Ensuring the right contractual framework for building projects

By Peter Kouwenberg

Partner – Head of Commercial

19 June 2023

Article Insights

The American architect and designer Frank Lloyd Wright said, “You can use an eraser on the drafting table or a sledgehammer on the construction site.” Which emphasises the importance of perfecting a building’s design to minimise the danger that expensive and time-consuming corrections have to be made during or after the actual build process.

By analogy, it is just as important to ensure the contractual framework for any building project is in order at the outset to best protect against costly and acrimonious Court battles months or even years later, in what is a relatively litigious area of law.

The importance of the contractual framework has recently been brought into sharp relief, with leading construction company Willmott Dixon suing subcontractors over problems with the cladding of a 17-storey building in south London.

Following concerns of serious fire safety failings, the building owner took legal action against Willmott Dixon in March 2020, with court documents highlighting that the building did not meet the Building Regulations or Centre for Window and Cladding Technology (CWCT) standards.

Willmott Dixon agreed to pay for necessary remediation, but is now attempting to recover the almost £50M in remedial costs from the five subcontractors that worked on the project and that the construction giant holds liable for the cladding-related fire-safety failings.

The contractor has cited a number of issues it believes subcontractors were responsible for, including there being no cavity barriers around doors, windows, other openings and at the junction with the roof as required by Building Regulations and the CWCT Standard, whilst also claiming that workmanship in respect of other cavity barriers was poor.

Willmott Dixon believes the subcontractors, from the architects that designed the building and specified the cladding materials to the Chartered Surveyors that issued the site a final certificate that effectively approved the suspect cladding, should also be held liable for breaches of contract.

There will now undoubtedly follow a lot of claims, counter-claims and finger pointing, but whatever the outcome, the issue relevant for all those in the construction sector is spending time getting the contractual framework right or face potentially damaging legal battles in the future.

The framework is complicated but critical

The contractual framework in a construction matter is complicated, typically involving several parties and a number of moving parts.

Construction – Framework Map

Whether you are the main Contractor with primary responsibility for the work, the client (or “Employer”) or any one of the myriad of interested parties (Professional Consultant, Sub-contractor, Funder, Tenant or Purchaser), it is essential that the respective rights and obligations you sign up to are satisfactory to both you and to your insurer.

Key legal documents in a construction project may include the following:

Collateral Warranties (or Schedules of Third-Party Rights): CWs are often sought from any party responsible for carrying out the work (the Contractor, Professional Consultants and Sub-Contractors) in favour of a third-party to the relevant contract (the Employer, a Funder, Tenant or Purchaser) in order to provide that third party with a potential remedy if certain design and/or build issues arise.

JCT Contract: A series of industry-standard building contracts which may be purchased from the Joint Contracts Tribunal and made bespoke by drafting a schedule of amendments. Although the JCT Contract is between the Employer and the Contractor it often creates the framework for the full construction package, whether the project is the extension of a domestic property or a multi-unit commercial build.

Parent Company Guarantee: Many construction documents will specify that the Employer (or other third-party) may bring a claim for up to 12 years after the construction is completed, a comfort somewhat diluted by the fact that more than half of the construction companies started in 2001 won’t survive into their second decade. Employers may therefore seek a Guarantee from the Contractor’s Parent Company and/or a Performance Bond from a funder.

Performance Bond: An Employer will often require that the Contractor obtains a Performance Bond under which a third-party funder (often a Bank) essentially guarantees the performance of the main contract by the Contractor. If the Contractor default’s in performing its obligations, the Employer can claim directly against the funder, which is particularly important if the Contractor has become insolvent.

Professional Team Appointment: An Employer may directly appoint its own consultants, such as an architect, engineer, project manager or quantity surveyor under a Professional Team Appointment form. This is likely to include Collateral Warranties in favour of interested third-parties (e.g., the Funder, Tenant or Purchaser). The Professional Team Appointments may be novated from the Employer to the Contractor so that the Contractor remains the ‘single point of responsibility’.

Sub-Contract: Whilst usually retaining overall responsibility for a construction project, a Contractor may sub-contract parts of the work to specialists, such as structural engineers and mechanical and electrical sub-contractors. As part of the Sub-Contract, it is often agreed that the Sub-Contractor must provide agreed form Collateral Warranties to the Employer and/or other third parties.

In conclusion

As the scale, complexity and costs of projects increase in what are challenging economic conditions, few developers, contractors, sub-contractors or funders can risk the mistake that could see them face eye-watering legal claims that drive them out of business.

The solution is to take a little more time at the outset and seek experienced legal advice when developing the contractual framework to ensure you and your business, at whatever point in the supply chain you occupy, are protected from the sort of fallout we are currently witnessing.

If you would like to speak to one of our experienced solicitors, from our Commercial team, you can do so via email or at our offices in St Albans, Harpenden and Luton.

Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.