CHARTERED INSTITUTE OF ARBITRATORS

EAST ANGLIA/LONDON BRANCHES - JOINT MEETING 19TH

MARCH 2015

DISPUTE AVOIDANCE – A PRACTITIONER’S VIEW

In my view ‘Dispute Avoidance’ is a term of art; some may even believe it is impossible to avoid

disputes in the construction industry

However, there are things that can be done to reduce the opportunity for conflict, and effective

management by all stakeholders has to be central to this theme

Ask a solicitor what constitutes the most effective dispute avoidance weapon in a Contract

Administrators armoury and in most cases the answer will be “Records, Records and more Records”

Sage advice, but in my view this approach is only part (and a retrospective part at that) of the

answer. Success in avoiding conflict requires close and pre-emptive attention to other matters, and

by all parties involved, from inception to completion of a project or programme of works.

In this short session I shall be looking at some of the main causes of construction conflict which in

turn should point to practical ways of avoiding the need to implement formal dispute resolution

processes. In essence, Dispute Avoidance is the process of removing uncertainty throughout all of stages of the

performance of a contract and making contingency plans for those areas where uncertainty cannot

be removed.

Most disputes have their root causes in the adversarial nature of construction contracts exemplified

by each of the parties having their own objectives and needs including:

• A clash of expectations, usually established during the tender process, aided and abetted by

one party being excessively opportunistic in contract negotiations, and the other being

commercially aggressive, or perhaps optimistic, in pricing,

• Poor allocation of risk,

• Poor communication and contract administration, and

• The parties failing to identify and properly deal with issues as they arise.

These four points seem to summarise the custom and practice of the construction industry in the

Western Hemisphere.

A cross-industry survey conducted by EC Harris in 2014 concluded the top three primary causes of

conflict arising from construction contracts to be (in no particular order):

1. Unrealistic risk allocation between employers and contractors

Primarily due to selection of an inappropriate standard form of contract, or the imposition on

the contractor of risks incapable of quantification at the time of tender. An example of this

would be the imposition of “EPC” or “turnkey” terms following a tender process geared to mere

Design and Build. I shall look at this in a bit more detail shortly.

2. Ambiguities in the contract documents

Notwithstanding that the standard forms of construction contract have been around for a

number of years (decades in the case of some) it is depressing to still see the presence of terms

that are either incomplete, poorly defined or otherwise capable of subjective if not creative,

interpretation. Notwithstanding the best efforts of parties solicitors to plug such gaps, usually by

means of schedules of amendments which in some cases end up with a higher word count than

the document being amended, problems remain. I shall provide one or two examples later.

3. A failure to properly administer the contract

Some standard forms of contract require a more ‘hands-on’ approach to administration than

others. Traditional forms such as JCT, ICC and FIDIC require an interpretive approach – that is to

say there is an implied presumption of good management by both parties in the day to day

running of the contract. The NEC form differs in that its inbuilt processes are said to be a

stimulus to good management (not my words) but require greater resources to administer.

So, looking at a way of avoiding the first potential cause of conflict, my starting point would be that

risk should be owned by the party who is circumstantially best placed to properly manage and/or

control it, and the procurement strategy should be geared to this principle from the outset, having

regard to the prevailing circumstances.

Where risk is not allocated to the party who is best equipped to manage it, it is essential that the

precise nature of the risk is properly defined. Often disputes occur because the risks are not defined

with sufficient clarity or, alternatively, couched in ambiguous terms that open the door to conflict.

Unfortunately, a number of pressures can conspire to interfere with the basic proposition shown on

this slide.

Risk ownership and procurement method are of course inextricably linked, so let’s take a look at the

main procurement options:

This simplified diagram shows the effect of risk ownership on contract price.

On the left hand side, the building contract where most if not all of the design work is carried out by

or on behalf of the Employer, the Contractor’s risk is principally that of on time delivery of the

completed work to a satisfactory quality. Relief is available to the Contractor for any delays by the

Employer in the provision of design information, undeclared ground conditions and exceptional

weather conditions, to mention but a few matters.

Next up, the Design and Construct contract in standard form requires the contractor to take the risk

of completing a design concept prepared by the Employer and then subsequently carrying out the

work.

The EPC contract, (jargon for ‘Engineer, Procure and Construct’) sometimes referred to as ‘Turnkey’

places most of the design and construction risk with the contractor.

In the UK, turnkey contracts are usually bespoke documents being for the most part, extensively

amended standard forms, or in some instances, imports from other jurisdictions such as the USA.

FIDIC- the International Federation of Consulting Engineers, does publish a standard form of EPC

contract – the so called Silver Book.

