Building Contract Law Case Study

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SCENARIO 1

You have been appointed using the RIBA Standard Agreement 2010: Architect [2012 revision, including 2015 CDM Addendum]. It is a straightforward traditional appointment for the works –to design, tender and manage the project on site, etc. Only after you have signed (and received the countersigned document), you notice that My Zhang had crossed out the stipulation for Public holidays, writing the words “void: works shall proceed as necessary”. As works will extend over the Christmas period –and Chinese businesses do not often celebrate Christmas –Mr Zhang is dismissive when you raise it in a general conversation.

 

Public holidays cause an issue on the project because Mr Zhang has different expectations of working (or not) on Public Holidays based in a different jurisdiction. However, the law governing the contract is the law of England: In Britain, the Banking and Financial Dealings Act 1971 regulates Public Holidays, with England, Scotland and Northern Ireland having several different holidays. According to the act, there is no legal right to time off on public holidays (GOV.UK, 2017a). Any right to time off depends on the terms of the contract of employment (Acas, 2017). On the other hand, Working Time Regulations 1998 [as amended 2003] associated with Health and Safety duties regulates hours of work, rest breaks and holidays. The Regulations provide rights to not have to work more than 48 hours a week on average as well as 5.6 weeks’ paid holiday per year that is known as statutory leave entitlement or annual leave (GOV.UK, 2017a).

Because there is no general legal right to time off on bank holidays, both parts must agree to include them in the contract. We can modify the contract at any time, as long as both Mr Zhang and I express our consent to the changes. Besides, Mr Zhang might not be aware that although Chinese businesses do not often celebrate Christmas, this is a very important and celebrated public holiday in England. After explaining that, I will try negotiating the contract with Mr Zhang to include Public Holidays in the contract again – same as any contractual negotiation. If he still insists that I am required to work on public holidays, I will renegotiate to include bank holidays as part of my statutory annual leave, as I have right to request 5.6 weeks’ paid holiday per year (Acas, 2017).

The Building works have received Planning Approval (and was submitted for Building Regs approval just last week). Enabling works are due to start on site soon.

You have advised Mr Zhang that the best Form of Contract is the JCT Standard Building Contract With Quantities. He agrees but has taken advice from the head office and insisted that:

  • you must work together with the international multi-disciplinary firm of engineers (Benji-Enji) on the offices and accommodation blocks,
  • will use JCT DB16 on the commercial facilities.

 

He recommends that you be re-assigned so that you will work under the project management authority of Benji-Enji; and that you be assigned to the contractor’s D&B contract as a novated specialist. Note: Mr Zhang is not changing his mind in bad faith, but simply wants what he believes to be the best solution. 

What are the key issues, what are the problems and benefits of working this way, and how do you communicate this to the client? 

Explain briefly the extent of your powers and duties as a lead consultant) under the two contracts (and how might this change under these different proposed scenarios)?

The level of design responsibility and input from the contractor is much greater on Design and Build projects than a traditional contract with a contractor’s designed portion (JCT, 2017). On the other hand, under JCT Standard Building Contract with Quantities (SBC/Q), the employer and his/her team have control over any design elements of the project that are included in their requirements; they provide drawings and bills of quantities to specify the quantity and quality of work (JCT, 2016c).

I will let Mr Zhang to know both in writing and verbally that If he chooses to use JCT DB16 over JCT SBC/Q, as the main contractor of the project Benji-Enji (the international multi-disciplinary firm of engineers) will be responsible for undertaking both the design and construction work on the project, for an agreed lump-sum price. Thus, Mr Zhang (and his office) not only will lose direct control over the contractor’s detailed design but also will have to provide detailed documents to outline their requirements. JCT DB16 can be a relatively low-risk procurement option for Mr Zhang, in terms of cost and time. Yet, if Benji-Enji doesn’t gather the design requirements, follows a cheaper route to meet contract specifications and/or Mr Zhang’s team doesn’t examine Benji-Enji’s proposal accurately, there will be a risk related to build quality.

