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7 Key Things

To Check Before
You Sign
That Contract! Written by
Barry J. Ashmore
DipLaw DipArb FCIArb MCMi

Ashmore Consulting

information for key decision makers


in specialist subcontracting in the construction & engineering industries

t: 01773 715062 f: 01773 719455 e: info@SubContractingToday.co.uk


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7 Key Things to Check Before You Sign That Contract!

Contents

1. Who Are You Actually Dealing With?........ Page 1

2. Scope Of The Works.................................... Page 3

3. Time / Programme........................................ Page 5

4. Price / Discount............................................ Page 7

5. Payment Terms............................................. Page 8

6. Design Liability............................................. Page 10

7. Dispute Resolution!...................................... Page 12

8. Bonus Section – Lots More Useful Information Page 15


7 Key Things to Check Before You Sign That Contract!

1 Who Are You Actually Contracting With?

Key Points

Hundreds of Contractors will become insolvent in 2011.

If the Contractor you’re working for goes bust you will get
nothing!

Watch out for contracts that allow the Contractor not to pay
you if the Employer becomes insolvent.

OK, I accept that this sounds really obvious but how much do you actually know
about the organisation that you are getting into a contract with? More importantly will
they be around to pay you when the time comes?

Trust me this isn’t a stupid thing to ask. Hundreds of companies will go bust in
2011!

I appreciate that you may really want that order but what if they go bust?

A Contractor or Employer that is likely to become insolvent, or who can’t or won’t,


pay is worse than no customer at all and a Contractor who takes too long to pay,
makes unreasonable reductions or sets off money unfairly, could turn out to be your
worst nightmare!

If you don’t think it can happen to you then you need to speak to some of my clients.
They didn’t think it would happen to them either!

So here are a few things to bear in mind;

• Don’t rely solely on the size of the company.


• Not all large companies pay their debts on time.
• Some national Contractors are the worst payers of all.
• Unless you know them well you won’t know whether or not they pay on time
or are quick to make deductions or raise set-offs.
• Don’t assume that all offices of national Contractors operate in the same way.
• Relationships with individuals within an organisation are crucial.
• Watch out for organisations that have an inherently adversarial culture.

As a very minimum, credit checks should be made on the organisation you are
planning to work for. If you don’t subscribe to a credit reference service you can buy
them on a one off basis.
In addition I would advocate making as detailed an enquiry as possible from other
Specialist Sub-Contractors who have worked for this organisation. Ask about the
culture of the organisation and whether or not they are helpful or unhelpful to their
sub-contractors in respect of payment.

Ask about individuals involved and whom you can and cannot trust and rely on. Ask
how easy it is to agree interim applications, variations etc and whether or not they
are prone to making reductions or set-offs. Most important of all, ask whether or not
they always get paid on time.

You especially need to be careful about working on terms that allow a Contractor not
to pay you if the Employer becomes insolvent. Such terms are enforceable and
mean that not only do you have to know about the Contractor; you also have to
know that the Employer is good for the money too!

If you are in doubt you can find lots of really useful information at a great UK web
site for Specialist Sub-Contractors, simply click on this link or type it into your
browser; Streetwisesubbie.com . It’s entirely free!
2 Scope of the Works

Key Points

It’s a chore but you should carefully check that the scope
of works in the contract matches what you have priced.

At best Contractors don’t care if you get it wrong – their


terms will protect them.

At worst some Contractors will deliberately manipulate the


scope of works to increase their profits.

This may sound really obvious but you would be surprised how many disputes I
have resolved for Specialist Sub-Contractors where the Sub-Contractor and the
Contractor have disagreed about the scope of the works included in the contract.

I accept that it is a chore but you neglect this at your peril. Check carefully that
what you thought had been agreed during the tender and negotiation pre-contract
period, has actually been properly incorporated into the contract, including drawing
revisions etc.

