At the Risk of Ignoring Contract Terms in Construction Law
ABSTRACT:This paper aims to analyse the parameters of risk in relation to terms of a contract. The research is based on commercial considerations in construction law and revolves around the concerns of the contractor. Contractual terms are assessed in themselves, as a party to the contract as a whole, and in relation to the lifecycle of a project. Key elements of analysis are provided in examining the definition of terms, the variety of risks on a project, and the liberties taken in assessing contracts at the point of claims.
While the article takes strides to define particular stages of the construction project lifecycle, the true emphasis is made on what those particular stages mean for the terms used in contracts therein. In many construction projects the stages even defined on the ‘critical path’ can be unique to specific projects and based on time restrictions. The issue examined here is not so much on the varying nature of construction projects, it is understood here that this is difficult to control. However, what is analysed here is the use of contractual terms, how they function, operate, and how they are interpreted by the many parties involved.
Terms are so defined so as to act as a constant in the realm of variables. This article contextualises this notion and asks why such a fixture is yet so often misinterpreted.
As is often the case with any major initiative, the construction of large infrastructure projects involves many areas of risk. Due to the scale and nature of these projects, problems with subcontractors, weather, and the construction itself are practically inevitable. Unfortunately, risk means costs, delays, and the ripple effect could go as far as taking down companies or crippling communities. As it relates to construction projects, “one usually takes risks by choosing from among a range of risks, deciding which are acceptable and laying off those that are not”. 1
There are elements that can be managed; particularly the way risk is spread and the degree of fallout that can occur. A common method of attaining certainty is through the use of contract management in large construction projects; this includes the procurement process and resulting contractual documents developed by the Contractor.
This paper will establish the contract as a key facet in mitigating risk through the use of contract terms and development in major infrastructure construction projects. Key issues covered shall include the makeup of a contract, importance of terms, and commercial claims. In order to contextualise this argument, methodology and exemptions will be addressed, and the value of the contract will be established before outlining the importance of the terms therein. The article will generally flow through the systematic stages of a project. These stages can be recognised in different ways, some of which are addressed, and are known as the procurements stage, contract development, change management, and commercial claims (which can come at any point of the project lifecycle but often arrive near the end). The interpretation of terms is not done simply in stages however, with each stage comes a unique set of parties that interpret the terms, as will be further outlined below. Key players include the owner, contractor, subcontractors, consultants, specialists, and judges. The article shall assess the context of ‘the contract’, breaks down the importance of terms, assesses the critical risk areas of change management and the court’s interpretation of terms, analyses the risk of claims, and outlines the exceptions to the rules provided.
Business practices are generally unique to a region and the uses of contract terms are not exempt to this. While there may be different rules, regulations and standards for conducting business in other areas of the world (especially as large construction projects are themselves international in nature), this article will mainly focus on the United Kingdom and countries that have adopted their methods.
The nature of construction law is deeply commercial and although there will naturally be a significant effort to extrapolate strictly legal significance, this article will address the larger, more practical, and contractual issues that precede and incite the use of legal principles. The analysis will take an open-ended approach in order to maintain relevance to the wide variety of projects and cases that fall under this topic. Although particular areas of research would resonate further with a scholar or professional in the subject matter, efforts shall be made to contextualise the key elements of construction law contracts. This is done more so to frame the discussion, than to summarise the fundamentals of contracts in construction. Areas of note may be touched upon and expanded further in the paper, as a more critical understanding is required.
Contractual terms may vary based on the specific requirements of a project and thus any efforts to outline best practice will remain relatively broad in scope. While this paper may offer suggestions to avoid major risk, it is by no means a hard and fast guide to certainty in commercial projects. The aim of this paper is not to instruct as much as is to identify, analyse, and criticise current models of contract management and the value of terms. Any advisory conclusions will be substantiated as best as possible and are meant to initiate dialogue.
It should be noted that this article aims to address issues specifically faced by the contractor. Often, the same issues are prevalent with subcontractors or other parties. However the discussion here is focused on the contractor and contract management from within large-scale construction projects. The reason for this is that the contractor holds both the interest of commercial success shared by the subcontractor, and the value for socioeconomic benefit as assigned by the client. Additionally, as illustrated in the research, work presiding under the contractor is often the epicentre of conflict and where risk has the most potential to be minimised. Based on current project models and trends, the contractor is made up of a joint venture partnership of two or more parties that combine commercial capital in terms of employees and funds.
In initiating the dialogue from the perspective of the contractor, the key commercial fundamental is certainty. This is important to establish in a contract, not only to mitigate risk, but also to maintain any actual control of how that risk is spread. There is only so much a contractor can manipulate in the actual construction of the works, the reliability of the subcontractor, or the whims of the court. Hence the contract is arguably the only remaining area where the contractor can exert some control as to how risk is spread and how they are protected from claims. The contract in itself is an instrument of declaration and encompasses the rights of the parties as per the agreement; with the contractor guiding the process of developing this agreement, they are in a beneficial position to prevent risk.
