Construction Contract - Case Study Example

 Section A Question (A) The construction contract in question between GPD, the employer and CCL, is governed by the standard form of contract JCT 98.1 Clause 2.1 of JCT 98 2 setting out contractor’s obligations requires the contractor to carry out and complete the works undertaken strictly as mentioned in the documents of the contract. It adds that quality of materials and standards of workmanship as stipulated in the contract documents should be to the reasonable satisfaction of the Architect. During the period of work in progress, the architect finds that cladding materials used is of inferior quality not in compliance with specifications of the designs and contract documents. This is violative of most of the conditions of clause 8.1 and its sub clauses.3 As such, as per clause 8.2 of JCT98, the architect must notify the contractor of his dissatisfaction within a reasonable time of carrying out of the work found to be unsatisfactory. He may also ask the Contractor to open up any work already covered and test the materials used in the executed work or yet to be used.4 If the materials are not of the required standard, cost of testing shall be borne by the contractor. The poor workmanship found in the doors and poor quality of materials being quite apparent, the architect has the option to ask the contractor to remove from the site any work or materials found to be defective in his opinion 5 or permit materials to remain on site with the concurrence of the employer and in consultation with any nominated sub-contractor in which case a deduction from the contract sum can be made by him.6 Further as per clause 17.2 of JCT 98, the architect must deliver within 14 days of expiry of defects liability period, a schedule showing all defects, shrinkages or other faults that are observed within the defects liability period requiring the contractor to remedy the defects within a reasonable time. The contractor must remedy the defects at his own cost or the cost of remedying the defects shall be deductible from the contract sum. As per clause 27.2.1.3, if the contractor fails to remedy the defects, the architect may give notice to him mentioning the defaults on his part and if even after 14 days of notice, the contractor continues the default, the employer may within 10 days of or on expiry of the 14 days notice send a notice to the contractor determining the contract immediately on receipt of the notice by him. Under clause 27.2.3, if the contractor remedies the default or continues the default or if the employer has not given the above said second notice, the employer may determine the contract by giving him a notice. Clause 27.2.4 states that the above said two determination notices shall not be given without reason or in a vexatious manner. With regards to the inferior quality of cladding materials and the improper functioning of the doors, it can be undoubtedly decided that while the inferior quality cladding materials has no scope for being classified under temporary disconformity, the poor functioning doors may be given the benefit of temporary disconformity since the contractor is apt to argue that doors are in unfinished condition provided the contract period has not ended or is not nearing its end. The reasoning is that if the period is so short, it can be argued by the architect that the contractor must have already completed the work. Question (B) Any replacement is considered as a variation under clause 13.2 of JCT 98.7 Clause 17.3 of JCT 98 empowers architect to issue instructions rectification of defects. The standard of work contemplated in the absence of JCT98, shall be in accordance with what is expected of the contractor under common law. That is, if the contract is complete for dwelling, then the standard should result in the desired outcome as dwelling unit. Since in this case JCT 98 with quantities applies, contractor’s obligation in respect of standard is limited to what is stated in the bills. If it is not sufficient for the dwelling unit, the employer must bear the extra cost vide Patman & Fotheringham Ltd v Pildtich 8 Needless to say that the contractor’s duty towards standard of work is as per the terms of contract. This embraces the clause 8 of JCT 98 which states that the work shall be of standards mentioned in the bills and the implied condition is that materials must be of satisfactory quality. The conditions invariably would state that the standard of work shall be to the satisfaction of the contract administrator which gives the impression that he has the unfettered right to reject any work. However, clause 2.1 of JCT 98 restricts such power by stating that if the standard materials or workmanship is in accordance with the opinion of the contract administrator, then