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Law Standard forms Part 1

In our first two articles we looked at the two branches of the law which underpin construction law - contract and tort.

Another key legal aspect of the construction industry is its widespread use of standard forms. In this article we look at their use, misuse and abuse. Next month, in part two, we shall pick out some of the industry's most familiar forms for comment.

Standard forms: the basic rule

Rule one is to know what your chosen standard form says and to understand its effect. Obvious, but sadly overlooked on a surprising number of occasions in commercial practice.

Many large organisations have a regime of internal checks that require the use of prescribed forms for any contract. To comply, harassed employees delve into a sheaf of forms, extract one and tick the compliance box.

By way of chastening example, one multi-national company procured significant work on new plant at its UK site using a contract form designed for the bulk purchase of soya beans.

What are they?

In the construction industry, as in most industries, there are two basic types of standard forms - company specific standards and industry standards. It is the proliferation of the second type, and their widespread use, that marks the construction industry apart.

However, the company specific or bespoke standards are frequently also a feature of the industry. Perhaps the most controversial of the bespoke standards are the forms of subcontract produced by main contractors.

By contrast industry standards, usually produced by or for representative bodies such as the Institution of Civil Engineers, seek to be applicable to a wide range of projects and participants and attempt to achieve some degree of balance between competing interests.

What is the rationale?

In a perfectionist legal world, each contract would be individually crafted to reflect the unique risk allocation and administrative arrangements of the specific transaction. However in the real world this would take too long and cost too much. Also, reinventing the wheel for each transaction makes no commercial sense.

So it is good practice at least to identify a bundle of core clauses and incorporate them in a standard form. As most businesses involve repeat transactions of one or more types, an available standard form for each type is an obvious benefit - if it is commercially acceptable.

Bespoke vs industry standards

The usefulness of bespoke standard forms is conditioned by market forces and the general law.

Individual main contractors' standard subcontract forms are frequently the butt of criticism for being significantly one-sided in risk allocation.

Particular sources of contention have been 'pay when paid' clauses (now substantially outlawed by the Housing Grants, Construction & Regeneration Act 1996) and provisions requiring a subcontractor who submits a dispute to adjudication to pay the costs of both sides, win or lose.

A main contractor may be able to force his own standard onto subcontractors desperate for work. But he will not be able to force them on a client on whom he depends for his business.

So whenever bargaining power is equal, or where the parties seek a 'fair' solution, the rationale for standard forms applies.

Industry standards

Industry standard forms do not provide the ideal solution but they provide at least a good starting point. And some are better than others.

They are most useful if they not only recognise the interests of both parties, but can also be seen to have a degree of impartiality - most likely if produced by representatives of both intended parties.

Although the motives of a respected professional body should not be impugned, the ACE conditions of engagement may not seem impartial to potential clients.

By contrast, in the building world, the RIBA conditions of contract evolved into the JCT conditions.

The presence on the Joint Contracts Tribunal of consultant, contractor and employer interests met some of the criticisms of a single representative form. Even then there are the problems of the compromises of committee drafting.

A forerunner of the JCT form was famously described by a Court of Appeal judge as a 'farrago of obscurities'. A bit strong perhaps, but it underlines the need to regard standard forms as something less than a panacea.

The effect of general law

It is important to remember that the general rules of contract law apply to standard forms as much as to any other contract. This is particularly true of bespoke forms.

The result may well be that the contractual effect of a bespoke standard form differs from what its words appear to say.

General legal principles include the quaintly named contra proferentem rule. This broadly means that any ambiguity in a contract document produced by one party will be interpreted in favour of the other party.

Most significant of all is the Unfair Contract Terms Act 1977 - Parliament's attempt to impose a degree of fairness on nearly all commercial contracts. All contracts covered by the Act are prevented from excluding liability for causing death or injury by negligence.

In particular the provider of the standard form cannot exclude or restrict his liability for breach of contract unless the term purporting to do so satisfies a reasonableness test.

One of the statutory criteria for reasonableness is relative bargaining strength. Because one side's standard terms can generally be imposed only from a dominant bargaining position, most standard form exclusions face the reasonableness test.

