This judgment from the Inner House of the Scottish Court of Session is therefore very useful as an indication of the UK Courts’ current approach to causation of delay and extensions of time. Of course, this may not be the end of the story as City Inn still has the chance to lodge an appeal to the Supreme Court.

Key Elements

The dispute centred on a late-running project to build a hotel in the city of Bristol. Shepherd was employed by City Inn to carry out this project under an amended version of the 1980 edition JCT contract (a UK standard form of building contract with Quantities). The adjudications which followed the late finish resulted in Shepherd being awarded a 9 week extension of time (“EoT“) made up of 4 weeks awarded by the Architect and a further 5 weeks from the Adjudicator. City Inn was unhappy with this result and took the matter to the Outer House of the Scottish Court of Session. They applied for various orders including
a declaration that Shepherd were not entitled to an EoT; a reduction of the Architect’s award of 4 weeks EoT; and an order for payment of outstanding liquidated damages for delay.

Shepherd counterclaimed for a further 2 weeks EoT and for consequent loss and expense. The matter eventually proceeded to trial and was heard by Lord Drummond Young.

The main elements of the case were a bespoke clause covering entitlement to an EoT (clause 13.8), and the cause of the delay, taking into account the multiple delaying factors which occurred and the extent of their impact.

On the first issue, Lord Drummond Young found that clause 13.8 could not logically apply to instructions which caused delay just because they were in themselves late. Lord Drummond Young also noted that City Inn had not referred to their clause 13.8 rights until this juncture, and that neither of the parties appeared to take the clause into account when acting.

On the second – and more interesting – issue, causation and delay, Lord Drummond referred back to another contract clause (clause 25) to give his judgement. He said that under clause 25 the architect was to exercise his judgment and fix a “fair and reasonable” completion date. He held that an apportionment exercise may be necessary where there is concurrency or no dominant event.

The parties had been unable to locate an electronic, logic linked version of the original programme and so had to use a basic programme showing the activities and durations of the project. Lord Drummond rejected City Inn’s expert evidence which tried to establish, retrospectively, a critical path which led to the conclusion that Shepherd was not entitled to any EoT at all. Instead, he favoured Shepherd’s expert who said that he had attempted to establish a critical path, but that it was impossible to do so accurately. Lord Drummond preferred this common sense approach and found that, using this analysis, Shepherd was entitled to 9 weeks EoT.

City Inn appealed unsuccessfully with most of the judgment concurring with Lord Drummond’s reasoning. The majority opinion was set out by Lord Osborne, and contains five principles relating to the evaluation of a delay and loss plus expense claim. Of course, the Court was examining these issues under clause 25 of the JCT form. However, I think these general principles would have relevance to most construction contracts and illustrate the likely approach that would be adopted by the UK Courts:

1. For an EoT claim to succeed the relevant event must be shown to be likely to cause delay or have caused delay.

2. Whether or not a relevant event causes delay is a matter for common sense.

3. It is for the decision maker to decide what evidence to use in forming his conclusion. This may or may not include a critical path analysis. What matters is that the evidence used is sound, whatever form it takes.

4. If there is one dominant cause, all other causes will be disregarded. The dominant cause must be a relevant event for a claim to succeed.

5. It is for the decision-maker to apportion the delay to completion of works in a “fair and reasonable way” where there are two (or more) causes of delay, but only one of which is a relevant event and neither is dominant.

Although Lord Calloway dissented from the ‘apportionment’ reasoning, all three judges concurred in the result and on the critical path analysis being relevant but not necessary to decide the outcome of an EoT claim.

Implications for future cases

I should have of course stressed that this was a Scottish Judgment. What this means is that the decision is binding on the lower courts of Scotland but not so on the English courts – although given that it is an appeal court decision it will at least be persuasive in England.

What is most striking is that all the judges leaned heavily towards the arguments for being guided by principles of fairness, reasonableness and common sense. Many of the arguments put forward centred on the true meaning and consequences of events being concurrent. However, Lord Osborne stated that the important question was not whether events were truly concurrent, but rather the effects on the completion date of the events. In a similar spirit, Lord Carloway talks about the Architect applying “professional judgment” and “using his and not a lawyer’s common sense“.

In terms of implications for future cases in the UK, the judgment must not be considered an approval of the use only of common sense and fairness at the expense of a critical path analysis. In this case the critical path analysis presented was not considered sound and so was not used to form the judgement. However, that is not to say it may never be used to determine EoT claims, but rather it is up to the decision-maker as to whether he uses the critical path analysis in his “fair and reasonable” decision-making process.

And what of its implications further afield – in the international arena? I think the judgment and the arguments employed would be useful to anyone involved in disputes on causation and EoT’s where there are concurrent events and particularly where there is no critical path analysis or such evidence is flawed.

