Misuse of amendments to standard forms of contract
Amending standard forms of contract is commonplace in the construction industry, with the purpose of better meeting the needs of the project.
In recent years, organisations have come under increased scrutiny for misusing amendment provisions to primarily better their commercial risk profile. This can be done through several methods depending on contract suite selection:
- New Engineering Contract (NEC) – Z clauses.
- Joint Contracts Tribunal (JCT) – schedule of amendments.
- International Federation of Consulting Engineers (FIDIC) - particular conditions of the contract.
Note: other contract suites are available.
It must be said that welldrafted and mutually understood amendments can significantly enhance project outcomes, sometimes becoming a necessity when standard forms prove inadequate in anticipating all project complexities.
It must be said that well-drafted and mutually understood amendments can significantly enhance project outcomes, sometimes becoming a necessity when standard forms prove inadequate in anticipating all project complexities. In an industry characterised by constant change, it is essential to have contracts that align with evolving conditions.
Some typical best practice amendments are likely to encompass:
- General Data Protection Regulations (GDPR) – to ensure compliance. NEC4 now deals with confidentiality and privacy terms under clause 29.
- Building information modelling (BIM) – to enhance project efficiency and reduce costs. Typically seen in government-funded projects and mandated in their 2016 strategy, Construction 2025.
- Brexit – to ensure compliance and awareness of changes post-Brexit.
- The Housing Grants, Construction and Regeneration Act 1996 (as amended) – whilst not new it is good practice to expand on the provision.
- Collateral warranties – now addressed in NEC4 through secondary option X8.
No matter the proposed amendment it should be approached ‘with caution and reluctance’, reserving amendments for substantial improvements or absolute necessity1. In a lot of cases, this advice is ignored with heavily amended contracts landing on the desks of tender departments, legal teams, and advisory consultants. It may ultimately deter organisations from engaging in the tender process and can portray the position of hostility from a potential employer.
Some argue that if significant deviations are necessary, the initial contract choice is possibly incorrect. In The Royal Brompton Hospital National Health Service Trust v Frederick Alexander Hammond and Others (2002) EWHC 2037 (TCC), it was suggested that ‘a standard form is supposed to be just that2. It loses its value if those using it or, at tender stage those intending to use it, have to look outside it for deviations from the standard’3.
Drafting by naïve users, who believe the amendment provisions are simply a tool for bettering their commercial position and shifting liability and risk will only likely lead to contractual ambiguity and disputes. Careless amendments include those relating to payment mechanisms which should be done in compliance with the Housing Grants, Construction and Regeneration Act 1996 (as amended) (HGCRA 1996).
What would happen if the last date of the period falls on a Friday and you have one-hundred new drawings to review?
In Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) (2023) EWHC 2243 TC, the final date for payment was amended, so that it was ‘conditional on 3CL providing a valid VAT invoice’, which was found to be a breach of section 110 of HGCRA 1996 4 5.
While the due date can be fixed to an event, the final date for payment must only be a time period from the due date. Payment, and in particular non-payment, are such a hot topic industry-wide that it is interesting how this amendment managed to pass even the first draft.
Unreasonable contract amendments are so prevalent within the industry that in October 2020, the Chartered Institute of Architectural Technologists advised its members to ‘be extra vigilant when agreeing to terms in contracts’, due to an increase in unattractive provisions being offered, namely and at the time, removing COVID-19 as a force majeure event and any right to claim for unforeseen costs relating to it6.
Unreasonable contract amendments are so prevalent within the industry that in October 2020, the Chartered Institute of Architectural Technologists, advised its members to ‘be extra vigilant when agreeing to terms in contracts’.
Other examples of unreasonable and/or careless amendments include:
- The deletion of clause 10.1/10.2 in NEC3/4 contracts – ‘in a spirit of mutual trust and cooperation’ – NEC’s ethos is collaboration;
- Unreasonable amendments in relation to notification of events such as the below example to clause 61.3 under NEC3/4:
61.3 The subcontractor notifies the contractor of an event which has happened or which he expects to happen as a compensation event if:
- The subcontractor believes that the event is a compensation event; and
- The contractor has not notified the event to the subcontractor the subcontractor becomes aware of the event prior to the expiry of the current assessment interval.
If the subcontractor does not notify a compensation event within the current assessment interval, he is not entitled to a change in the prices, the subcontract completion date or a key date.
- Poorly drafted liquidated damages, such as those in Eco World – Ballymore Embassy Gardens Company Ltd v Dobler UK Ltd (2021) EQHC 2207 (TCC). In this case the liquidated damages clause entitled Eco World – Ballymore Embassy Gardens Company Ltd (EWB) to recover £25,000 per week for delay to completion of the whole works beyond the contractual completion date, with a grace period of four weeks and a 7% cap on liability of the total contract sum. The project, governed by the JCT 2011 construction management trade contract, permitted the employer to take partial completion of the works before achieving practical completion of the entire project. In this specific case, two out of three residential blocks were taken over six months before practical completion. However, the contract lacked a provision for adjusted liquidated damages concerning partial handover. Although EWB’s argument claiming the voidance of the liquidated damages provision due to partial handover was rejected, as the provision was deemed operable, the entire dispute could have been avoided had the drafter addressed the interaction between liquidated damages and partial completion in a more comprehensive manner.
