22 October 2020 - Firm News
The new forms of RIBA contract
Getting the contract right when undertaking building works, no matter how big or small the project, is as important as selecting the right architect to design the works and contractor to build them. There can be no substitute for a contract drafted to meet the needs of the parties and the particular circumstances of the project. However, the dizzying array of precedent contracts available on the market can be off putting to the most experienced construction professionals when choosing the appropriate starting point for a project, and an un-amended precedent is rarely the best course of action.
For high end residential and smaller scale commercial works there has never been a universal solution to contract selection, and the JCT suite of contracts, well known to construction professionals, are a popular choice. However, precedents by their nature are designed for particular types of projects. The JCT Home Owner Contract is intended for small domestic building works such as extensions and alterations, whereas the JCT Minor Works Contract is intended for use in smaller projects (domestic or commercial) but can also be used in larger schemes provided the works are simple in character. Clients often find that neither contract quite fits their circumstances and sometimes elect to proceed at significant risk without a written contract in place at all. This is never advisable. Others opt for an amended precedent tailored to their particular projects, yet with such wide variation between building projects the level of bespoke drafting required, and expense incurred, can be similarly diverse.
The Royal Institute of British Architects (RIBA) launched two new forms of precedent contract to the market late last year, the Domestic Building Contract (DBC) and the Concise Building Contract (CBC). Prepared by RIBA in response to feedback from its members calling for improvement and innovation within the building contracts currently available, the new contracts keep domestic and commercial works separate and aim to cater for a wider range of projects without the need for lengthy bespoke amendments. The DBC is intended to be suitable for all domestic building work including renovations, extensions, maintenance and new buildings. The CBC is prepared for simple commercial building works and so is unsuitable for domestic building work. Taken together, the RIBA contracts offer a suite of contracts to be used on small or medium-sized construction projects. They are not suitable for complex projects.
Created by architects it is possible the natural champions of the DBC and CBC will be architects working on high end residential and smaller scale commercial projects. With architects often engaged in the early stages of a project and heavily involved in the procurement process, the new contracts may prove popular. But will this popularity be deserved or should clients continue to rely on the familiar (amended or un-amended) JCT forms? Both the DBC and CBC share the same format and core provisions, with only a few differences intended to cater for the specific needs of a domestic project or commercial works. The similarity means that a consultant or practitioner who has worked with the DBC should be able to advise on using the CBC and vice versa. This article will focus on the provisions of the DBC.
Positive features of the DBC
The DBC (and CBC) provide a flexible form of contract by offering a range of optional clauses to allow parties to tailor the contract to their particular requirements. The ability to stipulate sectional completion and incorporate flexible payment arrangements, such as payments by milestones, are elements currently not catered for in the JCT Home Owner or Minor Works Contracts. Furthermore, provisions dealing the use of a risk register and a programme mirror some of the more sophisticated clauses in the JCT Minor Works Contract (clauses which are absent from the Home Owner Contract) and aim to provide the client with an element of control over the works. For example, the parties can agree 'financial' or 'non-financial' consequences for the Contractor if the Contractor fails to provide a programme showing the sequencing of the works. If non-financial, the Contractor is not able to start on site until a programme is submitted and the Contractor bears responsibility for any resulting delay or costs. If financial, the client can withhold 10% of the amount due under the first payment certificate and 5% of the amount due under subsequent payment certificates until a programme is submitted. Care must be taken when exercising this option as it is effectively a liquidated damages provision. If this provision amounts to a penalty under the contract it will be unenforceable. Ideally, this clause should be discussed and agreed with the Contractor before signature and if possible a calculation conducted showing that the amount to be withheld broadly equates to the loss the client would suffer in this instance. Alternatively, the amount to be withheld could be amended to reflect this calculation. We suggest advice is sought from an experienced construction professional regarding the operation of this provision and a record of any discussions kept.
Even though it is more complex than the JCT Home Owner Contract, the DBC is accessible and easy to follow as it is set out in 3 main sections: the Agreement (party details), the Contract Details (project specific information), and the Contract Conditions. Helpful guidance notes give a practical 'how to' guide on filling in the contract and an explanation of terms simplifies common construction jargon which is useful for clients who are new to the sector. By contrast, the JCT Home Owner Contract, while only 8 pages long, is arguably less accessible as it does not contain any guidance notes at all. The clause structure in the RIBA contracts also generally avoids large numbers of sub-clauses and too much cross referencing between provisions making it easier to understand. The focus on plain language is perhaps the RIBA contracts most striking feature.
Unusually the RIBA contract defines Practical Completion. The definition: 'No aspect of the Works or a Section of the Works shall be outstanding' appears to be an attempt to do away with the ability of the Contract Administrator to issue a snagging list. Snagging lists, detailing the minor works to be completed either before or just after practical completion of the works, are commonplace in the industry and their exclusion from the contract may come as a surprise to many in the sector, not least the Contract Administrator operating the contract. As with both of the JCT contracts, if it is intended that a snagging list will be used on a project, without amending the contract to address how the list will operate in practice, there will be no legal certainty for the parties as to the effect of using a snagging list on the contract.
