3 Documents
3.1 DB16 defines the ‘Contract Documents’ as being the agreement and conditions (i.e. the printed form), the employer’s requirements, the contractor’s proposals, the contract sum analysis and ‘(where applicable) the BIM Protocol’: these documents comprise the contract to which the parties are bound.
3.2 The articles of agreement and contract particulars must be completed carefully. All the information inserted must reflect that issued at tender stage, or agreed during post-tender negotiations. Ideally, the formal contract documents should be executed before the project commences on site. Normally, a contract is formed if there is a clear acceptance of a firm offer.1 The contract, once executed, will supersede any conflicting provisions in the accepted tender and will apply retrospectively (Tameside Metropolitan BC v Barlow Securities).
Tameside Metropolitan Borough Council v Barlow Securities Group Services Limited [2001] BLR 113
Under JCT63 Local Authorities, Barlow Securities was contracted to build 106 houses for Tameside. A revised tender was submitted in September 1982 and work started in October 1982. By the time the contract was executed, 80 per cent of building work had been completed, and two certificates of practical completion were issued relating to seven of the houses in December 1983 and January 1994. Practical completion of the last houses was certified in October 1984. The retention was released under an interim certificate in October 1987. Barlow Securities did not submit any final account, although at a meeting in 1988 the final account was discussed. Defects appeared in 1995, and Tameside issued a writ on 9 February 1996. It was agreed between the parties that a binding agreement had been reached before work had started, and the only difference between the agreement and the executed contract was that the contract was under seal. It was found that there was no clear and unequivocal representation by Tameside that it would not rely on its rights in respect of defects. Time began to run in respect of the defects from the dates of practical completion; the first seven houses were therefore time barred. Tameside was not prevented from bringing the claim by failure to issue a final certificate.
3.3 Supplemental Provisions 1 to 10 are incorporated by deleting the words ‘does not apply’ against each required provision in the Schedule 2 entry in the contract particulars. Any supplemental provisions that are not required should be deleted, and an appropriate entry made in the conditions. Any amendments to the terms themselves, or additional conditions, should be incorporated by means of an additional article.
3.4 The form contains an attestation for formal execution of the contract. Execution ‘under hand’ is a straightforward matter, whereby the parties or their authorised representatives sign in the presence of witnesses. There are four alternative methods of execution as a deed. For individuals, a signature in the presence of a witness is required. For companies, either two signatories are required, one of which must be a director and the other either another director or the company secretary or, instead of signing, the company’s seal may be affixed in the presence of these two people. A third option, since April 2008, is that a single director’s signature is sufficient, provided that it is witnessed (Companies Act 2006, section 44(2)(b)). This form of execution is included in DB16. The form does not require any of the other contract documents to be signed, and as they are all to be uniquely identified in the contract particulars with exact titles, revisions numbers, etc., this should not be necessary but, to avoid any possible doubt in practice, a set is often signed.
Employer's requirements
3.5 The contract does not stipulate any format for the employer’s requirements. It does, however, refer to and rely on the requirements in many places (e.g. under Schedule 1 the contractor is to provide information in the format set out in the employer’s requirements), and it is therefore important that the requirements address all these issues.
3.6 In broad terms, the document sets out the employer’s requirements for the completed building. It should be prepared carefully and on the assumption that there will be no changes to the requirements once the contract is let, for although the contract contains provisions whereby a change can be instructed, such changes may result in additional costs to the employer, and are subject to the consent of the contractor. Significant changes will negate many of the perceived advantages of this form, and if these are anticipated it may be more appropriate to consider using another form.
3.7 The requirements may be in a very summary format; for example, simply giving a schedule of accommodation. However, it is likely that, in practice, the information will be much more detailed and will include a detailed specification, in either prescriptive or performance terms, or, in all probability, will involve a mixture of the two. It may also include, for example, schedules of finishes, fittings and services requirements. It could also include schematic layouts or outline designs. In essence, it acts as a brief.2 Where descriptive or performance specifications are included, these should be accurate. Use of the phrases ‘to be to the employer’s approval’ or ‘to be approved’ should be avoided at all costs (see paragraph 8.45).3
3.8 The contract does not refer to the use of bills of quantities (this is a change since DB11). It sometimes occurs that only a part of the works will be designed in detail by the employer’s design team, in which case it may be helpful to use a bill for that part only. If bills are included, amendments to the from will be needed to indicate how they will used; for example, will they contribute to the valuing of changes, and will they act as a basis for the assessment of periodic payments?