Check that the Stabards (you can find Stabard at Streetwisesubbie.com) haven’t
added in references to documents or specifications you haven’t seen, and be wary
of phrases such as “necessarily implied from”.

I have seen Stabards who have deliberately and blatantly added works into my
client’s scope that my client had definitely not priced.

One of my seminar delegates told me about his son who was training to be a QS
with one of the major Contractors. His son had told him that he was trained how to
use this very technique!

Just think about it for a minute. It’s such a simple way for unscrupulous
Contractors to make money.

When they tender for the job Contractors get all their prices from Sub-Contractors.
So a simple view of life might be

Tender
Sub-Contractor 1 Package A B & C
Sub-Contractor 2 Package D E & F
Sub-Contractor 3 Package G H & J
When they let the job they blatantly include package “D” into Sub-contractor 1’s
contract documents, and package “F” into Sub-contractors 3’s contract, without
including the costs!

Usually the Sub-Contractor won’t spot it until it’s too late. Even if they do spot it they
will be pressured by the Contractor into accepting the order as it stands!

So now they insist that Sub-contractor 1 does A B C & D but only pay him for A B &
C and Sub-contractor 3 does G H J & F but only pay him for G H & J. Finally they
omit packages “D” and “F” from Sub-contractor 2’s account but keep the money for
packages “D” and “F” all for themselves!.

Simple; but very effective. So, if you are in any doubt go back to the Contractor and
make sure the written document properly reflects what you have priced.

You must make it clear in writing to the Contractor exactly what you have priced to
do before you start work on site or do design work or anything else that could
constitute acceptance.

Don’t sign any documents until you are satisfied that they only refer to the scope of
works that you have priced.

If you want to be sure you are protecting your interests remember that free web site
where you can read more about potential onerous terms and conditions? You can
find it at www.streetwisesubbie.com/contractual
3 Time/Programme

Key Points

Make sure the contract period is agreed and properly


documented before you start the works.

Don’t agree to work “in accordance with the Contractor’s


programme” or “in accordance with his directions.”

Failing to protect your interests in respect to time can


prove extremely costly!

Time is a tricky little sucker to get right!

First check whether you are going to have one start and finish date or are going to
have to complete the work in sections. If the work is to be completed in sections
then you need to be especially careful.

Make sure the start date and any notice to start period is what you agreed with the
Contractor and be wary of large “windows” for commencement i.e. the period during
which you would be obliged to start the works.

I have seen client’s being asked to agree to a 3 month window for starting the works
on a weeks notice! What this means is that you would be obliged to start on just one
weeks notice at any time during that 3 month period.

That would be crazy because you couldn’t possibly plan your labour and material
resources to suit such a wide time frame for starting the works.

It may be tempting to leave agreement of the contract period until later, particularly
when there are so many other pressing matters to consider. But doing so opens the
door to problems and disputes later on during the contract period.

If no period is agreed, the law will imply a term that the work must be completed
within a reasonable time. This is virtually impossible to establish and may be
unhelpful for both parties. It will be difficult for the Contractor to establish what your
obligations were in respect to time, which may sometimes be useful, but the
downside is that it will be very difficult for you to demonstrate that you have been
delayed, and are therefore entitled to recover the costs of the delay.
Time Shall Be of the Essence

A phrase frequently found in non-standard contracts is ‘time shall be of the


essence’. This means that obligations regarding time are fundamental terms of the
contract, and if you cause delay the Contractor has the right not only to claim
damages, but also to treat the contract as being at an end. This could prove
extremely costly!

Make sure the period for carrying out the works is clearly stated and confirms what
has been agreed.

Programmes

There is often considerable confusion over the status of programmes particularly the
Contractor’s programme.

The key point to bear in mind is that a programme has no legal validity unless it is
formally incorporated into the contract between the parties. In fact, many
programmes are simply management tools used by the Contractor to measure and
co-ordinate progress on the contract, and do not set out the contractual obligations
of the parties.