Other key innovations in the DBC (and CBC) include encouraging the Contractor to suggest improvements to the quality or price of the works, with any costs savings that arise as a result of the suggestions to be shared equally between the parties. Contractor claims for additional time or money are subject to strict deadlines after which the right to extra payment or time is lost. This type of condition precedent is relatively uncommon in standard forms of building contract and is certainly not in either of the JCT Home Owner or Minor Works Contracts. While a Contractor may be willing to agree strict deadlines for making claims, depending on the scale of the project and the Contractor's ability to comply with the timescales in the contract, it may insist the ten day period in the RIBA contracts is extended. There is also an emphasis on collaborative working and proactive project management which is absent from the JCT Home Owner Contract. The parties are obliged to meet before the works begin to set out, among other things, their expectations for the project and practical procedures to communicate and to mitigate risk. While this obligation may be a little too 'hands on' for some clients who prefer to remain in the background, the meeting is an excellent opportunity for clients to establish a good working relationship with their Contractor and Contract Administrator, a key element often vital to the success of many projects.
Both contracts are intended for use in schemes administered by a Contract Administrator, which is unsurprising, given the sophistication of some of the provisions. The DBC does allow a client to administer the contract, however, the guidance notes caution this should only be done in 'very limited' circumstances, (for example) where the works are simple and small or where the client has previous experience in undertaking this role. The Contract Administrator's role is of vital importance in safeguarding the proper operation of both the RIBA and JCT contracts and clients would be well-advised to appoint an independent professional Contract Administrator on all but the most straightforward projects. Whilst architects do have the capability to carry out this function, some are more comfortable only undertaking their design role and professional project managers or quantity surveyors with expertise in this field may be more suited to the role. When considering how to structure a professional team, and indeed who to appoint, it is worthwhile for clients to do their homework: obtain relevant references and look into the management as well as technical credentials of the intended team. Putting in the work at the inception of the project can pay dividends further down the line. Indeed, the Contract Administrator's role of providing guidance to the client throughout the project is pivotal and may prove comforting and even beneficial to those clients who prefer to take more of a hands off approach to the works.
Key issues of concern
The DBC clearly provides a compelling contender to the well-known JCT forms of contract for residential schemes, and of course provides much better protection for those clients habitually averse to concluding any form of written contract. However, for relatively simple yet high value projects caution should be exercised when considering using the RIBA contracts as a starting point ahead of their competitors. Even where the works are fully privately funded, clients should take care to prepare their investments for the future contractually. It remains to be seen what the market will think of these pioneering forms of contract, and whether banks and institutional funders will feel comfortable with the use of such an unfamiliar precedent. Amendments to the common-place JCT forms have become standard in the market when negotiating with banks / funders and it is likely they will, at the very least, want to see these standard amendments reflected in the RIBA contracts in a bespoke schedule of amendments.
Similarly, if the Contractor, or indeed a Sub-Contractor, will be undertaking elements of material design in the works the ability to call for collateral warranties could be key in preserving the investment value of a property. While the CBC provides the client with an optional clause to call for collateral warranties if required, the DBC is silent on the matter. If a client intends to live in the property beyond the limitation period (ideally the maximum of 12 years from completion of the contract) this issue may fall away. However, if any lending is to be secured against the property or indeed the property is sold within the limitation period, funders or purchasers will invariably ask for the comfort and protection of collateral warranties for any substantial building works. Without the ability to call for collateral warranties, the value of the high value residential property in particular, may suffer. Collateral warranties may be considered in this context as 'nice to have' rather than a 'need to have', however, in a market which is still feeling its way to stability and prosperity, collateral warranties can provide comfort by creating rights of action against sub-contractors in the event of the insolvency of the main Contractor. Clients would therefore be prudent to consider in advance whether collateral warranties should be required for their project, and if so, consider amending the contract to make them an express requirement.
The ability to assign the benefit of the contract may of course offer sufficient investment protection to a client as an alternative to main contractor collateral warranties for a lending bank or future purchaser. The Employer is able to assign the benefit of the DBC and the Contractor can do so with the Employer's written consent. However, can the Employer make further onward assignments? If a party fails to notify the other of the assignment, is it still valid? While the DBC/CBC are more accessible than their JCT counterparts, an overzealous pruning of the clauses has in some instances led to a lack of clarity, raising more questions than answers. In addition, the unusual reference to “burdens” within the assignment clause hints at novation (transfer) rather than a simple assignment of the benefit of the contract, potentially causing confusion as to the aim of the clause. The main concern with this clause is likely to centre on its uncertainty rather than any perceived unfairness. We recommend amending the assignment provisions in line with other standard form contracts.
It is a well-established principle that where a contract specifies a completion date and a weekly or daily rate of liquidated damages (which must be a genuine pre-estimate of the client's loss) for delayed completion, when the works are indeed delayed beyond the date of practical completion, the client is entitled to deduct liquidated damages from the Contract Sum for the period of delay. Somewhat bizarrely in the DBC, the client must follow the Contract Administrator's advice as to whether to claim liquidated damages for late completion, watering down the client's entitlement, and so reducing the impact of the damages provision. If liquidated damages are not levied, it might be argued that contractors have little incentive to complete the works as speedily as possible. Damages are however perceived as a 'blunt instrument' by some industry professionals, which may be the logic behind RIBA's novel treatment of liquidated damages in these contracts.
Success or failure?
The new forms of RIBA contract appear to be a positive step forward for more complex residential and lower value commercial projects, providing an accessible and flexible contract that the parties are more likely to be able to understand and use in practice which is no bad thing. The RIBA contracts are a good starting point when considering which form of contract to enter into, but for more unusual and/or high value schemes very possibly all that they should be is the starting point – a framework on which to build a more bespoke contract. There is no substitute for a carefully considered and negotiated contract dictated and shaped by the project and the needs of the parties. With these forms of contract so new to the market, it also remains to be seen what those in the wider sector will make of them, and whether they will consider the provisions adequate in themselves or in need of substantial amendment. The true test of the RIBA building contracts will come when they are used in practice. Their success or failure is, at this early stage, very difficult to predict.