3.9 The document should state whether any development permissions have been obtained, including planning permission. If there are conditions attached to any approvals these should be set out. If planning permission has still to be obtained, the requirements should specify who will take responsibility for this (although it should be noted that this will be the contractor’s responsibility unless stated otherwise). It should also be stated, with reference to clause 2.15.2.2 of the contract, whether any amendments needed to comply with planning requirements are to be treated as a ‘Change’. In this case, the amendments would be the employer’s risk, unless the requirements stipulate otherwise.
3.10 The requirements should also include information on any covenants or easements relating to the site, and the extent to which the contractor is to base its proposals on site information provided by the employer, or is to make its own investigations. The requirements should stipulate any constraints which the employer wishes to impose on the use of the site or its facilities.
Table 3.1 Matters relating to the form that should be covered in the employer’s requirements
3.11 The requirements should include all the items to be entered in the contract particulars, as well as dealing with all the issues covered in Table 3.1 (which lists the clauses in the conditions that refer to matters that could be detailed in the employer’s requirements), and which are not also covered by entries in the contract particulars. One of the most important inclusions is to stipulate exactly in what form the contractor’s proposals should be submitted, and what they should include. This is essential so that the employer can make a clear assessment of the submitted tenders.
3.12 It is also very important that the requirements should specify the drawings and other design information (the ‘Contractor’s Design Documents’) to be submitted by the contractor following acceptance of tender, and a programme for their submission. The purpose of this requirement is to control the scope, format and timing of the submission of design documents for review. For example, it should protect the employer from being overwhelmed by design documents at an inconvenient time, or from being presented with design documents to review for key elements in the absence of information on other related aspects of the design. It is likely that the programme will be the subject of negotiation at tender, as it is important that any programme in the requirements will also meet the contractor’s needs in terms of developing the design at a rate which will support its intended construction programme. It would also be wise to set out the information required to be submitted at practical completion, such as ‘As-built Drawings’, otherwise the contractor’s obligation is to provide such information ‘as the Employer may reasonably require’ (cl 2.37).
Contractor's proposals
3.13 The contractor’s proposals should be in the format and contain the information stipulated in the employer’s requirements. These may request that various documents are provided, including drawings, specifications, schedules, programmes, method statements, etc.
3.14 The contractor should raise matters relating to the contract data so that any necessary outstanding decisions can be made by the employer. The proposals should indicate clearly any areas of conflict in the requirements, and any instances where the contractor has found it necessary to amend or amplify the brief. The contract does not allow for the inclusion of provisional sums in the proposals, only in the requirements (cl 1.1 and 3.11), so if the contractor wishes to cover any part of the proposals with a provisional sum, then it should inform the employer so that the requirements can be amended.
Contract sum analysis
3.15 The contract does not prescribe a format for the contract sum analysis. It would therefore be advisable to stipulate an acceptable format in the employer’s requirements. (It would not be unreasonable, for example, for the contractor to be asked to prepare a full bill of quantities, although in practice this would be unlikely on smaller projects.) The contract requires that the document is used for assessing the value of employer-instructed changes, for work which was covered by a provisional sum in the requirements and, where Fluctuations Option C is applicable, to enable the operation of this clause in accordance with the formula rules. The conditions do not require that the document is used to assess the value of work carried out, etc., to be included in periodic payments, but it would normally be used by the contractor to prepare applications for payment, and by the employer in checking such applications.
3.16 It is also important that a clear basis for assessing the value of design work is included. If the employer has exercised its right under Supplemental Provision 1 (Schedule 2) to name sub-contractors, then the contractor should also be required to itemise the parts of the contract sum which relate to these.