There are of course disadvantages associated with EPC Contracting:

• The Contract Price will be higher than under other forms of contract; and,

• The Employer has little control over the quality of construction – there is no Engineer

(Contract Administrator) in the FIDIC Silver Book – the Contractor deals directly with the

Employer

• Where there is a substantial amount of underground works,

o few or no tenders is a possibility and

o tenders submitted will be qualified

This slide summarises some differences between the FIDIC EPC and DB Contracts (Although you

could be forgiven for concluding that I’m partisan to FIDIC) I’ve chosen the form simply to illustrate

the comparison within the same standard suite):

In the FIDIC EPC form (Silver Book) Errors in Employer’s Requirements are at the Contractor’s Risk

save for a (very) limited list of exclusions (usually deleted by well-meaning amendments). In the

Plant, Design/Build form (Yellow Book) , any such errors are the Employer’s risk subject to such

errors being unforeseeable by an “experienced contractor” (emphasis added) I shall revisit the

concept of experienced contractor shortly.

Similar provisions exist for Physical Conditions

Regarding bad weather, the Yellow Book permits relief for the Contractor, subject to the test of

exceptionality, whereas with the Silver Book the only relief available for the Contractor is via the

Force Majeure provisions at S/C 19.1 which refer to catastrophic conditions.

Regarding Works supervision I have already made the point that the Employer has no hands-on

influence over the quality of work when using the EPC form.

All very straightforward you may think, but enter the ‘something for nothing brigade’ aided and

abetted by their professional advisors , and as if by magic, the simple design and build contract as

offered for tender grows nasty teeth likely to bite off an unwary head. By this I mean vague

statements within the Tender Invitation, such as “standard form of (whatever) contract

incorporating amendments by the Employer” (emphasis added)

The unwary contractor often fails to understand, until well into post tender proceedings (when for

business reasons there may be an urgency to secure work), that the Employer’s actual requirement

was for the contractor to accept risks inconsistent with the tendered price.

What the contractor may perceive to be a design and build tender is often ‘converted’ to an EPC

contract by means of cleverly scripted amendments to the proposed form of contract,

notwithstanding that the Employer either cannot or will not provide adequate information or time

to enable a suitable risk assessment to be carried out by the tenderers. A favourite target for such an

amendment is the requirement for the Contractor to take responsibility for the accuracy of, and any

omissions within the Employer’s Requirements.

Although EPC contracts do not find much favour within the Contractor community there is nothing

inherently wrong with such agreements, providing the tender documents are sufficiently clear as to

what is required and, more importantly, the tenderers are provided with adequate time access and

opportunity for complete pre-contract due diligence .

This is seldom the case and for reasons I have mentioned previously, contractors are more often

than not faced with Hobson’s choice, having, in some cases, committed substantial resources to

providing a tender.

This was a development set up on a PFI model, where “bankability” was a primary driver. A horrible

term which effectively permits a funding institution to pre-dictate risk apportionment, irrespective

of the need to place risks with the party best able to manage them .

No matter, the Contractor here signed up to a FIDIC Silver Book extensively amended to remove

even the limited means of relief available within the standard form. (by that I mean the removal of

Sub Clause 5.1(d), which relates to information provided by the Employer, and incapable of

verification by the Contractor)

The pre-contract period was driven by political requirements, which resulted in a shortened tender

period of 4 months.

The Employer was a “no-risk” special purpose Company.

It gets worse – airport security requirements precluded any access by tenderers for conducting site

exploration.

Notwithstanding all of this the Contractor took a “punt” and signed up, being keen, for corporate

reasons, to develop its international ambitions.

Once in possession of the site, detailed boreholes conducted by the Contractor revealed conditions

inconsistent with its tendered design solution for the main aircraft parking apron (approximately

three sq km in area), and this required extensive foundation work costing an additional EUR 30m and

delaying the project by 6 months.

We were asked to assist in preparing the Contractor’s claim

There was no meaningful possibility of canvassing for relief under the Contract , but the situation

was ultimately resolved by persuading the Employer that the revised solution presented a massive

saving in maintenance cost over the 30 year period of its concession agreement, and accordingly was

prepared to make a significant contribution to the Capital cost, which in fact prevented the

Contractor facing financial difficulty in completing the project.

The Contractor was lucky on this occasion – there was no obligation on the Employer to take such an

approach

This slide paraphrases the official FIDIC guidance notes, which warn against the gratuitous use of its

EPC contract, but as we have seen from the Airport example, little cognisance of that was taken in

the first instance.

So, now looking at the second of our top three causes of conflict, the key issue is avoiding

uncertainty

In the leading case of Investors Compensation Scheme v West Bromwich Building Society [1998], Lord

Hofmann said (inter alia):

“Written contracts should be clear and convey a meaning consistent with the parties’ intentions…”

Notwithstanding the sterling efforts of drafting committees, many standard forms in current use, are

littered with ambiguities, which in our experience present a consistent source of potential party

conflict.

To demonstrate this theme in the time available I have chosen two propositions to illustrate

uncertainty (unfortunately there are many more):

In the first example I compare the provisions for physical conditions within two standard forms, one

for Design/Construct, and the other, EPC

In the NEC3 form clause 60.1(12) relates to the contractor’s relief entitlement for physical conditions

providing an experienced contractor would not have allowed for them

Compare that with Sub Clause 4.12 of the FIDIC Silver Book : “…by signing the contract, the

Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully

completing the Works; and, the Contract Price shall not be adjusted to take account of any

unforeseen difficulties or costs.”

