Mauna Loa Observatory, Hawaii
B.4. Results and discussion
And God said unto Noah, the Ark shall be finished within seven days. And Noah saith, it shall be so. But it was not so. And the Lord saith, what seemeth to be the trouble this time? And Noah saith, mine subcontractor hath gone bankrupt. The pitch which thou commandest me to use has not arrived. The plumber hath gone on strike. And the glazier departeth on holiday to Majorca, even tho I did offer him double time.
Christopher Taylor, Engineering Manager, Shell UK Construction contracts in the distant past consisted of a document of about five pages long.
They generally concluded with a handshake, but underlying such agreements were an essential set of values of competence, fairness and honesty. Today things are different. We have developed a complex and onerous set of conditions that attempt to cover every eventuality and in so doing create loopholes that the legal professions can feast upon. It has often been suggested that the only individuals to make any money in the construction industry are the lawyers! Precious time and resources are thus drawn away from the main purpose of the industry: getting the project built on time, to the right design and use of construction technology at an agreed price and quality.
Everyone in the industry agrees that construction contracts need to become less adversarial and more simply constructed, emphasizing the positive needs of the project. Consultants and contractors should be allowed and encouraged to use their best endeavours and to work together as a team (Chapter 11) rather than watching their individual backs all of the time.
When a project ends up in a protracted dispute, the project will fail to meet its original goals and expectations. In addition, clients will suffer from high legal fees, delayed completion and occupation and general dissatisfaction. The contractor’s profits will diminish and to these will be added additional legal fees. There are no winners under these circumstances.
The British construction industry offers its customers great flexibility. It is envied in many parts of the world. But, due to the pressures involved in getting a project completed as quickly as possible, many construction projects are inadequately or not fully designed before the construction work starts on site. 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. Disputes between the various parties that are involved are an ordinary and everyday occurrence.
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36 Settlement of Disputes
Thankfully most of these differences of opinion or interpretation are resolved in an amicable and agreeable way. However, if the dispute is not managed efficiently it leads onwards to conflict and the project begins to suffer in terms of time, cost and quality. This chapter considers the potential for escalation and the alternative ways in which differences of opinion or judgment can be resolved.
THE REASONS WHY DISPUTES ARISE
The construction industry is a risky business. It generally does not build many prototypes, with each different project being individual in many respects. Even identical buildings that have been constructed on different sites create their own special circumstances, are subject to the vagaries of different site and weather conditions and use labour that may have different trade practices even from one site to another. Even the identical building constructed on an adjacent site by a different contractor will have different costs and different problems associated with its construction. The introduction of new building materials and designs, changes to the procurement and organisation of the project and the poor margins of profitability provide a good platform for disputes. Disputes are therefore likely to arise under the best circumstances, even where every possibility has been
potentially eliminated. Disputes between parties, it should be remembered, are really in no one’s best interests. Here are some of the main areas where disputes might occur:
General
■ Adversarial nature of construction contracts
■ Poor communication between the parties concerned
■ Proliferation of forms of contract and warranties
■ Fragmentation in the industry
■ Tendering policies and procedures
Clients
■ Poor briefing
■ Changes and variation requirements
■ Changes to standard conditions of contract
■ Interference in the contractual duties of the contract administrator
■ Late payments
Consultants
■ Design inadequacies
■ Lack of appropriate competence and experience
■ Late and incomplete information
■ Lack of coordination
■ Unclear delegation of responsibilities
Claims 37 Contractors
■ Inadequate site management
■ Poor planning and programming
■ Poor standards of work
■ Disputes with subcontractors
■ Delayed payments to subcontractors
■ Coordination of subcontractors
Subcontractors
■ Mismatch of subcontract conditions with main contract
■ Failure to follow and adopt agreed procedures
■ Poor standards of work
Manufacturers and suppliers
■ Failure to define performance or purpose
■ Failure of performance
ISSUES FOR THE RESOLUTION OF DISPUTES
The following matters need to be resolved in order to reduce the possibility of future disputes occurring:
■ Clarification of responsibilities
■ Need of single-point responsibility contracts
■ Allocation of risk to the parties who are best able to control it
■ Further investigation of insurance-based alternatives
■ Need to develop and extend non-adversarial methods of dispute resolution
■ Partnership sourcing (contractors and consultants working in a consortium)
■ Quality management and quality assurance
CLAIMS
It is evident from society in general that as individuals we are becoming more claims conscious. Firms of lawyers are now touting their services, often on a no-win no-fee basis.