However if your obligations as to time are defined by reference to a programme, you


should be very wary indeed of the contract’s wording. Obligations requiring
compliance with a Contractor’s programme and all of his directions regarding order
of the work, etc., mean that you will be at the beck and call of the Contractor, and
will find it almost impossible to make claims for delay and disruption.

Onerous Provisions

You also need to watch out for any provisions that limit your rights to extension of
time to those that the Contractor can secure for himself. Or the contract is written in
such away that you take all the risk of delay from whatever cause.

There are all sorts of ways in which the Contractor will try and make you take all the
risk. Which could prove extremely costly!

Make sure you get everything clarified and agreed before you sign up or start any
work.

If you are in any doubt about the terms of the contract you are being asked to enter
into, you can get free advice about it at Streetwisesubbie.com
4 Price and Discount

Key Points

If you have made important qualifications in your tender


make sure they are not lost when the contract is formed.

Make sure you know the fundamental basis of the contract


(e.g. lump sum, re-measurable, cost plus) and therefore who
is taking the risk of quantifying the scope of the works.

Don’t allow one off discounts to be applied to variations.

Trust me I have resolved lots of disputes involving price and discount. It happens all
the time, so please don’t let it happen to you.

Make sure that you know what the fundamental basis of the contract is.

For instance is it lump sum or re-measurable? This may sound pretty obvious, but
the failure to spot the difference has just cost one of my clients £30,000. Ouch,
that’s a hell of a costly mistake!

Check that your price has been properly incorporated along with any tender
summary or amendments and clarifications that have been agreed.

If you are relying on any qualifications in your tender make sure they are not “lost”
because of terms like “…the Sub-Contractor acknowledges that all terms and
conditions of his quotation are excluded”.

If you negotiated a one off discount on your price to win the job then make sure the
contract clearly states that this discount does not apply to the valuation of work
instructed as variations. In days gone by (that unfortunately I am old enough to
remember) “Main Contractor’s Discount” was linked to prompt payment. There is no
such provision in most modern Standard Form contracts.

So if the contract mentions discount make certain you know what it applies to and
how it will work in practice.

If you are in any doubt at all about your obligations as to price or discount you can use
the Ask Streetwise or Streetwise Confidential facilities on
Streetwisesubbie.com. They are completely FREE.
5 Payment Terms

Key Points

Make sure the payment terms are clear and unambiguous.

Watch out for pay when paid, or pay when certified type
abuses.

If the payment process is linked to valuation dates make


sure these are agreed and recorded and go beyond the end of
the anticipated contract period.

Again this might sound like an obvious thing to check but you might be surprised
how many times this becomes a problem.

Make sure that you understand how long the payment period actually is. These days
contracts normally refer to a “Due Date” and a “Final Date for Payment”.

For example;

21.2.1 The first payment shall be due 30 days after the Sub-Contract Valuation Date
next following the date of commencement of the Sub-Contract Works.

21.2.2 Interim payments after the first payment shall be due 30 days after the Sub-
Contract Valuation Dates thereafter.

21.2.3 The final date for payment for the first and interim payments shall be 30 days
after the date when they become due.

Now, you could be forgiven for having skim read this and thought it’s 30 day
payment.

What it actually says is that the first payment and the following interim payments
shall be due 30 days after the Sub-Contract Valuation Date. That is not due in the
sense that it is “due” for payment on that date!

So, the payment becomes “due” 30 days after the Sub-Contract Valuation Date. The
final date for payment for the first and interim payments shall be 30 days after
the date when they become due.

In other words 30 days plus 30 days is 60 days from the Sub-Contract Valuation
Date!
In this particular instance the days are counted from the Sub-Contract Valuation
Dates, because that is what triggers the payment sequence. Make sure you know
what these dates are and that they are only a month apart. They could quite easily
be longer!

You should also ensure that the Sub-Contract Valuation Dates go on beyond the
end of the planned Sub-Contract Period, and if the works are delayed you should
ensure that an extended list of dates is agreed.

