills and contractual drawings are afforded protection at clause 2.17.3 on proviso that, at the time of uncovering any non-compliance between these documents and legal requirements, prompt notification is given to the contract administrator. This will be discussed in more depth in the following chapter in relation to how this applies when the CDP optional recital is used.

One final note with regard reasonable skill and care must be made in respect of the fact that the obligation is not limited to the substantive design, this refers to the need to apply this standard of care to his choice of what he is to design. This became an important issue in the case of Platform Funding Ltd v Bank of Scotland plc (formerly Halifax plc)[42] where a surveyor produced a professionally competent valuation but in doing so based it on the wrong premises. This means that the designer has this same obligation with regards interpreting his client’s requirements in deciding on how to progress the production of any design.

2.5 Chapter Conclusion

This chapter has outlined, prior to examining the SBC/Q/Scot position in detail, the common law obligations that will rest on those undertaking design. It has also began to introduce some of the contractual principles that will apply to both the traditional forms of procurement and also more modern forms such as Design & Build.

It is clear that contracting parties whether designer of not hold various contractual obligations and must consider fully the contract that they are party to, inclusive of the potential implied terms and expected professional standards and practices which they must observe, if they are to achieve the required set for them by obligation. With cases cited ranging from the year 1870 to 2008 one can clearly see that this area of law is ever developing and it would be folly and potential commercial suicide for any contractor not to ensure full awareness in this area of legal obligation.

Chapter Three

The Contractor Design Portion – SBC/Q/Scot

1.0 Introduction

SBCC and JCT standard form building contracts have generally been ‘build only’ contracts, whereby the employer specifies the work to be done in exact terms. This would mean that design work is then carried out by the Architect or by other competent professionals in his name, other than implied obligations in respect of workmanship or materials and a duty to comply with Building Regulations the contractor would not ordinarily be required to do design works.

However, in modern day construction there are instances when the employer wishes the contractor to undertake all or part of the design, SBCC/Q/Scot will not be the best option if all design work is to be undertaken with the most appropriate standard form contract being the SBCC Design & Build contract. The in-between situation will obviously be when an employer requests design input from the contractor to be substantial in a clearly identifiable portion of the works though not all of them and it is here that CDP works are introduced.

This chapter will examine, discuss and outline in detail the CDP procedure and the liabilities and obligations that will flow from its use enabling further analysis. An in-depth debate as to the correct use of CDP will be provided focussing on the impact that poor commitment or adherence to procedure may have on both the overall project management process outlining potential future liability issues.

2.1 CDP – The Basics

The correct standard form choice in this case would be Standard Building Contract with Quantities for use in Scotland (Revised May 2006) (SBC/Q/Scot) which contains an optional set of recitals (seven to ten), that have introduced the concept of the ‘Contractor Design Portion’ which for the purposes of this dissertation will be generally referred to as ‘CDP’. In the main, CDP procedures in respect of the specific portion, replicate the core principles of the SBCC Design & Build Contract (SBC/D&B). It should be noted that if the employer fails to invoke the CDP procedure it will not debar him, or the architect, from introducing any design works to be carried out by contractor in an informal fashion via the contract bills. With all of the above in mind it is perhaps opportune to first of all investigate the design standard as expressly required under this form of contract.

2.1 SBC/Q/Scot – Express Obligations

Express provision begins within this contract with the obligation to carry out and complete the works, located at Article 1 of the Articles of Agreement and subsequently clause 2.1 of the contract conditions. Taken further this obligation is to carry out and complete the works in a proper and workmanlike manner which is in accordance with the contract documents which include:

  • The Contract Drawings
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