Allocating risk under Building Contracts

Parties to a building contract are required to deal with a variety of risks that may affect them during a construction project. Some risks are common to most building projects but others may be project specific.

It is imperative when preparing contract documentation, for employers, developers, contractors and design professionals, to identify and consider how to allocate within the contract, the risks most likely to occur.

This allocation will of course give way to commercial reality and the negotiating strength of the parties but factors to take into consideration include:

  • deciding which party is better able to manage the risk most effectively and cheaply,
  • which party would most benefit from managing the risk or has the greater incentive to do so,
  • whether the risk is one that can be insured against and if so by whom.

Standard forms of contract allocate common risks in various ways but do not account for all eventualities, particularly on complex or unusual projects.

There have been two recent Court of Appeal cases dealing with the allocation of risk and how is it dealt with in building contracts. Both cases demonstrate how important contract drafting is in relation to risk.

Clin v Walter Lilly [2018] EWCA Civ 490

The court had to decide where the risk lay in relation to obtaining conservation area consent for a construction project where the contract had not expressly dealt with the risk.

Mr Clin owned two adjoining properties situated within the Kensington Palace Conservation Area. Walter Lilly were engaged by Mr Clin to carry out demolition, reconstruction and refurbishment works to create a single dwelling.

A dispute arose after the local planning authority wrote to Walter Lilly stating that planned “substantial demolition” work required conservation area consent. Mr Clin maintained that consent was not required. Activity on site halted for over a year with the design of the scheme changing during this time. Walter Lilly made claims for an extension of time.

One of the questions before the court was who should bear the risk of the action taken by the local authority. The court considered whether in the absence of an express term to allocate risk under the contract, an implied term relating to planning permission and consents could be relied upon.

It decided that such a term need not always be implied. However, the law supported the notion that generally the employer should bear the responsibility for obtaining the relevant planning permissions and consents and, in this instance, it was appropriate to imply such a term.

However, as the employer had no control over the action of the local authority, its obligation under the implied term was only to use “all due diligence” to obtain the relevant permission or consent. This implied term was to be considered alongside the other terms of the contract.

Thus whilst it was for the employer to use all due diligence to obtain the necessary conservation area consent, the time that this might take was at the risk of the contractor.

North Midland Building Ltd v Cyden Homes Ltd [2018] EWCA Civ 1744

North Midland engaged Cyden under an amended JCT Design and Build 2005 contract. Amendments were made in relation to the clauses dealing with delay events and extension of time including a clear express provision that where there was a delay caused by North Midland, which was concurrent with a delay caused by Cyden, liability for the concurrent delay rested with Cyden and Cyden would not be entitled to an extension of time.

Cyden argued that the ‘prevention principle’[1] should as a matter of legal policy and commercial fairness rescue them from the effects of the clause. Lord Justice Coulson rejected this argument for five reasons, the most important of them being that there was nothing stopping the parties from contracting out of some or all of the effects of the prevention principle. It was “an allocation of risk which the parties were entitled to agree”.

These cases illustrates the importance at the outset of identifying the likely risks and providing who is to be responsible for any delay or increase in costs arising from them.

The Construction & Engineering Team at Slater Heelis has extensive experience advising employers looking to manage risk on construction projects.

Please contact us on 0161 672 1255 or get in touch with our Construction & Engineering team.

[1] If the contractor is prevented by the employer from completing by the date for completion,  then the employer forfeits his right to liquidated damages.