UK Construction Market – let no-one put asunder?

With the news that All Mass Cladding Systems’ creditors stand to lose £2m according to administrators, Grant Thornton, and the demise of Bristol based MJN Colston owing creditors £41m, you could be forgiven in thinking that recent announcements that UK Plc is back in recession is a self-fulfilling prophesy.

 

Despite these very sad instances, BPE are seeing a number of projects ranging from a few million up to £12-15m getting underway. There is a steady cycle of healthcare, retail and leisure and heritage regeneration schemes (despite adverse changes on VAT treatment for the latter) continuing to be tendered for, won and successfully completed.

 

We are not seeing a mass collapse of the market that we did in 2009. True, it’s too early to start predicting that things may not slow down but confidence in the ability of constructors and engineers to deliver projects on time and on budget is as high as ever.

 

Pre-Tender Solutions – There is a growing tendency for contractors to offer up solutions to problems pre-tender awards to avoid issues arising later. Sharp practice in profiting from Employer Design Team led mistakes is still happening, but severely frowned up as everyone needs to pull together in a much more collaborative way. Basically, very few can play roulette as to whether they get paid or not. Those that still do play by those rules are falling by the wayside. Everyone is fed up with the glass half full mentality and realise that we have to create our own luck at times and work more strategically to get projects off the ground.

 

Colleagues and clients always laugh at my expression for this, “contracting for grown-ups”, but that is really the essence of what needs to continue to happen.

 

“Quietly Confident” – I can’t say that some further big names will not go under, nor am I saying that the picture is rosy. I do think however that the construction and engineering industries in particular have ridden a very rough road since 2008 and that have sought to adapt their practices to survive. In doing so, we are seeing some excellent integration (good old fashioned team work) which is enhanced by technological advances. The appropriate use of BIM (Building Information Modelling) is set to help bring all parts of the team together and, over a period of time, may result in more efficient practices and cost savings which has to be a laudable goal, whether we find ourselves in tough economic times or not. 

Suspending performance v repudiatory breach

When there is no other choice – wrongful suspension: the consequences of repudiatory breach

Contractors need to be careful that they suspend performance of their works on proper grounds and ensure that they do so in the correct procedural way. A timely reminder as to the consequences of getting it wrong can be found in the recent case of Mayhaven v DAB [2010].

The question facing the court was whether the effect of the contractor wrongfully suspending its works amounted to a repudiatory breach of contract. This would entitle the employer to terminate the contract and sue the contractor for damages or, alternatively, force the contractor to perform its services. In this case, the court decided that wrongful suspension did not automatically constitute a repudiatory breach. Why is that the case? Because it is only fair that a party be penalised when the breach is sufficiently serious so that he “so acts or so expresses himself as to show that he does not mean to accept the obligations of a contract any further”.

The court did not accept Mayhaven’s submission that a wrongful suspension, which gave rise to a failure to proceed regularly and diligently under an express term of the contract, would necessarily amount to a breach of a condition or fundamental term so that every such breach would amount to a repudiatory breach of contract. It would be a matter of considering the seriousness of the breach and the facts and circumstances of the case. DAB’s mistake as to its legal entitlement to suspend the contract was merely one of several factors to consider when determining whether the suspension amounted to repudiation.

Unless there is an express refusal to operate the terms of the contract, the court will ask itself whether the defaulting party’s actions were such as to lead a reasonable person to conclude that it no longer intended to be bound by the contract in the circumstances. A breach of contract will be considered repudiatory where:

1. the parties have agreed that any breach of a particular contractual provision will entitle the other party to end the contract; or

2. where there has been a fundamental breach of contract so that the innocent party is denied a substantial amount of the benefit of the contract. The right to suspend at common law is limited to very narrow circumstances, such as when the employer pays consistently late or not does not pay at all without good reason.

There may be some other unacceptable past conduct by an employer which may indicate that it has no intention of honouring contractual terms in the future. In most scenarios, and in the current economic climate, the contractor will delay treating the employer’s conduct as repudiatory in the interests of keeping the work flowing and in the hope that they get paid at some point in the future. It really is seen as a weapon of last resort by many and rightly so.