THE NATURE & ADMINISTRATION OF CONTRACTS
Contractors can take many shapes and forms and it is important to specify the type of contractor, or rather the parameters that guide the project that the contractor takes on. Simple logic dictates that in order to address the most relevant concerns of the contractor, one must observe its most common form.
The Royal Institute of Chartered Surveyors (RICS) developed a survey in 1985 and updated it every two to three years to keep track of what agreements were being used in the UK and to what scale.2
Considering the influence of UK commercial law and the worldwide influence of the RICS, the most recent Contracts in Use Survey of 2007 is a good indicator of which contracts would be considered salient. The Survey asserts that standard form contracts are most widely used through the Joint Contracts Tribunal (JCT). While it is understandable that standard form contracts establish the foundation of an agreement, it has also been “highlighted that [these forms have] major disadvantages, identifying duplication of effort and wasteful use of resources at almost every level of activity. It has been suggested that many of these forms also probably help to fuel the adversarial nature of the construction industry in which they are applied”. 3
It is therefore common practice on large construction projects to begin with standard form contracts and modify as necessary to meet the overall objectives, and in some cases for specific subcontractors. The Survey also identifies the contracts to be based on a lump sum to manage cost, whereby the larger projects, or larger elements take the form of ‘design and build’ contracts, which are “seen as the most logical way to procure”.4
The current trend for design and build is to have a ‘public-private partnership’ whereby the contractor assumes the risk for the public body and delivers the project on the basis of a lump sum (the profit margin of which is whatever remains after cost and delays). “The benefits of a truly fixed price, a single point of responsibility and having the contractor assume full responsibility for design and construction of the building, all [are] attractive propositions”.5
This has been found to be easier to manage for the client (otherwise known as the owner or a public body, as the case may be) as opposed to other models such as ‘multiple prime contractor’, in which the client assumes all risk for delays and cost, or ‘fast track’ which has no fixed price but is time contingent. Although design and build is prevalent, it may not be due to a self-aware value for the benefits of design and build as opposed to expediency. The true value of this model is to spread the risk between parties and “actual risk apportionment under the various procurement methods is not well understood”.6
Hence the contracts under the design and build model shall be more overtly analysed with the benefits of risk apportionment in mind.
The model for design and build can be contextualised through the succession of contractual documents that are developed as the project goes underway. One of the key contracts at the advent of the project is the joint-venture agreement between parties, where two or more bodies form a coalition to take on the works (also known as the project) if they are to win the bid. The ‘design-build agreement’ then follows this, whereby the joint venture (or the ‘contractor’ as the parties are collectively identified) commits to perform the works for the client (in many cases this can be a public body). The design-build agreement outlines the cost (which is the pre-determined budget, as agreed and financed by the contractor alongside the client as a lump sum) and ‘critical path’ – which includes key stages such as groundbreaking and ‘substantial completion’ (when the majority of the project is completed, notwithstanding minor elements or delays). The design-build agreement is important for the purposes of this paper because it determines the limits set on the project; what falls under this agreement are the works agreements (or subcontracts) and the ‘consultant services agreements’. Not all agreements function in the same way. Whereas the design and build agreement is drafted for one collective, each of the subcontractor agreements and consultant service agreements are made for different parties with completely different roles and responsibilities. The subcontracts and the consultant services agreements are hence critical areas of risk because they are developed for a wide range of parties who each come with their own unique set of issues in each case.
As mentioned, the development of bespoke contracts for these parties is considered essential and yet the process can cause inherent problems if there is not a consistent method of streamlining contract management. The selection process of subcontractors and consultants and establishment of contractual agreements is undertaken in the ‘procurement’ procedures. This process is often interchangeably described as tendering, which will be elaborated upon further in the context of developing terms in the contract. Basic fundamentals of this commercial process are that the contract should not be dissuasive in breadth, in that the length and detail of an agreement should not intimidate or cause the subcontractor to become wary of a potentially contentious document. Simplicity is valuable in this regard, as the subcontractor’s comfort in understanding the document will allow both parties to stand on level ground as far as expectations are concerned. Additionally, it allows the contractor to develop a bespoke set of agreements as opposed to a uniquely structured contract for each element of the works. In an accessible agreement, the trend is that negotiations are fewer and any changes that are required either initially or at a later stage can be made with ease.