Everyone wants their pound of flesh and what they rightfully believe belongs to them.
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.
Contractual claims arise where contractors assess that they are entitled to additional payments over and above that paid within the general terms and conditions of the contract.
38 Settlement of Disputes
For example, the contractors may seek reimbursement for some alleged loss that has been suffered for reasons beyond their control. On many occasions the costs incurred lie where they fall and contractors will have recourse to recover them. Thus losses and delays arising from the intervention of third parties who are unconnected with the contract almost invariably fall with the contractor. The fact that a loss has been sustained, without fault on the part of the loser, may merit sympathy, but does not in itself demand compensation.
Where a standard form of contract is used, many attempts may be made by contractors to invoke some of the compensatory provisions of the contract in order to secure further payment to cover the losses involved.
The details of such claims will be investigated by the quantity surveyors and a report made to the architect, engineer or other lead consultant. The report should summarise the arguments involved and set out the possible financial effect of each claim. Quantity surveyors frequently end up negotiating with contractors over such issues in an attempt to solve the financial problems and to arrive at an amicable solution, wherever this is possible.
This is preferable to a lengthy legal dispute.
As with many issues in life, contractual claims are rarely the fault of one side only. If the claim cannot be resolved in this way then some form of legal proceedings may be initiated. Particular care therefore needs to be properly exercised in the conduct of the negotiations since they may have an effect upon the outcome of any subsequent legal proceedings. Claims may be classified in several different ways. They usually reflect a loss and expense to a contractor.
Contractual claims
Contractual claims have a direct reference to conditions of contract. When the contract is signed by the two parties, the contractor and the employer, there is a formal agreement to carry out and complete the works in accordance with the information supplied through the drawings, specification and contract bills. Where the works constructed are of a different character or executed under different conditions then it is obvious that different costs will be involved. Some of these additional costs may be recouped under the terms of the contract, through, for example, remeasurement and revaluation of the works, using the appropriate rules from the contract. Other additional costs that an experienced contractor had not allowed for within the tender may need to be recovered in a different way. This is usually under the heading of a contractual claim.
Ex gratia payments
Ex gratia payments are not based upon the terms or conditions of contract. However, the carrying out of the works has nevertheless resulted in some loss and expense to the contractor. The contractor has completed the project on time, to the required standards and conditions and at the price agreed. Perhaps, due to a variety of different reasons, and at no fault of the contractor, a loss has been sustained that cannot be related to the contractual conditions. On rare occasions a sympathetic employer may be prepared to make a discretionary payment to the contractor. Such payments are made out of grace and kindness. They may be made because of a long-standing relationship and trust between
Claims 39 employer and contractor, or because of outstanding service and satisfaction provided by the contractor. Nevertheless, they are rare occasions.
JCT 98
The standard form of building contract ( JCT 98) seeks to clarify the contractual
relationship between the employer and the contractor. As far as possible, ambiguities have been removed, but some nevertheless remain. If such forms or conditions of contract were not available, then the uncertainty between the two parties would be even greater. This could have the likely effect of increasing tender totals. Under the present conditions of contract, the contractual risks involved are shared between the employer and the contractor. Claims may arise most commonly under clause 26, and these are known as loss and expense claims. They may also arise due to a breach of contract. The contractor must make a written application to the architect, in the first place, stating that a direct loss and expense has occurred or is likely to occur in the execution of the project. The contractor must further state that any reimbursement under the terms of the contract is unlikely to be sufficient (clause 26.1). This information should be given to the architect promptly in order to allow as much time as possible to plan for other contingencies.
As soon as reasonably possible, the contractor should provide the architect with a written interim account providing full details of the particular claim and the basis upon which it is made. This should be amended and updated when necessary or when required. If the contractor fails to comply with this procedure, this might prejudice the investigation of the claim by the architect and any subsequent payments by the employer to the contractor.
