Practical Law

As the employer and contractor on a construction and engineering project get ever closer to concluding negotiations and signing their building contract, they are often settling technical details of design or specification. Typically, they do so by e-mails, or perhaps minuted meetings. Should those emails or minutes form part of the final contract?

Common contract documents

The technical and pricing documents to any building or engineering contract may include a specification, scope of works, bills of quantities, works information, contract sum analysis or schedule of cost components, used alone or in combination with other documents.

In this Ask the team, we assume that the parties enter into a JCT Design and Build Contract, 2011 edition (JCT DB11). As such, we focus on some of the implications of including a specific bundle of correspondence in the definition of Contract Documents, highlighting just some of the issues that may affect the parties.

Liability for design

An unamended JCT DB11 does not create a true single point of responsibility for design and construction. For example, the Third Recital states that the employer has examined the Contractor’s Proposals (a Contract Document) and is satisfied that they appear to meet the Employer’s Requirements (also a Contract Document). At the most basic level, if the Contractor’s Proposals only meet the Employer’s Requirements if they are read along with the bundle of correspondence, even the Recitals arguably do not match the parties’ intentions.

In clause 2.1, the contractor’s key obligation to carry out and complete the works refers to the Contract Documents as a whole. However, the clause goes on to refer to the contractor completing the design of the works in the context of the Employer’s Requirements and Contractor’s Proposals only.

In clause 2.17, the contractor’s specific design duties are also framed with regard to the Employer’s Requirements and Contractor’s Proposals only, unless further work is carried out as a Change (for which the contractor will be paid).

Changes

It is easy to think of an agreement or misunderstanding that leads to last-minute alterations, set out in correspondence, being dealt with as a Change, whatever the parties’ intention at the time of negotiations.

For example, JCT DB11 clause 5.1 refers to a Change as a “change in the Employer’s Requirements… including… the addition… of any work”. Correspondence finalising a building contract can often add (or omit) work, both of which may be Changes.

From the employer’s perspective, a Change means increased cost uncertainty. For both parties, if they agreed an increase to the Contract Sum in their final negotiations, that could lead to uncertainty (or a dispute) about whether the cost of the Change was already included.

Alternatives to including correspondence as separate Contract Document

The primary alternative to adding a bundle of correspondence to the Contract Documents is probably to make that bundle part of the Employer’s Requirements or the Contractor’s Proposals (without actually amending the Employer’s Requirements or Contractor’s Proposals themselves). The potential downside of this includes making those critical documents harder to read, use and understand.

This risk is magnified by clauses 2.11 to 2.14 of the JCT DB11, which address inadequacies, discrepancies and conflicts in those documents. In practice, it is unusual for all of the issues discussed in a meeting or an e-mail to appear in a form that slots neatly into the existing document. Often, while one critical issue has been addressed, other knock-on effects have not been. (For example, the parties may vary the details of a loading bay to allow for a larger vehicle size, but accidentally leave the access road requirements referring to a smaller vehicle size.)

In addition, from the contractor’s perspective, the parties could suffer from confusion about whether the solution in correspondence might still be overruled by the employer under clause 2.14.1, with the employer “choosing” something in the original Contractor’s Proposals.

For the employer, as well as the Third Recital (referred to above), clause 2.11 states that the contractor is (broadly) not responsible for the Employer’s Requirements. Clause 2.12 reinforces the likelihood that an “inadequacy” in the Employer’s Requirements will lead to a Change.

Be realistic but try to do it right

The best solution is nearly always to actually update and amend the Contract Documents themselves, not add explanatory documents, correspondents, minutes or separate amendments to those documents. For example, as part of a successful meeting that concludes negotiation of a detail of the works, the contractor and the employer should ideally also consider whether the Employer’s Requirements or the Contractor’s Proposals need amending (as well as any agreed implication for the Contract Sum).

From the Employer’s perspective, following through on these details may also mean expressly confirming with the architect or other professional consultants that they agree with any changes to the Employer’s Requirements, which they may have a contractual responsibility to prepare.

That said, it is not always possible to drill down to the details and amend original documents (often time simply does not allow). In those circumstances, the parties must appreciate  that they are compromising and that their compromise is more likely to lead to a dispute. That does not mean a dispute is inevitable, but if an issue arises, it may be worth quickly passing it back up to the commercial directors or others who agreed the deal, in the hope that they may settle the issue before it leads to an adjudication.

In the context of letters of intent, lawyers often repeat the warning that it is important to actually enter into formal contract. The same may be true in these situations: better to enter into contract with a limited bundle of correspondence attached and keep talking, rather than start works with the issues still up in the air and no formal agreement at all.