Significantly prone to issue are the selection of specialists, who must often be determined prior to assessing which subcontractors or consultants are required. There are certain areas such as design, where an early selection is critical and takes priority over the organization of project-specific procurement methods. In cases such as these, a nomination process can take place in which capable parties are identified and the works are advertised for an initial bid. The issue is that procurement is generally seen as a process that takes place after the design and build objectives are already set. However, this is a common area where the requirements for a contract manager are great and yet tender protocol has not been set. “One way forward would be the use of pre-construction agreements as these enable the client/designer to name a specialist and bring them in at an early stage of project development”.7
The risk is exacerbated should there be a naming process instead of nomination.
“Naming a specialist for a construction project is done for one or more of the following reasons: (i) the specialist is known to the client or design team; known in terms of their products and the quality of their output; (ii) it provides the potential to improve supply chain management by involving the specialist early on in the process and enhances the opportunity for integration both of the construction details and of the construction and design teams; (iii) it facilitates continuous improvement; and (iv) it can be economic to do so”.8
While there are particular benefits associated with naming a specialist, and in fact there are cases that put the spotlight on nomination and the problems that could emerge from its use9
there are long-term risks that can cause far greater problems. “The evidence that the construction industry business management decision depends substantially on intuition and experience, rather than quantitative analysis irrespective of educational and professional qualification, is supported by the firms' attitudes to risk analysis and management techniques”.10
Although the specialist may be familiar to the client or design team, assessing the market for the best value and skill can only be beneficial, and may eventually reinforce the preferred choice. As long as procurement methods are established by the contractor as part of the consortium (which they likely are), then nomination will not be a hindrance to supply chain management as compared to the hasty task of naming. The economic benefits of naming are found largely in the saving of time and perhaps relatively less negotiation, however these costs are heavily outweighed when considering the benefits of due diligence in assessing a crucial element to the design and build process. In establishing a swifter relationship with a specialist and bringing them on board with less oversight, the project opens itself to a greater risk of intrinsic problems further down the critical path.
Naturally nomination is not a cure-all for establishing a specialist early on. If procurement procedures are not refined then the project will snowball with delays due to disorganisation. “Contractors have a tendency to contract out all the work packages involved in a project to sub-contractors and undertake 'contract management' as part of a strategy to reduce or eliminate their risk. The implication therefore is that the general contractors with the means to do so either fail to or have no incentive to undertake research as part of the strategies to reduce the risks associated with their construction business activities”.11
In fact, this is a particular area where the contractor may benefit from being less petty in terms of cost. The investment in the initial phase of the project and the establishment of amicably suitable tendering is far more valuable than a quick fix of naming or even initiating a tender that is too competitive or antagonistic. For example, in the case of Costain Ltd v Charles Haswell & Partners Ltd, the contractor was ‘keen to keep costs down’ in tendering the works.12
This resulted in the bidder, a consulting engineer, providing a low-cost solution to key areas of the critical path and not accounting for significant costs in the tender. While limited damages were awarded, the judge found that the individual engineer had limited experience and there was a “lack of consultation with senior colleagues, or other persons who had specialist knowledge”. Ultimately there was no strict liability because the claim “was based on breach of an express term [which warranted] that the consultant had exercised due skill, care and diligence”.13
This illustrates the need for constant oversight in a non-contentious manner, and especially the stringency required in selecting a specialist and working alongside them.
Overall the method of contract management is critical to the development of effective terms in the contracts and establishing project objectives for the congruent efforts of specialists and subcontractors. The overarching risk is that “many will better manage expectations and tell a good story rather than be overly concerned with selecting a method of procurement”.14
Naturally there is no substitute for procedures and good documentation, especially realised at the stage when claims arise.
THE IMPORTANCE OF TERMS IN A CONTRACT
The lifecycle of a construction project has particular moments when risk spikes and problems are more likely to occur. All of these elements are somehow integrated in the contracts between the contractor and individual subcontractors. At face value the contract reflects the understanding between parties and an extensive ‘if, then’ statement to address concerns that may arise should the understanding be in any way compromised. However, what is somewhat understood by contractors and construction lawyers alike is that each of the areas within a contract, in particular the types of terms, has a personality. Certain areas of the contract can be antagonistic and risky whereas others can be areas of opportunity, often many of these areas can be both depending on the circumstance. While it may appear to be a speculative exercise to assess subtext in the contract, there is a reason why it would be valuable; the contract will not be assessed here in light of standard form contract breakdown, rather the more commercially relevant breakdown of the project lifecycle. Even bespoke contracts retain certain fundamentals but to assess each section or each term in the contract would in fact be speculative because of the wide potential for application. However, in analysing the contract as a function of the project lifecycle, not only do opportunities for risk mitigation become more obvious but those opportunities can also be directly traced to any areas of the contract deemed applicable. The importance of terms in risk mitigation shall be assessed in stages; through the understanding of ‘terms’ in and of themselves, the procurement process, contract negotiation, change management, and finally implied terms in practice.