BIM and other protocols
3.17 If building information modelling (BIM) is to be used on the project, it will be important that the parties agree many matters to do with how the model will be prepared and managed, such as format, communication methods, timing, the detecting and resolving of problems, copyright, use following completion, etc. The contract allows for the use of a ‘BIM Protocol’, and the parties should adopt a standard form protocol or prepare a bespoke one for the project. At the time of writing, the only standard form available is the Building Information Model (BIM) Protocol published by the Construction Industry Council (CIC, 2013 available free from the CIC website). The protocol to be used should be identified in the contract particulars (cl 1.1). Clause 1.4.6 states that ‘references to documents shall, where there is a BIM Protocol or other protocol relating to the supply of documents or other information, be deemed to include information in a form or medium conforming to that protocol’. (Note that cl 1.1 refers only to a BIM protocol; if some other protocol is needed then this would require some minor amendments.)
Health and safety documents
3.18 The employer and contractor are required to comply with the Construction (Design and Management) (CDM) Regulations 2015 (cl 3.16). A key element of the Regulations is the employer’s duty to appoint a principal designer and a principal contractor (regulation 5); on most projects using DB16 the contractor will fulfil both roles, at least during the construction phase (see discussion in paragraph 4.28). In addition to the general obligation to comply with the Regulations, clauses 3.16.1 to 3.16.5 refer to various specific obligations. Particularly important in regard to documentation are matters relating to the construction phase plan and the health and safety file.
3.19 The construction phase plan is not a contract document under DB16, and the recitals make no mention of it having been prepared and given to the contractor at the time of tender. However, the employer (and the principal designer, if not the contractor) must provide the contractor with pre-construction information (regulations 4(4) and 12(3)), which should be sent out with the tender documents. Where the contractor is the principal contractor, it must ensure that the construction phase plan is prepared before setting up the construction site (regulation 12(1)); compliance with this is required under clause 3.16.3. To avoid uncertainty, it is advisable to require that this document be submitted by the contractor well in advance of the start of work on site. Following commencement, the contractor must ensure that the plan is reviewed and updated on a regular basis (regulation 12(4)).
3.20 Under the Regulations the health and safety file is principally a matter for the principal designer, who will compile it (regulation 12(5) and (6)), but there is a requirement on the contractor to provide information for the file (regulation 12(7)). Under DB16 the contractor, where it is the principal designer, must prepare the health and safety file and deliver it to the employer (cl 3.16.2). In addition, clause 2.27 requires the contractor to have complied with all its CDM duties with respect to the supply of documents and information before a statement of practical completion is issued.
Bonds
3.21 DB16 refers to several types of bond: an advance payment bond, a bond in respect of payment for off-site materials and/or goods, a retention bond and a performance bond. Where bonds are required, these must be arranged by the contractor and, as all bonds are optional, it must be made clear to the contractor at tender stage if any will be required. The first is normally required where an advance payment is to be made to the contractor under clause 4.6. The second is for use where it has been agreed that certain materials or goods will be paid for in advance of their being brought onto site (cl 4.15). The retention bond is used where a contractor is required to provide security in lieu of the normal deduction of retention from amounts included in interim payments. Only the second of the bonds may be used where the employer is a local or public authority. Terms for each of these bonds have been agreed between the British Bankers’ Association and the JCT and are included in the form at Schedule 6. Performance bonds are discussed under paragraph 3.46 – if one is required, or if any other type of bond is required, this must have been made clear at tender stage, and the form of bond must be given to the contractor before the contract is entered into. In practice, the alternative terms should be sent out with the tender documents, so that the contractor can provide for them in the tender figure.
Sub-contract documents
Domestic sub-contracts
3.22 The JCT publishes a standard form of sub-contract for use with domestic sub-contracts under DB16, comprising an agreement (DBSub/A) and conditions (DBSub/C). The contractor is required to sub-let on these terms where appropriate (cl 3.4). There are also restrictions on the terms that may be agreed in any sub-contract. These are set out in clause 3.4 of DB16, which requires that particular conditions relating to termination, ownership of unfixed goods and materials, access to workshops, the CDM Regulations, the right to interest on unpaid amounts properly due to the sub-contractor, third party rights and warranties are included in all domestic sub-contracts. The sub-contract should also, of course, comply with the requirements of the HGCRA 1996 (as amended).