Regarding my duties as a lead consultant, JCT Standard Building Contract with Quantities will allow me to carry out design management as a part of my duties as both the designer and the lead consultant of the project. As a lead consultant, I will be responsible for delivering a satisfactory design on time, within budget and to the specified standard of quality through ‘advising, providing leadership and coordination, monitoring and reviewing, managing change, reporting and liaison’ (Sinclair, 2011). Under JCT Design and Build, however, as Employer’s Agent (Mr Zhang’s consultant), I will be assigned by Benji-Enji (working under Benji-Enji) to complete the detailed design under what is known as a novation agreement, which will limit my responsibilities as a Lead consultant.

SCENARIO 2

Work has not started on site.

The client says that they may want to have a specialist fit-out contractor and lighting engineer for the recording studio, but that they won’t know for sure until the contract has proceeded (so they can assess the budget and the programme). These two items have already been identified –albeit very loosely in the initial budget –as a prime cost sum and day works rates respectively. The client wants to know if there will be any difference accommodating these two items if he uses the Intermediate Contract (IC) instead of the Standard Form(SF). (He seems to prefer the SF; his wife, the IC)

Both the JCT Intermediate Building Contract (IC) and the JCT Standard Building Contract (SBC) are suitable for projects procured via the traditional or conventional method. However, If Mr and Mrs Davies intend to have a specialist fit-out contractor and lighting engineer for the recording studio, The JCT (IC) will not be appropriate. Although it is designed for the fairly detailed contract provisions, it is not suitable where complex building service installations or other specialist work needed (JCT, 2016a). Thus, I will recommend Mr and Mrs Davies to use The JCT (SBC), which allows detailed contract provisions. In addition, it offers the full control of the project from the design process through the construction process till completion as well as enables the client to have full involvement in every single stage of the project from the very first design and quality specification (JCT, 2016c).

 

One week later, Mr and Mrs Davies reveal that funds have not become available due to the non-sale of their business and premises in Old Street. Thus, the initial budget is way higher than their available funds and so they will put off work to the garage, outhouses, and landscaping, etc until the following year -splitting the work into two phases. The initial phase of the work still cost £1.2million but the costs need to be very carefully managed. The total cost budget was £2.5million. The initial estimate –at Stage 2-3 -had been around £3 million total.

 

What are the implications for you, the project, the contract? Consider in terms of professional services, business management and legal liabilities.

 

The client doesn’t have the funds available to tackle the whole of the work immediately This is not the most desirable situation for my firm. However, in such condition, splitting up the project into two phases will be better for me than postponing the project until the funds are available (it is not known when/if the funds will be available).

Splitting the works into phases will enable the initial phase of the work to be finalised and approved until the funds for the second phase will be available. However, because the circumstances specific to the project is unclear, this should be dealt with administering a project programme to ensure compliance to the timescales included within the employer’s requirements.

In addition, having a clear statement of the required duties set out in the articles of agreement between the lead consultant, the client and the contractor will help eliminate misunderstandings.

However, this decision will bring along extra tasks for me including adjustment of the initial Project Execution Plan, cost, and budget calculations etc. Most importantly, my duties in the contract will change. If these are not noted carefully, I might be hold responsible for the delays to the project. Thus, before any work or fee can be agreed, it is important that we establish the new project details and services to be provided as well as identify associated terms and conditions.

I should consider the budget, scope and design of the building to see plans are realistically achievable within available funds and keep a watching brief on this prior to receipt of tenders.

Provision of a contract is as important as monitoring the progress and vital to the successful realisation of a design project. Choosing the appropriate form of building contract ensures that the parties are very clear of their obligations and liabilities and the risks that they are accepting. It needs to be negotiated, modified, and adapted to the conditions and risks assessed and presented.

Thus, I will write Mr and Mrs Davies to advise them that the project can be completed in two phases but requires a sound work management plan. The purpose is to ensure that spending follows a plan, supports business objectives, stays within present limits, and does not exceed available funds.In addition, I will explain the differences this decision will bring to project and tell them preparation of a new contract will be necessary to define the scope and the duration of the work and my responsibilities clearly.