Contract management is important not only in execution but also in its form. There is a worthwhile discussion of terms that is currently not taking place in the discourse of construction law, particularly with respect to the value it may have in risk mitigation. In order to address the importance of terms in a contract, there must be an understanding of what ‘terms’ are. Without going into the basic fundamentals of contract law, it must be noted that terms of any contract are generally split into those that are express and those that are implied. While implied terms (which are viewed as an inherent part of the contract due to custom, statute or the courts) are valuable to this discussion of terms and will be addressed as relevant, the key variable here is express terms.15
The reason express terms are perhaps of greater consideration to the contractor is because express terms are in large part easier to control and determine (within the limits of the law, of course). It is for this reason that express terms will be more thoroughly discussed as an asset towards mitigating risk. Express terms are clear stipulations in the contract, which are binding, based on the parties shared interests. Express terms are divided into ‘conditions’ - terms that go to the root of the contract; and ‘warranties’ – minor terms, for which the remedy is damages if breached.16
It must be noted that conditions are the more common of the two types of terms used in construction contracts and again are more important to the discussion of value in risk mitigation. However, there may be another variant of express terms that can be assessed on a micro scale; whereas a condition is seen to express a complete idea, a warranty is a minor term, the ‘micro’ term refers to the strength of words independently. The notion of micro terms seems unfamiliar to those well versed in contract law, this is because it is simply a supplemented phrase used here as a descriptive for a particular element in contract law.
The micro interpretations of terms are those that comprise the specific language within a contract. These are found as capitalised references to titles and an overt wording to explicitly signify meaning; furthermore, these may otherwise be detrimental to the parties if misconstrued. Examples of this can be found in the initial part of a contract as titles – Owner (or “the Client”). Another part of the micro term is the overt use of language, such as the discrepancy between the words ‘will’ and ‘shall’. To use the word ‘will’ may imply a strict liability, which can either be an unintended or forced commitment upon the parties; whereas the word ‘shall’ can be interpreted as an expectation, based on an understanding between parties without coming across as a command. The essential element that differentiates micro terms from the understood concept of an express term or condition is that the micro term focuses on a single word. While a phrase that forms an express term can have a particular message, there are still relatively fewer interpretations and subsequent repercussions than the interpretation of a single word or title that occurs in a contract repeatedly. This issue is often brought to light when grammatical errors are made and there is an incorrect use of words in syntax.17
The reflex of the court is to examine the traditional use of the word, because “construction must start somewhere and the most natural place to begin is with the words of the provision in question”.18
Often these micro terms are applied in court to derive the interpretation that appears to be most equitable.19
Whether there is in fact an equitable outcome or not depends on which party is consulted, and how. However, the messy process of claims can potentially be avoided if these micro terms are used effectively.
The terms and language of a contract can be a major alleviation to the risk apportioned to a subcontractor. The risk is not simply found in the final contract itself, but rather stems from multiple iterations of the document to reach its final stage. A careful effort at consistency is required as the courts also apply the process of reviewing iterations of the contract in the case that terms require context.20
Thus inferring that good documentation, practice, and record keeping is equally critical. Ultimately, whether the resulting contract is more or less beneficial to the contractor is entirely contingent on the strength of the terms as they carry forward in each draft. It is also worth noting that the contract is generally not developed immediately upon the subcontractor winning the bid on a particular job. There are standard contract documents that are used depending on the specific project and scale, with details often determined when the project advertises for bidders, these are then moulded to suit the subcontractor for a bespoke agreement. The value of terms then develop more thoroughly in the procurement stage, at contract negotiation before finalising the contract, and then in change management as necessary.
Terms and the usage of effective contractual language are invaluable to a contractor and, notwithstanding the quality of work as provided by the subcontractor; this is why the procurement phase is so critical to perform to the same standard as contract development. The documents that arise in the procurement stage are critical to establish the tone of professionalism expected by the contractor. If used to its potential, this stage can allow the contractor to weed out subcontractors who are incapable of performance. For example, the Request for Proposal (RFP) is when the contractor lays out what the project objectives are and provides specifications so bidders (or tenderers) can provide rates. The specifics of this document can illustrate the capability of the subcontractor and the contractor is then obliged by law to select the most capable and cost efficient bidder, with a contractual relationship arising only upon selection.21
Again this requires a sound understanding of project needs and a clear vision of what is expected from the subcontractor, relative to the works they are expected to perform.
