It seems to have become a constantly recurring theme recently when reviewing amendments to building contracts that the contractor is expected to assume all of the employer's obligations, liabilities and risks under agreements the employer has entered into "up the line" that relate to the carrying out of the works as if these obligations were set out in the building contract. Typical third-party agreements may include an agreement for lease or a licence to alter agreed with the employer's landlord or a funding agreement with a bank.
The wording inserted into the schedule of amendments will usually impose the following on the contractor: the contractor is deemed to have read and have full knowledge of the third-party agreements (even where it does not have any knowledge of them at all and usually has not even been sent a copy), it must not put the employer in breach of any of the employer's obligations under these agreements and it must perform all of the obligations under these agreements as if they were directly incorporated into the building contract. Therefore, all the provisions in the third-party agreement that place an obligation on the employer in relation to the works should be read as being the contractor's obligation too. It is as simple as that. How and why has this come about?
The negotiation, drafting and agreement of the terms of most third-party agreements (whether property or finance related) will usually be driven by factors more pressing at the time than avoiding conflicts between their final terms and those of a building contract. As mere construction lawyers, we become involved much later in the process or where the contractor may not even have been involved at all. In effect, therefore, the agreement for lease, licence to alter or funding agreement is often presented to the contractor as a fait accompli– it "is what it is". There is no room for manoeuvre and the landlord/funder will not accept anything else. From the employer's perspective (i.e. the tenant or the borrower), it does not want to be left exposed to risk because it has agreed to something "up the line" but cannot get the contractor to mirror those same obligations "down the line". The employer will therefore simply want the contractor to take on board all of its obligations (in so far as they relate to the works) so that there are no potential gaps. But, wait a minute – just because the employer has agreed to something up the line (in order to obtain his lease or be able to draw down funds), why should the contractor be left holding the baby?
Just as we should never advise in a vacuum without understanding the specifics of a job (i.e. where it is, what's being built, is it high risk or run of the mill, etc.?) and the impact those specific factors may have on carrying out the works in practice, so should third-party agreements not be negotiated and agreed in isolation. Without consulting contractors and/or construction specialists little or no thought may be given as to how these agreements sit with the contractor's obligations under the building contract and the reality of how works will be carried out in practice.
The employer's lawyers may argue that the contractor was involved at the "drafting stage" of a third-party agreement. However, although the contractor may have had some input in relation to the technical documents appended to, e.g. a licence to alter, it is rarely the case that it has been involved in negotiating and drafting the legal and operative provisions.
There are potentially many issues lurking within the third-party agreements which may be foisted on to contractors. Some may be obvious but others may be hidden and not immediately apparent. A more efficient approach is for the employer to identify those obligations that he really needs the contractor to comply with and only pass those down in the schedule of amendments. However, in our experience it is rare for this exercise to be undertaken – the time, effort and cost involved are off-putting so the employer simply passes the entire third-party agreement down wholesale. For the contractor then, spotting any potential conflicts or additional obligations is like looking for a needle in a haystack.
The employer's lawyers will often counter this with "Ah, but this is only in so far as these obligations 'relate to the carrying out of the works' so the contractor doesn't need to worry". Does this do the trick and neatly resolve the problem? No, unfortunately it does not when you take a closer look at the specific obligations in these agreements.
An obvious example relates to timing. A licence to alter or agreement for lease will often include an obligation on the tenant to procure that the works are complete by a specific date or within a specified time of having entered into the agreement. What is the effect of this if the works go on beyond this date? Under an agreement for lease, this may entitle the landlord to terminate the tenant's right to do the works. The contractor's obligations in relation to the date for completion of the works, however, are clearly set out in the contract particulars and there is a mechanism in the building contract that clearly provides that if there is an event entitling the contractor to an extension of time the completion date is pushed out accordingly. Under the building contract the contractor's only obligation is to pay LDs and nothing else, so does the late contractor also pick up the bill if the licence to alter is terminated?
Another example relates to obtaining all necessary consents, an obligation on the tenant which will usually be included in any licence to alter. The contractor should be very careful to check precisely the promises it may be making to the employer/tenant under the third-party agreement versus its commitments under the building contract. This can be a classic case of obligations being imposed by the back door. For example, the building contract may be completely silent on who is to obtain planning permission. Alternatively, the building contract may provide that the contractor's obligations are simply to assist the employer in the process of obtaining all necessary consents but it is the employer's responsibility to actually obtain them. If the licence to alter states that the tenant is under an absolute obligation to obtain any consents necessary for the carrying out of the works (e.g. planning permission, party wall awards, etc.), which it often will, the contractor will assume this obligation, by virtue of the third-party agreements clause, as if it is directly set out in the building contract. The employer/tenant can then simply point to this clause and say that as this obligation relates to the carrying out of the works it is incorporated into the building contract and is the contractor's risk. The position can be made even worse if the licence to alter also provides for the landlord to be indemnified against any liability by reason of any failure to obtain any consent, permit or licence, etc. If the tenant/employer decides to proceed prior to obtaining planning permission or fails to obtain it, any enforcement action taken by the planning authorities will be the contractor's liability. In fact, the opposite should actually be the case – the contractor should be seeking an indemnity from the employer/tenant in case it instructs the works to proceed without having obtained planning.
Another sobering example is a requirement, potentially buried in the small print of a lengthy funding agreement, to provide a performance bond upon request and which may not crop up until later in the project or when the employer decides to re-finance its loan. The danger is obvious – the contractor may be completely unaware of this obligation until it is far too late. What surety will agree to provide a bond halfway through a project or in the potential event that the contractor's credit rating has subsequently fallen since the start of the job?
Does including a priority clause (i.e. setting out which contract prevails in the event of conflicts between them) solve the problem? Not necessarily. There could be obligations imposed on the contractor under a third-party agreement which do not necessarily conflict with, but which are additional to, those set out in the building contract. For example, an agreement for lease may include an obligation to carry out the works "to the Landlord's surveyor's satisfaction". Under the building contract the contractor is required to carry out the works to the standard required under the building contract, no more and no less. What might the landlord's surveyor say in addition to this?
Third-party agreements may be defined narrowly (i.e. specific agreements which are expressly listed) or widely and generally (i.e. any third-party agreement that the employer has entered or may enter into in the future). Even if the contractor agrees to be bound by third-party agreements provided to it before the date of entering into the building contract, it needs to read them very carefully to spot any conflicts/additional obligations, and price and programme its works accordingly. Where the employer has the ability to provide further third-party agreements during the course of the project, the contractor simply may not be able to comply at all.
This begs the question, what is it the employer wants to pass on to the contractor that it is not already able to do via the mechanisms contained in the building contract? The employer has the ability, after all, to vary, suspend or stop the works if it so chooses. What more does it need to accomplish? Or, in the rush to get all contracts signed and sealed and proceed with the project, is it just being lazy? It seems that the job of finding the needle in the haystack must fall to somebody, but why should it be the contractor? It is unreasonable to expect the contractor to pick up all of these risks "by the back door" of the third-party agreements. Spotting the conflicts or any additional obligations is an onerous task and one which it may not actually undertake at the appropriate time – it is then only later that the reality of the obligations it has assumed comes back to bite.
This article is taken from Fenwick Elliott's 2017/2018 Annual Review. To read further articles go to Fenwick Elliott Annual Review 2018/2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
