By Dr. Chandana Jayalath
Any standard form of contract is a generic product applicable under ‘typical’ circumstances subject to amendments in the Particular Application section in order to cater locally specific project requirements where necessary. Importantly, the Contractors therefore recognize the differences and know how to act upon those amendments in the contract. All in all, everyone ‘knows the deal’ if presented with a standard form. The other significant advantage is that the wording of many standard forms has been subject to interpretation over the years by courts. But at least with standard forms both employers and contractors know roughly where they are standing. There are always those who wish to go down the bespoke route but even in bespoke contracts there are vast chunks of texts copied straightway from standard forms. Even though on most occasions what the standard form gives with one hand the amendments take back with the other.
This trend is apparently because some employers falsely assume that by deleting or amending the employer is getting immunity from potential claims. Unfortunately, this logic is flawed and deletion or improper amendment of such clauses is disadvantageous and, in some cases, even dangerous for employers and unhealthy for projects in long run.
The thumb rule is that if the Contractor does not have an entitlement within the Contract, he may well raise a claim outside the confines of the same, if there is an overriding statutory provision. Contracts are construed in accordance with the local provisions pertaining to governance of commercial contracts. Deletion therefore does not necessarily mean that no one is entitled or is loosing any right to claim, but it would obviously mean that the contract is silent in the issue, where the disgruntling party would definitely seek a resolution in the next available route, either by referring to similar case law or standard norms of the building trade. More over, in most jurisdictions, it is legally possible for a Contractor to raise a claim outside the contract if he has been hindered by the Employer for instance in line with the Prevention principle, which obliges both parties to co-operate and not hinder the other from fulfilling his obligations. This is applicable even if the Contract does not have a ‘claims clause’.
Furthermore, if there is no extension of time clause in the contract, the Contractor could also raise a ‘time at large’ argument (if he is delayed by the Employer) which would render the contractual completion date null and void. If time does become at large, the Contractor is only obliged to finish the Contract within a ‘reasonable’ period of time which would obviously put the Employer in embarrassment.
Another example is that, many standard forms require the Contractor to submit a notice within 28 days and he is also obliged to maintain contemporary records and submit regular interim particulars to support his claims. If the Contractor does not submit a notice within 28 days, his claim could be ‘time barred’ and he could lose his rights to an extension of time and/or other entitlements. If this time frame has been amended with the phrase such as ‘as soon as practicable’, it does not amount to a condition precedent to lodge a claim but results in an open-ended time frame that requiring a technical interpretation prior to establish the eligibility of the claim.
Also, silence is more dangerous than deletion. The premise behind this line of thinking is that the parties have taken on board the risk of deletion at the time they entered into the contract itself, but silence may sometimes purport acceptance or refusal, as the case may be. The classic case is price fluctuation. For instance, the majority of contractors in the Middle East have been locked into lump sum fixed-priced contracts where there is no provision for price escalation. Open market vacillations are a risk to the contractors, even in contracts having long durations. However, the recent surge in material costs has considerably affected their bottom lines where profit margins are not as high as they once were. As a result, contractors have been searching for recovery means, of course through claims on their own basis. Many contractors use consumer price index (CPI) as the basis of claim although the purpose of the index is far different. The only way to get rid of this issue is to compensate the additional cost on ex-gratia basis, however because the eventualities are so global and unprecedented.
Another case is termination for convenience clauses that are intended to provide the employer with the option to terminate the remaining balance of the contracted for work for a reason other than the contractor’s default. For example, if the employer cannot obtain additional financing to complete the work, the employer can terminate the balance of the work for convenience so long as there is a termination for convenience clause in the contract. However, if the contract does not contain a termination for convenience clause, and the employer terminates the contract before the work is complete, then the contractor would be entitled to the value of the work completed plus a reasonable profit margin that he or she would have earned on the balance of the contract.
In every contract there is an implied covenant of good faith and fair dealing. Therefore, it can be argued that if the termination for convenience clause is exercised in bad faith, the termination may be a breach of contract. For example, if the employer chose to exercise the termination for convenience clause when the project work was ninety percent complete in order to avoid paying the balance of the profit on the remaining contract work, the termination could be held to be a bad faith termination and constitute a breach of contract.
Employers must therefore take utmost care in amending typical standard clauses when they customize their contracts so as to avoid backfiring, especially the impact a change to one clause may have to the rest of the contract. Those amending contracts must always have in the back of their minds the contra-preferentum rule. Essentially it provides that if there is an ambiguity in a document which means a clause could have two alternative meanings, then a court may construe the words against the party who put the document forward (i.e. usually the employer) to give effect to the meaning more favorable to the other party. This can be a significant risk for employers.
The case of Balfour Beatty Civil Engineering Ltd v Docklands Light Railway is a good example of the dangers involved in amending standard forms. In this case the contract was an ICE 5th Edition, but two significant amendments had been made. Firstly, the independent engineer was replaced by an Employer’s Representative and, secondly, the clause 66 dispute provision had been deleted entirely. It is important to note that had the arbitration clause not been deleted it would have contained the right of the arbitrator to ‘open up, review and revise decisions of the contract administrator’. Given the clause had been deleted, did the court have the power to open up, review and revise decisions of the Employer’s Representative? The court held that they did not have such power and the contractor’s entitlement to payment and extensions of time was dependent on the judgment of the Employer’s Representative. Whilst it was held that the Employer’s Representative had a duty to act honestly, fairly and reasonably, the court held that there was no means of contesting the Employer’s Representative’s decisions and that they became final and binding.
Hence, it is always better not to touch the General conditions but to have proper amended clauses as long as the primary intension of the standard clauses are secured in the given the General section.