the “satisfaction” should qualified with the word “reasonable”. That is, the standard should be of reasonable satisfaction of the contract administrator. Here the architect is acting as the contract administrator. Hence the standard must pass the subjective test of his satisfaction. JCT attributes reasonableness to the satisfaction of the contract administrator. Then the question arises whether the standard should pass the subjective test alone or whether the contractor must satisfy objective standards also. In effect whether there are two standards to be complied with by the contractor in respect of quality and workmanship. Whether the employer can insist that although the architect has approved the standard, the work has to still to comply with the “satisfactory quality” as defined under the Supply of Goods and Services Act 1982. It depends upon the wording of the contract though authority is in favour of both the standards.9However in JCT contracts, position is different in view of the decision in Crown Estate Commissioners v John Mowlem & Co Ltd.10 It was held in that case that the clause enabling the final certificate as the conclusive evidence of the contractor’s satisfaction. Clause 17.2.1 describes conclusiveness of certificates. The words ‘standard of work’ comprises of workmanship, standard of materials, suitability of materials, stability of the building and statutory obligations all fully described in the JCT 98. The statutory obligations cover the health and safety plan. Question (C) The ‘defects liability period’ clause refers to the time for defects to surface and to be rectified with a minimum of resistance on both sides. This for the benefit of contractor and employer. Any such defects will amount to breach of contract by the contractor and in the absence of which the employer is disabled from claiming contractual remedy from the contractor. The said period starts from the date of practical completion mentioned in the administrator or architect’s certificate. If no specific period is mentioned it is assumed as three months though there is justification to so restrict. This is because there will be dome works completed just at the time of practical completion. 12 months period will be ideal because the building will witness four seasons during the period when the latent defects will be begin to surface. But this long period will tempt the employer to give a higher figure of defects. The contractor is obliged to make the defects surfacing within the liability period. If the architect has omitted some defects in the completion certificate, he can include it in the defects within the period. This was followed in William Tomlinson v Parochial Church Council of St Michael. 11 There is no prescribed time limit for the contractor to rectify such defects noted and he should carry out correction within a reasonable time. Further it depends on the terms of contract to decide whether the contractor is liable for a particular defect. For example, if the employer is not satisfied with the paint, it could be due to the contractor not applying the correct paint or the employer has given inadequate specification. Hence the latter possibility is not the responsibility of the contractor. In order to decide whether the instant case’s condition of dampness is inherent or due to contractor’s poor workmanship, facts should be analysed rather than law. Thus the dampness maybe due to shrinkage because of weather conditions. In such a case, the contractor need not be held liable for defects. Similarly, damage due to frost could be claimed only for the frost damage that existed during the period before practical completion of work.12 In respect of inadequate specification of the paint or similar thing due to which the dampness has resulted in, if the contractor had already notified of the same, it is all the more safe for him to avoid the liability of “defects liability”. It may be relevant to state here the decision in Brunswick Construction Ltd v Nowlan and Others (1974)13, wherein contractor was held to have the duty to warn the employer regarding the defects found in the plans and drawings supplied to him by the employer. As such, it becomes clear that contractor’s liability in this regard (dampness) depends on the circumstances of the case. Section B The interim valuation process consists of the contractor’s or sub-contractor’s submission of valuation for works properly executed on site, materials and goods delivered on site, and off-site materials and other matters such as insurance delivered or honoured as the case may as per the terms of contract. Such valuations will be paid on the issue of certificates during the course of the work until practical completion subject to final certificate being issued for release of outstanding sums