Earlier this year, the JCT announced that they are publishing new 2016 editions of their suite of contracts.
As at the date of this article, the JCT has published the new 2016 editions of the JCT minor works family of contracts. The JCT have not yet advertised when they anticipate publishing the new editions of the rest of their suite of contracts.
One aspect emphasised in the announcement was the philosophy behind the JCT and its consensus approach to drafting. This must be strongly borne in mind when reviewing changes in the 2016 editions. They adopt a position of compromise between the employer’s interests and the contractor’s interests, perhaps not achieving the aspirations that either party may have had for these new editions.
FAIR PAYMENT, TRANSPARENCY, PUBLIC PROCUREMENT AND BIM
The JCT published its Public Sector Supplement 2011 in September 2011 to enable a public sector employer to let works under a JCT contract enabling:
- the government’s Fair Payment Charter making fair payment in construction a mandatory requirement in central government contracts,
- the Government’s mandate for all centrally procured government projects to be procured with building information modelling (BIM) level 2 from 4 April 2016,
- transparency and freedom of information requests.
Whilst, understandably, the 2016 editions of the minor works contracts do not incorporate the BIM enabling drafting, they do otherwise incorporate an updated version of the Public Sector Supplement. The changes include amendments to:
- Clause 6.6 (corruption), allowing the employer (being a local or public authority) to terminate the contractor’s employment where the contractor should have been excluded from participating in the public procurement procedure pursuant to regulation 57(1) or by virtue of the application of regulation 57(2) of the Public Contracts Regulations 2015, to enable the requirement for a contract to be terminated under regulation 73(1)(b) of the Public Contracts Regulations 2015,
- Clause 6.10 (termination by either party), allowing the employer (being a local or public authority) to terminate the contractor’s employment on the following grounds, to enable the requirement for a contract to be terminated under regulations 73(1)(a) or 73(1)(c) of the Public Contracts Regulations 2015 where:
- the contract has been subject to substantial modifications, or
- there has been a serious infringement of the obligations under the Treaties and the Public Contracts Directive.
Unfortunately for the JCT, these changes may be short lived in light of Brexit.
- Schedule 3 (Supplemental Provisions), incorporating:
- new supplemental provision 7, applying to all contracts where the employer is a local or public authority, enabling the employer to comply with requests made under the Freedom of Information Act 2000, and
- new supplemental provision 8, applying to all contracts where the employer is a local or public authority and where the contract is subject to the Public Contracts Regulations 2015, requiring the contractor to include in its subcontracts provisions which enable the fair payment charter, including a requirement to pay undisputed invoiced sums within 30 days, and which step down the termination provisions which relate to the Public Contracts Regulations 2015.
The changes to the payment provisions to promote fair payment across the more lengthy JCT contracts are anticipated to include:
- establishing valuation dates that will operate down the supply chain at sub-contract and sub-subcontract levels,
- allowing for monthly payment cycles to continue during the rectification period until the final payment is made,
- introducing a new procedure for:
- prompt assessment of loss and expense,
- more flexibility in respect to fluctuations,
- consolidation of the notice requirements of the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009.
For the 2016 editions of the minor works contracts:
- the previous 4 weekly payment cycle has been substituted by a monthly payment cycle,
- section 4 (payment) has been substantially modified into a more logical, easier to read format.
- there is now provision for the contractor to issue a payment application prior to the interim valuation date or prior to the final certificate (as applicable) as its pre-emptive default payment notice, to avoid the situation where the final date for payment is extended in the absence of the architect/contract administrator’s interim or final certificate, and
- the rather repetitive provisions for pay less notices separately set out in both the interim payment and the final payment provisions have been consolidated.
CDM REGULATIONS 2015
Extraordinarily, it was only just over a year ago when the JCT published a supplement to adapt the 2011 suite of contracts to conform to the Construction (Design and Management) Regulations 2015, which came into force on 6 April 2015, with the transitional provisions expiring on 6 October 2015. The supplement also deleted the redundant references to the Site Waste Management Plans Regulations 2008.
The 2016 editions will incorporate the CDM supplements and this has been seen in the 2016 editions of the minor works family of contracts.
Without going into detail in respect to the changes introduced by the CDM Regulations 2015, the relevant changes impacting upon a building contract include the following:
- the role of CDM co-ordinator has been replaced by the role of principal designer, required to be a designer with control over the pre-construction phase of the project. All references have been updated accordingly,
- there is no longer a requirement to identify a CDM planning period in the CDM Regulations 2015 and so this entry in the contract particulars to the building contract has been omitted, and
- the CDM Regulations 2015 now apply to projects for domestic clients and so the JCT’s homeowner contracts are updated accordingly.
PERFORMANCE BONDS AND PARENT COMPANY GUARANTEES
At long last, we are told that the JCT are incorporating provisions for performance bonds and parent company guarantees, though understandably not seen in the JCT 2016 editions of the minor works family of contracts.
Will these changes be for the benefit of the employer only? I anticipate that there will be provision for security to be provided for the benefit of the employer but also for payment security to be provided for the benefit of the contractor. For employers, this may have the unfortunate consequence of contractors seeking payment security on a more regular basis.
Whilst the parent company or cross company guarantee should be a relatively predictable document, the form of bond may create some debate. Where the JCT have previously appended a form of bond to their contracts, they have been in a form agreed with the Surety Panel of the Association of British Insurers. In line with the JCT’s consensus approach, the likelihood of the prescribed form of bond being an ‘on demand’ bond is somewhere between low and non-existent. Instead, we are likely to see a form of default bond, which is more commonly used.
