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standard form, and a court should seek to identify and give effect to that reason.9 Indeed, in another Court of Appeal case10 this was taken one stage further; a majority of the court interpreted what appeared to be a ‘one-off’ contract by comparing it with the JCT form on which it had clearly been based, and interpreting it so as to give full effect to the differences.
10.2EXEMPTION CLAUSES
The law imposes certain controls on contractual terms that seek to exclude or restrict a party’s liability for breach of contract. Those controls are in principle fully applicable to construction contracts, but one or two specific points are worth making.
First, the contra proferentem principle lays down that, where one party seeks to rely on a contract term that it has drafted, any ambiguity in the words used is interpreted in favour of the other party. This principle will clearly apply where, for example, a supplier of materials has its own standard terms of business. However, although the courts have never had to reach a definitive decision on the issue, it seems that the contra proferentem principle would not apply to a standard form contract produced by a negotiating body such as the JCT, whose membership reflects different interest groups within the construction industry.11
The second point concerns the application of the Unfair Contract Terms Act 1977. Where it applies, this Act requires a party who seeks to rely on an exemption or limitation clause to prove that the clause meets a standard of ‘reasonableness’, which the Act defines. If the reasonableness test is not satisfied, the clause in question has no effect on that party’s liability.
The 1977 Act applies in two situations. The first is where the party that seeks to rely on the clause in question has entered into a contract on its own ‘written standard terms of business’. Whatever is meant by this phrase, it would seem that, as with the contra proferentem rule, it will not include a contract made on an industry-negotiated standard form. However, the Act has been held to apply to a management contractor’s own form of management contract,12 a supplier’s ‘general conditions of sale’ for the supply and installation of an overhead conveyor system in a factory13 and the supply on standard terms of pipe work for the construction of a tunnel.14
The fact that an exemption clause is subject to the Unfair Contract Terms Act does not automatically mean that it will be struck down as being unreasonable. The courts start from the sensible position that, if a contract is entered into between two commercial organizations of roughly equal bargaining power, the terms of that contract should normally be regarded as ‘reasonable’. This approach has led the courts to uphold a clause providing that a management contractor should not be
9 Mottram Consultants Ltd v Bernard Sunley and Sons Ltd (1974) 2 BLR 28.
10Team Services plc v Kier Management & Design Ltd (1993) 63 BLR 76.
11See Tersons Ltd v Stevenage Development Corporation (1963) 5 BLR 54 and Section 8.1.
12Chester Grosvenor Hotel Co Ltd v Alfred McAlpine Management Ltd (1991) 56 BLR 115.
13Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 2 All ER 257.
14Barnard Pipeline Technology Ltd v Marton Construction Co Ltd [1992] CILL 743.
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held responsible for a trade contractor’s default,15 and another restricting a pipe work supplier’s liability for defects to the cost of replacing the defective materials.16 On the other hand, the Court of Appeal has struck down as unreasonable a supplier’s clause which sought to exclude the client’s right to set off a claim for defects against the price.17 The case of Ampleforth Abbey Trust v
Turner & Townsend Project Management Ltd18 provides a reminder that the 1977 Act applies to also to professional appointment contracts. The letter of appointment, which the consultant had proposed, sought to limit liability to the amount of the fees paid by the employer for their work done under that appointment. It was held that this limitation was unreasonable under the 1977 Act because in the same terms of appointment the consultant was to maintain professional indemnity cover of £10m, a considerably greater sum than the fees paid.
The second situation in which the 1977 Act applies the requirement of ‘reasonableness’ is where one of the parties ‘deals as consumer’ (which means that it does not make the relevant contract in the course of business). As one might expect, the courts have appeared generally more protective towards private clients than towards commercial organizations, who can be expected to look after their own interests. However, even where consumers are concerned, the crucial test is that of reasonableness, and a clause restricting an architect’s liability to £250,000 (roughly the expected cost of the works the architect was to supervise) was held to satisfy that test against a private client.19
The position of consumers has been further strengthened by the Unfair Terms in Consumer Contracts Regulations 1994 and 1999, which were enacted to give effect to EU Directives. The Regulations, which apply to all contracts for the supply or sale of goods and services by businesses to consumers, enable a court to strike out any contract term which has not been individually negotiated and which, contrary to the requirement of good faith, causes ‘a significant imbalance in the parties’ rights and obligations arising under the contract’. Those provisions were considered in Robinson v P E Jones (Contractors) Ltd,20 a case arising from the consumer purchase of a house in which defects were later found. Under the purchase terms, the purchaser had a right to claim against the NHBC warranty provided, but claims were limited to those particular defects covered under the warranty. Other defects were excluded. It was held that this was reasonable for the purposes of ss.2 and 3 of the 1977 Act as amended by the 1994 and 1999 regulations.
15Chester Grosvenor Hotel Co Ltd v Alfred McAlpine Management Ltd (1991) 56 BLR 115.