3.23 The provisions for a named sub-contractor under Schedule 2 paragraph 1 do not require that any particular form of sub-contract is used. However, the clause 3.4 requirements, as set out above, would apply to contracts with named sub-contractors. The contractor is also required to include the provision set out in Schedule 1 paragraph 1.5 (discussed later at paragraph 10.36). The employer may wish to stipulate in addition that specific terms are used for all named sub-contracts. It may be particularly important, where the sub-contractor is undertaking a significant element of design, to arrange for a collateral warranty, in order to allow the employer a means of claiming against the named sub-contractor should that part of the design fail (see paragraph 3.62). If the contractor should become insolvent and there is no warranty in place, the employer will not be able to recover its losses.
Use of documents
Interpretation, definitions
3.24 Clause 1.1 sets out definitions of terms that are used throughout the contract. Many of these are in common with other JCT forms, but some are unique to DB16, namely:
- change (refers to clause 5.1);
- contractor’s proposals (refers to the second recital and contract particulars);
- development control requirements (any statutory provision and any decision of a relevant authority thereunder which control the right to develop the site);
- employer’s agent (refers to Article 3);
- employer’s requirements (refers to the first recital and contract particulars);
- final statement and employer’s final statement (refer to clauses 1.8 and 4.24).
3.25 As can be seen from the examples above, further and more detailed definitions are frequently embodied in the text of clauses; for example, ‘All Risks Insurance’, ‘Joint Names Policy’ and ‘Specified Perils’ are defined at clause 6.8. Some derive from the HGCRA 1996 (as amended) and restate its requirements relating to the calculation of periods of days and the serving of notices (cl 1.5 and 1.7). Clause 1.7.1 requires that any notice or other communication expressly referred to in the agreement or conditions must be in writing. Clause 1.7.2 then states ‘Subject to clause 1.7.4, each such notice or other communication and any documents to be supplied may or (where so required) shall be sent or transmitted by the means (electronic or otherwise) and in such format as the Parties have agreed or may from time to time agree in writing for the purposes of this Contract’. This would allow the parties to agree that all communication is by electronic means. It should be noted, however, that the contract sets out specific requirements for notices in some situations (for example, termination), which refer to clause 1.7.4, whereby all notices must be ‘delivered by hand or sent by Recorded Signed for or Special Delivery post’.
3.26 Clause 1.6 was introduced through Amendment 2 to WCD98 in response to the coming into effect of the Contracts (Rights of Third Parties) Act 1999. In broad terms, this Act created rights for a person not party to a contract to bring an action for breach of a contract, where that contract expressly gave a benefit, or purported to give a benefit, to that person. This clause prevents any such claims being brought, by making it clear that the contract confers no rights on third parties, other than any specifically set out in clauses 7A and 7B of the contract (see 3.50).
3.27 Clause 1.11 states that the law of the contract will be English law. This would apply even if the contract was signed, or the work was carried out, in another jurisdiction.
Priority of contract documents
3.28 Clause 1.3 states that nothing contained in the employer’s requirements or the contractor’s proposals or the contract sum analysis, nor anything in any framework agreement, shall override or modify the agreement or the conditions. Were this clause not included, the position under common law would be the reverse. In other words, anything stated to be specifically agreed and included in a document would normally override any standard provisions in a printed form.
3.29 If the parties wish to agree to any special terms that differ in any way from the printed conditions, then amendments should be made to the form. This could be done either by amending the clauses themselves, or by inserting an additional article referring to the special terms, which should be appended to the form. The article could take a similar form to that used by the JCT to incorporate separately published amendments. However, attempting to amend standard forms without expert advice is very unwise as the consequential effects are difficult to predict. Deleting clause 1.3 may be particularly unwise as it may have unintended effects on other parts of the contract.
3.30 It should be noted that the CIC BIM Protocol contains a priority clause, which states that in the case of conflict with other contract document, the CIC protocol will prevail (paragraph 2.1). There is therefore a potential clash between DB16 and the protocol if they are used together. In reality, this should not present a significant problem with respect to DB16; provided that the protocol is completed in such a way as to deal solely with BIM-related matters, as the only clauses in DB16 that mention BIM are simply referring to the protocol, which will supplement rather than conflict with the form. However, there is potential for conflict between the protocol and matters set out in the employer’s requirements, for example in relation to document provision. Although it is likely that the protocol would take precedence, the ‘discrepancies and divergences’ clauses (cl 2.10 to 2.14) do not specifically mention the BIM protocol, therefore it is not clear how the conflict will be resolved. It may be sensible for the parties to give this some thought, and to set up a clear document hierarchy between all relevant documents and a procedure for notification and resolution should conflicts be discovered.