- Within continental Europe, there is a trend of employer borne risks being transferred to the contractor on FIDIC forms of contract, via exclusion clauses or importing provisions from other (unsuitable) forms of contract. An example of this is using the FIDIC Yellow Book general conditions of contract, which is primarily used for design and build projects and importing the risk profile from the Silver Book, which is used for turnkey works. By doing this, liability for errors in setting out data (subclause 4.7 YB/ SB) and site data (subclause 4.10 YB/SB) are all transferred to the contractor. EU financed projects have been criticised over the years for inaccuracy in employer requirements due to the rush in getting new tenders to market in order to obtain EU funding. This leaves the contractor liable for rectifying any errors in the employer’s tender documents and limited scope for recovery which wholly goes against FIDIC’s principles of ‘fair and balanced risk/ reward allocation’7.
The NEC initiated a campaign in October 2014 to improve industry standards and to reduce Z clause misuse emphasising the need for understanding the implications. Rekha Thawrani, then NEC general manager, stated ‘the biggest problem with the misuse of Z clauses is that when they’re used incorrectly, they change the risk profile of a contract’ and it ‘can make the contract ambiguous’8. Poor drafting and unnecessary clauses can lead to disputes and project disruption, emphasising the importance of having Z clauses drafted by an NEC specialist.
The law isn’t always available to give organisations a lifeline when it comes to poorly drafted or negotiated terms. Whilst many organisations argue their terms at tender stage, there are instances of organisations agreeing to drafts without fully understanding the agreed-upon terms.
In 2019 FIDIC issued its golden principles (GPs) document which outlined ‘the reason(s) why such principles are considered to be GPs’ and guidance as to how users should draft particular conditions (PCs)’ with the document addresses limiting amendments in the PCs in a way that its compliant of the GPs and spirit in which FIDIC should be administered, with ‘fair and balanced risk/reward allocation’ and organisations not taking ‘advantage of its bargaining power’9. As with the FIDIC example above, core best practice principles are not being followed it, nor with other suites of contracts.
The law isn’t always available to give organisations a lifeline when it comes to poorly drafted or negotiated terms. Whilst many organisations argue their terms at tender stage, there are instances of organisations agreeing to drafts without fully understanding the agreed-upon terms. In Cartwright Pond Ltd v Wild (2021) EWHC 1600, it was exactly that – the claimant’s submitted in the proceeding that her ‘only obligation was to complete within a reasonable time’, however it was found that the contract ‘contained an express term for completion within 14 weeks’, something the claimant would have known had they properly understood the terms they were being governed by10.
Contract providers have not only issued guidance and initiatives to enhance contract terms, but the UK Government consistently releases its ‘Construction Playbook,’ outlining the delivery protocols for public works. The government advocates for contract amendments but emphasises the importance of careful drafting and consideration.
The Crown Commercial Service (CCS) and Infrastructure and Projects Authority (IPA) conducted a comprehensive review of prevalent amendments, resulting in the creation of a set of standard ‘boilerplate’ clauses. Central government mandates the inclusion of these clauses in all government construction contracts.
The specified clauses encompass, among other things:
- Definitions.
- Freedom of information.
- Tax compliance.
- Fair payment.
These clauses, derived from effective past amendments in government contracts, are to be integrated without further modifications. This approach aims to establish a more consistent and standardised framework for the government’s procurement processes.
While the primary purpose is to adapt to project complexities and changing laws and regulations, some organisations may attempt to exploit others through their bargaining power to introduce unreasonable amendments, possibly leading to an imbalance of risk and commercial liability.
In conclusion, the use of amendments offers organisations a versatile toolkit to tailor contractual conditions to specific project needs.
While the primary purpose is to adapt to project complexities and changing laws and regulations, some organisations may attempt to exploit others through their bargaining power to introduce unreasonable amendments, possibly leading to an imbalance of risk and commercial liability.
While there is widespread advocacy for the use of standard form amendments they should only be applied when necessary and with careful drafting. Without such precautions, projects may experience ambiguities, inconsistencies, and eventually end up in disputes.
Nonetheless, it is imperative for all organizations involved to possess knowledge and understanding of the accepted terms. Without this fundamental requirement, a project may face delays and disruptions right from the outset.
---
1 Rycroft, M, and Ndekugri, I. 2009. The JCT Standard Building Contract: Law and Administration. Oxford: Elsevier.
2 The Royal Brompton Hospital National Health Service Trust v Frederick Alexander Hammond and Others (2002) EWHC 2037 (TCC).
3 The Royal Brompton Hospital National Health Service Trust v Frederick Alexander Hammond and Others (2002) EWHC 2037 (TCC).
4 Lidl Great Britain Ltd vs Closed Circuit Cooling Ltd (t/a 3CL) (2023) EWHC 2243 (TCC).
5 Fenwick Elliot, 2023. Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL). October 4 2023. Accessed January 5, 2024. https://www.fenwickelliott.com/research-insight/newsletters/dispatch/archive/lidl-great-britain-closedcircuit-cooling.
6 Chartered Institute of Architectural Technologists, 2020. Z clauses in procurement – COVID-19. October 22. Accessed January 03, 2024. https://architecturaltechnology.com/resource/z-clauses-in-procurement-covid-19.html.
7 FIDIC, 2019. The FIDIC Golden Principles. Geneva: FIDIC.
8 NEC, 2014. NEC warns of misuse of Z clauses in contracts. October 27. Accessed January 03, 2024. https://www.neccontract.com/news/z-clauses.
9 FIDIC, 2019. The FIDIC Golden Principles. Geneva: FIDIC.
10 Cullyer, A. 2021. The consequences of getting the basics wrong in your construction contract. June 28. Accessed January 5, 2024. https://www.warnergoodman.co.uk/site/blog/news/getting-the-basics-wrong-inconstruction-contract.
Strikethrough present in order to signify the update to the clause,