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Terms and Conditions: Protecting Yourself in a Difficult Market

March 2021

The industry has witnessed many challenges over the last few years, particularly in the last 12 months, many of which are likely to persist for the coming months and years and which should be addressed in your terms and conditions.

The key challenges to the construction industry and insurance markets (in the UK and globally) include amongst others, the significant impact of the COVID-19 pandemic, the general hardening of the contractual market, uncertainty in relation to the implications of Brexit and the hardening of the professional indemnity insurance market, particularly in respect of fire safety and cladding issues.

In this article, we discuss how consultants can bolster their terms and conditions of appointment to protect their businesses in respect of, amongst others, unlimited liability, entitlement to payment, design life liability, and liability for fire safety and cladding related issues.

What are the key changes to consider?

Liability

Increasingly so, we are seeing bespoke employer drafted appointments that provide for unlimited liability for consultants, as well as employer’s solicitors aggressively negotiating to keep caps on consultants’ liability out of appointments (or to limit the scope of any caps which are included). We recommend that consultants push hard for a limit of liability to be agreed in their appointments (without exclusions to the cap!) and that the agreed limit reflects their insurance cover arrangements otherwise liability will be unlimited. Given the hardening insurance market as mentioned below, evaporation clauses linking liability to sums recoverable under insurance policies should also be considered.

Professional Indemnity Insurance

As a result of the hardening professional indemnity insurance market over the last few years, consultants are finding it increasingly difficult to “shop around” for professional indemnity insurance. Unsurprisingly, cover for fire safety and cladding issues is in some cases non-existent but generally is limited.It is therefore very important to ensure that limits of professional indemnity insurance are reasonable and are on the basis that the required insurance is available at commercially reasonable rates. It is also very important that the basis of insurance required under appointments and limits of liability reflect insurance arrangements i.e. if consultants have no cover for fire combustibility and/cladding issues then the requirement to hold cover for these matters should be excluded and liability for these matters excluded or limited to sums recoverable under insurance.

Payment

Final Date for Payment: It has been (up until very recently) common for contracts to link the final date for payment to the receipt of an invoice. Many of the industry standard forms of appointment take this approach e.g. NEC 4 PSC. However, following the recent decision in Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC), it now appears that provisions linking the final date for payment to the submission of an invoice may be inconsistent with the Housing Grants, Construction and Regeneration Act 1996. We therefore advise that consultants ensure that payment of their invoices are linked to fixed due dates for payment as per the example set by the NEC in its October 2020 amendments to the NEC 4 PSC.

Construction Costs Based Fees: Whilst the percentage construction cost based fees can be very profitable for consultants when the projects progress to completion, if a project does not proceed to construction the construction cost can be unclear. In addition, additional costs could be incurred without the construction cost increasing. We therefore recommend that consultants consider agreeing a method of valuation for the construction cost from the outset and an entitlement to additional payment if additional services are required and the construction costs do not increase.

Design Life

Design life requirements are increasingly present in appointments. The TCC case of Blackpool Borough Council v Volkerfitzpatrick Limited & Ors [2020] underlined the risks arising from design life obligations that are not clearly set out in the appointment and held that a design life obligation in a technical schedule was a strict obligation even though the relevant appointment also included a duty of care provision. We therefore strongly recommend that (i) an overarching duty of care clause is implemented in all appointments to reduce the risks arising from design life obligations; (ii) all documents forming part of and/or referred to in the contract are reviewed so that any design life obligations are understood at the outset; and (iii) any design life obligations are clearly defined to avoid any unintended inferences as to the meaning of “design life”.

Prolongation

Over the last year and in particular, as a result of the impact from the COVID-19 pandemic, prolongation issues have marred the progress of many projects. Employer appointments often include very limited entitlement to an extension of time and to an additional fee, yet this is an increasingly common risk for consultants. We recommend that consultants stand firm in demanding a contractual mechanism to claim for time and money for prolongation and that consultants resist conditions precedent that may deny access to relief for prolongation.

Brexit

With the Brexit transition period having ended, it is very important to request adequate protections in relation to any additional costs or delay caused by Brexit. For example, delays in delivery of materials and the increased cost of materials which may cause delay to programmes and prolongation. In addition, delays could lead to circumstances where specifications need to be varied at the last minute. Accordingly, we recommend that consultants ensure they have a contractual entitlement to an extension of time and additional money as a result of the consequences of Brexit.

BIM

The ISO 19650 Information Protocol was published in the summer of 2020, to reflect the international ISO 19650 series of information management standards and is based on the CIC BIM Protocol. ISO 19650 requires that all appointments include an information protocol. It is very common for appointments to fail to adequately reflect the approach to BIM, which creates real uncertainty. We recommend that consultants incorporate the Information Protocol in their appointments when appropriate and include appropriate alternative drafting and exclusions of liability when BIM is not a deliverable.

Extranets

One consequence of the increased digitalisation of construction is that project documents are increasingly being shared and stored on third party extranets. Access to extranets is often limited and controlled by a third party. This can create real difficulties in accessing documents after the project is complete and in particular if a dispute arises many years later.  It is therefore important that when extranets are being used terms are included in contracts requiring the extranet to be maintained and requiring access to the extranet to be provided following completion of the project.

De-scoping/Omissions of Work

The recent Scottish decision of Van Oord UK Limited v Dragados UK Limited [2020] CSOH, held that the instructed omissions by Dragados were compensation events and the sums payable following the omissions were to be assessed in accordance with the sub-contract’s compensation event mechanism. This reduced the sums payable to Van Oord for the work which was not omitted and meant that Van Oord failed to receive compensation for the instructed omissions. In light of this decision, we recommend that express rights for employers to instruct omissions are resisted and that a straightforward mechanism for valuing the effect of omissions of services is included in all appointments.

Change in Law

With major building safety reforms on the horizon in particular with the draft Building Safety bill currently undergoing consultation and anticipated changes to the Building Regulations (in addition to the impact of Brexit as discussed above), now is the time for consultants to ensure they have a change of law clause in their appointments. Consultants should seek to include a change of law clause that entitles them to an extension of time and additional fees for a change in law.

Force Majeure

Often force majeure clauses are not included in bespoke consultant appointments. However, since the impacts from COVID-19, they are now a “must have” provision to include in consultant appointments. Importantly, the definition of “force majeure” in appointments should expressly refer to pandemics and other events that are outside the consultant’s control. Additionally, we recommend that force majeure provisions provide for an entitlement to additional time (and payment where possible), make clear that the consultant is not liable for the force majeure event and entitle consultants to suspension and termination if the force majeure event persists.

Dispute Resolution

Brexit will also bring challenges in relation to cross border disputes between EU and UK contracting entities as no agreement was reached on mutual recognition and enforcement of judgements as part of the withdrawal agreement. In order to overcome these challenges, we recommend that consultants consider adopting arbitration clauses when working in the EU.

How can we help?

We recommend that our clients revisit their standard terms of appointment and reconsider their approach to all appointments to address the above key risks.

Should you require further support or wish to obtain a quotation for a review of your standard terms of business (or precedent banks) please do not hesitate to contact us, or your usual contact at the firm.

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