REALWorld Law

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

In the UK, the use of standard form building contracts goes back more than one hundred years. Initial collaboration between the Royal Institute of British Architects (RIBA) and the then federation of construction employers led to the first standard form building contract. These bodies subsequently formed the Joint Contracts Tribunal (JCT) which is now the main UK body that produces standard form contracts, guidance notes and other documentation for use in the construction industry. In Scotland, the Scottish Building Contracts Committee (SBCC) adapts and publishes Scots law compliant versions of the JCT suite of contracts. The latest edition of these contracts was published in 2016.

The main rival to the JCT/SBCC family of contracts is the New Engineering Contract (NEC) and its suite of Engineering and Construction Contracts (ECC) published by the Institution of Civil Engineers. This has been endorsed by the UK and Scottish governments and is now being widely used in government contracting. The latest edition of these contracts (NEC4) was published in June 2017.

The main professional bodies that govern the activities of construction consultants also produce contracts for the appointment of their members to provide design and/or consultancy services, namely:

• Royal Incorporation of Architects in Scotland (RIAS) – architects
• Institution of Civil Engineers (ICE) – civil & structural engineers
• Institution of Mechanical Engineers (IMechE) – mechanical engineers
• Institution of Engineering and Technology (IET) – electrical engineers
• Association of Consulting Engineers (ACE) – all types of engineer involved in building projects
• Institution of Chemical Engineers (IChemE) – chemical and process engineers and material scientists
• Royal Institution of Chartered Surveyors in Scotland – quantity surveyors
• the Association for Project Safety (APS) – health and safety consultants.

International forms of contract (such as FIDIC) are also used in the UK, typically in the infrastructure and energy sectors. The latest edition of the FIDIC contracts was published in 2017 (although modified 1999 versions are more widely used in the UK, as the 2017 versions are less popular with developers and funders).

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

The main parties involved in a construction project are:

Employer/Client

This is the party procuring the work (typically, a land owner or land developer). In relation to building contracts, this entity is usually referred to as the 'employer'. In relation to the contracts of appointment of the professional consultants, this party is commonly referred to as the 'client'.

Contractor

A main building contractor is engaged by the employer to carry out and complete the works. This contractor will usually, in turn, engage subcontractors to carry out and complete separate parts of the works. Contactors may also take responsibility for the design of all or part of the works they are to execute depending on the procurement method and/or contract used.

Professional team

The team of professional consultants appointed can be broken down into two categories, the principal consultants being as follows:

Funder

This term is used to describe the banks and other institutions and parties (for example, government or charitable organizations in the case of urban regeneration, infrastructure and cultural/sports projects) who provide finance to the employer towards the development (and require security in return). Depending on the size of the project, there might be a single bank or a syndicate of banks.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

In what is called 'traditional' procurement, the building contractor is responsible for the construction of the works, but not for its design. In design and build (D&B) procurement, the building contractor also takes on responsibility for design of the works. The design consultants are appointed by the employer in the usual way, even before the building contractor is selected; when the employer enters into the D&B building contract, the design consultants' appointments are simultaneously transferred across (or 'novated') to the building contractor and this places sole responsibility for design (as well as workmanship) on the contractor and gives him control of the design process.

Force majeure is not a Scots law concept and a party that is unable to perform its obligations because of an unforeseeable event outside its control would have to rely on the doctrine of frustration in order to avoid liability for non‑performance of the agreement.

Unlike most industry forms, the JCT/SBCC standard building contract do contain a definition of force majeure but in the published contracts it is an event which, if it occurs, will entitle the contractor to additional time to complete the works. A force majeure clause should be construed with close attention to the words that precede or follow it and with due regard to the nature and general terms of the contract. In JCT/SBCC contracts force majeure has a more restricted meaning because matters such as war, strikes, fire, weather and government action are expressly dealt with elsewhere in the contract.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

Governments have always paid private contractors to build roads, government offices, schools, hospitals and prisons out of tax revenues. They would pay to have buildings built, then pay to have them operated and maintained. In 1992, the right of centre Conservative government created the Private Finance Initiative (PFI) which saw government procurement in the UK evolve from delivery of an asset into the long term delivery of a service, ie no longer just the construction of a building, but the design, construction, financing and subsequent operation of the asset – often for terms of 20, 25 or 30 years (and a few are even longer).