Generally speaking, suspending performance is fraught with risk unless done pursuant to a s112 notice or by operating prescribed, contractual provisions which provide the contractor with more security as to the outcome.

Understanding Practical Completion

Understanding the meaning of “Practical Completion”

The term is of key importance to all those in the supply chain as well as subsequent purchasers and tenants. Developers will want practical completion to be certified quickly so that rental payments begin, or so that their profit can be paid in terms of a forward funding agreement. Tenants may not otherwise be able to start fit-out works or open for trading. Contractors will want to avoid or minimise liability for liquidated ascertained damages (LADs) and have the insurance risk transferred back to the developer.

Practical completion may lead to a release of retention monies (normally 50%) to the contractor if that has been agreed beforehand and, depending on its wording, any performance bond may also fall away (although increasingly bonds are extended to the time when all snagging has been completed).

The consequence of achieving practical completion is that this triggers the commencement of the defects liability period (3, 6 or 12 months typically). This narrows the matters which the contractor needs to address to incomplete and defective works that arise during that period. Issuing variations is no longer an option post practical completion and normally amount to the instruction of additional works pursuant to a separate contract.

In practice, practical completion certificates are often issued conditional upon certain snagging items being completed and so this needs to be an amendment to the standard form.  It is often also necessary to include a timeframe for the contractor rectifying such snags as there is no other duty otherwise to do so before the expiry of the defects liability period.

There can be disparity between the definition of practical completion in the Agreement for Lease and the building contract. For example, a developer may agree that the date of entry for a purchaser or tenant can only occur when the local authority has accepted the completion certificate, but this same requirement may not be included in the building contract. The issue of drawings, operation & maintenance manuals and other certificates should, if required, be drafted in as conditions precedent to achieving practical completion so that the developer ensures a smooth transition.

The risk of dispute can be mitigated by ensuring that:

• All relevant obligations in property documents are mirrored in the building contract;
• The professional team remains in constant communication in the lead up to practical completion and all are clear about the role they are to undertake;
• The contract administrator operates the terms of the building contract to the letter and remains impartial (which can be difficult when faced with client pressure);
• Practical completion is certified subject to certain outstanding snags being completed to motivate the contractor to return;
• Any further defects are dealt with promptly, both contractually and on site. This avoids disputes festering and not being dealt with until the expiry of the defects liability period, by which time often documents have been archived and memories have faded.

Public procurement – the not-so-new rules

Complaining about unsuccessful public bids – the new rules

Over the last few years, more and more contractors are disputing decisions by public bodies when unsuccessful in public tenders. This has long been the hallmark of construction disputes in Scandanavian countries but represents a shift in the mindset, in view of harsh economic times, of UK contractors. Morrison Facilities Services Limited v Norwich City Council [2010] is a recent example.

In this case, Norwich City Council awarded a contract for £17.5m bid to Connaught Partnerships Limited. All other bids were in the £23m-£26m range, including the one from Morrison.

Morrison complained that Connaught’s tender was accepted despite it being “abnormally low” and that the Council had applied undisclosed criteria when assessing the ‘quality’ of bids. As a result, Morrison applied for an injunction to prevent the award of the contract to Connaught, pending the outcome of a trial on its various claims.

The court ruled that Morrison had a seriously arguable case that Connaught had submitted an abnormally low tender and that the Council had failed fully to investigate whether the bid was sustainable. Furthermore, the Court found that Morrison had a seriously arguable case that the Council had relied on undisclosed award criteria in its assessment of the bids. The Court also concluded that, in the absence of an injunction, damages were an inadequate remedy for Morrison. Thus the injunction was awarded.

Morrison had to endure the costly and lengthy process involved in getting their injunction. Under the new Public Contracts (Amendments) Regulations 2009 (“the 2009 Regulations”) there is an automatic suspension of the tender process as soon as proceedings, such as those commenced by Morrison, are started. The issuing of the claim form (without even a letter before action) is sufficient now  to suspend the contract award process.