such as retention held etc. Sections 109,110,111 of the Housing Grants, Construction and Regeneration Act 1996 contain procedures in this connection. Variations can also happen due to various causes such as cost outruns since contract pricing in construction is not an exact science capable of foretelling all such possibilities and providing for the same in the contract bid amount. Variations will arise due to alteration or modifications in the design, quantity and quality, instructions of architect in respect of the access to the site through using only specified parts of the site, working space limitations at the site, working hour limitations at the site and requirement of execution of work in a particular order not envisaged beforehand.14. Clause 30.1.1.1 of JCT 98 provides for issuance of interim certificates to the contractor by the architect at the specific intervals as may be mentioned in the appendix. In the absence of an appendix, it should be issued with an interval of one month and amounts to be included in those certificates are those stated above. The general impression is that a final certificate is the sum total of interim certificates in addition to the uncertified works in contrast to what is provided in a contract.15 Interim certificate is supposed to represent considerably the work properly executed as contemplated by clause 30.2.1.1. Failure by the architect to pay within 14 days of issue of the interim certificate shall entail payment of simple interest by the employer to the contractor as per clause 30.1.1.1 of JCT 98. Meaning of the expression “work properly executed” was considered in Sutcliffe v Chippendale and Edmonson16 Expert witnesses said of the interim certificates with slight variations. One witness said that he would exclude defective work when ever he observed at the time of his visit to the site and issue a written order to contractor so that he could include it in the next certification. It was the practice because the certificate should conform to the terms contract as far as possible and as such if the work is defective, it was implicit that value of the work should not be included in the certificate. Another witness said that the interim certificate consisted of only approximate value of the work as it progressed and issued based on the assessment of the quantity surveyor without any detailed inspection of the work. The rationale behind this practice was to ensure availability of working capital for the contractor to continue with the work without interruption.17 In Baston v Butter (1806)18, it was held that the architect could not certify the work which was not as per the terms of contract. He could even abate the sum awarded for defective contract. It is therefore apparent that interim certificates are just part of the series of continuing and cumulative valuations and if later any work is found defective, the architect must recover the value of such work in the next certificate and keep it excluded until it is rectified. It is dangerous to simply follow blindly the quantity surveyor’s assessment as the basis for issue of the interim certificate as already held in Sutcliffe v Thackrah (1974)19 It was held in R.B. Burden v Swansa Corporation (1957) 20 that the architect is entitled to rely on the valuation certified by the quantity surveyor. In spite of the above rulings, the reason why it was held in Dawnays Ltd. v. F.G. Minter Ltd. and Trollope & Colls Ltd. 21 that interim certificate was like a bill of exchange as the employer had no right of set off a sum certified by an architect under the building contract as the cash flow is the life blood of a business more so a building trade. …….As the sub-contractor lost in the arbitration proceedings, he appealed in the present case with the following result. Edmund-Davis LJ interpreted the clause 13 of the sub-contract and rejected the main contractor’s claim.22 The main contractor insisted on reading clause 13 together with clause 11(b) which gives the main contractor to claim what ever he assert as due from the subcontractor. The judge further said as That seems to me, with respect, an alarming submission. The result would be that the simple fact that the main contractor makes an assertion of some liability in the sub-contractor to pay him something is sufficient to entitle the former to hold up payment. The practical result would be to render available to any main contractor a ready means of avoiding payment out to the sub-contractor even of sums which the building owner had already paid the main contractor in respect of sub-contract work covered by interim certificates…….An interim certificate is to be regarded virtually as cash, like a bill of exchange. It must be honoured. Payment must not be withheld on account of cross-claims whether