FIDIC talks about the Engineer making a “fair determination” whenever required to determine any matter under the Contract [Sub-Clause 3.5] and the provision dealing with extensions of time [Sub-Clause 8.4] refers to an extension of time “if and to the extent that completion……..is or will be delayed by any of the [specified] causes“. So the same arguments about causation, apportionment and concurrency could run under a FIDIC based contract.

Similarly, the NEC construction form NEC3, which treats delay events as “Compensation Events”, requires the Project Manager (who has to act “as stated in this contract and in a spirit of mutual trust and co-operation”) to assess “the length of time that, due to the compensation event, planned Completion is later than planned Completion” [Core Clause 63.3]. Interestingly, in NEC, assessment of the impact of the event includes “risk allowances for cost and time for matters which have a significant chance of occurring and are at the Contractor’s risk under this Contract” [Core Clause 63.6].

And, of course, I cannot sign off without mentioning that Pinsent Masons acted for Shepherd Construction on this case!

Presently, many companies in the UAE rely heavily on the use of standard form construction contracts (“SFCCs”) as a basis for their contractual obligations, as opposed to using bespoke construction contracts drafted for each project.

There are various types of SFCCs which have been developed by different entities in different regions. Some examples of SFCCs include the Fédération International des Ingénieurs-Conseils or International Federation of Consulting Engineers (“FIDIC”) construction contracts, the Joint Contractors Tribunal (“JCT”) construction contracts, the Australian Standards construction contracts and the list continues.

The FIDIC Red Book 1987 and 1999 editions (which are construct only contracts) are the most commonly used SFCCs in the UAE.

The FIDIC 1987 Red Book is a more employer friendly contract, whereas the newer FIDIC 1999 Red Book is a more balanced contract. As the 1987 edition is an employer friendly contract, it is still used by many companies in the UAE.

Design and build (“D&B”) contracts and engineer, procure and construct (“EPC”) contracts have traditionally been used sparingly in the UAE. However, with the increase in the number of experienced contractors in the region over the past few years and the wide variety of expertise that is now offered by construction contractors, D&B and EPC contracts are finding their way into the market.

SFCCs are very useful instruments for parties seeking to enter into a contract for the performance of construction work. They generally address a majority of the issues which should be considered when entering into a construction contract and are particularly useful where the works to be performed are relatively simple. There are a variety of advantages with using SFCCs, which include the following:

• The terms of SFCCs have an element of certainty to them as they have been tried and tested and many of the provisions have been the subject of litigation in various jurisdictions. Therefore, the parties can ascertain how certain clauses have been interpreted in the past and will generally have familiarity as to their meaning and intent.

• SFCCs are relatively quick to procure (assuming they are not heavily amended) and parties are generally willing to accept the clauses in SFCCs as they are regularly used in the industry.

• The use of SFCCs generally results in reduced legal costs as a party may choose to use a SFCC that has only minor amendments. Furthermore, it is quicker to amend a SFCC rather than draft a bespoke construction contract.

• SFCCs generally cover most of the issues which need to be considered when entering into relatively simple or common construction contracts. Therefore, the parties can be less concerned that key issues are not addressed or considered by the parties when entering into a contract.

Despite being widely used and tried and tested, SFCCs are not appropriate to use for all projects. Parties need to carefully consider the terms of the SFCC and assess whether such a contract is appropriate in the circumstances. Some of the inherent risks with the use of SFCCs include the following:

• SFCCs are generic documents that must be amended to reflect the actual intent of the parties. The key risk areas for each project must be considered and the SFCC should be amended accordingly. Parties often make the error of relying on unamended (or inadequately amended) SFCCs which will not always address the unique risk issues in a project and may result in disputes arising as the contract does not adequately allocate risk.

• SFCCs are not always amended correctly, which can lead to uncertainty when clauses are interpreted. For example, if a party is filling in the blank for interest to be paid on outstanding invoices, the mere insertion of a figure will not be appropriate. Care needs to be taken to specify whether interest is calculated yearly, monthly or daily. This is an example of a very simple error to make, but it is surprising how frequent these errors occur when SFCCs are utilised.

• When amending SFCCs it is important to take care to ensure that the amendments flow through the whole contract and that all related clauses are amended. It is frequently the case that a party will amend a clause, which also affects the operation/interpretation of another clause, which in turn causes an inconsistency in the contract and leads to confusion.

• Certain clauses in SFCCs may be inconsistent with the applicable local law. It is important that parties consider this issue carefully, otherwise the situation may arise where a party is relying on a right in a contract which is not enforceable in a particular jurisdiction. For example, the enforcement of termination for convenience clauses in the UAE is questionable and a party seeking to rely on this right may find that they have no entitlement to do so. The same applies with respect to the applicability of time bar clauses. Therefore, it is important to consider whether the terms of a SFCC are purporting to introduce legal concepts which do not fit within the bounds of the local law.

From the above it can be seen that there are both advantages and disadvantages with using SFCCs. The key is for parties to consider the convenience and cost effectiveness of SFCCs in light of the need to have a more tailored contract which specifically addresses all the pertinent risk issues. Furthermore it is particularly important to assess whether the provisions of the SFCC are consistent with the local laws which govern the contract.