As Morrison sought an injunctions before 20 December 2009 (the date that the 2009 Regulations came into force) in order to obtain an injunction Morrison was forced to meet the high threshold for being awarded an injunction, set out in the well known American Cyanamid case.

Under those rules, a claimant needs to show that there is not only a serious issue to be tried, but also that damages would not be an adequate alternative to an injunction. Furthermore, a claimant has to show that the balance of convenience does not favour the contracting authority entering into the contract. A claimant also risks being held liable for the contracting authority’s costs, should they successfully resist the claim. This combination represented a significant hurdle for potential claimants to overcome for contractors, some of whom have limited resources, when constantly unsuccessful in public tenders for no good apparent reason.

Since 20 December 2009, when proceedings alleging a breach of public procurement procedure are brought at the contract award stage and before the contract is entered into, the contracting authority must automatically suspend the procurement process. There is no need to apply for an injunction to prevent the contract in question being awarded.

This suspension remains in force until proceedings are determined or discontinued, or until the court passes an interim order lifting the suspension. This shifts the balance much more in favour of aggrieved bidders. The onus is now on the contracting authority to have the suspension lifted.

It is important to respect the timeframes within the 2009 Regulations and to note especially that:

• proceedings must be started promptly and, in any event, within three months beginning with the date when grounds for starting the proceedings first arose. Proceedings need not be started before the end of the standstill period.
• proceedings which seek a declaration of ineffectiveness must be brought within six months from the date of the contract, if there has been no publication, or 30 days beginning on the day after the date on which a contract award notice is published in the Official Journal or when the contacting authority has informed the bidder. However, in the 2009 Regulations, the 30 day time period only begins in case of notification to the bidder on the day after the date on which the bidder receives a summary of the relevant reasons, as well as being informed of the conclusion of the contract.
•  a claim form can be issued even though the contracting authority has not been informed of the breach or anticipated breach of duty. The requirement for a letter before action is therefore removed.

 

The scope for the application of the 2009 Regulations is clear to see in overcoming the initial hurdle and to mitigate the risk of the contract being awarded quickly without others being able to air their grievances. Success will depend on advancing legitimate grounds and not simply using these enhanced remedies as a strategic tool to prevent competitors benefiting from a legitimate award.

Endeavours – merely semantics?

Constantly endeavouring…but to what end, exactly?

Lawyers can spend a lot of time arguing about such terms as “reasonable endeavours”, “best endeavours” and “all reasonable endeavours”. Why? Because the law is often uncertain about the effect of certain wording which may have a direct impact upon your entitlement to, for example, get paid.  

Getting it wrong can have serious effects for anyone entering into a construction or engineering contract, whereby payment of sums due can be conditional upon a party endeavouring to carry out certain actions. This is a fertile area of dispute if not handled carefully. The issue can and should be closed off when reviewing contracts at tender stage.

The recent decision in CPC Group Limited v Qatari Diar Real Estate Investment Company [2010] is a timely warning to dedicate some time to ensuring the scope of what you say you can achieve, is actually achievable!

In this case, joint venture parties entered into a sale and purchase agreement for the development of Chelsea Barracks which included an obligation to “use all reasonable but commercially prudent endeavours to enable the achievement of the various threshold events and Payment Dates“.

One of the parties retracted its application for planning following much publicised objections. This effectively delayed one of the payment dates under the sale and purchase agreement. The judge was asked to consider whether the withdrawal of the planning application was a breach of Qatari Diar’s obligation to “use all reasonable but commercially prudent endeavours“.

The judge rejected the submission that Qatari Diar’s behaviour was in breach of this obligation. Having considered the Court of Appeal’s decision in Yewbelle Limited v London Green Developments [2007] he found that:

• the wording “all reasonable but commercially prudent endeavours” did not equate to a “best endeavours” obligation;
• the obligation to use “all reasonable endeavours” does not always require the obligor to sacrifice his commercial interests; and
• the wording “but commercially prudent endeavours” was effectively superfluous in these circumstances.