good or bad – except so far as the contract specifically provides.23 Disagreeing with the above and concurring with the Lord Morris’ ruling in Gilbert-Ash case24, the Malaysian Supreme Court in its judgment 25 said that merely because Lord Dennings was overruled by the House of Lords, the dictum of Bill of Exchange principle was not wrong. The judgment insists that Dawnays does not invalidate the main contractor’s cross claims and prevent its being litigated or arbitrated at the end of the day and that Dawnays decision only confers a “temporary finality” of the interim certificate and the right to immediate payment in full in the absence of an specific provision for deduction due to the main contractor. What the Gilbert-Ash case has said is that in a contract between parties, there can be no overriding rules beyond those generally applicable to construction contracts. And that if a contract has provision for issue of interim certificate, there can be no case that debts of special kind can come into existence preventing a set-off or as any other defense.26 The standard form in which the contract was entered into in Gilbert-Ash case, states in condition 14 that in the event of a sub-contractor’s failure on any count, the main contractor had the right suspend or withhold monies due to the subcontractor and had the right to deduct from any money certified as due to the subcontractor. The Malaysian judgment maintains that contractual terms in Dawnays case and Gilbert-Ash case are entirely different in that condition 14 of the Gilbert-Ash contract gave powers to claim to the main contractor over the money due to his subcontractor if there were any bonafide dues from him. It says that while Gilbert-Ash case related to construction industry, Dawnay’s case related to building industry. Since the loss in the Dawnay’s case was not quantified unlike in Gilbert-Ash case, it was observed in the latter case that Dawnay’s decision would have been wrong.27 The Dawnay’s case dictum remained unopposed until the decision came in Gilbert-Ash case. Two things emerge from the comparison of the Dawnay’s case to Gilbert-Ash case. One, that interim certificate is like a bill of exchange is not in dispute. Further there is no case that moneys due under a bill of exchange cannot be attached towards the debts due by the payee of the bill of exchange. Second, circumstances of the both the cases are entirely different. Hence the impact of the these decision on the construction industry is that interim certificate should be honoured as a bill of exchange in the absence of any outstanding claim due from the interim certificate holder. In Clark Contracts Ltd v The Burrell Co (Construction Management) Ltd) 28 , the subcontractors who were the pursuers claimed that defendants who were main contractors whose architect issued them with an interim certificate no 11 under which an amount of £ 29,408 was due to the pursuers by the defendants. They simply relied on the interim certificate as a bill of exchange held by them without giving the case background. The defenders disputed the architect’s certificate saying that architect’s view was only indicative and not authoritative. They maintained that as per condition no 30.2, the sum due under the contract was gross valuation as defined in condition 30.2.1.1.in pursuance of which the architect would issue an interim certificate and hence that “what was therefore due was not necessarily what the architect said was due”.29 Since the architect’s certificate was based on the quantity surveyor’s assessment, architect’s certificate can be inaccurate if the quantity surveyor’s assessment was wrong. The defendants relied upon the opinion of Lord Hoffman’s opinion in Beaufort Developments (NI) Ltd v Gilbert Ash NI Ltd 30 that the interim certificate was not a conclusive evidence of contract having been executed in accordance with the contractual standard for the reason that architect was only the agent of the employer and therefore not independent. “ It was unreasonable therefore for the contractor to submit himself to be bound by a decision of the employer's agent. The Scottish Courts had adopted a similar approach as could be seen from the opinion of Lord Davidson in W & J R Watson Ltd v Lothian Health Board 1986 SLT 292.”31 In this connection the provisions of section 111(1) of the Housing Grants, Construction and Regeneration Act 1996 was pointed out by the defendants. It says that "A party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he has given an effective Notice of Intention to Withhold Payment “ 32 The defenders maintained it was not necessary to give notice since the pursuers were not proceeding against them for money due under the contract. They added “the Interim Certificate was not conclusive as could be seen