Publication of the 2016 suite of JCT contracts is now well underway and the 2016 editions of the following contract families (together with their associated Sub-Contracts and Guides) have now been published:
- Design and Build Contract
- Standard Building Contract
- Intermediate Building Contract
- Minor Works Building Contract
- Generic Sub-Contracts
- Collateral warranties
Key changes in JCT 2016
This article considers some of the key changes in the Design and Build Contract 2016, but similar changes are intended to apply as appropriate across the JCT suite.
Although the JCT considers "It is not believed that any of the 2016 edition amendments or changes in format will in practice materially affect risk allocation." (Guide to the Design and Build Contract 2016), the drafting amendments are significant and parties are advised to carefully familiarise themselves with the revised provisions.
Some of the most notable changes appear in the payment section. A key change is the introduction of the concept of Interim Valuation Dates, which are intended to apply throughout the contract chain (i.e. at main contract, sub-contract and sub-subcontract level).
The first Interim Valuation Date is to be specified in the Contract Particulars with further Interim Valuation Dates occurring on the same date, or nearest Business Day, in subsequent months. Employers, in particular, should note that Interim Valuation Dates in certain months will be altered to the nearest Business Day in the month. This will directly affect the calculation of when certain dates fall, such as the due date, the 5 day period for issue of the Payment Notice, the deadline for giving a Pay Less Notice and the final date for payment. As a result of the consequences of failure to give such notices, as demonstrated by recent case law, it is essential that parties are aware of the relevant dates and the fact that these may differ in practice in certain months.
The provisions relating to stage or milestone payments are also amended. Under the 2011 Design and Build Contract where stage (or milestone) payments are selected, the contractor is entitled to apply for payment at the completion of each work stage. Under the 2016 contract, whilst the contractor still only becomes contractually entitled to any payment for a work stage when the entire work stage has been completed, the contractor is now permitted to submit applications for payment on a monthly basis. If the contractor wishes to apply for payment for something other than a completed work stage, for example in respect of a variation or a loss and expense claim, it no longer has to wait until completion of the next stage to submit its application. The contractor may be able to apply for some form of payment every month.
Whilst this will no doubt be welcomed by contractors to improve their cash flow, employers will need to be alive to the possibility of receiving applications for payment in between the completion of work stages, when they might not otherwise be expecting them, and ensure they serve Payment and Pay Less Notices in accordance with the contract in the event that they disagree with the sum claimed.
Another change relates to payments post practical completion, as the monthly payment cycle envisaged before practical completion will now continue and apply after practical completion. This replaces the previous regime under the 2011 contract of permitting payment applications only every two months after practical completion.
Loss and expense
Perhaps one of the most significant changes in the 2016 edition is the introduction of a different procedure for loss and expense claims. As before, the contractor is required to notify the employer as soon as the likely effect of a Relevant Matter on regular progress or the likely nature and extent of any loss and/or expense arising from a deferment of possession becomes (or should have become) reasonably apparent. With that notification, or as soon as practicable thereafter, the contractor is required to provide its initial assessment of the loss and/or expense incurred and any further amounts likely to be incurred, together with such information as is reasonably necessary for the employer to ascertain the loss and/or expense incurred.
In addition, however, the contractor is now also required to update its assessment and the information at monthly intervals until all of the information reasonably necessary to allow ascertainment of the total amount of such loss and expense has been supplied to the employer. The employer is required to notify the contractor of his initial ascertainment within 28 days of receiving the required information, and make further notifications to the contractor within 14 days of each subsequent update. In each case, the employer needs to identify any points on which that ascertainment differs from the contractor's ascertainment.
This suggests the contract requires the parties to adopt an ongoing proactive assessment procedure, which may seek to address the traditional storing up of claims until the end of the project.
The JCT has sought to address the perennial problem of insuring existing structures, which was often a difficulty under the 2011 edition when the employer under the contract was not the owner of the building. An issue commonly faced by employers who are tenants of the building where works are being carried out is that the Insurance Option C in respect of existing structures in the 2011 suite requires the employer to insure both the existing structures and the works. Where the existing structures are occupied under a lease, however, it is often the case that the landlord maintains the insurance of the building and the parties have to amend the standard form JCT contract terms to reflect the practical scenario.
The JCT has now introduced increased flexibility surrounding the provisions dealing with insurance of the works and existing structures. Paragraph C1 (of Insurance Option C in Schedule 3) requiring the employer to insure the existing structures can now be disapplied and replaced by bespoke provisions to be set out in a separate contract document (the "Replacement Schedule"). The Design and Build Contract Guide gives an explanatory summary of some of the alternative arrangements generally adopted in these circumstances, but the JCT recommends the preparation of the Replacement Schedule is carried out by insurance professionals.