No ambiguity here, - or is there??

Setting aside syntax issues within the above-quoted FIDIC Sub Clause, the term “an experienced

contractor” is subjective, unless it is expressly defined. Arguably, the incumbent contractor will

satisfy the definition (otherwise why was he given the job), but I don’t think that is what it really

means. If a contractor has previously completed one similar contract he is arguably “experienced” or

are we to apply the “Bolam” test (not much use when the law of the contract is not that of England)

The meaning of this term will depend on the context in which it is used, and it is rare to see that

context fully defined or properly described.

So, where does all this lead to?

This scenario is not based on an actual event in which I was involved (although I have no reason to

believe the photograph is anything other than genuine).

I use the illustration to show the differing approaches taken by a Design/Build contract and an EPC

contract

So in these circumstances, an excavator is happily digging away, when the ground opens up

unexpectedly.

So what would be the D&B Contractor’s position? [slide]

He may argue that the soils report upon which the method statement was based, was completely

inadequate

The Employer’s response would be that an experienced contractor should have foreseen this.

The EPC Contractor’s approach may be that no pre-contract time was provided for the Contractor to

carry out its own checks. “Hard luck you!!” would be the Employer’s response – “You signed the

Contract”

Notwithstanding the respective rights and wrongs, it is a fact that this particular project would have

been delayed and additional cost incurred, inevitably resulting in a claim.

All avoidable with the benefit of clearly qualified statements in the contract regarding foreseeability,

contractor competence and provisions for relied upon information where the risks are

unquantifiable.

My second example of uncertainty in drafting, relates to climatic conditions – weather.

As can be seen from the above standard forms provide an eclectic approach, for the most part

leaving the parties to sort it out for themselves – but how often do they do this?

In this example we were asked to help an International Contractor with its EOT claim for bad

weather – in this case rain.

The Contract was FIDIC Red Book and the jobsite was 27 miles in length, passing through two

separate climatic regions of the country

Clause 8 of the contract was amended to provide this formula for calculating time relief.

A celestial onlooker could be forgiven for concluding “they’re making it hard for themselves” !!

In addition to being a roadbuilder the contractor is in this case was required to possess the intellect

of Einstein

I don’t propose to analyse this formula now or we will be here all night, but perhaps we should

perhaps spare a thought for the parties who were obliged to implement it.

The formula was found to be inoperable (hence the Contractor’s claim) and as it turned out the

Kenyan Highway Authority had merely cut and pasted it into the contract using a Ugandan

precedent.

Average climatic conditions in Uganda are totally different to those in Kenya, but the formula also

failed because it made no provision for the time consequences of adverse weather conditions – that

is to say, time spent in clearing up, pumping out etc after it had stopped raining.

Based on the submissions we made at the time, on behalf of the Contractor, the Highways Authority

amended this provision, and the Contractor obtained relief.

This could have been avoided if the parties taken a pre-contract look at the environment of the

project and the nature of works to be undertaken, and agreed specific rainfall amounts and

effective periods of duration, beyond which relief was available upon proof of loss.

In summary, parties are entitled within their contract, to a clear and unambiguous statement of

their respective rights and obligations but with close attention within the drafting to the substantive

needs of the transaction.

However, Judge Stephen’s words on this slide are a stark reminder of the banana-skins we should

seek to avoid when drafting contracts.

Poor Contract Administration is the last of our top three causes of conflict

Having invested much time and expense in arriving at an agreed contract, it is completely illogical

that parties pay mere lip-service to its requirements – until of course there is a disagreement – but

that is what we see happening all the time.

Earlier in this presentation I mentioned the difference in approach to management between

standard forms such as FIDIC; ICC etc, and NEC

The NEC form takes a more prescriptive approach to contract administration, hoping to dissolve the

potential for conflict within its processes for planning and programming, early warning, and

compensation events.

Taking programme as an example, the requirements are extensive as to what the programme

should contain (17 requirements in all), and the process for update and acceptance is all clearly and

comprehensively set out in core clause 3.

In addition the lump sum contract (Option A) makes provision for alignment of the Activity Schedule

(aka Contract Sum Analysis) with each iteration of the programme.

Unfortunately compliance with these requirements is the exception rather than the rule

The above slide is representative of what we find – and it does go on:

It begs the question of the parties’ ability or competence in understanding and properly

implementing the provisions – a worrying observation, when taking into account that the

requirements (for NEC in particular) are defined in such detail, and even more so for other standard

forms that contain nothing like the same extent of process requirements

Effective contract administration requires a combination of good interpersonal skills with technical

knowledge and ability.

In conclusion, a typical construction industry project involves the bringing together of groups of

people with diverse interests, and in the pursuit of conflict avoidance, all parties are involved.

Accordingly to avoid the possibility of disputes my summary checklist would be as above

END OF PAPER