What is the impact of this judgment in real terms? The following table summarises the current distinction between the various terms:

“Reasonable Endeavours”	“Best Endeavours”	“All Reasonable Endeavours”
A “reasonable endeavours” obligation does not require a party to disadvantage itself unless the contract specifies that certain steps have to be taken in performance of the obligation. There may also be an obligation to litigate, subject to the costs and the likelihood of success.	More onerous than a “reasonable endeavours” obligation and subject to the test of reasonableness.	An “all reasonable endeavours” obligation does not necessarily equate to a “best endeavours” obligation. It does however require a party to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted.
This does not require the party to exhaust all possible actions; one particular course should discharge the obligation.	Satisfying a “best endeavours” obligation does not require a party to take steps that would bring about its bankruptcy, certain liquidation or disregard the interests of shareholders.	This obligation does not always require the sacrifice of commercial interests and very much depends on the commercial context in which it is applied. It is therefore the least certain of all such endeavours obligations.
“Reasonable endeavours” applies an objective standard of what an ordinary competent person might do in the same circumstances. It also allows commercial considerations to be taken into account.	A party should probably exhaust all of a number of reasonable courses which could be taken in a given situation to achieve a particular aim.
	A “best endeavours” obligation can require the party under the obligation to invest and take the risk of success or failure  but only where there is a reasonable prospect of commercial success.
	A “best endeavours” obligation can be qualified by other duties such as the duty of directors to act in the best interests of the company.

 

Unless there is a reason not to do so, the best advice is to make any pre-condition an absolute obligation by the use of the words “shall” or “must”. Trying to compromise an agreement too far can lead to unintended, negative consequences. It is best to invest time upfront getting your contracts reviewed and such uncertainty stripped out, rather than fall foul of the court guidance and pay a lot more later on without a cast-iron certainty of recovery.

Construction & Engineering Briefing Notes – Collateral Warranties

What is a Collateral Warranty?       
It is a contract under which a consultant such as an architect or a contractor / sub-contractor warrants to a third party (e.g. a funder, landlord or purchaser) that it has complied with its professional appointment or duties under a building contract.        

Why have Collateral Warranties?  
The appointment of a consultant or the award of a building contract will be between two parties i.e. the developer and the consultant or between the employer and the contractor. Often a third party will need the benefit of the contract even though it is not a party to the contract.           

The collateral warranty will contain statements to the effect that the consultant or contractor:       
a) takes proper skill, care and diligence in design;    
b) uses materials of appropriate quality;       
c) carries out the work in a proper workmanlike manner;     
d) maintains an adequate level of insurance.

The collateral warranty may also provide the third party with a contractual right of redress enabling it to sue for losses which would not otherwise be recoverable.   

Are Collateral Warranties really enforceable?    
No-one ever sues on a collateral warranty right? Wrong, as the case below demonstrates.          
           
In Scottish Widows Services Limited v Harmon & others [2010], Scottish Widows claimed several million pounds against a contractor who had installed defective cladding under a collateral warranty that had been assigned to it. The case is important because the contractor had been careful to include a ‘net contribution’ clause, which it believed would limit its liability. This was held to be effective in overriding the principle of ‘joint and
several’ liability i.e. that a single party can be held singularly responsible for the liability caused by a collection of wrongdoers. As a result of the ‘net contribution’ clause, the contractor was only responsible for the proportion of those losses which it had caused and not the total losses incurred by Scottish Widows.

Pitfalls
Parties will often attempt to include its rights of ‘set-off’ or counterclaim in the collateral warranty. A third party beneficiary should ensure that such rights are excluded. If a consultant or contractor has not been paid for its works under the building or engineering contract, then this could be used to ‘set-off’ any claim against it and could reduce the liability of the contractor under the collateral warranty to nil. In effect, the collateral warranty would become worthless.      

Many insurance policies exclude liabilities that are assumed by way of a guarantee. This can cause problems in collateral warranties where the consultant or contractor ‘warrants’, ‘covenants’ or ‘ensures’ that no prohibited materials have been used. The reason is that such terms are akin to giving an express guarantee. Therefore the consultant or contractor should only ‘see’ that prohibited materials are not used. Precise drafting is very important.            