Discrepancies and errors
3.31 It is preferable that all inconsistencies, errors or omissions within or between contract documents are corrected before the contract is entered into. Footnote [3] to the third recital, states that ‘Where the Employer has accepted a divergence from his requirements in the proposals submitted by the Contractor, the divergence should be removed by amending the Employer’s Requirements before the Contract is executed’. In many cases the later resolution of errors and inaccuracies will result in additional costs to the employer and, in some cases, in an extension of time.
3.32 The employer is obliged to issue instructions to deal with any divergence between the employer’s requirements and the definition of the site boundary to be given under clause 2.9. The instruction ‘shall be treated as a Change’ (cl 2.10.1), and is therefore to be valued under clause 5.6. It is also listed as a relevant event (cl 2.26.1), and under clause 8.11.1.2 as a ground for termination by the contractor, should the instruction result in a suspension of the works. It is not specifically referred to under clause 4.19 as a matter giving rise to a claim for direct loss and/or expense, and it is suggested it should not be treated as falling under the remit of clause 4.21.1.
3.33 The employer must also take steps to deal with any inadequacy that is discovered in the design contained in the employer’s requirements (cl 2.12), if this is not already covered in the proposals. Such ‘correction, alteration or modification’ shall be treated as a change (cl 2.12.2). This would be the case however the correction was effected, whether or not it was covered by an instruction, but in practice it is wise to cover all such corrections by an instruction to ensure clarity.
Between documents
3.34 The contractor is required to notify the employer if it finds any discrepancies or divergences ‘in or between’ the employer’s requirements, the contractor’s proposals and other design documents, and any instructions (other than one requiring a change) (cl 2.13). The employer must also issue instructions regarding the discrepancy, and the contract sets out specific procedures for particular categories of discrepancy or divergence.
Contractor's proposals
3.35 Where there is a discrepancy ‘within or between the Contractor’s Proposals and/or other Contractor’s Design Documents’ the contractor must inform the employer of its proposed amendment to deal with the discrepancy. The contractor is obliged to accept the employer’s decision and comply at no cost to the employer (cl 2.14.1). If there were to be undue delay by the employer in reaching a decision, however, then this would constitute grounds for an extension of time (cl 2.26.1 or 2.26.6) and loss and/or expense (cl 4.21.2 or 4.21.5).
Employer's requirements
3.36 Where there is a discrepancy within the employer’s requirements, or a discrepancy between the requirements and any change, the contract states that if the contractor’s proposals deal with the discrepancy then they will prevail (cl 2.14.2). The discrepancy between the requirements and any change refers to inadvertent problems resulting from the effect of a change, rather than intended alterations to the particular part of the requirements at which the change was aimed. If the employer decides that it dislikes the solution in the contractor’s proposals, and would prefer some other solution, this would have to be instructed as a change.
3.37 If the proposals do not deal with the discrepancy, the contractor is required to inform the employer of its proposal for dealing with the discrepancy, and the employer must either agree or decide on alternative measures and, in either case, notify the contractor in writing (cl 2.14.2). The acceptance or notification is to be ‘treated as a Change’, which would result in it being valued under clause 5.6. It would also constitute grounds for an extension of time under clause 2.26.2.1, for loss and/or expense under clause 4.21.1, and for termination under clause 8.11.1.2, in the unlikely event that it causes a suspension. As stated in paragraph 3.35, if the employer failed to reach a decision within a reasonable time, this would be grounds for an extension of time (cl 2.26.1) and a claim for loss and/ or expense (cl 4.21.2).
3.38 It should be noted that, with respect to the clause 2.10 and 2.14 divergences, although the parties are required to notify each other immediately regarding any divergences they discover, there is no express obligation for the contractor to search out divergences. It is likely, however, that an obligation to identify at least obvious errors would be implied as part of the normal duty to use reasonable skill and care.
Employer's requirements and contractor's proposals
3.39 The contract does not deal with the situation where a divergence between the employer’s requirements and the contractor’s proposals is discovered after the contract is entered into. The third recital states that ‘the Employer has examined the Contractor’s Proposals and, subject to the Conditions, is satisfied that they appear to meet the Employer’s Requirements’.
