Business not quite as usual

Although open to criticism for producing terms that are arguably too favourable to contractors, the forms of building contract produced by the Joint Contracts Tribunal (JCT) remain the most popular for use on construction projects in this country.

The JCT design and build form, in particular, is probably the most widely used main building contract, in terms of projects by value. The JCT has now published the 2016 edition of its suite of design and build contracts, known for short as DB 2016, which will be read with interest by commercial developers and their advisors.

Most commercial developers tend to produce their own “schedules of amendments” to the JCT standard forms. The JCT terms are often used as a starting point, but developers impose their own amended clauses to redress the balance of risk between the parties – essentially to move away from any JCT standard terms that are perceived to be unduly favourable to the contractor. It seems certain that most commercial developers will continue to seek their own amendments when using the 2016 versions of the JCT contracts, including DB 2016.

Developers should be wary though. Even though for the most part it is “business as usual”, a number of clauses have been added, others removed, and the fine detail of the wording amended in a number of ways. Parties wishing to amend DB 2016 will need a new contract-specific set of amendments – relying on a schedule of amendments drafted to fit the previous edition of the JCT will not work.

Some of the most substantial changes from the previous 2011 edition have been made to the payment provisions. These are set out in Section 4 of DB 2016. The changes are intended to reflect fair payment principles and simplify the payment mechanics. The changes, in common with the changes to the remainder of DB 2016, are not intended by JCT to change the risk profile for the parties. However, any changes to the wording of a standard contract bring the additional risk of unfamiliarity – parties who are less able to identify and understand the implications of the changes will be at a disadvantage when using the new contract form.

One specific change is to the standard payment cycle. Payment applications are to be made by the contractor on a monthly basis, all the way through to the final payment. Under the 2011 JCT contracts the payment cycle was monthly up until practical completion, but then every two months after practical completion. Employers need to be prepared for receiving monthly payment applications even after practical completion – this may catch out unwary employers, who may fail to serve the appropriate payment or pay fewer notices if they receive a payment application that they were not expecting.

DB 2016 introduces new defined terms, the “Interim Payment Application” and, importantly, “Interim Valuation Date”. The Interim Valuation Date, to be agreed by the parties and set out in the Contract Particulars at the beginning of the JCT document, will be the same date in each month, but it must always be a Business Day – not a Saturday, Sunday, or Bank Holiday. If the Interim Valuation Date in any month does fall on one of those days, it will automatically move to the nearest Business Day in that month.

The Interim Valuation Date is so important because the timing of each event within the payment cycle – the due date for payment, the final date, the last date for the employer to issue a Payment Notice, and the last date for issuing a Pay Less Notice – is calculated by reference to the Interim Valuation Date. Everything starts with the contractor’s Interim Payment Application, which is to be issued on or before the Interim Valuation Date.

If the employer party disagrees with the valuation attributed to the works by the contractor and wishes to pay less than the sum set out in the contractor’s application, then the employer must serve the appropriate pay less notice, setting out the sum the employer believes to be due instead. Under the standard JCT wording, the employer must serve any such pay less notice no later than 5 days before the final date for payment.

What if the employer disagrees with the contractor’s Application, but misses the date for serving its pay less notice? Employers and their advisors need to be mindful that in some months the Interim Valuation Date will not be a Business Day, and will change to the nearest Business Day that month. The parties will in such circumstances need to be aware of the need to re-calculate the other dates in the payment cycle accordingly. This is particularly relevant for employers. The potential for change may seem minor but could have far-reaching consequences. The courts have consistently stated that the full amount of the contractor’s Application, however inaccurate or inflated the sum claimed, will become payable to the contractor in such cases. The employer’s remedy will be to revisit the valuation of the works in the next interim payment – but in the meantime, the employer will be obliged to pay up.

The JCT DB 2016 Guide suggests that users of the contract may wish to list, and make appropriate diary entries, for those months when the Interim Valuation Date will be different from the usual date. This small but crucial piece of forward planning could help developers to avoid the costly mistake of missing the date for service of a pay less notice.

This article first appeared in Shopping Centre Magazine.