Care needs to be taken when using SFCCs. In an attempt to cut legal costs many companies use SFCCs without appropriate legal advice. Consequently, a SFCC which may appear to be your friend at the outset may well end up being your foe in the long run.

By Sachin Kerur and George Varma

“Tests on Completion

The first 30 days shall be a monitoring period during which the Contractor sets up the operation of the plant and conducts his own water quality tests to confirm that the final effluent consent has been met. At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.”

We have met the final 30 consecutive days successfully and want taking over. The Employer says we must complete the 90 days which takes us outside of the construction period and hence delay damages are being threatened.

I say we have satisfied the contract at the end of the 30 consecutive days and we should get Take Over even though it is not 90 days.

Have you any idea if we are right in our assessment?

Answer:
Firstly, a couple of brief provisos. I assume that you have made no amendments to the Yellow Book that affect this issue. I’m also assuming that, as you say, otherwise the works have indeed all been completed in accordance with the Contract.

Have the Tests on Completion been passed and are the Works ready for Taking Over?

Obviously your argument is that having satisfied the first 30 day monitoring period and then completed the further 30 consecutive day period and having notified the Engineer that the plant is complete and meeting the Process Guarantee, you have therefore satisfied the requirements for completion and Take Over.

Clause 10 – which deals with Taking Over – says that the Works must have been completed in accordance with the Contract and that a Taking-Over Certificate must have been issued. The Employer must issue such certificate within 28 days of an application if the Works are substantially complete in accordance with the Contract (i.e. apart from minor outstanding work and defects not substantially affecting the Works); otherwise the certificate is deemed to have been issued.

Crucially, “completion” for these purposes includes:

• achieving the passing of the Tests on Completion; and
• “completing all work which is stated in the Contract as being required for the Works to be considered completed for the purposes of taking over”.

So it all comes down to (1) what is required to achieve passing of the Tests on Completion and (2) what the Contract states needs to be completed to achieve take over.

Under the Yellow Book, “Tests on Completion” means “those tests which are specified in the Contract or agreed by both Parties…and which are carried out under Clause 9 [Tests on Completion] before the Works…are taken over by the Employer”.

Clause 9 goes on to spell out the process for carrying out these tests, which falls into 3 stages – pre-commissioning tests, commissioning tests and trail operation – the latter which is intended to show that the plant is operating reliably.

Ambiguous provisions

I think that the Engineer/Employer will forcefully argue that waiting for the 90th day to elapse is part of the “trial operation” and is required for you to pass the Tests on Completion. I agree that there is some ambiguity in the wording in Volume 3 of the Contract as it states: “At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.” However, my own view is that the drafting of the full testing period is clear and explicit – “The test on completion duration shall be 90 days“. Bearing in mind that FIDIC explicitly states “The documents forming the Contract are to be taken as mutually explanatory of one another” I do not think that this wording is actually inconsistent with the words: “which then shall be met by a further 30 consecutive days before Taking Over can take place”. In my view, all the Contract is saying is that the actual commissioning tests period is 30 days but there is then a further 30 day trial operation period to ensure the plant is operating reliably. This is also consistent with the description of Tests on Completion (and the 3 stages) described in Clause 9.1.
Of course, it is open to you to request clarification on this point from the Engineer. Clause 1.5.2 of the General Conditions provides that: “If an ambiguity or discrepancy is found in the documents, the Engineer shall issue any necessary clarification or instruction.”

You do not mention if the Engineer in this case is an independent engineer or is part of the Employer organisation. Whichever is the case, he may well come to the same view as the Employer and, in my opinion, this would be consistent with:

• the express wording (“The test on completion duration shall be 90 days“);
• interpreting the documents as mutually explanatory of each other; and
• the 3 stage process of Tests on Completion which includes a “trial operation”.

Whether or not the Engineer is truly independent, Clause 3.5 applies when a party asks the Engineer for clarification and provides that he must consult with each party in an endeavour to reach agreement. If agreement is not reached, “the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”

The Engineer must give notice to both parties of the determination with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 (Claims, Disputes and Arbitration).

What do you do now?

Whilst I think that the correct interpretation is that the testing period is the full 90 days, I am conscious that complying with this period will put you in delay and at risk of liquidated damages for delay. Therefore in practical terms, I think that you should at least make the argument that you have already substantially completed. I think that there is sufficient ambiguity in the Volume 3 wording to argue that the Tests on Completion have been completed and that you are entitled to issue of the Taking-Over Certificate. Therefore you should apply for issue of this certificate if you haven’t already done so (although if you haven’t already done so you will still have to wait at least 28 days before the Engineer is obliged to issue the certificate or you can argue that it is deemed to be issued).

Under Clause 10.1 [Taking Over of the Works and Sections], the Engineer is deemed to have issued a Taking Over Certificate if he fails either to issue a TO Certificate or rejects the Contractor’s application for a TO Certificate within a period of 28 days after receiving the Contractor’s application.