16Barnard Pipeline Technology Ltd v Marston Construction Co Ltd [1992] CILL 743.
17Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 2 All ER 257.
18[2012] EWHC 2137 (TCC).
19Moores v Yakely Associates Ltd (1998) 62 Con LR 76.
20[2011] EWCA Civ 9.
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10.3INCORPORATION BY REFERENCE
Many construction contracts, and certainly most of those which concern sizeable projects, are drawn up and executed by the parties in a formal manner. The terms of those contracts are therefore easily identifiable and, if the parties intend to incorporate other documents by reference, this will be made clear in the main contract document. This is commonly done, for example, in relation to such documents as the contract drawings, bills of quantities or specification.
This principle of incorporation by reference is also of great importance where (perhaps through meanness, laziness or simply an over-casual approach to business procedures) no formal contract is executed at all, despite the fact that the parties intend their relationship to be governed by one of the standard forms with which they are familiar. The question that then arises is whether the terms found in the relevant standard form contract are applicable.
It may be stated at the outset that there is in general nothing to prevent the incorporation of an entire standard form contract by simply referring to it, in either a written or an oral agreement. Indeed, this is precisely what happened in Killby & Gayford Ltd v Selincourt Ltd.21 In that case an architect wrote asking a contractor to price certain work and stated: ‘assuming that we can agree a satisfactory contract price between us, the general conditions and terms will be subject to the normal standard-form RIBA contract.’ When the contractors submitted an estimate that the architect accepted, and the work was done, it was held that the current RIBA form of contract was incorporated, although no formal contract was ever signed.
One danger in the practice of incorporation is that not all references to wellknown forms of contract are as clear and unequivocal as in the Killby case and, if the parties fail to express properly what they mean, it cannot be assumed that a court will always rescue them. In particular, it has consistently been held that a sub-contractor’s undertaking to carry out work ‘in accordance with the main contract’ does not necessarily incorporate all the terms of that main contract, so that in Goodwins, Jardine & Co v Brand,22 for example, an arbitration clause was not included.
An even more graphic illustration of the dangers is Chandler Bros Ltd v Boswell.23 The main contract in that case provided that, if a sub-contractor was guilty of delay, the employer could instruct the main contractor to dismiss that subcontractor. The sub-contract expressly covered many of the matters in the main contract, but did not specifically give the main contractor a power of dismissal for delay. When the main contractor (acting on instructions from the employer) purported to dismiss a defaulting sub-contractor, it was held by the Court of Appeal that the main contractor was guilty of a breach of the sub-contract. The sub-contractor’s undertaking to carry out the work in accordance with the terms of the main contract was not enough to incorporate the power of dismissal for delay.
Notwithstanding these two decisions and others to similar effect, there have been many cases in which the courts tried very hard to make sense of what the
21(1973) 3 BLR 104.
22(1905) 7 F (Ct of Sess) 995.
23[1936] 3 All ER 179.
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parties said or wrote, and to give effect to what they really intended. For instance, where sub-contractors were appointed ‘in full accordance with the appropriate form for nominated sub-contractors RIBA 1965 edition’, it transpired that, not only was there no RIBA 1965 edition of any contract (the current form of main contract was the 1963 version), there were no RIBA forms of sub-contract at all! Despite this appalling drafting, the Court of Appeal was convinced on the evidence that what the parties had in mind was the FASS ‘green form’ of sub-contract; it was accordingly held that that form should be incorporated.24
The decision in Brightside Kilpatrick Engineering Services v Mitchell Construction Ltd25 is perhaps even more generous in rescuing parties from the consequences of sloppy drafting. A sub-contract was there placed on an order form that identified the main contract and concluded: ‘The conditions applicable to the sub-contract shall be those embodied in RIBA as above agreement’. Printed references on the order form to the ‘green form’ of sub-contract had been deleted, although the standard-form tender, to which reference was made, stipulated that a ‘green form’ sub-contract should be used. The main contractors argued that the whole of the RIBA 1963 form of contract was to be incorporated into the subcontract but the Court of Appeal, after some hesitation, agreed with the subcontractors that what had to be incorporated was merely those terms of the main contract which dealt with nominated sub-contractors. And, since these contemplated a ‘green form’ or equivalent sub-contract, this is what would be implied.
10.4IMPLIED TERMS
Construction contracts are, like other contracts for work and materials, subject to the implied terms contained in the Supply of Goods and Services Act 1982.26 In addition, it may be possible for terms to be implied by the courts into such contracts, although this is less likely to happen where the contract document itself is detailed and apparently exhaustive.
In considering the question of implied terms, it is important to appreciate that two different kinds of implication may be involved. First, certain terms will be automatically implied as a matter of law into certain categories of contract, provided only that they are not inconsistent with any express terms. Secondly, and far less common, a term may be implied as a matter of fact into an individual contract where that contract would be commercially unworkable without it. Again, of course, there can be no implication of a term that would conflict with an express term. These two kinds of implication may be separately considered.
