Construction Contracts: Part One - Key Considerations for all Parties
23 July, 2019
It is a reality that on many construction projects, the contract between the parties is often not finalised, not signed or simply forgotten. While at the outset of the project agreeing the contract may seem like a tedious task, when a problem occurs, the contract will prevent a dispute arising, provide for how the issue should be resolved and will protect the rights of the parties.
While the law recognises an oral contract and a contract agreed through the conduct of the parties (in certain circumstances), a written document prepared at the beginning of a project which sets out the parties’ rights and obligations can save considerable time, cost and stress if something does go wrong. Additionally, for those who are embarking on a project which will be partially financed through a mortgage or borrowing facility, most lenders will require a signed contract as a condition of the borrowing.
Practically speaking, construction in the Cayman Islands presents its own unique set of challenges and uncertainties particularly in respect to the weather, the supply of materials, cost inflation, the availability of specialised professionals and compliance with relevant building and planning regulations. As well as including standard terms and conditions, a properly drafted contract should account for the unique and often unpredictable nature of the local Cayman construction environment.
On smaller construction projects, we see a number of disputes arising which relate to the “defects liability” period and the retention of funds by the homeowner because the parties disagree whether “practical completion” has occurred. Another common issue is the occurance of unforeseen events which are outside the parties’ control and which significantly change the fundamental assumptions upon which the contracts are based. Below is a non-exhaustive list of considerations the various parties to a construction contract should have in mind when negotiating terms of an agreement. The points listed below provide a general overview only and more detail on a number of these considerations will be provided in subsequent articles, which will address the common pitfalls experienced on construction projects more specifically.
Considerations for the Builder –
- An agreed price - Are payments staged in accordance with the phases of construction or is the full amount payable at project completion? What is the process if payment of invoices doesn’t occur?
- Do site set-up and mobilisation costs need to be paid upfront by the building owner to allow the project to begin or are these costs payable once the build has begun?
- Arrangements with sub-contractors on the project and whether their engagement is by the builder or the building owner.
- The work that the builder will be contractually liable for, for example, just the builder’s own work, or the work of other professionals and sub-contractors who are engaged on the project.
- Is the builder responsible for sourcing all of the construction materials or is this responsibility shared with others?
- Is the builder responsible for ensuring the that the building complies with the building laws and regulations or will compliance be managed through the architect or other consultant?
- Insurance on the project, including the type of policy that will be taken out and what aspects of the project it will cover.
- When is “practical completion”, how is this term defined and in what circumsances can the final amount payable be retained by the building owner?
- An agreed resolution process if a dispute does arise and whether that process is appropriate for the scale and value of the project.
Considerations for the sub-contractor(s) or design consultant–
- Who is the sub-contractor’s agreement with: the homeowner / developer or the builder?
- Who is responsible for paying the sub-contractor’s invoices? If the main-contractor is responsible for paying the invoices, does non-payment to the main-contractor mean that they are then not obliged to settle the sub-contractor’s invoices on time?
- Does the sub-contractor maintain the right to review the amount quoted for the work upon unforeseen circumstances, delay or a variation of instructions?
- What work is the sub-contractor actually responsible and liable for? At what stage of the construction will this occur?
- Does the main project insurance also cover the sub-contractor’s work or does separate insurance need to be obtained?
- Is there a limitation of liability clause to limit the recovery which can be made against the sub-contractor? Is this amount an appropriate sum which reasonably covers the work that the sub-contractor will be responsible for?
Considerations for the developer or homeowner -
- What work is the builder responsible for completing?
- Is the contract price a fixed sum, or is the price going to be determined throughout the build and as required?
- Who is responsible for engaging designers, engineers and various other sub-consultants? What happens if they do not do their job properly?
- Are there limitation of liability clauses in the agreement which could prevent or limit recovery of compensation if a loss occurs?
- Is there adequate insurance in place covering the project and what circumstances will not be covered by the policy?
- What happens when the extent or cost of the work agreed at the beginning of the project changes? Can the contract price be increased or reduced, and if so, in what circumstances?
- What happens if the completion date changes? What happens if these changes cause the building owner to incur other costs?
- Who is responsible for checking that the different stages of the build are properly completed and up to standard?
- Does the contract allow for a defects liability period? Is the length of time for this period appropriate and what constitutes a “defect” which the builder is responsible for fixing?
- Who or what determines when practical completion has occurred and when is the final payment due? In what circumstances is the building owner permitted to retain this payment?
As all construction contracts are unique and differ in one way or another, the list above is intended as a guide only and it is strongly recommended that if you are going to be involved in a construction project (even to a limited extent), you seek proper legal advice before the contract is signed. This should ensure that as the builder or sub-contractor your rights are properly protected and that you are only held liable for the work that you are responsible for completing. Similarly, for the building owner, having the appropriate contracts in place should ensure that you only pay for the work you intended to pay for and have a clear path to recovery and the resolution of disputes, should things not go to plan.
Our team:
Broadhurst LLC have extensive expertise in a range of construction projects both locally in the Cayman Islands and internationally. Whether you require advice on setting up structures for a complex project, assistance with reviewing or drafting an agreement, dispute resolution or just general advice, our team are able to help throughout every stage of the process. For further information, please contact our office on 1 345 949 7237 or by email to Laura Stone at laura@broadhurstllc.com.
*This publication and the material on this website are prepared for general information purposes only to provide an overviewof the subject matter. It is not a substitute for legal advice nor is it a legal opinion and should not be taken as such. It deals in broad terms only and is subject to change without notice. If you require legal advice, our experienced Attorneys are available to assist, please contact us and arrange a consultation.