It is also crucial to include a ‘no greater’ liability clause. Professional indemnity insurance policies commonly exclude cover for claims where the collateral warranty has imposed obligations which are more onerous or longer lasting than the equivalent liability under the building or engineering contract.

 The Future? 
Collateral warranties may create certainty and is favoured by the construction and engineering industries as well as funders. The resulting paper-chase can however be time-consuming. As a result, some major projects and consultancy appointments make use of a schedule of third party rights. This makes use of the Contracts (Rights of Third Parties) Act 1999 and is intended to provide the same benefit as a collateral warranty without the need for a separate document.   

The downside is that the drafting and negotiation of the master document becomes more complex. For instance, a schedule of third party rights requires the contracting parties to consider carefully the relevant contract terms so that they benefit not only the contracting parties, but also consider the third party requirements and whether that third party can enforce those terms. The master contract will also need to deal with the risk of double recovery by those third parties.   

The JCT 2005 suite provides the option of a third party rights schedule on all standard form contracts. Many funders however still insist upon being granted a collateral warranty as a separate document. They regard the ‘step-in’ rights (allowing the funder to take over the development if the developer or contractor becomes insolvent) as being better worded and therefore more certain as security.  This remains a culture hard to shift.

 A Word of Caution   
Even if a collateral warranty has been provided, a consultant or contractor may become insolvent. Professional indemnity insurance must be renewed annually so it is often a warning sign of foreseeable cashflow problems if parties delay or refuse to forward policies or other evidence of insurance cover.    

A solution can be found in ‘latent defects insurance’, which is a non-cancellable policy to cover the cost of repairing hidden defects and insulate against consequential losses. Policies vary however and this is merely an extra level of protection. This kind of insurance is not a substitute for a robust collateral warranty providing a wider contractual right of redress whilst the parties remain trading.

NEC3 – the finished product for effective procurement?

Is NEC3 the finished product for effective procurement?

I recall having a similar discussion about 5 years ago when NEC3 was first published. At that time, we were seeking to make sense of the changes from the second to third edition for clients.

Five years on, where are we? Our experience is that certain perennial debates are still ongoing such as:

–          Contract formation: how do clients achieve the desired result by choosing the various options;

–          Partnering: what exactly does it mean?

–          Life: how do I cope with industry expectations/evils which threaten the  precise workings of the contract?

An appraisal of NEC3, as with all industry form contracts, must come with a caveat attached. It is all-too-easy to criticise a particular contract for its failings. Contracts are not meant to be and cannot be one size fits all, which must be borne in mind here.

There are real benefits to using the NEC suite, as we all know. The three main advantages are often hailed as flexibility, simplicity and clarity.

But is that due to the terms of the contract itself, such as the early warning mechanism, or are other factors in play? How much of its apparent success is also due to market forces or strong on site project management.

It is, of course, slightly disingenuous to criticise a contract that may substantially avoid disputes by its very operation. But from a legal perspective there are aspects which, if tested, could result in the consequences of certain ambiguities in drafting being magnified.

There are, in reality, both pluses and negatives as with any contract.

Flexibility vs clarity

One of the core features of the NEC3 is, of course, its flexibility.

The forms can be used for any procurement method in an international, multi-discipline environment (be it building, civil, process engineering etc) and whether it includes contractual design or not:.

The contract is made up of various sections, as we all know:

– 9 core clause selecting the appropriate main option clause;

– 15 secondary option clauses;

– bespoke terms or amendments from the Z clauses; and

– a choice of two different schedules of cost components.

The negatives with NEC3 are exacerbated by inexperience and lack of care which may inadvertently result in no contract at all being agreed, or at least not in the way parties intended.

In terms of adjudication, there may not be a contract sufficiently evidenced in writing to enable an adjudication to take place but that may become less important with the proposed changes to the Construction Act due next year subject to the points below.