Other unknown variables in respect to the bond will be:
- Expiry of the bond: will the JCT prescribe when the bond expires or will they allow the parties to agree upon this? How will the JCT tackle the thorny issue of the regular request from the bondsman for a calendar date to be specified for the expiry of the bond?
- Assignment rights: will the bond be assignable in the event that the underlying building contract is assigned, being the typical compromise position offered when the question of assignment of the bond arises in negotiations?
Of greatest interest will be whether the JCT provide for a sanction against a party who fails to provide the relevant performance bond or parent company guarantee. Perhaps they will follow the FIDIC approach and provide that no payments are due to the contractor until the relevant security has been provided. Perhaps they will allow the contractor the right to terminate performance if the employer fails to provide the relevant security.
THIRD PARTY RIGHTS FOR SUBCONTRACTORS
No surprises are anticipated here.
For employers, sadly, there will inevitably be included in the new forms of third party rights to be procured by the contractor from the identified subcontractors those limitations and exclusions on liability which the JCT have traditionally included in their standard forms of collateral warranty and third party rights schedules including:
- restricting liability to a purchaser / tenant to the costs of repair, renewal and/or reinstatement of the affected part of the works,
- a capped amount for liability for other losses suffered by the purchaser / tenant, and
- copyright licences conditional upon payment of all sums due and payable under the underlying subcontract.
To date, parties have traditionally shied away from prescribing subcontractor third party rights in building contracts for the reason that a considerable percentage of contractors use their own bespoke forms of subcontracts which may contain terms which either contradict or fail to enable the third party rights provisions. These concerns will remain and it will be interesting to see whether there is much appetite for these provisions in the industry.
INSURANCE OPTION C
There has long since been a problem with applying the existing insurance options in a building contract to scenarios where the works are being procured by tenants and domestic homeowners. The JCT had indicated that they would be including an extension of (Works) Insurance Option C to allow alternative solutions to the problems encountered by tenants and domestic homeowners in obtaining existing structures cover for contractors.
For tenants of multi-let buildings, the issue has been that they cannot themselves take out joint names insurance of the existing structure outside their leasehold demise, as they do not have a legal interest in the existing structure. Landlords regularly refuse to allow the tenant’s contractor to be named on the policy as joint named insured or to include wording waiving the insurer’s subrogation rights against the tenant’s contractor and its subcontractors.
Unfortunately, in such scenarios, it is difficult to find a complete and satisfactory solution to this predicament, with contractors understandably reluctant to agree to expose their public liability policies to potentially very high claims for loss/damage to the existing structure. Understandably, the JCT have been unable to resolve this predicament in their changes.
For the 2016 editions of the JCT minor works family of contracts, they have included a new option under Clause 5.4C which makes a simple reference to applying any such alternative arrangements, to be set out in the contract particulars, which the parties have agreed to adopt in such circumstances. Linked to this is now an express right under Clause 5.7 for either party to terminate the contractor’s employment, if it is just and equitable to do so, where there has been material loss or damage to an existing structure, replicating the position under the larger contracts in the 2011 suite. The industry can take some comfort in knowing that parties using the 2016 editions should hopefully avoid overlooking such a significant issue, with the amended insurance option triggering a discussion between the parties, though this doesn’t fix the underlying problem.
There is also proposed to be a consolidation within the main text of the generic provisions that apply to Insurance Options A, B and C (evidence of insurance, insurance claims and reinstatement work) which we will hopefully see in the 2016 editions of the intermediate, standard and design and build families of the contract.
We are also told to expect further changes to improve functionality and user-friendliness across the suite, including minor updates and clarification of the intellectual property provisions, and incorporating (where appropriate) the provisions of the JCT 2012 Named Specialist Update.
For the 2016 editions of the minor works family of contracts, apart from section 7 (settlement of disputes) and the schedules, the minor changes are widespread. This does present a major headache for organisations who maintain a precedent bank of schedules of amendments to the current editions of the JCT suite of contracts, particularly in respect to the more lengthy JCT contracts.
Surprising changes include a new clause 1.7 (consents and approvals), which provides that the consent or approval of either party or of the architect/contract administrator shall not be unreasonably delayed or withheld save in respect to those instances expressly stated in the contract to be at the sole discretion of the relevant party. Seemingly innocuous, this amendment creates a high risk that parties may not appreciate that this clause exists and may fail to realise that various later clauses are subject to this qualification or they may add in bespoke new clauses referring to the matter of giving consent or approval without considering whether or not they wish to exclude their clause from the application of clause 1.7.1.
Inevitably, we don’t expect to see incorporated all of the changes which employers routinely include in their contracts, by way of a schedule of amendments. Understandably, thorny issues such as:whether the contractor should receive an extension of time for loss or damage to the works resulting from the occurrence of a specified peril caused by the default of the contractor or one of its subcontractors; and
- whether the design and build contractor takes responsibility for the design in the employer’s requirements to create a true single point of design responsibility,
- whether the design and build contractor should take a novation of the employer’s design consultants,
- will remain matters for negotiation on a project specific basis.
There are seemingly some missed opportunities, such as the continued absence of a definition of practical completion, but we will not know the full extent of the changes until the JCT publishes the balance of the 2016 editions of the JCT suite of contracts.