You have not said whether or not the Engineer has rejected the application. If he has not, and more than 28 days has elapsed since you issued it, then the TO Certificate will be deemed to have been issued on the last day of the 28-day period.

Of course, if you applied for the TO Certificate right before the end of the 30+30 days, then the Engineer has up to 28 days to issue or reject, and you are almost in the same position as if your completion test phase was 90 days. If you applied substantially earlier than that then it will make a bigger difference and might be the difference between completing on time or late.

If you are late, then there probably is no harm in making the application for a Taking-Over Certificate. Note that in accordance with Clause 10.1.3(b) of the General Conditions, if the Engineer wishes to reject the application, he has to give reasons and specify the work that is required to be done by the Contractor to enable the TO Certificate to be issued. Even if the Engineer has purported to reject your application, you might be able to argue that he has not done so in accordance with the contract, because he has not specified the work that is required to be done in order to enable the TO Certificate to be issued. Of course in my view, he is likely to simply point to the further 30 day trail operation period under the Contract.

Delay to Testing

Whilst I do not think you have a basis of claim (as my interpretation of the Contract is that you have not yet fully passed the Tests on Completion), if the Employer’s insistence on you waiting until the end of 90 days after the start of the testing period is not permitted under the Contract, there is potentially the right to claim for delay. Clause 7.4.5 provides that “If the Contractor suffers delay and/or incurs Cost … as a result of a delay for which the Employer is responsible, the Contractor shall give notice to the Engineer and shall be entitled to claim both an extension of time and “payment of any such Cost plus reasonable profit, which shall be included in the Contract Price” (Clause 7.4.5(b)). Equally there is the ground in Clause 8.4.1 (e), being “any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site.” The Employer’s Personnel, as defined, includes the Engineer.

Any right to claim will be subject to strict compliance with FIDIC’s notice provisions in Sub-Clause 20.1 (Contractor’s Claims)). I have previously stressed the importance of getting your notice exactly right in the previous Q&A; click here to read more. After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 (Determinations) (see above) to agree or determine these matters.

One final note

Finally, do you have any minutes or notes of any discussions with the Employer about completion testing? If you do, have a look at them to see whether they clarify the position. Obviously it will be helpful if you have evidence that you and the Employer intended the tests to consist of the 30-day monitoring period plus the second consecutive 30-day period only. It is worth noting that FIDIC Yellow Book does not include an “entire agreement” clause precluding extra contractual documents/negotiations in interpreting the Contract. If you have clear evidence that the parties both intended the completion tests to last for 30 days plus 30 days (only) then you may be able to claim successfully that the figure 90 was inserted into the contract by mistake instead of 60, in the event that the dispute goes to arbitration.

]]> http://kluwerconstructionblog.com/2010/04/14/tests-on-completion-under-the-fidic-yellow-book/feed/ 0 http://kluwerconstructionblog.com/2010/02/02/ask-the-expert/ http://kluwerconstructionblog.com/2010/02/02/ask-the-expert/#comments Tue, 02 Feb 2010 10:44:58 +0000 Sarah Thomas http://kluwerconstructionblog.com/?p=346 Continue reading →]]> Question:
I am a project manager for the employer on a power plant project based in Europe. We have been on quite good terms with the contractor up until now. Last week the contractor sent us a claim for 12 weeks’ delay to the programme and for compensation costs (we are using the FIDIC Yellow Book (Plant and Design Build) 1999 form and English governing law). They are saying that dealing with contamination in the ground discovered in the last few weeks will cause a delay. We had a couple of site meetings with the contractor and sub-contractor about the programme and the potential delays, prior to the contractor sending the claim. I have two issues with the claim: firstly, we do not believe that the ground conditions will cause 12 weeks’ delay; our estimate would be closer to about 6 weeks. Secondly, the contractor’s written notice of claim is just a couple of lines in an email to me and I am not sure this counts as proper “notice”.
I do not want to jeopardise our relationship with the contractor, but obviously I am concerned to limit our exposure to any delay costs. I would appreciate any advice about how we can deal with this claim from our contractor.