When the left of centre Labour party came to power in 1997, PFI was further developed under the rubric of public-private partnerships (PPPs) and the scheme was continued by the Labour/Liberal Democrat coalition Scottish Executive (now known as the Scottish Government) in the newly‑constituted devolved administration.

The continued use of PFI/PPP as a means of financing capital expenditure infrastructure and construction projects came under review as a result of the Scottish Nationalist Party's election in the 2007 Scottish parliamentary elections. As part of its election manifesto the SNP set out its proposal for the Scottish Futures Trust as an alternative to PPP/PFI. The Scottish Futures Trust was established in 2008 (an executive non-departmental public body of the Scottish Government) and given primary responsibility for increasing the efficiency and effectiveness of infrastructure investment in Scotland.

Non-Profit Distribution (NPD) was developed by the Scottish Government as an alternative to, and has since superseded, the traditional PFI model in Scotland and is now the preferred method of procuring projects on PPP.  In essence, the NPD model limits the internal rate of return (IRR) that the private sector investors in the PPP project can make (as the historically high level of returns for investors when unrestricted, particularly where PPP projects were re-financed or where shareholdings in project companies were disposed of, was considered politically unacceptable). The Scottish Futures Trust is considering whether the Welsh Government’s Mutual Investment Model (MIM) could be adopted in Scotland (under this investment model the public sector would act as a co-investor and co-owner of up to 20% of the issued share capital of the special purpose company established for a project).

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

There are three main factors in a typical construction contract which provide for an alteration to the price. They are:

1. Instructed variations to the works;
2. Other events for which the contractor is not responsible which, should they occur, would cause him to incur loss and/or expense; and
3. Fluctuations in cost (eg due to inflation).

Whilst it is theoretically possible to draft a construction contract where the price is fixed (by omitting the three factors just mentioned), the commercial reality is that both the employer and the building contractor will want to have some flexibility built into the contract; the employer will usually want to have the right to instruct variations and the contractor will certainly want the right to claim for losses suffered and expenses incurred for which it is not blameworthy. In essence, what parties usually mean when they talk about a 'fixed price contract' is a lump sum contract where the contractor's entitlement to additional money is limited, for example there are no fluctuation provisions and/or the events which would usually entitle the contractor to recompense for loss and/or expense are restricted. Parties may often refer to a 'guaranteed maximum price' contract which, again, is unlikely ever to truly mean this – employer changes and/or other possible occurrences will be excluded from the guaranteed maximum price figure.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

All contractors must take out employer's liability insurance which covers loss, damage, injury or disease caused to an employee of the company. Failure to do so is a criminal offence.

Contractors must also take out public liability insurance if members of the general public or customers visit the contractor's premises or the contractor attends theirs. The contractor is then covered if injury to person or damage to property is caused by the contractor or his company.

Although not a compulsory insurance, professional indemnity insurance (PI) covers negligence and is almost always taken out by those contractors that perform design work. All professional consultants who design and/or give professional advice are required to maintain PI. Building contracts and consultants' appointments usually impose a requirement on the contractor/consultant to maintain PI insurance.

Contractors also take out contractors’ all risk cover (CAR) that insures the construction works that are being undertaken against loss or damage (usually for their full reinstatement cost plus a percentage for professional fees). However, an employer may choose to take out the CAR insurance (to ensure that it is named as “first loss payee” and can satisfy the requirements of its funder). The contractor may also take out product liability insurance that covers risks caused by any product supplied, such as bricks or lifts.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

In relation to the construction activities comprised within a development project, the funder will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the funder. The documents to be assigned to the funder include the construction contract itself, the guarantee to the employer of the building contractor's obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance bond from a third party surety to the employer. Performance bonds can be either 'on demand' in nature (meaning that before the surety would release bond monies on written demand from the employer) or 'on default' in nature (meaning that, broadly, a court judgement or adjudicator's decision would be required to be presented by the employer before the surety would release bond monies).

Bonds and guarantees form part of the standard security package. If the contractor breaches the construction contract, the performance bond will usually entitle the employer to payment of an amount up to about 10% of the contract sum for the underlying building contract. The guarantee of the contractor's obligations is given by a superior company within its corporate group but these guarantees often contain some type of limitation clause or financial cap limiting the guarantor's liability.