Moreover, the procurement process must be evaluated on the facts provided, in addition to the simple ability to fill out an RFP. It is commonplace to find that information provided between different subcontractors can be returned and presented in completely different ways on the same standard of RFP. However, this must be balanced with an internal assessment (and must be recorded in the tender files for efficacy) that takes into consideration each subcontractor’s ability to perform the works both commercially and in practice. It is commonly asserted that the tendering process is “heavily weighted in favour” of the contractor, and this advantage cannot be squandered.22
The reason this part of the process is so fundamental to success is that selecting an unprepared, underfunded, or incompetent subcontractor for the works can cause delays and undermine contract management, among many other potential risks.23
“It is often observed within the contracting fraternity that the [subcontractor] who is awarded the contract after competitive tender is generally the [subcontractor] who has made the most mistakes in his bid”.24
As the old adage goes – if it seems too good to be true, it probably is. There must be an understanding of fair market value and contractors should also be wary of giving more weight to an effective bid over the commercial reputation of a subcontractor, and capacity to perform.25
It is also very essential, regardless of how stringent the procurement procedures are, to ensure the contract has particular provisions to free the contractor should there be a case of non-performance. This can arise as a ‘discharge by renunciation’ upon refusal to perform obligations; ‘frustration’ in the case that the subcontractor is incapable of performance; and as ‘assignment’, should the subcontractor pass on performance duties to another party (as opposed to novation of the agreement, which will be discussed in more detail regarding change management). In the case of assignment there is always a risk as to who is actually performing the works, “subcontractors may have subsequently contracted the job to someone else”.26
Another opportunity to ascertain the most accurate language for a contract is through the process of negotiation. Contract negotiations can take place upon selection of the winning bidder and renegotiations can occur at the onset of delays, problems with contingent subcontracts, or issues in payment or liquidity. While renegotiation can certainly derive benefits for the contractor, it may be worth the opportunity cost to attain certainty in the initial phase of negotiations. This period is crucial for contract managers to develop the express terms as thoroughly as possible, so that the benefits of a bespoke contract can be derived and there is less risk of implied terms being imposed.
There is much to be said about negotiation techniques and how to parlay the dialogue into an agreement that suits the needs of both parties; however the focus here is to draw out the subtext of each party’s interests and integrate such language in the contract. The negotiations themselves are an exercise of documentation as “evidence of negotiations is admissible to show that a fact otherwise forming part of the factual matrix was known to a party”.27
Of course this is based on the presumption that the subcontractor actually seeks to negotiate, a point that would be valuable for the contractor to encourage for the reasons given. The negotiation phase is not only a key indicator of subcontractor expectations, but also provides the contractor with an opportunity to manage those expectations before a draft of the contract is developed. One common negotiation strategy is to allow the opposing party to state preferred terms and draw boundaries where necessary; this prevents the contractor from initiating excessive limits on time and cost, and also reinforces the value for face-to-face negotiations. Even in the case that negotiations are made in correspondence, it should be the standard form contract that is submitted for review as opposed to the contractor’s assumption of what is acceptable. It goes without saying that the negotiation process is relationship dependent and the parties are able to communicate requirements and preferences with ease. The mutual interests of the parties is the most valuable element here and often if it is developed face-to-face, conciliations are generally made to areas that are contractually vague. Many perceive the negotiation phase to be antagonistic, especially when parties must enforce a difficult position. Although negotiations are not the only reason for parties to meet and discuss issues of performance, it is wise to enforce the common practice of regular discussions in person. “Meetings as a dispute prevention tool was identified in the UNCITRAL's (1987, p. 111) Legal Guide, which suggests that a contract may provide that representatives of the parties are to meet periodically at specified intervals on the site to promote co-operation between them and to resolve outstanding issues concerning the construction on site”.28
Relationship building is something that the construction field can get all-too-comfortable with however, while a personal consensus can make things easier, social expectations can also be swiftly disposed when things go wrong.29
A balance is required to apply respectful manner and open-ended communication for negotiation, while ensuring that this is not a substitute for effective documentation and risk management. Ultimately, the contract signifies how well the relationship between parties translates into good commercial practice.
One of the areas in which renegotiation may take place is upon ‘Change Management’. This can occur in many ways based on the reasons that precipitate the changes. For the purposes of contract terms, the most common option is an amendment or in the case where a new subcontractor enters the contract, there would be a novation.30
In any case, this presents an opportunity for the contractor that can also create some form of risk. The most obvious concern being the practice of amendment, as it is essential that any changes to the contract not only reflect the specific change with regard to the term itself, but also reflect the overarching interests of the parties and tone of the agreement. The amendment phase also presents an opportunity for renegotiation, a measure that should not be taken to find new areas of risk but rather to reflect the actual practice of service delivery.31
“Changes to the design are therefore both inevitable and welcome in achieving satisfactory solutions to meet the needs of clients. But such changes have the result of changes to the contract programme and this in turn affects the price originally quoted by the contractor to complete the project works”.32
The nature of changes is often to re-evaluate the cost of the works or the time that is required to complete, and although contractors can see this as an unexpected burden, it may potentially act as an opportunity to close potential floodgates in the form of claims. Relative to the potential issues and detriment that could be faced with a contentious issue, an amendment to the contract or change in delivery may be a valuable option.
