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Protecting against Inflation Risks...

Rising inflation and market volatility make it important to consider the impact of future price changes on a project. A fluctuation provision provides a contractual mechanism to adjust the contract price for specific purposes.

Some of the standard form contracts contain boilerplate fluctuation clauses, but they will usually require amendment to reflect the specific project requirements. Looking at JCT and NEC, for example:-

• JCT Option A provides a simple clause that only allows changes to the contract price for alterations to tax, levies and contributions that the contractor is required to pay. Whilst easy to administer, this would not catch various price risks, including increases in the cost of materials.

• JCT Option B allows for adjustments to labour and material costs, as well as fuel and electricity etc. However, it may not cover everything or may not be specific enough to a project.

• JCT Option C has a sophisticated formula to adjust the contract sum, but the formula rules are complicated to administer and might be too detailed for the project.

• The NEC4 contract includes Option X1, which needs to be specifically selected to apply, and is very broad, so it may allow an adjustment that the parties did not bargain for.

Many people believe fluctuation provisions create potentially unlimited cost exposure, but that isn't the case; bespoke wording can limit the change to the price for one material only, or see costs assessed by using a specific index for each type of material. Fluctuation clauses, if used properly, are a valuable tool in the current market but specific and careful drafting is important to ensure that they work as intended.

Force Majeure Risks...

A force majeure clause protects parties from events outside of their reasonable control, often referred to as "Acts of God", which prevent the relevant party from performing its obligations. Despite attempts to rely on them for events linked to Covid or the war in Ukraine, there is no default definition of what is, and what isn't, classed as a force majeure event.

The safest way to ensure that an event is caught by a force majeure clause is to define it, as well as the consequences of such an event occurring. A defined list of specific events avoids confusion but being too restrictive may result in an event falling outside the list. On the other hand, a more general definition could lead to disputes over whether or not a specific event is included, as was often the case with Covid.

There are various points that need to be considered when drafting force majeure clauses, for example:-

• Is your list tailored to cover events that are more likely in the light of current events (for example the Russian invasion of Ukraine) and the specific location of where the contract is being performed (for example, if a specific freak weather event is more likely given the location).

• How are the other parts of your contract affected following a force majeure event? Does the employer wish to avoid making payments whilst the contractor is prevented from carrying out the works, for example?

• Is there a requirement that the impacted party must use best endeavours to mitigate the effects of the force majeure event by, for example, resuming performance of its obligations under the contract as soon as is reasonably possible?

• What is the time/money impact? If a contractor wants additional money for such an event, then that will possibly need to be dealt with elsewhere in the contract. Can the non-impacted party terminate if performance cannot be resumed quickly? What are the financial consequences of such a termination? Does it include loss of profit?

Payment Notices

Payment notices continue to be a hot topic, with 'smash and grab' type claims still rife. It is crucial to have protections in place to mitigate the risk of such claims. Examples include:

• Robust payment procedures to ensure notices are served on time,

• An understanding of the contractual payment cycle and notice requirements, and

• Ensuring that your notices are clear and unambiguous.

The recent decision in Advance JV v Ensica Ltd [2022] EWHC 1152 (TCC) illustrates the importance of being familiar with your contractual payment terms and the need to express your intentions clearly when drafting notices.

In this case, Advance tried to argue that a notice which referred to one payment cycle (cycle 25) could also act as a notice for an earlier one (cycle 24). The notice was, after all, served in time to be valid for both and there was no obligation, either in the Construction Act or via the contract, to specify which payment cycle a notice referred to. However, in rejecting Advance's argument, the Technology and Construction Court decided that:-

• Advance's notice was not in "substance, form and intent" a notice referrable to payment cycle 24 (ten different reasons were given for this) not least because no reasonable recipient would have understood the notice to refer to this payment cycle. It was clearly intended to refer to cycle 25 and whilst it was valid for this payment cycle, it was not a valid notice for any other payment cycle.

• On a broader point, the Construction Act 1996's payment regime requires that notices refer to individual payment cycles. A notice cannot, therefore, apply to two payment cycles. Advance's argument had no support within either the Construction Act or the contract.

The result was that Advance had to pay Enisca some £2.7million, despite believing that it had already overpaid Enisca. This case again highlights that the best way to avoid a smash and grab claim is to ensure that valid notices are served.

Liquidated Damages...

Liquidated damages clauses provide that a pre-determined sum becomes payable as damages for a specific breach of contract. They are most commonly used for delay, where a failure to meet the completion date results in a fixed amount being paid per week of overrun.

Liquidated damages clauses have benefits for both parties. It avoids the employer having to spend significant time, effort and cost proving its actual loss, and it gives the contractor certainty about damages it will face. Such clauses do, nevertheless, need to be drafted with careful thought. For example, which specific breaches of contract will trigger the liquidated damages provision? Is the liquidated damages figure a genuine pre-estimate of loss - too low might not provide an appropriate remedy, but too high could be unenforceable? Should the total damages payable be capped, and does any potential liability need to be reflected by incorporating liquidated damages clauses in your sub-contracts?

The drafting of a liquidated damages provision was considered in Buckingham Group Contracting Ltd v Peel L&P Investments and Property Ltd [2022] EWHC 1842 (TCC). Buckingham was in delay and Peel sought £1.9m in liquidated delay damages. Buckingham defended the claim on the basis that the liquidated damages clause was void and/or unenforceable as it was so poorly drafted. The problem stemmed from using a pre-contract document called "Schedule 10" which hadn’t been properly aligned with the rest of the contract and contradicted itself. The result was confusion as to the completion date, the liquidated damages rate, and the value of the cap.

The TCC accepted that there was ambiguity but nevertheless, through a process of contractual interpretation made the clause ‘work’ - though probably in a manner that neither party originally intended. In light of this decision we recommend:

• Liquidated damages clauses should be specific to the project that you’re working on. One size does not fit all.

• If those pre-contract documents are to be added to the contract, care needs to be taken to avoid contradictions with the rest of the contract.

• Pre-contract documents need to be aligned with the contract particulars. A pre-contract document for use with the JCT 2016 is unlikely to suit the NEC4.

Collateral Warranties...

Collateral warranties are extremely common in construction projects. They are used to create direct contractual relationships between otherwise separate parties regarding obligations derived from an underlying contract / professional appointment / subcontract.

Prior to the case of Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2022] EWCA Civ 823, there was uncertainty as to whether a collateral warranty was a ‘construction contract’ under the Construction Act 1996. If so, there would be various repercussions, including the incorporation of a right to adjudicate as opposed to the (generally) more costly and time-consuming litigation process.

The Court of Appeal ruled that whilst it would depend on the wording of each particular warranty, the collateral warranty in question was a construction contract so the parties could adjudicate any dispute. Importantly, this warranty contained market standard wording, meaning that most standard collateral warranties are likely to be caught by the Abbey decision.

The approach in Abbey may open the floodgates for adjudication claims by collateral warranty beneficiaries. That gives rise to various drafting points that need to be considered in detail. In light of this decision we recommend:

• Liquidated damages clauses should be specific to the project that you’re working on. One size does not fit all.

• If those pre-contract documents are to be added to the contract, the same care as with the contract needs to be taken to avoid contradictions.

• Pre-contract documents need to be aligned with the contract particulars. A pre-contract document for use with the JCT 2016 is unlikely to suit the NEC4.

Need advice on any of the topics covered?

Get in touch with a member of our specialist construction law team today, or contact the author, Matthew Fletcher on 01482 324252 or via email: mdf@gosschalks.co.uk