Answer:
Let’s start by considering whether or not the contractor has given valid notice of the claim. In fact, even before we come onto that, I should just touch on whether or not the contractor has a claim in the first place. You do not say that you are disputing the existence of the pollution nor that it was “Unforeseeable” for the purposes of the contract (for the benefit of others reading this, “Unforeseeable” and “physical conditions” are defined in the FIDIC Yellow Book as not reasonably foreseeable by an experienced contractor by the date for submission of the tender and “physical conditions” means “natural physical conditions and man-made and other physical obstructions and pollutants which the contractor encounters at the Site when executing the Works”). Therefore as ground pollutants are expressly covered, I assume that you accept that the contractor has encountered unforeseeable physical conditions at the site which in principle give it the right to claim an extension of time and payment of costs under Sub-Clause 4.12.4 of the contract.
But Sub-Clause 4.12.4 makes that right to claim expressly subject to Sub-Clause 20.1. Sub-Clause 20.1 sets out strict time-limits for giving notice. Again, you do not say that the contractor’s notice was given late so I am assuming that you accept that it was given on time but I suggest that you check this carefully anyway. As a reminder, 20.1 requires the notice to be given as soon as practicable, and not later than 28 days after the contractor became aware, or should have become aware, of the event or circumstance giving rise to the delay. Note that this is days, not business days. You say that the pollution was discovered in the last few weeks so timing could be pretty tight. However, it is worth bearing in mind whether the Contractor has in fact given valid notice before the email. 20.1 talks about the notice needing to make a claim for extension of time and costs under Sub-Clause 20.1 and describe the event or circumstance giving rise to the claim. So the contractor can potentially fulfil this requirement in just a couple of lines and it is also not clear that he even has to issue this in a separate notice (i.e. separate from communications on other matters such as Programme, progress of Works, etc). Could any previous correspondence/documentation issued to the Engineer conceivably satisfy this requirement?
Also, significantly, I note that the email was sent to you. Was the Engineer copied in as well? Clause 20.1 actually requires the notice to be sent to the Engineer. You need to find out when, if at all, the Engineer received the notice and whether or not this was before the 28 day deadline. It is also worth checking whether your particular contract provides for notice formalities and whether this precludes email. FIDIC unamended simply says that notices shall be in writing and delivered by hand, mail or courier “or transmitted using any agreed system of electronic transmission as stated in the Appendix to Tender”. So you need to check this to see if email is allowed.
Sub-Clause 20.1.2 sets out quite clearly what is the effect of a failure to comply with this timescale: the contractor will not be entitled to any extension of time or costs and the employer will be discharged from all liability in connection with the claim.
In addition to the initial notice, the contractor must send to the Engineer a fully detailed claim which includes full supporting particulars of the basis of the claim and of the extension of time and/or additional payment claimed, in accordance with Sub-Clause 20.1.5. This must be sent within 42 days after the contractor became aware/should have been aware of the event or circumstances giving rise to the claim, unless any other period has been agreed between the contractor and the Engineer. The contractor is also obliged to keep such contemporary records as may be necessary to substantiate any claim (Sub-Clause 20.1.4). You will need to check whether or not these further obligations have been complied with in time.
Turning to your other issue with this claim – the length of the delay claimed by the contractor. As you know, the Engineer can respond with “disapproval” or with “detailed comments” if he considers that the delay claimed is too long. He can also request any necessary further information to help him assess the claim, but note that he must respond on the principles of the claim within the time limit set out in Sub-Clause 20.1.6, namely 42 days after receiving the claim or any other period he has agreed with the contractor. For that reason I am hoping that the Engineer’s assessment is well underway and even though there are queries about the validity of the claim, you need to make sure that this is the case.
Of course, he will also need to comply with Sub-Clause 3.5 (Determinations) which means he has to consult with both employer and contractor firstly to try and reach an agreement. This will be your opportunity to put forward your case for any notice non-compliances and regarding the length of delay impact. If the parties don’t agree he makes a “fair determination”. If at this point, you don’t agree with this determination it is always open to you to invoke the dispute resolution procedure and seek the decision of the Dispute Adjudication Board if there is one in your Contract.
To sum up, the contractor has to overcome several hurdles relating to the form, content and timing of the notice in order to benefit from its entitlements resulting from delays due to unforeseeable physical conditions. You will need to review the notice carefully against the contractual requirements referred to above and consider whether all the information has been provided in time, in the right format, to the right people. Given the clear language of Sub-Clause 20.1 it would be hard for the contractor to argue that compliance with clause 20.1.1 is not a condition precedent – i.e. if it does not comply, it cannot benefit from the relief. This strict approach was in fact adopted in a recent Scottish case. You may find that the contractor has not submitted a valid claim at all.  Concurrently, the Engineer will need to continue his assessment of the claim and preparation of his response in relation to the length of delay.

]]> http://kluwerconstructionblog.com/2010/02/02/ask-the-expert/feed/ 1 http://kluwerconstructionblog.com/2010/01/08/were-turning-green-new-green-contract-addendum-is-released/ http://kluwerconstructionblog.com/2010/01/08/were-turning-green-new-green-contract-addendum-is-released/#comments Fri, 08 Jan 2010 22:18:15 +0000 Andrew Ness http://kluwerconstructionblog.com/?p=319 Continue reading →]]> The U.S momentum to build “green” is rapidly gaining popularity, with the office market currently leading the way toward more sustainable structures. The construction industry, including the publishers of form construction contracts, is scrambling to keep up. ConsensusDOCS, a relatively new group of industry organizations that is promoting a family of contract forms that have been released in a steady stream since 2007, has now provided a document for contractually assigning the parties’ respective liabilities when entering into contracts for a green building.