If you have a payment problem you can get advice and support at
Streetwisesubbie.com to unlock payment absolutely free of charge!
6 Design Liability

Key Points

It is very easy to acquire design liability even when you


think you haven’t got any responsibility for design.

If the contract does not expressly limit your design


liability to “reasonable skill and care” you will get the
more onerous liability of “fitness for purpose.”

Fitness for purpose obligations will void your professional


indemnity or product liability insurance cover!

As a Specialist Sub-Contractor you will be liable for any design you provide if that
design subsequently proves to be faulty.

You need to be very clear that your design liability is restricted to reasonable skill
and care, and that the far more onerous standard of fitness for purpose does not
arise.

Unfortunately it is all too easy to get this wrong!

This is one situation where it isn’t necessarily what the contract says, but what the
contract doesn’t say that gives rise to the much more onerous standard!

If the contract is silent about design liability then your liability will be the far more
onerous standard of fitness for purpose.

Why is this so important? Well, fitness for purpose basically means you are
guaranteeing that your design will satisfy the end users needs. This is irrespective of
what you did or didn’t know about his business and irrespective of what it says in the
enquiry or specification!

A major consequence of this onerous liability is that it is highly unlikely that your
professional indemnity insurance will reimburse any resultant losses where you
have failed to provide the guaranteed result. In other words they will void your cover!

If you are unsure about your design liability and would like some free advice you can
use the Ask Streetwise or Streetwise Confidential facilities at
Streetwisesubbie.com.

Your obligation to produce a design which is fit for its purpose is an absolute duty
independent of negligence. It is a duty which is far greater than that imposed upon
a professional designer employed solely to design, as the professional would only
be liable if (in the absence of an express provision) he was negligent.
The implied obligations of the professional have been developed in the medical and
legal professions where a result cannot be guaranteed.

The kind of liability that arises when a Specialist Sub-Contractor designs and installs
has its root in the law related to sale of goods where the law imposes an obligation
to supply goods fit for purpose where the purpose is made known to the seller and
the buyer relies upon the seller’s judgement.

The principle behind a design and build contract is that the Contractor and his
Specialist Sub-Contractor are responsible for both design and construction.

The Courts have readily implied the following terms into design and build contracts.

1. That the work will be carried out in a workmanlike manner


2. That good quality materials will be used
3. That the materials and work (including design) will be reasonably fit for their
respective purposes.

Lord Denning M R in Greaves and Co (Contractors) Ltd -v- Baynham Meikle and
Partners (1975) said;

“Now, as between the building owners and the Contractors, it is plain that the
owners made known to the Contractors the purpose for which the building was
required, so as to show that they relied on the Contractor’s skill and judgement.
It was, therefore, the duty of the Contractors to see that the finished work was
reasonably fit for the purpose for which they knew it was required. It was not
merely an obligation to use reasonable care, the Contractors were obliged to
ensure that the finished work was reasonably fit for the purpose.”

Lord Denning’s comments were reinforced by the House of Lords in IBA -v- EMI and
BICC (1981) where Lord Scarman said;

“In the absence of any term (express or to be implied) negating the obligation,
one who contracts to design an article for a purpose made known to him
undertakes that the design is reasonably fit for the purpose.”

Did you know that if you need advice about design liability you can get free advice at
Streetwisesubbie.com?
7 Dispute Resolution!
Key Points

Being able to suspend performance for non payment is a very


effective remedy.

Adjudication (used correctly) is a very effective legal


solution.

Neither remedy is automatically available, and you need to


ensure that these rights are not taken away by onerous
drafting of the contract.

If things go wrong and you do need to get serious you need to know that your rights
have not been deliberately compromised by the Stabards!

If you haven’t met Stabard yet you can find him at www.streetwisesubbie.com

If the contract between you and the Contractor or Client is subject to the
Construction Act (The Housing Grants and Construction Act 1996) the contract
should have certain provisions which provide some degree of protection. But beware
that these have not been taken away by the specific words of the contract!