Funders will also require collateral warranty agreements from the building contractor, the key professional consultants and subcontractors with design responsibility giving them direct rights for poor performance. In addition, they may require contractual step‑in rights in the main contractor's collateral warranty agreement in their favour (which is sometimes termed a 'direct agreement'), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.

This 'direct agreement' has the following effect:

• It creates the step‑in rights
• It limits the ability of the main building contractor to terminate the corresponding construction contract during the step‑in period
• It limits the financial obligations of the funders to the main building contractor during the step‑in period.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

Methods of payment vary according to the works. The four main types of payment are:

1. Lump sum: A pre‑agreed sum that the contractor/consultant/subcontractor will be paid to carry out either a stage or the whole of the works that are required under the contract (subject to various provisions, including variations for which the contractor may receive additional monies).
2. Measurement: The work is measured and valued according to a schedule or formula.
3. Prime cost: Payment is made for the costs of the labour and materials used.
4. Cost plus: Payment is by prime cost plus an added percentage for profit.

Payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre‑agreed specific milestones or stages).

The Housing Grants, Construction and Regeneration Act 1996 sought to introduce a more certain and satisfactory system for payment, aimed at facilitating cash flow throughout the course of the contract. It requires every construction contract to provide an adequate mechanism for determining what payments become due, when they become due and a final date for payment. On 1 November 2011, the Local Democracy, Economic Development and Construction Act 2009 came into force and amended the payment regime for contracts entered into on or after 1 November 2011. The Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009 sets out a two notice system. The first notice is intended to fix the amount due to be paid. The second notice must be issued by the paying party if it wishes to pay less than the notified sum. In addition, any contract provision which states that any payment to the contractor is conditional upon the issue of a certificate or notice by the employer or its representative is unenforceable (unless the ultimate payee becomes insolvent).

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

Construction contracts require the works to be completed by a specified date. Instead of the employer bringing a claim for general damages (compensation) for late completion of the works by the building contractor, it is standard for the contractor to be required to pay what are termed 'liquidated and ascertained damages' (LADs) or, more simply, 'liquidated damages' (LDs).

LADs are damages that are fixed and the amount is agreed by the parties in advance. A typical clause requires the building contractor to pay or allow the employer to deduct LADs at a rate per day or week of delay in the completion of the works. The rate is usually set out in an appendix to the construction contract.

Contractual provisions for the payment of such sums are common in building contracts and are favoured because:

• In some situations, it can be difficult and costly to ascertain the actual loss suffered by the employer
• LADs avoid the employer having to prove his loss by claiming general damages and avoid arguments over remoteness of damages
• The contractor is often keen to fix the level of his liability to the employer for late completion
• LADs provisions save the courts' time.

It is important to note that, (1) if included in a contract, LADs will be the only remedy for delay available to the employer, and (2) in order to avoid challenge, it is advisable for the rate of  LADs  to represent a genuine pre‑estimate of the loss likely to be caused to the employer by the contractor's failure to complete on time. If they are not a genuine pre‑estimate, then it could be argued that they amount in law to a penalty unless there is a commercial justification for the level of damages used – penalties / punitive damages are unenforceable under Scots law.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

Contractual mechanisms for dealing with variations to the works vary depending on why the variation is requested:

Employer-led changes

Under most standard form contracts, the employer has the right to request variations to the works, for which the building contractor is entitled to additional time and money. The building contractor is also entitled to raise reasonable objections to material changes.

Contractor-driven changes

Where variations are necessary due to the building contractor's error, delay or default, the contractor is not usually entitled to additional time or money under the contract. He is also liable for any delays caused to the project by these variations, and where the variation means that the work has not been carried out in accordance with the contract.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

UK construction contracts commonly refer to completion of the works as 'Practical Completion'. By this point in time, the works must be complete 'for all practical purposes' so as to enable beneficial occupation; they may be practically complete even if there are latent defects, but a certificate should not be issued if there are any patent defects.

Practical Completion is usually achieved to the satisfaction of a third party certifier such as the architect or employer's agent (in design and build procurement) who has the discretion to certify Practical Completion where minor non‑material items are incomplete.

