Building Contracts

Procurement in a construction project generally refers to the process of obtaining a product or service from a third party. In the construction industry, the way in which the project is procured largely dictates the way in which the risks and responsibilities for the design and construction of the project are contractually allocated from conception to completion. It is a vital part of the overall construction process and the participants in a construction project will choose how they structure the contractual and practical arrangements for their project. The choice of procurement method will largely dictate the type of contract that the parties enter into.

A construction contract does not have to be in writing but it is best practice to do so. A contract simply requires an offer, acceptance, consideration and intent and there is therefore no requirement for this to be in writing. However, where written contracts are not formed, questions then arise as to what terms apply to that contract, for example:

• What are the payment terms?
• Is there an agreed programme and who is liable where delays take place?
• How are disputes between the parties resolved?
• What is a party terminates the contract, how can they do this and what happens?

Without any written terms the answers are defined by the applicable law and the parties' verbal agreement. This can lead to the parties being in dispute as to what terms apply and what rights each party has, as it is difficult to accurately define the content of those verbal discussions that took place.

Force majeure events are certain acts, events or circumstances, defined within an agreement, which are beyond the control of the contracting parties. They may include natural disasters, the outbreak of hostilities or, in some instances, the declaration of a pandemic / epidemic.

A force majeure clause tends to excuse one or both parties from performance of the contract (normally allowing for a delay) following the occurrence of a force majeure event. Fundamentally, the purpose of a force majeure clause is to outline whether or not a party will be liable to the other for its failure to perform the obligations as a result of specific circumstances which are beyond its control. The clause may also allow for the contract to be terminated (without liability being owed) if the force majeure event continues for a specified period of time.

Frustration of contract occurs where, for an unforeseen event, performance of a contract becomes impossible; the contract effectively comes to an end and the parties are released from their respective obligations.

While this may sound appealing to a party struggling to meet its obligations, case law has emphasized that frustration will only apply in very narrow circumstances. A contract cannot, for example, be "temporarily" frustrated. It is either frustrated or performance is delayed (potentially due to a force majeure event).

The terms of the contract may also eliminate a party's ability to rely on frustration. In some instances, the contract may include a "hell or highwater clause" - an absolute clause applied, for example, to equipment lease agreements which requires the party to pay irrespective of whether the other party's performance is frustrated.

Both NEC and JCT contracts suites of standard forms of documents for procuring works or consultancy services.

While the JCT has been described as a 'traditional' contract and for many years was seen as the standard building contract for use in England and Wales, the NEC suite has been designed for international use with a choice of governing law and language.

Each contract has an allotted person to act on behalf of the employer (a contract administrator in JCT and project manager in NEC). They both include obligations relating to time, cost and quality (although the explicit requirements are quite different).

The NEC suite does however include procedures providing for a more proactive and collaborative approach to managing the contract and requires the parties to follow these procedures.

Liquidated damages in construction are a contractually agreed upon sum of money that one party to a contract must pay the other party if they breach the contract. This sum is intended to provide the non-breaching party with compensation for any losses or damages they incur as a result of the breach. In the case of construction contracts, they are most often used in the context of delays to completion of the works. It is a useful tool to include within construction contracts as they provide for a predetermined amount of compensation should a breach of contract occur.