While arriving at mutual interests is beneficial for all, each party generally has their own divergent particular interest. In the case of the contractor, the major interest would be to minimize cost and complete the works along the critical path for maximum profit. In a design and build project, the profit margin is largely contingent on subcontractor valuations and efficiency. However, the contractor must be careful not to allow potential advantages in contract development to manipulate the subcontractor into performance. The courts are naturally averse to exploitation of inherent subcontractor weaknesses, and the contractor should also beware of creating favourable ambiguities in the agreement for the same reason. The courts will make an effort to interpret this against the contractor by applying the principle of contra proferentem
against exclusion clauses.33
The key advantages to the contractor lie in the shared objectives, which is to attain profit and project completion for the contractor and allow this to have a trickle down benefit for subcontractors as well. Any sign of a hostile agreement that does not reflect the larger interests of both parties is quick to be exposed and revised by the courts.
THE COURT’S INTERPRETATION
The courts do appear to have significant powers in the interpretation of contracts, for better or worse. Contractors would be wise to avoid a contract being at the whim of the court for reasons beyond just time and cost. The test of what a reasonable man would do may not always be reflective of the commercial endeavours of a construction project, even with “all the background knowledge”.34
Such an outcome may not only be detrimental to the contractor, but also compromise the interests of all parties. As the case may be, “English contract law remains little concerned with substantive unfairness; its main emphasis is on procedural unfairness, impropriety in the manner in which bargains are induced”.35
The courts are not concerned with the actual intentions of the parties, and make an effort to depersonalise the issues so as to limit the scope of interpretation.36
However, the crux of this issue falls on the ‘manner in which bargains are induced’. This notion presents an opportunity to protect from sweeping judgments that do not reflect the objectives. Although the contract in itself is seen as simply subjective, the processes by which it is developed and the key elements that make up the contract (such as tenders, negotiation minutes, and amendments) are also evidence of the procedure by which the agreement was derived. Notwithstanding judicial reform, this is a scant avenue where contractors can reinforce proper documentation, so the courts can clearly ascertain the intentions of the parties without having to draw it out. The court then applies legal devices available in contract law to contextualise the issue and make a judgment or reinterpret the contract accordingly. Evidence from the background of the conflict are brought forward and the “proper way to correct the contract is to seek rectification or resort to conventional estoppel”.37
Lord Grabiner further identifies the five rules for assessing implied terms within a contract, as found in the case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings: “(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that it ‘goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”38
Of course, this is only effective as long as actual practice does not completely diverge from the paper trail.
It should be noted that there exists criticism of applying this idea of good faith to definable content, especially considering the parties have “sought to do no more than enforce the terms of a contract freely negotiated”.39
Unfortunately this takes the onus away from the contracting parties, and the lack of accountability reinforces irreverence for best practice in contract management. It has been proposed that there should be “limited room for the court to conclude that those words were used by mistake. The court should not speculate on the commercial common sense behind those words and should not be tempted into constructing an abstract commercial purpose…[and the] court should not fill a perceived gap in the contract unless, without doing so, the contract will not work”.40
The contractor must ultimately ensure that the agreement does not contain ambiguities, does not exploit the position of the other party, and is built on a foundation of iterative documentation in order to arrive at the contract in use. Although the criticisms of common law procedure have been identified and there is support for balanced judgment in ascertaining true meaning of terms, there is an opportunity for the contractor to not only prevent this occurrence, but also simultaneously reinforce a firm position should a contract go to the courts.
THE FUNCTION OF CLAIMS IN RISK PREVENTION
Construction projects are open to a wide array of risks and although the contract can act as an opportunity to prevent this, it is no panacea and circumstances may allow conflicts to prevail. Although the contract is not impervious to the fallout from inevitable risk, there are still opportunities to mitigate the lengths at which an issue can derail a project from the critical path. Commercially speaking, the cost impact is measurable and an understanding of this can be very beneficial to the contractor. Cost impact as a subject would merit a much lengthier discussion and there would be potential to examine the various types of risks versus the avenues for prevention in time, expense, and actual work. The remedies and damages available in construction law are also open to a breadth of common law that addresses outcomes even for very technical areas of the field.
Even assessing the risk of claims in general terms, the first step is to focus on prevention. The analysis here lies in the internal motives of the contractor, and focuses on the balance between securing interests while avoiding a contentious relationship with subcontractors. “Claims are seen by many to be a last resort issue. Even in the construction industry this is true, although some would want to argue that some contractors prepare their claims alongside their tender submissions”.41
The idea is to prevent the claim, and while some may see preparation of claims as preventative, it would be prudent to maintain good documentation as a matter of best practice rather than as a defensive mechanism.
