Rachel Murray-Smith and Oliver Slater look at the importance when entering construction contracts of the parties reflecting the allocation of risk.
Construction projects involve a number of variables, each of which present risk – market forces, weather conditions, grounds conditions and workforce issues (to name a few favourites!) all of which can cause delays and/or impact on cost. It is essential, therefore, for parties entering into a construction contract to:
- fully assess the project specific risks;
- make informed decisions regarding risk allocation; and
- reflect that allocation in the contract.
It is the last of the above actions that we will consider in this article.
Employers are often keen to allocate the vast majority of risk to the Contractor. This approach does, however, have significant drawbacks. Excessive risk dumping can result in contractors simply adding a premium to their costs/overhead and profit, thus driving up the project budget. Taken too far, it even has the potential to deter contractors from bidding for projects.
Paul Reed QC advises allocating risk to the party best placed to “evaluate, control, bear the cost of, and benefit from, the assumption of that particular risk”  – sound advice! Parties to a construction contract, or any contract for that matter, should seek to consider and allocate risk in this manner and ensure that they have good commercial, legal or practical reasons for departing from this principle.
Following consideration of the specific risks of your project comes the task of codifying the same in your contract.
The JCT and NEC suites take very different approaches to the allocation of risk. Whilst the JCT adopts a more traditional Employer/Contractor approach, the NEC tends to allow greater flexibility with a focus on partnership and sharing the burden of risk. Employers should use the standard form which best suits their needs and approach to risk.
Irrespective of which standard form is used, parties should be especially careful when it comes to compiling and completing their contracts. The inclusion of conflicting documents and requirements could inadvertently alter the risk allocation, as was the case in Clancy Docwra v E.ON . Here, pre-contractual correspondence and tender documents were judged to trump risk allocation clauses, meaning, contrary to E.ON’s belief, the subcontractor in question had not in fact taken on the risk of ground conditions. The cost and programme implications of these sorts of misunderstandings can be very significant.
In Northern Ireland Housing Executive v Dixons Contractors Ltd, the court was asked to consider whether there was an ambiguity and/or inconsistency between two contractual documents. Dixons, the contractor, argued that there was an ambiguity and that, as such, it was not responsible for the installation of window trims. Whilst Horner J was quick to accept that there was a ‘difference’ between the documents – one mentioned window trims and the other did not – he emphasised that ‘in the overall context of the contract’ there was no ambiguity. As a result, Dixons had taken on more risk than it had anticipated and believed it had signed up to.
In MT Højgaard v E.ON , grouting at an offshore wind farm was found to be defective post-completion and the court was asked to consider whether the ‘fitness for purpose’ obligation contained in the contract applied. MT Højgaard, the contractor, contended that the 20-year warranty imposed by the obligation was at odds with the remainder of the contract which simply demanded the exercise of reasonable skill and care.
The court ruled that the ‘fitness for purpose’ obligation was to ‘be given its natural effect’; unambiguously upholding the risk allocation clause and leaving the contractor with significantly more risk than they’d originally thought they were taking on. This judgment continues the trend towards literal contractual interpretation and should serve to further underline the need for contracting parties to fully understand the allocation of risk.
These cases serve as a sobering reminder of the importance of reviewing and considering all elements of your contract. Normally much time and effort, quite rightly, is spent on the core terms. However, equal care and consideration should be given to those documents, such as the technical and pricing schedules, which are incorporated into and form integral parts of the contract. Parties should ensure that:
- They carefully consider which documents should be included in the contract;
- The position on a particular risk is consistent throughout the contract;
- The contract clearly represents their positions; and
- They remain vigilant so as not to find themselves with, at best, ambiguity in the contract and at worst unintended risk allocations.
 Paul Reed QC, ‘Construction All Risks Insurance’, p.29 (2016)
 Clancy Docwra Ltd v E.ON Energy Solutions Ltd  EWHC 3124 (TCC)
 MT Højgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd  UKSC 59