Practical Completion is not defined in JCT/SBCC construction contracts and should be left to the discretion of the third party certifier but industry standard form building contracts are often amended to state that certain requirements must first be satisfied before the works may be certified as practically complete.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

In Scotland, contracts are subject to prescription. Prescription is a legal mechanism which establishes or extinguishes certain rights or obligations by the passage of time. Essentially, a claim in damages for breach of contract may (as it is a financial claim) be brought within the period of five years from the date when the party’s right of action first arose (under the Prescription and Limitation (Scotland) Act 1973). Note that the prescriptive period does not start to run where the party claiming was not (and could not with reasonable diligence have become) aware that the loss had occurred. It is generally accepted that such a right of action would prescribe after a period 20 years from the date upon which the right of action first arose (known as “long negative prescription”). That said, construction contracts and consultant appointments will often provide an express “long stop date” contractually limiting the duration of the contractor’s / consultant’s liability and/or the employer’s right to raise actions to a period of 10 or 12 years from the date of Practical Completion of the works.

On 1 June 2022, the Prescription (Scotland) Act 2018 finally came into effect  and amended the 1973 Act to provide that the 5-year prescriptive period will not begin to run until the claimant has actual knowledge (i) that loss, injury or damage has occurred, (ii) that the loss, injury or damage was caused by a person’s act or omission and (iii) of the identity of the person who is the wrongdoer. Therefore, the 2018 Act preserves a claimant’s right of action for a longer period than would be the case under the 1973 Act before time-bar (estoppel) applies to the claim.

The Building Safety Act 2022 (which also took effect on 1 June 2022) came into existence as a direct result of the Grenfell Tower fire in London in 2017 and its aftermath. The purpose of the 2022 Act is to introduce wide-ranging measures to seek to prevent a repetition of the Grenfell Tower disaster. This includes a prohibition on the use of combustible cladding materials in multi-storey accommodation and the amending of the 1973 Act to increase the period of prescription so that:

• any action relating to liability for construction products under Section 148 of the 2022 Act can be brought up to 15 years after the date on which the right of action accrued, being either: (i) the construction of the building is completed, if the works relate to the construction itself or (ii) the completion of works, where these do not relate to the construction of the building; and
• any action relating to cladding products under Section 149 of the 2022 Act can be brought (i) on a retrospective basis up to 30 years from the date on which the right of action accrued if this was before the commencement date of the 2022 Act and (ii) up to 15 years from the date on which the right of action accrued if this was on or after the commencement date of the 2022 Act.

In tandem with 2022 Act coming into force, the Building (Scotland) Amendment Regulations 2022 took effect, introducing a ban on the use in Scotland of combustible cladding on any buildings of 11 metres or more in height which fall into any of the following categories:

• residential dwellings – including a sheltered housing complex or a shared multi-occupancy residential building;
• buildings used as a place of assembly;
• buildings used as a place of entertainment or recreation; and/or
• hospitals or residential care buildings.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

With regard to the liability of the land developer procuring the works to the end users of the building, it is often the case that the agreement between the developer and the end‑user will limit the developer's liability for the design and construction of the works to a stipulated period (usually ending on the expiry of the defects liability period under the building contract for the development, but depending upon the developer, the nature of the project and the stage in the economic cycle, sometimes for considerably longer than this period) after completion of the works – except either for claims that have been issued or where the intention to make a claim in respect of accrued and identified rights of action has been notified to the developer before the expiry of the period.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

In a typical development project, there is no contractual relationship between (1) the parties employed in connection with the design and construction of the development (the architect, engineers, other consultants, main building contractor and subcontractors) and (2) the end users of the completed building. Under Scots law, pure economic loss – which includes the costs of remedying defects in a building, as well as loss of profits, loss of income, damage to stock and so on – is not recoverable where there is no contract between parties. For this reason, it has become common and standard for end users to require the main construction parties to provide them with separate collateral warranty agreements. Industry standard forms of these collateral warranties contain exclusion and limitation clauses which restrict the damages which end users can recover. In large developments, these limitations are often unacceptable to end users. Since the coming into force of the Contract (Third Party Rights) (Scotland) Act 2017, it has been possible for parties to a contract to confer a right of action or immunity from liability on a person/entity who is not a party to the contract (in a similar manner to the position in England).

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

The construction process produces a built environment which has potentially adverse implications for future owners and occupiers. There are serious consequences for these parties, who have no control over the design and construction of their buildings, if the original building team gets it wrong.