24Modern Building (Wales) Ltd v Limmer & Trinidad Co Ltd [1975] 1 WLR 1281.
25(1973) 1 BLR 62.
26As amended by the Sale and Supply of Goods Act 1994. See Section 11.1.
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10.4.1Implication in law
The law regards certain terms as ‘usual’ in building contracts, so much so that, if the contract is silent on these matters (as may well be the case with small informal agreements), these terms will be implied. However, it must be stressed once again that the court will not re-write a contract freely entered into, and so there will be no implication of terms that would be inconsistent with the express agreement. This will have a direct practical effect. Where, as under the main standard-form building contracts, all the ‘usual’ matters are covered in some detail, implied terms are rendered largely (though not entirely) irrelevant.
The terms which are regarded as ‘usual’ in this respect, and which will therefore be implied into construction contracts, will be dealt with in more detail in Chapters 11–15. Nonetheless, a brief summary of the most important terms may be useful at this stage.
Employer’s obligations
The implied obligations of the employer, though capable of appearing as a list, can effectively be reduced to two: a general duty not to hinder the contractor’s efforts to complete the work and, more positively, a duty actively to co-operate with the contractor. The duty of non-hindrance has been breached, for example, by an employer causing delay via servants or agents (who include, for this purpose, the contract administrator, but not independent third parties or even nominated subcontractors); interfering with the supply of necessary materials to the contractor; and interfering with a contract administrator’s function as independent certifier under the contract.
As to the duty of positive co-operation, this involves such matters as giving possession of the site; appointing an architect and nominating sub-contractors and suppliers; supplying the necessary instructions, information, plans and drawings; and, if the contract administrator persists in applying the contract in a wrongful manner, dismissing him or her and appointing a replacement. All these things must be done and, what is more, they must all be done without undue delay.
Contractor’s obligations
Where a building contract does not specify a date for completion or, more commonly, where a contractual completion date has passed, the contractor’s implied duty is to complete within such a time as is reasonable in all the circumstances. However, whether or not the contract specifies a completion date, it seems that there will not normally be an implied obligation on the contractor to carry out the work with due diligence so as to maintain any particular rate of progress.
As to the standard of the work, it is implied that the contractor will use proper workmanship and, in most cases, that the materials used will be of good quality and fit for their purpose. However, the ‘fitness for the purpose’ warranty will be excluded where it is clear that the employer has placed no reliance on the contractor’s ‘skill and judgment’ in selecting the materials, such as where the employer specifies the material and nominates the supplier. Further, there may be
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circumstances in which even the warranty as to quality will not be implied, for example where the employer knows that the contractor will have no right of recovery against the actual supplier of the materials.
Apart from the fitness for the purpose of the materials used, there may in certain cases be an implied warranty that the completed works will be fit for their purpose. Such a term depends upon the employer’s reliance on the expertise of the contractor. Accordingly it will not be implied where the contractor is merely to build in accordance with detailed plans and specifications, nor where the contractor is under the supervision of an architect. A warranty of fitness will be fairly readily implied, for example, into a contract to buy a house that is in the course of being built. However, the sale of an already completed building is subject to an ancient legal principle known as ‘caveat emptor’ (‘let the buyer beware’) and consequently attracts no such implication.
10.4.2Implication in fact
We saw earlier that a court will strain to make sense of the parties’ agreement, for example in identifying the form of contract to which they have inaccurately referred. However, the courts have repeatedly stated that they will not make or improve contracts for the parties. The principle of freedom of contract means that, if parties have entered into a contract that is unreasonable, inconvenient or commercially unwise, it is not for the courts to change their arrangement. They must simply be left to bear the consequences. A term will not be implied into a particular contract just to make it more convenient, reasonable or sensible; it will only be implied if its absence is so glaringly obvious that both parties must have intended to include it.
A good example of the courts’ extreme reluctance to imply a term just to ‘improve’ a contract is the decision of the House of Lords in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board.27 A contract for the construction of a hospital extension in phases provided that Phase III should commence six months after the issue of the certificate of practical completion of Phase I, but that Phase III should itself be completed by a fixed date. There were express provisions for extensions of time to be granted in respect of Phase I, but no express provision for this to have a ‘knock on’ effect on Phase III. Delays in completing Phase I (for virtually all of which extensions of time were granted) effectively reduced the period for Phase III from 30 months to 16 months, whereupon the contractors argued that a term should be implied permitting the Phase III time to be extended in accordance with any extensions to Phase I. However, the House of Lords refused to make any such implication, ruling that, since the contract was clear and unambiguous in fixing a time for completion for Phase III, the parties must live with the agreement that they had made.
Another example of this judicial reluctance to intervene is Bruno Zornow (Builders) Ltd v Beechcroft Developments Ltd,28 a case in which sloppy drafting made it very difficult even to identify the express terms of the contract. The judge
27[1973] 2 All ER 260.
28(1989) 51 BLR 16.