The courts' dislike of unfair contract provisions can lead to the Act applying even on a contract negotiated between parties of equal bargaining power.

In theory, industry standard forms prepared by a 'neutral' body ought not to be subject to the parts of the Act applicable to bespoke standards. But in practice this may not be correct because the courts may apply the Act if one party habitually uses an industry standard form as its business terms, particularly if it applies its own modifications to the standard.

The pitfalls

The first point to stress is that no standard form, industry or bespoke, constitutes a contract. It is better regarded as a bundle of core clauses - and maybe nearly all the necessary clauses.

It cannot be a contract without the project specific details - specification, price and time scale most important among them - being added clearly, correctly and consistently.

We are all familiar with consumer contracts with an almost invisible box which we are invited to tick if we do not want to be inundated with junk mail. We miss the tick and get inundated.

Similarly, standard forms habitually provide a number of blanks that must be carefully completed or the contract may be ineffective or have an unexpected effect.

Falling into the pits

Main contract for subcontract.

Following a competitive tender, a contractor is awarded the main contract on a main contract industry standard form. The programme is tight and the contractor wishes formally to engage the various subcontractors whose prices were included in the tender.

He writes a letter, intending it to constitute the subcontract, confirming price, specification and programme and saying that the terms of the main contract industry standard will apply.

This is not uncommon practice but it is bad contractual practice. It leads at best to a lottery in trying to establish how the subcontract terms apply.

Traditional main contract industry standard forms involve an important supervisory and administrative role for an engineer or architect. The engineer/ architect is employed to design the work and to carry out the supervisory and administrative tasks. He is meant to give instructions and valuations to the main contractor, not direct to subcontractors, but attempts to use a main contract as a subcontract may have this result, causing project management chaos.

Misuse of main contract forms in this way also causes confusion with indemnities, dispute resolution, liquidated damages and other important contractual provisions.

Very recently a long case involved the judge wading through evidence trying to establish whether, and on what terms, a subcontract had been entered into.

The correspondence referred to the FIDIC contract without identifying which of several main contract FIDIC forms was intended.

The best the judge could do was to identify a subcontract out of the chaos of communications, including the novel requirement that the spirit but not the strict terms of FIDIC should apply.

Filling in the blanks. Another common pitfall is hasty completion, or failure to complete, the blanks in standard forms.

One case saw an employer fill in the rate of liquidated damages in an industry standard form as '£nil'.

Perhaps he intended general damages should apply on the above basis. Yet the court held that the parties had agreed a zero rate of liquidated damages so there was no payment to be made by the contractor for his delay.

Old forms. From time to time the courts decide that a provision in a standard form does not work as the industry had assumed. New legislation is introduced which requires new contractual provisions.

Those who stubbornly adhere to the old form with which they are familiar will fall into the traps the revisions and supplements are meant to overcome.

Particularly in the building industry, standard supplements are issued to bolt on to a basic industry standard form to provide, for example, sectional completion.

Frequently mismatching supplements and revisions of the standard form are used together to confusing effect.

Recent cases

Temloc v Errill Properties Pegler v Wang Motherwell Bridge v Micafil Feedback Over the years the courts reflect a frightening number of tales such as those illustrated by our selection of recent cases. To avoid such situations, be sure you and your team are aware of the basics and the pitfalls.

Have you any similar tales from the coalface or any real contract law problem or example that you would like to share? Let Professor Capper and the Lovells team know by emailing projects. engineeringteam@lov ells. com.

All will be treated in confidence and the best featured in forthcoming articles and if possible tackled live at the NCE/Lovells legal surgeries in the new year.

Register for Lovells legal seminars

NCE and Lovells are teaming up to provide civil engineering professionals with a series of practical seminars at which real legal problems and issues will be discussed and resolved by industry experts.

These events will be held at venues across the UK.

Designed to be more than just legal 'talking shops', the surgeries will inform and educate engineers at all career levels from students through to company bosses.

For more information on these events and to find out how they can help your professional development visit www. nceplus.co.uk/legal to register for preferential booking.

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