3.40 The recital is somewhat problematic from the point of view of the employer in that it appears to give precedence to the contractor’s proposals and the contract sum analysis. It is suggested, however, that the contractor is obliged to meet the employer’s requirements, even if an aspect of its accepted proposals does not initially comply. The overall structure of the conditions is that the contractor must provide a design that meets the employer’s requirements. In addition, as the employer has no power to amend the contractor’s proposals, there would be no means of effecting any change if this document always took precedence.4 Nevertheless, the recital is often deleted in practice to avoid any scope for argument.
3.41 A footnote to the recital explains that if a discrepancy is discovered before the contract documents are executed, and the employer is prepared to accept the contractor’s proposals, then the employer’s requirements should be amended accordingly. Even if discovered afterwards, the matter can be remedied by a change instruction, provided the employer is happy with the contractor’s proposal. Where the employer would prefer the version set out in its requirements, there is no need for any change, although it might be sensible to confirm the position with the contractor in writing.
Divergences from statutory requirements
3.42 The contractor and the employer are required to notify one another of any discrepancy or divergence between the employer’s requirements or the contractor’s proposals or other contractor’s design documents, and any statutory requirement as defined under clause 1.1 (cl 2.15.1). The contractor must inform the employer of its proposed amendment and the contract requires the employer to ‘note the amendment on the Contract Documents’, i.e. the executed contract documents (cl 2.15.1). The contract states that the contractor must comply at no extra cost to the employer, unless the discrepancy results from a change in statutory requirements since the base date, in which case the instruction is treated as a change (cl 2.15.2.1). In addition, unless precluded by the employer’s requirements, any modification to the proposals required by the terms of an approval is also to be treated as a change. This applies to permissions and approvals by statutory authorities relating to ‘Development Control Requirements’ as defined in the contract, and the approval must have been given after the base date. Finally, if the parts of the requirements which specifically state that they comply with statutory requirements are found not to do so, the employer must issue instructions requiring a change to remedy the situation. The effect of this clause is that the costs will be borne by the contractor in situations where the divergence is between the contractor’s proposals and statute, and in limited circumstances where it is between the employer’s requirements and statute.
Custody and control of documents
3.43 The employer’s requirements, the contractor’s proposals and the contract sum analysis remain in the custody of the employer, and must be available for inspection by the contractor at all reasonable times (cl 2.7.1). The contractor must be provided with one certified copy of the certified contract documents, unless the BIM protocol or other communication protocol states otherwise (cl 2.7.2). This should be done immediately after the execution of the contract. Although it is frequently done in practice, there is no need to sign two copies of the contract. It is easy to make minor mistakes when filling out two copies of the form, and it is safer to have one definitive set of contract documents, with certified copies made as required.
3.44 The contractor is obliged to supply the employer with two copies of each of the contractor’s design documents, unless stated otherwise in the employer’s requirements or contractor’s proposals (cl 2.8, Schedule 1). The contractor is required to keep copies of the contract documents and the contractor’s design documents on site at all times (cl 2.7.3).
3.45 Clause 2.7.4 stipulates that the copies of the contract documents and the contractor’s design documents must not be divulged or used for any purpose other than in relation to the contract, and that the same restriction applies to ‘any confidential information of the other party’, but allows the employer a limited right to use any document supplied by the contractor for the purpose of maintenance, use, repair, advertisement, letting or sale of the works. Where the employer is a local or public authority, the obligations of confidentiality are subject to the specific requirements of Schedule 2: Supplemental Provision 11 (cl 2.7.5).
Performance bonds and guarantees
3.46 It is becoming increasingly common on larger projects for employers to ask for a performance bond from the contractor. This is a device to protect the employer from the risk of the contractor failing to perform the contract, and can be provided by a bank or an insurance company. An alterative is to ask the contractor to provide a guarantee from its parent company. If either of these is required, details should be included in the tender documents, and entered into the contract particulars (cl 7.3). DB16 does not contain a model form of bond, so full details of the document will be needed and the bond or guarantee must be provided on execution of the contract (cl 7.3).
Assignment and third party rights
Assignment
3.47 The right of a subsequent purchaser to bring an action against the builder of their property, with whom they have had no contractual relationship, could be of considerable value. The employer in a construction contract might therefore wish to assign this right to such other person as may acquire an interest in the property.