To read more about onerous terms check out Streetwisesubbie.com/contractual

Suspension For Non Payment

Exercising your right to suspend performance (and sometimes just threatening it) is
the most effective way to get paid!

But be careful. The right to suspend may not be exercised unless you have given
written notice of your intention to suspend performance. The period of notice is the
bit that the Stabards will change to make it more difficult for you. The time period in
the Act is 7 days but there is nothing to stop them extending this period to 14, 21 or
even 90 days!

It is easy to check and as you can see it make a hell of a difference.

Any valid period of suspension automatically confers on you a right to an extension


of time under the contract and where the contractual time limit has been set by a
date rather than a period the date for completion is deemed to be adjusted
automatically. That’s just a contractual way of saying that you can get clobbered for
delay if you have suspended properly, that’s one of the reasons its so powerful – it
makes the Contractor responsible for the delay.
Having the right to suspend performance for non payment is not a statutory right
unless the Act applies, so it is a good idea to ask for such a provision to be included
into those contracts where the Act does not apply.

If you are in any doubt find out more at Ask Streetwise at


www.streetwisesubbie.com.

Adjudication

Adjudication is a statutory procedure by which any party to a construction contract


has the right to have a dispute decided by an adjudicator. It is intended to be a quick
process and it can be cost effective when handled properly.

It is normally used to obtain payment but most types of dispute can be adjudicated.

It is a very quick process and the adjudicator must generally decide the dispute in
less than 42 days. Which is a very short time scale for a legal process.

Find out more at www.streetwisesubbie.com/adjudication

The adjudicator’s decision is temporarily binding and can be enforced by the Courts
But in the vast majority of cases the parties accept the decision as binding.

Watch out though because some Stabards put a stop to this very effective remedy
by making you responsible for all the costs!

Unfortunately the Stabards get away with this because of a decision by the courts in
Bridgeway Construction Ltd v Tolent Construction Ltd (2000) TCC. The issue was
whether a provision in an adjudication procedure on the matter of costs was void if it
inhibited a party from pursuing the remedies provided by the adjudication process.

The subcontract between Bridgeway and Tolent incorporated the CIC Model
Adjudication Procedure, but with amendments. Two amendments were relevant to
the issue of costs. A new clause 28 had been added which stated:

"The party serving the Notice to Adjudicate shall bear all of the costs and
expenses incurred by both parties in relation to the adjudication, including but
not limited to all legal and expert fees."

A new clause 29 stated:

"The party serving the Notice to Adjudicate shall be liable for the adjudicator's
fees and expenses."
Bridgeway the subcontractors made an application to the adjudicator and the
adjudicator awarded them a sum of money. Bridgeway also asked for their costs,
but the Adjudicator rejected this request because of the terms of the contract.

Unfortunately, in the ensuing court case his Honour Judge Mackay had no
alternative but to decide that the clauses were not void, nor voidable. In this case
the alterations were to a CIC Model Procedure and not alterations to any Act of
Parliament.

It is obviously a decision that the Stabards love and Specialist Sub-Contractors are
stuck with until the Construction Act is amended to prevent this blatant abuse of the
Act.

You can find out lots more useful information about adjudication at
www.streetwisesubbie.com/adjudication.
8 Bonus Section – Lots More Useful Information
Key Points

As a Specialist Sub-Contractor you now have some fantastic


resources at your disposal courtesy of Streetwisesubbie.com.

Designed for the benefit of all Specialist Sub-Contractors


in the construction and engineering industries.

Quick, easy and FREE to access!

You can find lots more useful information at www.streetwisesubbie.com, which is


a web based resource exclusively for Specialist Sub-Contractors.

It’s for the benefit of all Specialist Sub-Contractors from the construction and
engineering industries, irrespective of your size or specialisation.

Whilst all Sub-Contractors are welcome all Contractors are banned!

You can access a whole range of on-line and off line services designed to help you
increase profitability and reduce risk.

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