Under Scots law, pure economic loss – which includes the costs of remedying defects in a building, as well as loss of profits, loss of income, damage to stock and so on – is not recoverable where there is no contract between parties. Accordingly, in Scotland, the common method of affording third parties protection is through what are known as 'collateral warranty agreements' (creating strict liability).

A collateral warranty is an agreement which is related to another primary contract (the main building contract, sub‑contract or consultant's appointment). It is entered into by the person engaged or appointed under the primary contract (i.e. the main building contractor, subcontractor or consultant) in favour of a third party beneficiary who is not a party to the primary contract but who has an interest in the construction project – namely, a funder, purchaser or tenant. These collateral warranties are also referred to as 'duty of care deeds'. Since the coming into force of the Contract (Third Party Rights) (Scotland) Act 2017, it has been possible for parties to a contract to confer a right of action or immunity from liability on a person/entity who is not a party to the contract (in a similar manner to the position in England).

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

In civil cases, litigation is commenced by a 'pursuer' against a 'defender'. Claims of lesser value will start in a local court, the Sheriff Court. More substantial civil claims are heard in the Court of Session, often using the more streamlined commercial action procedure. The Court of Session consists of an 'Outer House' and an 'Inner House'. Normally a single judge, called a Lord Ordinary, presides over a case in the Outer House. Financial claims started in the Court of Session must be for at least £100,000 and claims for less than that amount must be started in the Sheriff Court. Decisions of the Outer House can be appealed to the Inner House. The ultimate civil court of appeal in Scotland is the Supreme Court of the United Kingdom. For small claims that are worth less than £5,000, the Simple Procedure can be used (which does not require the involvement of a solicitor).

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

Until the mid‑late 1990s, arbitration was the favoured form of dispute resolution in the construction industry in Scotland, largely because it allowed industry experts to decide disputes. The coming into force of the Housing Grants, Construction and Regeneration Act 1996 resulted in a shift away from arbitration towards adjudication.

The Arbitration (Scotland) Act 2010 modernized and codified the law in statute to bring it into line with up to date arbitral practices in other jurisdictions. The Scottish Government hopes that the Act will lead to a revival of arbitration as a method of resolving construction disputes.

Last modified 13 Mar 2025

What are the main sources of law that govern and regulate contracts for the design or carrying out of building works?

The Housing Grants, Construction and Regeneration Act 1996 introduced, as a new option in the dispute resolution process, a procedure known as 'adjudication', designed to help parties obtain a speedy decision. Parties to construction contracts now have a statutory right to adjudication. Contracts may also make express provision for adjudication, but the terms must comply with the Act; if they do not, a statutory scheme will automatically apply. The new Local Democracy, Economic Development and Construction Act 2009 has made some changes to the adjudication scheme, principally to provide that this now covers written and oral contracts.

The adjudicator must reach a decision within 28 days of the referral, but this period may be extended by up to 14 days with the consent of the referring party or indefinitely if both parties agree. This flexibility has allowed more complex disputes to be dealt with by adjudication which, otherwise, would have been referred to arbitration or litigation.

Mediation is a method of seeking compromise by referring a dispute to an independent third party who has expertise in the field of the dispute and skills at brokering a settlement. There are two main types; facilitative mediation (where the mediator effectively tries to facilitate a settlement between the parties, but without expressing any view on the merits) and evaluative mediation (where the mediator will give a non‑binding view as to the merits, the intention being that this view on the merits will engender settlement). In relation to construction disputes, mediation is generally a facilitative process and has grown in popularity.

Expert determination plays a valuable role where the issue in dispute is narrow and specific, eg a pure valuation dispute (where the answer can be determined by a chartered accountant, a quantity surveyor or some other such professional) or a dispute concerning whether a piece of equipment meets its performance criteria (where the answer can be determined solely by an appropriate technical expert). The expert does not act in a judicial capacity and there is no general obligation on an expert to apply the rules of natural justice (this should be contrasted with adjudication, arbitration and litigation where, unquestionably, rules of natural justice apply). Expert determination will generally be regarded as final and binding; the court will not interfere with an expert determination, even if it is plainly wrong (provided the expert has purported to answer the right question). It is, therefore, inappropriate as a general form of dispute resolution.

Last modified 13 Mar 2025