Contractors assume that relationship building is valuable, especially on large projects, considering that the subcontractor community is often small in each area of construction and reputation is critical to commercial growth. However, the benefits to claims can be such that even subcontractors seeking to maintain long-term commercial relationships will take up an issue with the intent to keep working on the project. Contractors understand this to some extent (especially as engineers, designers, and contract managers often find themselves working on the contractor or subcontractor side at different stages) and must be cautious of a subcontractor’s need for liquidity, as this can be a significant indicator of an impending claim. Potentially more detrimental to the contractor can be a lien on the basis of non-payment, which could reflect poorly on the joint venture for future projects and undermine the contractor’s position in court. Liens and claims do not always come without warning, these risks conveniently peak at the point when the subcontractor is most needed and delays are of serious concern. Project delays can mean exponential problems for a contractor because other subcontractors can be affected and a shift in the substantial completion date can result in loss of profit and penalty payments to the client. On large construction projects, commercial disputes are lasting “on average, 9.1 months from beginning to resolution” internationally, and just below 7 months for the UK; “and the number of construction disputes is increasing, there is cause for concern”.42
While certain claims are legitimate and can be well earned, this is an area that is filled with variables and risk therein. A fulcrum for these two parties is the contract, and if administered effectively, it can keep the scales balanced for timely execution of deliverables with little excess cost. Again, retrograde action is much more difficult to perform. The value of contract management is essential in ensuring the subcontractor is sufficiently capable of performance through the RFP, and understanding any obstacles for each party in the negotiation phase. Reflecting such concerns in the contract can alleviate pressure for the subcontractor and create an onus to perform in light of overt conciliations made early on.
Key documents such as the RFP, Letters of Intent, and Bids precede the contract administration stage but are critical to mitigating risk. Beyond the aforementioned relationship and opportunity to assess, claims are made on the basis of procurement practices. “The term 'tendering procedure' means the whole process culminating in the employer awarding the contract and not just the preparation of the tender documents”.43
The language used in the early stage documents is thus very significant in preventing claims, or in preventing the potentially more detrimental enforcements that an unsuccessful bidder can make if fairness of the procurement process is in question. “Unsuccessful [subcontractors] now have much more power and leverage to prevent [another party] entering a contract where they believe that the procurement process was not properly undertaken. [Those] who enter procurement contracts contrary to advertising or standstill requirements now risk not only an expensive cancellation of the contract, but also a significant fine”.44
A pool of disgruntled bidders will be a difficult to negotiate with once aware of their second fiddle status, to the point that they may exploit this to their advantage. Such an issue could potentially undermine the confidentiality of the procurement process and would likely pose as an avenue for issues throughout the project, similar to the way children misbehave often simply because they are expected to.
The claims procedure can go through stages such as mediation, adjudication, arbitration, litigation, and/or alternative dispute resolution. These stages of resolution can be selected or assigned by the courts or by contractual arrangements, and can be facilitated sequentially or selected exclusively, depending on the scale of the issue at hand. Contracts often stipulate provision for mediation or arbitration due to the relatively swift nature of decision and award of damages.45
While cost can still accumulate, such as the arbitrator’s fees and taxation by the courts, if the agreement provides for ‘costs to follow the event’ then it can become a zero-sum game where the loser will pay.46
Arbitration is thus a potential area where the contractor can set terms that are beneficial to their interests, which can mean savings of time and a likely obstacle to court proceedings that can act as a deterrent to the claim. Even less contentious is alternative dispute resolution (ADR), which allows for the maintenance of the business relationship due to its voluntary and more informal nature. The most common method of ADR appears to be mediation, so much so that the courts may insist upon it as a prerequisite: “sufficient should be known about ADR to make the failure to adopt it, in particular when public money is involved, indefensible”.47
Claims procedures that precede the court generally involve or are administered by the Joint Contracts Tribunal (JCT), the Royal Institute of British Architects (RIBA) and/or the Royal Institute of Chartered Surveyors (RICS). While there are various other related organisations, the aforementioned three tend to be relatively more prominent in the United Kingdom.
There are particular points where it may also be beneficial for the contractor to undertake a claim. The contractor must take the wider objectives of the project into consideration when making a claim. Should the tone of the project become contentious, and this can be found in communication amongst subcontractors or even bad press, then all parties get their guard up, thereby increasing the risk of a snowball effect. The overarching exception to a contractor making a claim is if it is based on the merits of contract performance, such as when a subcontractor is at fault for causing delays and subsequently impacting other subcontractors. In such cases, time is critical in preventing delays but also in asserting the claim. The critical path and timeline of events is important to note for deliverables and can identify the time limits for a contractor to make a claim. Under the doctrine of ‘discharge under condition’, a contractor cannot even make a claim on work performed incorrectly if there has been a substantial benefit and the subcontractor’s obligations are near completion.48
Assuming the contractor has not discharged the right to bring an action or a court has prevented it, there are certain points when a claim can be brought after the issue has taken place. Although a project may be complete, a contractor can bring a claim forward if the court allows it and too much time has not passed, this is defines in the ‘limitations of actions’ and assessed relative to the project and facts of the case.49
Hence an understanding of the way the claims process operates can be advantageous to the contractor, in assessing the potential areas of risk and development of the contract accordingly.