3.48 A contractual right can be regarded as a personal right of property, and in property law it is classified as a ‘chose in action’. Choses in action can be assigned under the Law of Property Act 1925, provided that the requirements of section 136 of the Act are followed. It is important to note that only contractual rights, termed ‘the benefit of a contract’, can be assigned and not obligations. So if, for example, A enters into a contract with B whereby A agrees to carry out some building work, and B agrees to pay A £100 for the work, A can assign the right to claim the £100 to C, but not the obligation to carry out the work. The right to pursue a debt or claim is assignable to C without B’s consent, provided that B is notified as required by section 136. The obligation to carry out the work, however, could only be transferred to C with the agreement of all three parties (often termed ‘novation’).
3.49 DB16 contains express provisions which limit the scope for assigning contractual rights. Clause 7.1 states that neither the employer nor the contractor may ‘assign this Contract or any rights thereunder’ without the written consent of the other. Assignment without consent of the other party is grounds for termination (cl 8.4.1.4 and 8.9.1.2). There is one exception, however, to the prohibition on assignment: if clause 7.2 is stated to apply in the contract particulars, then the employer may assign some limited rights to a party to whom it has transferred a freehold or leasehold interest in the premises comprising the works. Among other limitations, the rights can only be assigned after practical completion. The clause does not provide a general right to assign the benefit, but does confer the right to bring proceedings in the name of the employer to enforce terms of the contract made for the benefit of the employer. It is thought that this would limit the assignee to claiming, at most, losses suffered by the employer as a result of any breach by the contractor, and would not extend to further losses suffered by itself.
Third party rights/warranties
3.50 DB16 offers two options for the granting of rights to bring a claim to persons who are not a party to the contract, either through the use of the ‘third party rights’ provisions included in the form or through the use of separately published standard form warranties. If either of these is to be used, full details should be set out in the ‘Rights Particulars’ (a separate document identified in the contract particulars (cl 7.4); Schedule 5: Part 1, paragraph 1.1).
3.51 The ‘third party rights’ provisions make use of the facility introduced by the Contracts (Rights of Third Parties) Act 1999. Until this Act came into force, it was a rule of English law (termed ‘privity of contract’) that only the two parties to a contract had the right to bring an action to enforce its terms. However, it is often the case in construction projects that other parties may wish to be in a position to take action, should one or other of the parties default on their obligations. A future owner of the property may, for example, wish to claim against the contractor should it later transpire that the project was not built according to the contract. Under the rule of privity, the future owner would be a third party, and would not be able to bring a claim. In response to this situation, ‘collateral warranties’ were developed which allowed third parties to pursue claims for breach of contract. Such warranties could, for example, be between contractor and owner, contractor and funder or between consultants and owner/funder.
3.52 The Contracts (Rights of Third Parties) Act 1999 changed the fundamental rules of law relating to privity by entitling third parties to enforce a right under a contract where the term in question was to provide a benefit to that third party. The third party might be specifically named, or might belong to an identified class of people. The effect of this Act is therefore to open the door to the possibility of claims being brought by a range of persons; in some cases persons that the parties to the contract may never have considered.
3.53 However, the Act allows for parties to agree that their contract will not be subject to its provisions, and many standard forms adopt this course in order to limit the parties’ liability. DB16 takes this approach and under clause 1.6 states: ‘Other than such rights of any Purchasers, Tenants and/or Funder as take effect pursuant to clauses 7A and/or 7B, nothing in this Contract confers or is intended to confer any right to enforce any of its terms on any person who is not a party to it.’
3.54 By invoking clause 1.6, the contract effectively excludes the terms of the Act. (In the light of the above, it is important to note that the effect of deleting or amending this clause would be significant.) The contract must define precisely which third parties will have rights with respect to the contract (in the rights particulars), and DB16 sets out what those rights will be in Schedule 5.
3.55 Schedule 5 sets out ‘Third Party Rights for Purchasers and Tenants’ (Part 1) and ‘Third Party Rights for a Funder’ (Part 2). The contractor warrants (in relation to the tenant) that it has carried out the works in accordance with the contract (with effect from practical completion), and (in relation to the funder) that it has complied with and will continue to comply with the contract. This allows both the purchaser/tenant and the funder to bring an action in respect of breaches of contract by the contractor.