The leading set of green building standards and certification process used in the U.S. to date is the LEED certification process, developed by the U.S. Green Building Council. Achieving a given LEED rating (Silver, Gold or Platinum) depends not only on the structure’s design but on its construction process and how it actually performs once in operation. Many commentators have noted that this creates the potential for significant disputes as to whom, if anyone, may be found liable if the project fails to achieve the targeted LEED rating. There is a consequent perceived need to control contractually the associated liability risks of project participants on green projects.

The new “ConsensusDOCS 310 Green Building Addendum,” released November 11, 2009, is intended to address this concern via a single Addendum for incorporation into each of the major contracts for the project. The basic scheme of the Addendum calls for the Owner to designate a Green Building Facilitator (GBF) to take the lead in identifying the measures needed to achieve a particular green status (such as a particular LEED certification level targeted by the Owner), coordinate their implementation by the project participants, and gather and submit the documentation needed to actually achieve the desired certification. The GBF can be the existing Architect/Engineer, the prime Contractor, or an entirely separate consultant. The project Architect remains responsible for incorporating the chosen “green measures” into the project design, with assistance from the GBF.

Most interesting are the provisions assigning potential liability. First, all project participants other than the GBF are expressly relieved of liability for failure of the selected green measures to achieve the targeted green status. The GBF’s own potential liability is left for determination under the GBF’s separate contract with the Owner. Second, damages from failure to achieve the targeted green status such as expected operating cost savings, tax benefits, and enhanced marketing opportunities, are all deemed “consequential damages,” and made subject to any waiver of consequential damages in the underlying contracts. Third, all project participants (including the GBF) preserve any specific limitations or assumptions of liability in their respective underlying contracts with the Owner.

Doubtless other forms will be unveiled in the coming months and years to deal with the growing popularity of green building, and their provisions will likely evolve over time to account for changes in green building methodologies and certification processes. The ConsensusDocs Green Building Addendum merely starts the conversation, offering one considered approach to dealing with the new legal issues associated with sustainable building projects.

Eric Casher
Andrew Ness

]]> http://kluwerconstructionblog.com/2010/01/08/were-turning-green-new-green-contract-addendum-is-released/feed/ 0 http://kluwerconstructionblog.com/2009/12/23/youre-creeping-me-out-design-creep-under-the-fidic-silver-book/ http://kluwerconstructionblog.com/2009/12/23/youre-creeping-me-out-design-creep-under-the-fidic-silver-book/#comments Wed, 23 Dec 2009 12:38:49 +0000 Sarah Thomas http://kluwerconstructionblog.com/?p=298 Continue reading →]]> In the wake of the current downturn, employers will increasingly look for greater budget certainty under EPC or Turnkey contracts. This is where the contractor undertakes all tasks – design, construction, management etc – so that, upon completion, the employer merely needs to ‘turn the key’ and operation of the plant or building can begin immediately. The whole point is that the contractor assumes price risk in return for relative autonomy over how he delivers the project – provided of course he meets the employer’s output requirements. But often employers want not just price certainty but also to retain control over design approval and how the project is actually delivered. This can lead to claims of ‘design creep’ by the contractor when he perceives that the employer is trying to introduce design improvements under the guise of reviewing the contractor’s documents.

But what is ‘design creep’? Why are contractors upset at its use and are their concerns justified?

I will be concentrating on the provisions of the FIDIC Silver Book, although design creep is not something particular to the Silver Book, or indeed any construction standard form.

Sub-clause 5.2 of the Silver Book allows the Employer to review the Contractor’s Documents. Nothing controversial about that. But what happens if the Employer undertakes a design review and makes ‘comments’ on those documents? Will those comments amount to a “Variation” (entitling the Contractor to time and money)? Or will they be taken as something less than a Variation, so that any additional work will have to be absorbed into the Contractor’s schedule and budget? This is the classic example of “design creep”.

What can the Contractor do when he considers that a comment constitutes a variation?

The first question to ask is: Does the “comment” amount to a “variation” under the terms of the contract? A Variation is defined in the Silver Book as “any change to the Employer’s Requirements or the Works which is instructed or approved as a variation under Clause 13″. Clause 13 [Variations] may be initiated at any time, “either by an instruction or by a request for the Contractor to submit a proposal”. The Contractor is often put in a difficult position because he must execute each variation unless he promptly gives notice that he cannot implement it (because of lack of goods, increased risk to safety or suitability of the Works or to his ability to meet Performance Guarantees). Obviously the broader the Employer’s Requirements and the Works are described in the contract, the less likely it is that the comment will be seen as a change to the Employer’s Requirements or to the Works.

However, if the comment does require a clear change, the Contractor’s first step should be to write to the Employer asking him to confirm whether the comment amounts to an instruction to change the Works under clause 13.1.

The second step is to follow the requirements of sub-clause 20.1 [Contractor's Claims] and request the Employer to agree or determine adjustments to the Contract Price and the Schedule of Payments, proceeding in accordance with sub-clause 3.5 [Determinations].