from the opinion of Lord Hoffman in Beaufort. Accordingly, the pursuers had not given sufficient notice to the defenders of what works they said entitled them to payment of the sum sued for. The pursuers required to set out what work they had completed in accordance with the contract and for which they now sought payment “ 33 The defendants maintained that the pursers even in the absence of notice under section 111, had the burden of disclosing the details for which the money is due under the interim certificate. The pursuers responded that the case cited by the defenders was not binding on them since it is predated to the date of coming into force of the Housing Grants, Construction and Regeneration Act 1996 and that condition 30.1.1 entitled them to payment upon the expiry of fourteen days of the date of the certificate. And that if what the defenders have said is to be accepted, the certification provisions in the contract are farcical and redundant. The decision however turned in favour of the pursuers as the defenders relied very heavily upon Lord Macfadyen’s opinion in SL Timber Systems Ltd’s case.34. The decision in this case only said that sum due under the contract could not be the sum claimed before the adjudicator. The sum sought to be withheld is the sum due under the contract. Since the parties to the dispute had complied with the provisions of the act which says that “The architect shall from time to time as provided in Clause 30 issue Interim Certificates stating the amount due to the Contractor from the Employer and the Contractor shall be entitled to payment therefor within 14 days from the date of issue of each Interim Certificate."35 This case also was revisited in Rupert Morgan Building Services (LLC) Ltd David Jervis and Harriet Jervis (2003)36 to consider the meaning of section 111 (1) of the Housing, Grants (Construction and Regeneration) Act 1996. The relevant decision reflects the state of affairs of the construction industry. It says A statutory provision such as s.111 now makes would have done something to protect the stonecarvers from acting as unpaid bankers to the head contractors; and had the Office of Works been dilatory in paying the head contractors, Street's interim certificates would have preserved their cashflow too. There is, as Lord Justice Jacob demonstrates, nothing irrevocable about the s.111 process. It is designed simply to ensure that once a certificate is issued, payment follows unless proper notice of withholding is given. It has no legal effect, even presumptively, on the true incidence of liability.37 Conclusion The above brief analysis would go to show that the interim certificate has it own sanctity and the Bill of Exchange Principle of Dawnay’s case still hold s good and the seemingly differing views in these decisions are in different context without touching upon the Interim Certificate’s stand alone validity. Bibliography Legislation Housing Grants, Construction and Regeneration Act 1996, CHAPTER 53 Case Law Beaufort Developments (NI) Ltd v Gilbert Ash NI Ltd [1998] 2 All ER 778 Baston v Butter (1806) 175. 41 Brunswick Construction Ltd v Nowlan and Others (1974) 21 B.L.R. 27s Clark Contracts Ltd v The Burrell Co (Construction Management) Ltd) (2002) Case No: A7038/00 Crown Estate Commissioners v John Mowlem & Co Ltd, (1994) 70 BLR 1. Dawnays Ltd. v. F.G. Minter Ltd. and Trollope & Colls Ltd. [1971] 1 W.L.R. 1205 Gilbert-Ash case ([1974] AC 689 at pp 699G–700A; [1974] 3 All ER 195 Patman & Fotheringham Ltd v Pildtich (1904) HBC 4th ed, ii, 368 Pembenaan Leow Tuck Chui & Sons Sdn Bhd- vs Dr Leela’s Medical Centre Sdn Bhd, Supreme Court of Malaysia, para 47 R.B. Burden v Swansa Corporation (1957) 1 WLR 1167 Rupert Morgan Building Services (LLC) Ltd David Jervis and Harriet Jervis (2003) EWCA Civ 1563 Case number B2/2003/0200 SL Timber Systems Ltd v Carillion Construction Ltd [2001] BLR 516 Sutcliffe v Chippendale and Edmonson (1971) 18 BLR 149 Sutcliffe v Thackrah (1974) AC 727 William Tomlinson v Parochial Church Council of St Michael, 1990, 6 Cont lj 319 Internet resources Standard Form of Building Contract, 1998 Edition Private With Quantities incorporating Amendments 1:1999, 2:2000,3.2001,4:2002, 5:2003, The Joint Contract Tribunal Limited, 2003 (9/03) , accessed Jan 2, 2010 Other resources (books) Chappell David, 2004, The JCT minor work form of contract, Wiley-Blackwell, p 140-145 Macroberts, 1999, MacRoberts on Scottish building contracts, Wiley-Blackwell, p 197 Murdoch John, 2001 Construction Contracts: law and management, 3rd ed, Taylor & Francis p 147-150 Parris John, Chappell David, 2002, Parris's standard form of building contract: JCT 98, Wiley-Blackwell, p 141 Pettigrew Roderick, 2005, Payment under construction contracts legislation, Thomas Telford, p 29-31 Read More