Although it has sought to address some of the problems faced by tenant employers, what the JCT has not taken the opportunity to do is to incorporate an option for the employer (or its landlord) to insure the existing structures and for the contractor to insure the works. Amendments to the insurance provisions may still be required, therefore, to cover the frequent scenario in these circumstances where works are carried out to an existing building and Option C applies, but where the contractor (rather than the employer) is required to insure the works.
Bonds and guarantees
The Design and Build Contract now makes provision for the Employer to request a bond or parent company guarantee from the Contractor. The form of the bond or guarantee is to be agreed between the parties and stated in the Contract Particulars.
In addition to identifying the form of the bond, the Contract Particulars should also state the initial value of the bond and its period of validity. In the event the validity of the bond extends beyond practical completion, the Contract Particulars envisage there will be a reduction in the value of the bond on practical completion (the default position, in the absence of an entry, being a reduction in value of 50%). Such reduction in value is more akin to a retention bond than a performance bond, and employers should consider this carefully in context of the contract as a whole, and may seek to amend this default position.
The revised standard form wording fails to include any express sanction in the event the required security is not provided, and employers may still seek to amend the contract to include a right for them to withhold payment (or to terminate) if the parent company guarantee or bond is not provided.
Third party rights and collateral warranties
The 2016 suite now requires details of the Third Party Rights and Collateral Warranties from the contactor and subcontractors (known as the “Rights Particulars”) to be set out in a document to be referenced in the Contract Particulars. A Model Form for the Rights Particulars is included in the Guide to the Design & Build Contract or available from www.jctltd.co.uk.
In the previous suite of contracts, net contribution clauses were not included in the terms of Third Party Rights from the contractor set out in Schedule 5. Furthermore, in respect of the relevant JCT warranties (CWa/F and CWa/P&T), the JCT's recommendation was for the net contribution clause in those warranties to be disapplied where the form of main contract was a Design and Build. Net contribution provisions are, however, now included in the Third Party Rights Schedule under the Design and Build Contract 2016, and the net contribution clause in the warranties is now stated to apply (unless the parties agree otherwise). The rationale given by the JCT is that under a Design and Build Contract there are circumstances where the employer's consultants could be held jointly liable with the contractor in respect of a design defect. This is particularly the case when it is considered that under an unamended clause 2.11, the employer retains responsibility for the contents of the Employer's Requirements. In our experience, however, clause 2.11 is often amended to transfer this responsibility to the contractor.
The parties should be aware that the inclusion of net contribution clauses is likely to be resisted by beneficiaries of the Third Party Rights or Collateral Warranties, and this is particularly likely to be the case in respect of funders.
Legislative and general update
The JCT has taken the opportunity to update the suite of contracts for compliance with current legislation. Amendment 1 to the 2011 forms, addressing the Construction (Design and Management) Regulations 2015, has now been incorporated in the body of the 2016 contracts. Usefully from an employer's perspective there is an express additional clause clarifying that the contractor cannot claim additional time and/or money for complying with the CDM Regulations.
Given the growing importance of BIM in the construction industry, the Design and Build Contract 2016 now contains an option for the parties to specify in the Contract Particulars details of a "BIM Protocol", which is a distinct document setting out the practical ways in which BIM will be implemented. The Design Submission Procedure for Contractor’s Design Documents is to be as specified in the BIM Protocol (or as in Schedule 1, in the event that BIM is not applicable).
Various new provisions have been added to ensure the contract is public sector friendly without having to make additional bespoke amendments, and it now specifically incorporates the requirements of the Freedom of Information Act 2000 and the Public Contracts Regulations 2015.
Drafting and other miscellaneous changes
The JCT has taken the opportunity to introduce numerous drafting amendments. Of particular note is a new clause 1.10 hidden away in the definitions and interpretation section. The JCT have deleted all individual references to the parties' consent or approval "not being unreasonably withheld or delayed", and instead have inserted a sweeper clause providing that where the consent or approval of either Party is expressly required under the Conditions, such consent shall not be unreasonably withheld or delayed. The only exception, in the Design and Build Contract, relates to consent to assignment under clause 7.1, which is still at the relevant party's sole discretion. If there are any other consents or approvals the parties require to be at their absolute discretion, the contract will need to be amended to reflect this.
The initial impression is that the amendments improve the functionality and ‘user friendliness’ of the JCT contracts. They also facilitate compliance with the CDM Regulations 2015 and Public Contracts Regulations 2015. Amendments to the payment provisions are likely to be welcomed by contractors, although employers will need to ensure they do not miss any deadlines for service of Payment and Pay Less Notices. Over the coming months we will no doubt see how the industry reacts to the changes and their ease of application in practice.