But what if the comment does not amount to a ‘change’ as such. Is the Contractor still bound to follow it? This is the more difficult area. The Contractor could argue that the provision of comments that do not specify “non conformity with the Contract” is not a proper use of the review procedure under sub-clause 5.2. That clause only allows the Employer to give notice to the Contractor if a Contractor’s Document fails to comply with the Contract. There is a difference here between the FIDIC Silver and Yellow Books. The key difference is that the documents are submitted “for review and/or for approval” (if so specified) under Yellow but under Silver, they are submitted for review only. Thus under Silver, the argument can be made far more strongly that the Employer can only issue a notice if the documents don’t comply with the Contract. Under Yellow on the other hand, where a document is specified “for approval”, the Engineer can give notice of approval with or without comments. This is an important difference and is the reason why “design creep” may well be a bigger problem under the Yellow Book than under Silver. But under both contracts, it is important to remember that the Employer’s scope to review the Contractor’s documents is confined to issuing a notice that the document does not comply with the Contract. A Contractor would also be well advised to check the formalities for issuing instructions and variations under his contract – to see whether he does in fact have to implement the change. For example under the FIDIC contracts, an instruction must (1) be given in writing and (2) state the obligations to which it relates as well as the sub-clause in which the obligations are specified [Sub-clause 3.4].

No matter what approach the Contractor adopts, to the extent that the Contractor is making a claim under a FIDIC contract, he will have to comply with the provisions of sub-clause 20.1.

So, what has been your experience of design creep? Is it occurring more or less often? What do you see as the threshold that needs to be reached in order for a comment to turn into a Variation? I would be interested to hear your war stories.

]]> http://kluwerconstructionblog.com/2009/12/23/youre-creeping-me-out-design-creep-under-the-fidic-silver-book/feed/ 2 http://kluwerconstructionblog.com/2009/12/01/a-convenient-ending/ http://kluwerconstructionblog.com/2009/12/01/a-convenient-ending/#comments Tue, 01 Dec 2009 16:51:01 +0000 Joel Heard http://kluwerconstructionblog.com/?p=239 Continue reading →]]> Recent examples illustrate clearly that cancelling a project can be very expensive. The City of Ottawa recently paid over C$36 million to settle claims from contractors arising from the cancellation of a light rail transit project. In Montréal, the termination of a contract to build an incinerator has resulted in years of costly litigation and a large court award against the municipal defendants (which they have appealed).

Particularly in the face of current economic conditions, project owners are well-advised to include appropriate provisions in their project contracts giving them the right to terminate without cause. Although “termination for convenience” clauses are not uncommon in construction contracts, they are, somewhat surprisingly, absent from some standard forms, such as the CCDC 2 – 2008 (the flagship standard form fixed price contract in the Canadian construction industry). Even in robust economic times, termination for convenience rights can provide owners with a measure of flexibility (for similar reasons, the inclusion of an express right to suspend the work for the owner’s convenience should also be considered).

Without a termination for convenience clause, a party who terminates without having appropriate grounds to do so may be exposed to liability for breach of contract. That liability could include not only the terminated party’s out-of-pocket damages, but also its lost expected profits on the unperformed work.

Accordingly, while termination for convenience provisions should address operational and commercial issues unique to the circumstances of the project (including, for example, the timetable and procedures for winding down the work and demobilizing), the key component of a termination for convenience clause is almost always the method for calculating the amount to be paid as compensation to the terminated contractor. Will the contractor be entitled only to payment for the work performed to the time of termination? To what extent should it be reimbursed for its cancellation and demobilization costs? What amounts, if any, should the contractor be paid as compensation for its bid costs, unabsorbed overheads and lost profits? These are some of the questions to which the terms of the contract should ideally provide answers if termination for convenience is contemplated.

To avoid disputes and unpleasant surprises, owners should give thought to including the right to terminate for convenience, and both parties have an interest in ensuring that the compensation to which the party terminated for convenience will be entitled is clearly articulated in the contract.

]]> http://kluwerconstructionblog.com/2009/12/01/a-convenient-ending/feed/ 0 http://kluwerconstructionblog.com/2009/11/02/a-tishoo-a-tishoo-the-walls-fall-down-%e2%80%a6/ http://kluwerconstructionblog.com/2009/11/02/a-tishoo-a-tishoo-the-walls-fall-down-%e2%80%a6/#comments Mon, 02 Nov 2009 22:15:57 +0000 Sarah Thomas http://construction.kluwerarbitrationblog.com/?p=78 Continue reading →]]> It’s official: the swine flu virus is now a ‘pandemic’ according to the World Health Organisation. The illness is of particular concern to the international construction sector, especially in countries where labourers live in communal accommodation. Rapid spreading of swine flu could potentially bring the sector to a standstill, causing significant delays, costs and lost profits.

So, how can Employers and Contractors prepare for a potential outbreak? To give you a flavour of the potential impact, a recent article in the National described the efforts of ETA Ascon Star (one of UAE’s oldest construction companies with a workforce of over 70,000 in 24 camps) to try to minimise the risk of spread.