In addition, a cost management plan is needed immediately.

The contractor also needs to be notified. He might not accept continue under such conditions. If they already have a contract with the client, they have rights to sue them as the scope of the work changed.

We can either continue with the same contract or treat them as two separate contracts. This might bring advantages to the project as only for the first phase the contractor can be selected by normal means and the second phase can be negotiated either with the same firm or a different one, depending on performance of the first contactor. In such circumstance, the contractor will make sure the work is of the required standard and is completed on time, as they might want to continue on the project (Smith, 1986).

SCENARIO 3

The Building Inspector sends a letter to the client to say that the Planning Authority has not received a Certificate of Lawful Use, and therefore they are concerned that the effect that the extension to the studio -used full time by Mrs Copper –will constitute a change of use from residential property into an office or commercial premises. The addition of a second study and library as well as so-called “reception rooms” suggest that there will be in increased traffic and “it is obvious”, they say, that the primary purpose of the building has shifted. They mention that there have already been complaints from neighbours that the eldest daughter’s music lessons (in an extended “music room”) constitute a business use, with increased parking by music students and commercial visitors is causing a nuisance in the front street. The complaint, they say, has to be taken seriously by the Planning Officer. 

There seems to be an implicit statement by the local authority that the architect was trying to deceive; while the client is annoyed that the architect was not shrewd enough (writing room names on the submitted plans has alerted the council to potential problems with the project).In the course a heated conversation with the client, Mr Copper lets slip to you that this change of use is indeed their long-term intention (“ building in flexibility”, as he puts it). 

Explain the issues, consequences, and your actions. 

(The client intends to use JCT Minor Works Building Contract 2016) 

The Town and Country Planning (Use Classes) Order 1987 sets out ‘Use Classes’ to categorise uses of land and buildings. Changing from one use class to another requires planning permission, although there are certain Permitted Development (PD) rights where the legislation allows changes between uses (GOV.UK, 2014b). PD rights derive from general planning permission granted by the Parliament, instead of by the Local Planning Authority (LPA), in the form of General Development Planning Orders (GDPO). PD rights apply separately to England, Wales, Scotland and Northern Ireland, and, in effect, they give implied planning consent to carry out certain classes of development (GOV.UK, 2015) -i.e. PD rights apply to houses, not flats, maisonettes or other buildings and; cover minor extensions, demolition, and certain changes of use, such as loft, garage, or cellar conversions (PlanningPortal, 2018).

Currently, planning permission is not required for the project, as it is under Permitted Development rights. The addition of a second study, a library and ‘reception rooms’ does not verify that the primary purpose of the building has shifted. In addition, although the eldest daughter’s music lessons in an extended ‘music room’ constitute a business use, it is still lawful use, as it is generally permitted to carry out business from home. However, it must be proven that the house is still mainly being used as a private residence and it hasn’t become business premises. (PlanningPortal, 2016). On the other hand, if Mr Copper’s daughter’s business continues to cause a marked rise in traffic and commercial visitors create nuisance in the front street, this will imply that the property is mainly being used as a ‘music studio’ which falls under B1 use ‘Offices, Studios’ along with other office uses, thus, may require planning permission (GOV.UK, 2017b).

First, I must confirm with Mr Copper his intention to use the premises. If he intends to use the property mainly as home, not a music studio, I must advice Mr Copper to immediately apply local authority for a Lawful Development Certificate (LDC) for the proposed activity -under section 192 of the Town and Country Planning Act 1990 (GOV.UK, 2014a) to confirm that it is not a change of use and still the lawful use. This will help end the conflict between the local authority and the project team/ the client. However, if a change of use is indeed Mr Copper’s long-term intention, I will inform Mr Copper that an application must be made to the Local Authorities to seek planning permission for the change of use of a house to a music studio.