EXCEPTIONS AND CONCLUSIONS
There is a great deal one can accomplish with the written word. Most subcontractors are aware how essential and potentially how antagonistic the contractual process can be to the job in practice. However, “whilst the contracts themselves contain inter-related time management and notification provisions, they are only as good as the operation of those respective provisions”.50
The onus is eventually on the contractor to ensure that the relationship reflects the agreement and effectively, they stay true to their word. It is on this basis that unrealistic expectations cannot be imposed on the subcontractor when the contractor is then failing to follow through on management tasks and processing documents. There must also be a concerted effort to deliver payment as each benchmark of the works are completed, as the subcontractor can become a burden when payments are late and they are dependent on fees to remain liquid.51
Over and above the issues within terms, relationship between parties, or claims that may arise, the shared interests of the contractor and subcontractor are fundamental to preventing risk and the courts enforcing project objectives. The case of London Borough of Merton LBC v. Stanley Hugh Leach Ltd elaborates that the works must not be hindered; rather parties should enable one another when possible.52
Both commercial practice and the common law reflect that the comments outlined in this paper are not common-knowledge, nor are they easily executed. The contractor has a demonstrated interest in ensuring the contract management procedures are observed from the outset of the project and key competences are highlighted at each relevant stage of the critical path. It would perhaps be worthwhile, as an exercise of best practice, to train managers to improve risk prevention methods as part of project procedures (part-time post-graduate studies, CPD, etc.).53
While the contract does not provide solutions in all cases, even despite best efforts the alternatives to best practice would likely result in far more detrimental issues.
It is understood that for large construction projects, contract formation cannot simply rest on standard form, nor can the development of bespoke agreements be at the behest of the subcontractor. Fundamental to success of a project are the establishment of project objectives and contractual procedures; only once these initiatives are understood can the contractor relay them to specialists, consultants, or subcontractors. It is important to marry the interests of other parties with the project objectives and find common ground for success.
Once the interests and the benefits have been established, it is also necessary to be mindful of the risks when developing contract terms. As discussed, risks can arise from specific words, to tender procedures and performance of the works. However, where there is risk, there is often opportunity to recalibrate even if significant prevention methods are not in place. Risk prevention is a lofty goal whereas risk mitigation is an attainable, albeit not as measurable, aim for the contractor. The key is identifying the point where a renegotiation of terms or settlement of a claim would be more beneficial to the overall objectives of the project than a protracted conflict.
The satisfaction of the client, project design, and actual construction of the works are all areas that determine risk and where risk can be mitigated. However, the focus on risk has been based on and around the process of contract management due to the consistent nature of the contract. It precedes the project and is referred to long after the project is complete. Additionally, whereas there are uncontrollable variables with the client, in the limits of design, and the ultimate risk of accident or force majeure in construction itself, the contract is simply a reflection of the agreement and can be manipulated to suit unforeseen circumstances to a large extent. The terms of a contract are the ultimate fulcrum of risk in that the court will almost always consult the agreement to determine the rights of the parties and legal ramifications. It is understood by the courts that the contractor is at an advantage due to the scale of works and control of funds. Less openly discussed is the contractor’s culpability in managing the dispute based on the terms they established collaboratively. Although the contract is of course not entirely at the whim of the contractor, subcontractors look to the contractor to establish project goals so that any negotiations are made thereon.
The current discourse in construction law certainly addresses contractual procedures. However, while the focus rests on particular terms, there is little discussion of how terms operate in a contract and in the larger sense of the law. Much of the legal-academic material aims to resolve the issues from conflict and work backwards. This analysis has been conducted in order to root out the issues that cause the conflict and reassess the burden of responsibility in light of the opportunities available for improved contract management. The discussion revolves around commercial principles due to the commercial nature of the construction projects that are examined. There must be a greater effort for the legal sphere to consider commercial objectives and an equal effort for commercial parties to prepare for legal ramifications.
Contractors have a significant number of opportunities to mitigate risk and a multitude of perspectives from which to assess the contract. The observation of and active effort to mitigate such risks can potentially improve the standard for best practice on large construction projects. The improvement of commercial performance can subsequently result in significant changes to the nature of construction law and the interpretation of express and implied terms. The reduction or development of contentious issues may influence the much-needed growth of more theoretical discourse and commercial knowledge in construction law. A theoretical understanding of contract terms and the way in which they function in a project lifecycle would be beneficial in both legal and commercial spheres.