From experience, problems in the contract could arise from one or several of the following:

–          A lack of attestation clause affecting insurance cover and the duration of parties’ intended obligations;

–          The scope of services being vaguely drafted;

–          The Employer’s risks ignored in the Contract Data. This is a problem for the Contractor since it bears the risk of any not so stated.

–          In relation to the risk register, there is only an obligation to record; not to do – decision making is not mandatory (condition 16.3)

–          There may be a lack of proper programme or a failure to set out adequately sectional completion information. (X5) must be included within the contract;

–          Confusion as to the meaning and consequences of key dates as opposed to section completion dates. For clarity, a key date is an obligation to meet the condition stated in the contract by that time, whereas a section completion date acts as a trigger for the Employer to take over the works not later than two weeks after completion.

 

May be a lack of contract at all…does it really matter?

The well-known case of RJT Consulting Engineers Ltd v DM Engineering (NI) Ltd  may well be overturned by the amendments to the Construction Act but at the risk of uncertainty as to payment terms. Additionally, the right to adjudicate will still need to be in writing.

A fundamental lack of agreement over rates will remain a fertile ground for dispute, irrespective of the procedural requirements. Experience suggests that this seems to arise when the draft contract goes out to tender, the contractors then price on the information given but the contract data is sometimes never firmed up.

As a practical point, you should always get the contract data firmed up as soon as accepted, whichever side of the fence you are on. Why leave it to chance when you are undoubtedly dedicating so much administrative resource to the operation of the contract anyway?

Partnering – meaning and enforceability

Core clause 10.1, of course, states: “The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in the spirit of mutual trust and co-operation.”

The simple problem is determining precisely what this clause means.

Core clause 10.1 comes close to a requirement to act in good faith and reflects the good faith requirements of those countries that operate under a civil code. This doesn’t work so well in England & Wales, which has a common law system. A few cases have tried to make sense of it though.

See, for example, Bedfordshire County Council v Fitzpatrick Contractors Limited [1998] where Dyson J would not imply such a term into a road maintenance contract that neither party should conduct itself in such a way that would “damage the relationship or confidence in trust” between them.

One reason for this was the care taken by the parties to detail out the terms which were to govern their contract. There was no scope to imply this further relationship.

One thing is clear from this case – being too prescriptive in terms can result in the parties losing the whole ethos of partnering. The problem is that not prescriptive enough risk the terms being too uncertain to be enforceable.

On the other hand, in Petromec Inc and Others v Petrobras and Others the Court of Appeal had to consider the whether an agreement to negotiate in good faith was enforceable. It was said the Court of Appeal because:

• The requirement was expressly agreed by the parties as part of a contract drawn up by lawyers.
• The Court recognised that it would be able to calculate the cost referred to and so would be able to establish whether there was a lack of good faith on the part of a party.

The questions then arise – (1) what is the standard of care in partnering and (2) how do you measure it to know if the standard has been breached?

As a reminder, it does appear that the English courts will pay attention to the intentions of the parties. Birse Construction v St David Limited is such an illustration  in which the  terms of a partnering charter was deemed not to be, and never intended to be, a binding contract even though it had been signed by the parties. As the judge said, the terms, whilst:

“clearly not legally binding, are important for they were clearly intended to provide the standard by which the parties were to conduct themselves and against which their conduct and attitude were to be measured.

This is the approach that any judge or adjudicator should follow if asked to consider the effect of core clause 10.1 in NEC3.

How do you establish the standard of care in partnering? The answer is to  list out any activities which demonstrate that the parties are acting in good faith.

How do you measure the standard? By the use of KPIs as an option to ensure that objectives surrounding cost, completion and accuracy are achievable.

Please mind the gap…z clauses

Notwithstanding the above, some would suggest that the lack of detail contained in NEC3 can lead to ambiguity and that clarity in respect of certain matters should be set out at the outset, rather than as particular events occur. Accordingly, Z clauses may typically address the following:

• The provision of collateral warranties. Notwithstanding the Contracts (Rights of Third Parties) Act 1999, the construction industry still relies heavily on collateral warranties. It is often the case that funders, tenants and the like will insist on an employer procuring collateral warranties from its contractor. An employer will therefore be forced to include such provision within the contract;

 

• Copyright. Where a contractor has design responsibility, it is important to include a provision addressing matters relating to copyright. Without such clarity the employer’s rights, if any, to use the design would be uncertain.