I will write to Mr Copper to summarise what I explained above. I will also let him know that if a permitted development change of use from a residential property to a music studio is required, The JCT Minor Works Building Contract 2016 will not be suitable for this appointment, as this contract is designed for ‘smaller, basic construction projects where the work is of a simple nature’ (JCT, 2016b).

 

SECTION 2:

 

Answer the following questions. You may use references, example from your practical experience and/or case law to explain your answers. Please include citations and further reading where appropriate. Answer (max 1000 words total) 

1. One construction journal claims that: “Contract administrators have a somewhat ambiguous role, as they are simultaneously the employer’s agent and independent.” Is it really ‘ambiguous’? Explain how this so-called ambiguity works ethically, contractually and in working practices? (Give examples, cases)

An employer appoints a contract administrator to administer the construction contracts. However, depending on the form of the contract administered, the contract administrator role may be performed by different professionals -i.e. architects are the contract administrator under traditional JCT forms, engineers take on the role under the ICE forms and, construction managers administer construction management contracts.

Some of the tasks contract administrators perform entails them acting as client representatives or employer’s agents. Thus, they cannot be independent. However, in carrying out other tasks, they are required to act as independent decision-makers, acting impartially and fairly between employer and contractor. Although these dual roles bring about great responsibilities upon them, it is not ambiguous: They exercise decision-making functions under building contracts in which they have an obligation to act independently between the contractor and the employer (Patterson, 2006). In this regard, the concept of acting independently is still relevant. Following a statement by Megarry J. in London Borough of Hounslow v Twickenham Garden Developments Ltd[1971] 1 Ch. 233 represents this perfectly:

‘under a building contract, the architect has to discharge a large number of functions, both great and small, which call for the exercise of his skilled professional judgment. He must throughout retain his independence in exercising that judgment … it is the position of independence and skill that affords the parties the proper safeguards and not the imposition of rules requiring something in the nature of a hearing.(Elliott, 2006)

2. Clarify the roles and duties of a Contract Administrator, Project Manager, Employer’s Agent, Site Supervisor.

Contract administration is the process of systematically and efficiently managing contract to maximise financial and operational performance and minimise risk to the project. The primary objectives of the professional appointed to administer a building contract include initiating good communication across the project team as well as controlling and managing project changes to deliver the project safely to the specified quality standards, on time and budget. Overall, the Contract Administrator’s key duties generally include administering contract documents as well as managing tender stage, project changes and project close-out (Wevill and RIBA, 2012).

Different forms of contracts attribute the contract administration role to different professionals: Under traditional JCT forms, architects are the contract administrator as well as the designer. On Design and Build Contracts, the role is performed by Employer’s Agent (an agent acting on behalf of the client), who may or may not be the architect, depending on whether `novation’ is favoured by the Employer. On the other hand, NEC gives the contract administration function to the Project Manager in relation to control of time and cost and to the Site Supervisor in relation to control of quality, including both workmanship and compliance with the Works Information (Forward, 2002). In addition, engineers take on the role under the ICE forms and construction managers administer Construction Management Contracts (Patterson, 2006).

Both the Employer’s Agent and Contract Administrator roles principally exist within the post-contract phase, once a contractor has been appointed whereas Project Manager is responsible for the whole project lifecycle (Elliott, 2006).

 

3. Explain the similarities and differences in the various forms of Alternative Dispute Resolution, specifically Mediation, Conciliation, and Arbitration.

Alternative Dispute Resolution (ADR) is a collective term used for methods of solving a legal dispute without using the traditional method of going to court (UTL, 2018). This is a more prompt, private and economical legal alternative to the traditional method of Litigation. Arbitration, Conciliation, and Mediation are the main ADR processes, differences in which are often provider driven rather than consumer driven. Thus, different options are chosen depending on the needs and circumstances (Wevill and RIBA, 2012).