3.56 There are some things to note about this system. In the case of purchasers and tenants, the contractor’s liability extends to the reasonable costs of repair, renewal or reinstatement, but does not include other losses unless so stated in the rights particulars, in which case the liability will be limited to a stated maximum amount (Schedule 5: Part 1, paragraph 1.1.2). The contractor’s liability is also limited in that the contract contains a net contribution clause (Schedule 5: Part 1, paragraph 1.3).5 In addition, the contractor is entitled to rely on any term in the contract as a defence should any action be brought against it by a third party (Schedule 5: Part 1, paragraph 1.4). Where the contractor is required to take out PI insurance, it is required to provide evidence of its PI insurance to any person possessing rights under the Third Party Rights Schedule (Schedule 5: Part 1, paragraph 5). The rights may be assigned by the purchaser or tenant without the contractor’s consent to another person, and by that person to a further person, but beyond this no further assignment is permitted (Schedule 5: Part 1, paragraph 6).
3.57 In the case of the funder, except for the inclusion of a net contribution clause (Schedule 5: Part 2, paragraph 1.1), no limit is placed on the extent of the contractor’s liability. As above, the contractor is entitled to rely on any term in the contract, should any action be brought by the funder (Schedule 5: Part 1, paragraph 1.2), and the rights may be assigned by the funder, without the contractor’s consent, to another person, and by that person to a further person, but beyond this no further assignment is permitted (Schedule 5: Part 2, paragraph 10). The Schedule also sets out various ‘stepping in’ rights which may be exercised by the funder in the event that it terminates its finance agreement with the employer.
3.58 Under the alternative system of ‘collateral warranties’ the contractor must actually enter into a warranty separately with each beneficiary. The beneficiaries are identified in the rights particulars, and the warranties are identified in clause 7C and 7D as the JCT standard forms of warranty to purchaser/tenant and funder (CWa/P&T and CWa/F). These comprise identical terms to the third party rights set out in Schedule 5.
Procedure with respect to third party rights and warranties
3.59 Where third party rights are to be used, the rights particulars must be drafted with care. It is important to identify the funder/purchaser/tenant, because if none is identified the rights/warranties shall not be required. It is not necessary, however, to identify a specific organisation; the description could simply be of a class of persons, e.g. ‘all first purchasers’ or ‘the lead bank providing finance for the project’ (cl 1.1). Footnote [25] to the contract particulars gives additional guidance on the rights particulars.
3.60 The third party rights take effect from the date of receipt by the contractor of the employer’s notice to that effect (cl 7A.1 and 7B.1). In the case of a purchaser or tenant the notice must state their name and their interest in the works, and in the case of a funder, simply identify the party concerned. Where collateral warranties are required, the contractor must execute the stipulated warranties within 14 days of the equivalent notice from the employer (cl 7C and 7D).
3.61 Purchasers, tenants or funders are not deemed to be aware of the existence of the third party rights unless the employer gives them a copy of the relevant part of the contract. In some cases the third party may prefer to obtain a separate collateral warranty directly from the contractor, and it would be advisable for the employer to establish whether this is feasible before executing the main contract. After the contract is executed, this could only be arranged with the consent of the contractor.
3.62 If warranties are required from any sub-contractors, including named sub-contractors, this should also be set out in the rights particulars. The requirement for obtaining warranties (clause 7E) states that: ‘Where the Rights Particulars state that any sub-contractor shall confer third party rights on a Purchaser, Tenant or Funder and/or to the Employer or execute and deliver a Collateral Warranty in favour of such person … the contractor shall comply with the Contract Documents as to the obtaining of such rights or warranties’.
3.63 In the case of third party rights, the contractor is required to give notice under clause 2.26.3 or 2.26.4 of the JCT DBSub/C (cl 7E.1.1). In the case of warranties, the contractor is required, within 21 days, to take ‘such steps as are required to obtain each warranty, promptly forwarding the executed document to the Employer’ (cl 7E.1.2). The contractor is required to include provisions as necessary in sub-contracts in respect of the execution of required warranties (cl 3.4.2.5). The JCT publishes a standard form of sub-contract warranty (SCWa/E) to cover this situation.