 

• Prohibited materials and Codes of Practice. Again, where a contractor has design responsibility a provision requiring the contractor to refrain from using prohibited materials in design and construction may be necessary so as to prevent the use of unsuitable materials;

 

• Assignment. A provision prohibiting the contractor from assigning the contract may be necessary so that the employer has certainty in respect of who is actually carrying out the works.

 

• Confidentiality clauses – of particular importance in the public sector.

 

• Project specific definitions – one size does not fit all, as mentioned earlier.  

 

• Notice to Contractor of any third party interests, e.g. a landlord or funder, so that it does not act inconsistently and inadvertently put Employer in breach of its obligations. If the Contractor cannot comply, then it is best to say upfront at which point relief from any indemnity that may be put in.

 

• Details of the insurance provisions actually in place for the project.

 What should be remembered is that Z clauses are not intended to substantially rewrite the standard clauses of contract. Indeed, improper use of Z clauses can be problematic.

No doubt it is quite easy for parties to simply “cut and paste” provisions contained in some “special conditions” or a “schedule of amendments” into Z clauses. The problem is that in doing this the parties can quite easily fall back into old habits, thereby defeating the benefits of using the NEC. Put simply, wholesale amendments to the standard form through the use of Z clauses should normally be resisted.

Saying that…certain conditions are (by the parties’ desire for clarity as to their consequences) still amended and redress the contractual balance. For example, dealing with the consequences of ambiguities/inconsistencies being discovered in condition 17.1.

Unamended, the Contractor is duty bound to notify the Employer of any ambiguity or inconsistency between “documents which are part of this contract.” Normally, an instruction follows. If it amends the Works Information, then this normally amounts to a Compensation Event.

A proportionate amendment would be to avoid the Contractor benefiting from its own breach where it fails to submit design information to the Employer and this leads to direct loss or delay.

What’s the feeling – does it tick all the boxes?

Success in using NEC3 requires a lot of pragmatism. Get the contract formation right and get the legal obligations drafted carefully so that they are effective. Partnering works when it can be measured.

There remain other barriers to effective procurement in addition to the legal uncertainties mentioned above including:

• The change in mindset required in complying with NEC3 weighed against the appearance of being “contractual”.

• Experience of managing a project on NEC3 terms.

• Resource having to deal with an administratively burdensome contract.

• Knowledge The increased use of NEC3 by both the public and private sector.

Get this right and the benefits can be considerable leading to cost savings and success in terms of delivery.

FIDIC – engineering a smooth project

Another week, another blog post…

I initially wrote this briefing note as an aide memoire for the RICS in November 2009 as part of their series of talks to a visiting Chinese delegation tasked with understand more about FIDIC as a possible procurement tool for the upgrade of their domestic electricity supply infrastructure.

I hope this short-hand note is of wider interest to some of you.

Overview

Since 1999, the FIDIC forms have been popular for all types of engineering projects, in particular those that are project financed. Lenders appreciate the greater certainty afforded in terms of project costs.

The performance of the asset to be built is typically critical to the lender’s security insofar as the loan is normally linked to its ability to operate and generate revenue e.g. selling electricity. Therefore, there is much emphasis in FIDIC on testing, commissioning and handover procedures and the use of key performance indicators to measure time, cost, designed production and output levels. Full completion is not deemed to have been achieved until final performance tests have been carried out and results positive.

The hallmark of FIDIC is balanced risk. In the context of the turnkey version (the Silver Book), the contractor is tasked with achieving the performance of whatever is necessary for a certain purpose. For example, the particular yield of power generation.   But it is not the case that all risk is necessarily transferred to the turnkey contractor in FIDIC, despite assumptions. Many large project involve several specialist turnkey contractors.

This can cause interface problems, as a contractor will not be willing to assume another’s work given the performance tests that it knows it must satisfy. Also, if plant and machinery are brought in on licence from a 3^rd party, a contractor will not assure its performance.

