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Standard industry forms of construction contracts - not the gold standard

31 August 2022

Those who operate in the construction industry will be familiar with industry standard form agreements. 

However, certain provisions of such agreements are commonly amended to bring the provisions in line with market expectations of funders and end users. This is due, in large, to the fact that industry standard forms are drafted to best protect the legal interests of the contractors and consultants party to such agreements, rather than the Developer and its commercial partners.

This article gives a brief overview of the provisions likely unacceptable to such interested parties, by reference to two standard forms: The RIBA Standard Professional Services Contact 2020 for Architectural Services (herein referred to as RIBA Appointment) and the Construction Industry Council form of Collateral Warranty to a Funder (CIC warranty) – in our experience the terms of these forms are commonly cited by consultants seeking to negotiate terms of their appointment.

RIBA Appointment

The obligations in the RIBA Appointment are drafted to be much more consultant than Developer friendly. We note the following main areas:

Skill and care:

Where a construction contract is silent on the standard of skill and care to be exercised, the implied standard is "reasonable skill and care (1)" regardless of whether the contract is for design or non-design services. Bespoke contracts will include provisions expressly requiring the consultant to perform the services with the reasonable skill and care to be expected of a consultant experienced in projects similar to Developer's project. This favours the Developer – otherwise the standard would be by reference to any non-specialised consultant of that discipline.

Bespoke appointments may also include the need for 'reasonable skill, care and diligence'. The phrase 'diligence' has been considered by the Courts on a number of occasions but appears to encompass an additional obligation to act expeditiously in the performance of the Services. Similarly, bespoke appointments may include the obligation to exercise 'all reasonable skill and care' – the interpretation of 'all' in this context has not been established by the Courts, but by analogy to the construction of 'all reasonable endeavours' against 'reasonable endeavours', inclusion of the word 'all' may, in time, be interpreted as imposing a higher standard. Whilst it certainly doesn't harm the Developer to try to insert 'all', we find that inclusion of the word 'all' is commonly resisted by consultants and their insurers.

The RIBA Appointment requires the architect to carry out all duties and obligations in accordance with the "standard of reasonable skill, care and diligence to be expected of an Architect/Consultant experienced in the provision of such Services for projects of a similar size, nature and complexity to the Project". Whilst the standard itself is relatively broad and exceeds the implied standard, we would object to this standard applying to the entirety of the Contract, particularly with regard to any statutory duties which we consider should not be subject to skill and care and should be strict obligations. We would argue that reasonable skill and care should apply only to the performance of the Services.

Deleterious materials:

The lack of deleterious or prohibited materials clause is also concerning, particularly given an Architect's role in designing and potentially specifying materials for use on a development. In the absence of such a clause, the default under the RIBA Appointment is for the Architect to exercise the standard of skill and care in the performance of its duties under the appointment.

The inclusion of a provision prohibiting the approval and specification of material which do not confirm to British or European Standards and Codes of Practice or the British Council for Offices publication "Good Practice in the Selection of Construction Materials" is usually an absolute requirement of a Developer and their commercial partners.

When acting for Developers, Funders or Tenants we would always request the inclusion of a clause setting out the prohibited materials including by reference to British Standards and expert publications to ensure that the list of prohibited materials is up to date. The inclusion of such a clause creates more certainty for the Developer in ensuring compliance with its statutory duties, liability to third parties, insurance, limiting the risk that significant remedial works will be required and making the development more marketable to other third parties.

Assignment:

Assignment provisions are key to making a development marketable. Funders will require the ability to take a security assignment over the construction contracts - particularly where providing development finance. Developers may want to sell the Property with the benefit of the warranties contained in the various construction documents, to do this they will need to assign the benefit of those contracts to a Purchaser.

The RIBA Appointment is not assignable to another party without consent. We note that the institutionally accepted position is for a construction document to be assignable at least twice without consent and we are seeing more often construction documents allowing unlimited assignments to/from group companies and by way of security to a Funder (including reassignment on redemption of security).

For developments where Funders and institutional investors are likely to be involved the assignment provisions are key and we would include as a default position the widest possible assignment provisions in any bespoke form of appointment to make the Development as marketable as possible. 

Limitations of liability:

There is a default limit of liability limiting the architect's liability under the appointment to the amount of professional indemnity insurance the architect is required to maintain under the appointment. 

The RIBA Appointment also contains a net contribution clause which limits the architect's liability to such sum as agreed by the parties or judged by a court to be the "proportion of the loss to the Client caused by the Architect/Consultant’s failure to exercise reasonable skill, care and diligence in the performance of its duties under the Contract". This proportion is to be calculated on the basis that all other consultants are appointed on similar terms to the architect with no exclusions or limit of liability and the other consultants are deemed to have paid to the Employer such sums as it would be just and equitable for them to pay having regard to the extent of their responsibility for that loss and/or damage.

In the absence of this clause and in the event of a claim against the architect, the Developer would be entitled to pursue the architect for 100% of its loss. If the loss was also caused by another construction party, the architect would need to pursue that additional party for its share of the damages owed to the Developer. The effect of this clause, however, means that the Developer can only pursue the Architect for its share of the loss. The risk for the Developer is not only the increased cost of pursuing each and every party that may be liable, but also if another construction party were to go insolvent or cease to be a viable target of litigation then the risk is on the Developer.

On this basis, net contribution clauses are not institutionally acceptable and would not be included in a bespoke form of appointment.

Third Party Rights / Collateral Warranties:

The RIBA appointment does not require the Architect to provide a collateral warranty as standard, but rather the parties must opt-in to third party rights. The RIBA Appointment limits the category of beneficiary to 'first' Purchaser of a freehold or leasehold interest. Coupled with the limited assignment provisions discussed above this could limit a development's marketability.  The RIBA Appointment also recommends the various CIC forms of warranty, which as discussed below, are not institutionally acceptable. 

CIC Warranty

We note similar deficiencies in the CIC Warranty by reference to the market standard for a collateral warranty.

There is a net contribution clause, for the reasons discussed above, places risk on the beneficiary should cause for a claim arise under the warranty. This clause would not be accepted by Funders taking an interest in the development.

We would also consider the copyright licence granted under the terms of the CIC Warranty to be unacceptable on a commercial development on the basis that exercise of the licence is subject to the payment of the consultant's fees being up to date. Understandably, a Funder would request that the copyright licence is not subject to the payment of the consultant's fees which, save for where step-in rights have been exercised, would be outside of its control.

The warranty is assignable once to another party providing finance or re-finance in connection with the development. We would expect as a minimum the warranty to be assignable twice to any party without consent and, ideally, with unlimited assignments to group companies and by way of security (including reassignment).

Conclusion

Whilst standard industry forms may be used in smaller or less complex developments, for larger commercial projects where third parties are taking an interest we would advocate the use of bespoke forms of appointment and collateral warranty which can capture the nuances of the development and which will be institutionally acceptable and protect the interests of Developers, Funders, Purchasers, Tenants and other parties, not only at the project's inception but throughout the limitation period of the construction package.

(1) See: Supply of Goods and Services Act 1982, s 13

If you would like to discuss any of the points raised in this article or to find out more about the NEC training course, please contact David McNeice.

Author: Natalie Tunstall-Jackman.

Further Reading