Mediation, which is also called facilitated negotiation, is a popular form of ADR in the UK. It involves a neutral third party, a mediator, who facilitates the resolution process to help parties reach a conclusive and mutually satisfactory agreement. However, although they may suggest a resolution, which is known as a ‘mediator’s proposal’, the mediator has no authority to decide on the outcome. Thus, it is parties in dispute who will sort out the dispute and come to an agreement.

Conciliation is similar to mediation as it involves a third party that helps resolve the dispute. However, the role of the conciliator changes as he discusses the legal issues involved in the dispute with both parties and analyse the different remedies that exist to solve the dispute. In this respect, the conciliators role is to pro-actively advise rather than merely assist, yet, they cannot impose any decision; the parties agree the solution themselves (Acas, 2018). On the other hand, arbitration is a more formal type of ADR where a third party -an impartial professional called an arbitrator determines the outcome of the case, which is final and legally binding. The parties must agree to arbitration. 

4. Explain the meaning of a “retention bond” and a “performance bond”.

An employer often requires a performance bond which is a surety bond issued by a bank or other financial institution such as an insurance company as part of the security given by a contractor. Performance bond is executed in connection with a contract and which secures or guarantees the completion, performance, and fulfilment of all the work, undertakings, covenants, terms, conditions, and agreements contained in the contract. It is usually released upon successful completion of the Defects Liability Period. There are two types of performance bonds; Conditional (or default) or Unconditional (payable on demand) with conditional bonds requiring that the client provides evidence that the contractor has failed to fulfil contractual obligations to the client and that they have suffered a loss as a consequence.

Retention is a financial security which usually refers to a percentage of contract value (often 5%) retained until the successful handover of the project. It guarantees that the contractor will complete the works required under the contract or carry out all necessary work to correct structural and/or other defects discovered immediately after completion of the contract. However, the recovery of retention is often a difficult area for parties in the contractual chain and cash flow problems frequently arise resulting from non-payment. Thus, retention bonds are way of avoiding problems associated with retention recovery. Amounts that would otherwise have been held as retention are instead paid, with a bond being provided to secure the amount.

A retention Bond is a type of Performance Bond that protects the customer after a job or project is finished (BusinessDictionary, 2018). In the bond agreement, the bond provider (the Surety) will act as guarantor between the two parties and will pay the client up to the full amount like they would have in place of cash retention if the contractor fails to perform the obligations or remedy defects immediately after contract completion, even if full payment has been made to the contractor.

Briefly, Performance Bonds serve as an assurance of quality completion of obligations, while Retention Bonds also ensure faithful performance and defect correction on public projects instead of applying cash retention practices.

5. What are the alleged benefits of Alternative Dispute Resolution compared to Adjudication. Do you agree?

Disputing parties use Alternative Dispute Resolutions (ADR) methods such as negotiation, arbitration, conciliation, and mediation as an alternative to the traditional method of litigation because they are prompt, private, and generally much less expensive than a trial. For instance, the advocates of ADR claim that ‘processes such as mediation can maintain existing business relationships as the parties are aided towards a settlement’ (Gould, 2017). In addition, it is much faster, as the average mediation lasts 1-2 days and it is a cheaper event than a trial as it eliminates lawyers and other trial costs. Furthermore, it is more flexible as the mediated settlement focuses on the parties’ interests and needs as opposed to litigation, which is based upon the rights and obligations of the parties to the dispute. However, ADR is a non-judicial process for the settlement of disputes (CIARB, 2018).

On the other hand, Adjudication is also much cheaper and faster than Litigation, as it doesn’t involve lengthy and expensive court procedure: The adjudicators, who will be chosen by disputing parties for their technical expertise must reach a decision within 28 days. Moreover, as oppose to Alternative Dispute Resolution, Adjudication is enforceable, as it is supported by courts [It introduced by ‘the Housing Grants, Construction and Regeneration Act 1996’ (Construction Act 1996) (GOV.UK, 1996)]. Thus, it may be called as ‘private litigation’. Thus, it can be said that Adjudication is a simpler and more efficient method of settling general and specialised construction disputes (CIARB, 2018).

Bibliography

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