Further, contractors are increasingly risk adverse in the current market. This means that they may wish to design first and then enter into a full FIDIC turnkey contract at a later stage. The risk is that the contractor will then seek to re-negotiate the terms of the FIDIC contract unless there is a mechanism at the time of contracting for design and placing of materials, for them to then enter into the FIDIC contract with its obligations.

Traits of FIDIC:

–         fixed price;

–         contractor can organise itself as it sees fit provided it achieves the deliverables;

–         Employer exercises limited control provided informed of programme and progress; and

–         Contractor must prove the reliability and performance of plant and material.

 The guidance published alongside the contract explains that FIDIC is not suitable in the following circumstances; namely where:

–        there is insufficient time for checking relevant information and scrutinising the Employer’s requirements. This is not a contract to ‘bounce’ on contractors to gain a commercial advantage in tendering;

–        the works involve a lot of underground work or areas where the contractor cannot verify the physical conditions;

–         if Employer needs to supervise closely or inspect the drawings closely throught the build and installation; or

–         if interim payments require an official or other intermediary to certify them.

There are cost implications, so the suite may not always be commercially viable for all projects. NEC3 may be better for more straightforward projects.

Specific points in the standard form

Priority of documents – be aware that the standard form may be amended. The terms of any other Contract Agreement always take precedence (clause 1.6).

Non assignable without consent (clause 1.7)

Responsibility for noticing errors or defects on both parties, not just the contractor as in some other standard forms (clause 1.8)

Duty on the Employer with helping the Contractor to obtain consents where the contractor asks the employer to do so (clause 2.2).

Concept of “Determinations” – a process by which the employer and contractor shall consult and endeavour to reach an agreement on any matter arising (clause 3.5). Leave for either party to refer a dispute to a Dispute Adjudication Board’s Decision (DAB).

Fit for purpose obligation (clause 4.1). Rare in other forms but success in FIDIC is measured by performance.

Contractor automatically needs to provide security to assure its performance. Not a matter for negotiation as in other forms. Clause 4.2 lays out the triggers for the employer using that security (normally upon 42 days contractor default).

Can’t subcontract all of the works (clause 4.4), so cannot be used as a management contract.

Implicit in the terms that labour will be of a sufficient standard and paid a sufficient wage according the local rates.

Employer can ask Contractor to search for the cause of defects (clause 11.8).Cost agreed and added to the Contract Price.

Acceptance by the employer of the works not achieved until Performance Certificate issued (clause 11.9), which is normally 28 days after the last Defect Notification Period has expired.

Scope for value engineering but no obligation to achieve savings (clause 13.2).

The main areas of negotiation

Ground conditions

The Employer provides all the relevant data on sub-surface conditions not later than 28 days prior to submission of tender.

Contractor deemed to base contract amount on data.

In the red and yellow book, the Contractor is however only responsible for interpreting the data – the accuracy of that data is warranted by the Employer who carries the risk of any physical conditions that are not reasonably foreseen at the date of the tender.

In the Silver book however, due to its turnkey nature, the Contractor takes all risk including any unforeseen conditions apart from items listed in clause 5.1 which include the purpose of the works and any specific information which the Employer can only verify contained in the Employer’s Requirements.  The contract price will not be amended otherwise.

One way contractors seek to get around the onerous conditions, if not negotiated out, is to obtain all relevant reports before tendering and then to make all assumptions based on that material. The risk stays with the employer in such circumstances if there is any variance between those assumptions and the physical conditions as any incidence is deemed to be unforeseen in such circumstances.

Handover, testing and commissioning

There is problem where the employer wants to start selling electricity as soon as it is being generated following commissioning. This is however prior to performance testing.

The employer can prejudice itself if it takes over before tests are completed. It is wise to wait.

Force majeure

Time and cost impact stays with the Employer unless amended.

FIDIC is a very effective contract provided to know and adapt to its limitations. Hopefully, this short article goes some way to explaining how to avoid its pitfalls.