What should Employers consider?

Employers should check a Contractor’s extension of time entitlement caused by a shortage of labour/staff and potential grounds for additional cost claims. They should consider the likely success of a force majeure claim, entitlement to delay damages, whether any resulting losses are an Employer risk event and whether there are any appropriate insurance policies available.

They probably should also include more robust provisions to ensure the “maintenance of adequate labour resources at all times” so that the Contractor has express obligations to have strategies in place should an outbreak occur.

What should Contractors consider?

Contractors should be aware of their contractual duties (e.g. timely completion, co-operation, reporting), health and safety obligations (including compliance with government rules and regulations), extension of time and cost entitlements, whether a force majeure claim applies, whether their insurance policies can protect them, liability for delay damages and lastly, whether epidemics etc. are an “Employer risk” event.

And what should everyone consider?

Parties should consider their duty of care to their employees and balancing this with maintaining staffing levels and compliance with privacy rules relating to disclosure of staff medical information.

Standard Forms?

Risk allocation for pandemics and epidemics tends to differ depending upon which standard form construction contract you are using. With regard to future contracts, given the global reporting and awareness of the pandemic, any effect of swine flu on construction projects will probably be deemed a ‘foreseeable’ event, not a force majeure. So specific provisions to cover swine flu in all new contracts may be sensible, especially for Contractors, to clarify who bears the risk in the event of an outbreak. For existing contracts it may come down to whether the pandemic was foreseeable at the time of tender.

What does FIDIC say?

Under the FIDIC Rainbow Suite Red (Construction), Yellow (Design & Build) and Silver (EPC Turnkey) Books, the following clauses should be considered:

– Clause 6.7 – has the Contractor complied with its obligation to make suitable arrangements for the prevention of epidemics; without distinguishing between epidemics and pandemics, a persuasive argument can be made that the provisions which refer to epidemics also encompass pandemics.

– Clause 19.1 (Force Majeure) – is the outbreak a force majeure event?

– Clause 17.3(h) (Employer’s Risks) – in Red and Yellow Books only – is the outbreak an operation of the forces of nature which is unforeseeable and therefore an Employer risk event?

– Clause 8.4(d) – is there an “Unforeseeable” shortage of personnel or goods caused by the outbreak entitling the Contractor to a time extension?

Clearly, the biggest hurdle for Contractors will be in demonstrating the event was “Unforeseeable” (i.e. “not reasonably foreseeable by an experienced contractor at time of tender”).

And the NEC3 engineering and construction contract form?

– Core Clause 19 (the ‘prevention’ provision, NEC’s lesser form of force majeure) – could a swine flu epidemic be considered an event of prevention, i.e. stopping the Contractor completing the works by the agreed date or at all? The test is whether an experienced Contractor would have judged, at the date of the contract, the event to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it. So the global awareness of the pandemic remains the problem.

– Prevention is also a ‘Compensation Event’ (Clause 60.1(19)) entitling the Contractor to time and/or money.

– Employer’s Risks (core Clause 80) do not include anything which could be deemed to cover a flu epidemic, but the parties can agree extra Employer’s Risks in the Contract Data section or in the Option Z clauses.

And finally the IChemE International Form of Contract (for use with Process Contracts):

This form contains perhaps the most helpful provisions, at least from the Employer’s perspective:

– Clause 3.6 – has the Contractor complied with the requirement always to have and maintain adequate resources for the proper and timely execution of the works?

– Clause 7.2 – has the Contractor developed, implemented and maintained the health and safety and environmental plans stated in schedule 4 (drafted by the parties)? Does that schedule contain any requirements in relation to pandemics?

– Clauses 12.6 and 26 – has the Contractor taken adequate responsibility for the health and welfare of its personnel?

– Clause 14 – could the inclusion of a force majeure event for epidemics also apply to pandemics?

Finally, some practical legal advice …

Some actions that Employers and Contractors might consider taking are:

– assessing rights and obligations under existing contracts and laws and seeking advice on minimising any exposure;

– re-negotiating existing contracts and reducing risk exposure in new contracts, although I appreciate renegotiation in most cases simply won’t be an option. As it is likely that existing provisions favour the Employer (and a force majeure clause is unlikely to be helpful anymore), Contractors will need to insert express provisions if they want time or money;

– implementing preventative strategies (for example business continuity plans);

– investigating appropriate insurance policies;

– considering health and safety obligations to employees; and of course,

– maintaining records and preparing extension of time and cost claims caused by an outbreak.

Taking steps to manage the risks now may save significant time and costs in the long term. Parties to a construction contract should clearly identify who bears the risk if this pandemic strikes down a workforce and take all appropriate precautionary steps to minimise the spread of the virus.

For those of you who subscribe to practicallaw.com, you may also be interested to read the detailed practice note ‘Pandemic influenza: is your business prepared?‘

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