The contractor is entitled to have such amounts included in the payment of interim certificates under clause 30.2.2. However, in practice a large majority of claims are not agreed until the completion of the contract. In these circumstances the contractor is entitled to receive part of the claim included in an interim certificate where this can be substantiated.
Contractors
Many contractors have well-organised systems for dealing with claims on construction projects and the recovery of monies that are rightly due under the terms of the contract.
They are likely to maintain good records of most events, but particularly those where difficulties have occurred in the execution of the work. However, some of the difficulties may be due to the manner in which the contractor has sought to carry out the work and thus remain the entire responsibility of the contractor.
Claims that are notified or submitted late will inevitably create problems in their approval. In these circumstances the architect might not have the opportunity to check the details of the contractor’s submission. Such occurrences will not be favourably looked upon by the architect or the employer.
The contractor must prepare a report on why a particular aspect of the work has cost more than expected, substantiate this with appropriate calculations and support it with reference to architect’s instructions, drawings, details, specifications, letters, etc. The contractor must also be able to show that as an experienced contractor they could not have
40 Settlement of Disputes
foreseen the difficulties that occurred. They will also need to show that the work was carried out in an efficient, effective and economic manner.
Claims are for additional payments that cannot be recouped in the normal way simply through measurement and valuation. They are based on the assumption that the works constructed differed considerably from the works for which the contractor originally submitted a tender. The differences may have changed the contractor’s preferred method of working and this in turn may have altered or influenced the costs involved. The rates inserted by the contractor in the contract bills are not now a true reflection of the work that has been executed.
Example
The construction of a major new factory on a greenfield site requires a large earthmoving contract. The quantities of excavation and its subsequent disposal have been included in the contract bills and priced by the contractor. It is found that the quantities of materials to be taken to tips has increased by 25 per cent by volume.
This is due to variations to the contract and the unforeseen nature of some of the ground conditions of the construction site.
The contractor’s pre-tender report indicates that a variety of tips at different distances from the site will be used for the disposal of the excavated materials. The contractor’s tendering notes indicated that the tips nearer the site would be filled first.
In this case they result in lower haulage costs, but in this case are also shown to have lower tipping charges. The disposal of the excavated material therefore includes two separate elements:
■ The haul charges to the tip
■ The costs of the tip
In the contract bills, the rate used by the contractor for disposal of excavated materials represents an average rate. This is based upon calculated average haul distances and average tipping charges based upon the weighted quantities in each tip. A revised average rate for the disposal of the excavated materials can be calculated similarly for the actual quantities of excavated materials that are involved.
The data is shown in Box 5.1.
To simply continue to apply the contract bill rates in similar situations to that shown in Box 5.1 is erroneous. The rates no longer reflect the work to be carried out and the contractor’s method of working, which have been changed by the variation to the contract. Other factors that might also need to be considered are the excavation of different types of construction materials that have been encountered, whether they bulk at different rates or whether they are more difficult to handle.
The increase in the amount of excavated materials, on this scale, may also have other repercussions such as an extension of time which might also need to be considered. The method of carrying out the works might also now be different from that originally envisaged by the contractor. Different types of mechanical excavators
Claims 41
Contract bills
Excavated materials for disposal in the contract bills 1,000,000 m3. Contract bill rate is based upon:
Tip A 500,000 m3 distance 1 km tip charge £0.10/m3 Tip B 300,000 m3 distance 2 km tip charge £0.20/m3 Tip C 200,000 m3 distance 4 km tip charge £0.30/m3
Final account
Actual quantities in the final account:
Tip A 500,000 m3 distance 1 km tip charge £0.10/m3 Tip B 300,000 m3 distance 2 km tip charge £0.20/m3 Tip C 300,000 m3 distance 4 km tip charge £0.30/m3 Tip D 150,000 m3 distance 6 km tip charge £0.50/m3
Average tip charge50,000 60,000 90,000 75,000
1,250,000 £0.22>m3 Average distance 500,000 600,000 1,200,000 900,000
1,250,000 2.56km>m3 Average tip charge50,000 60,000 60,000
1,000,000 £0.17>m3 Average distance 500,000 600,000 800,000
1,000,000 1.9km>m3 Box 5.1 Earthmoving claim
may be required or the plant originally selected to do the work might no longer be the most appropriate. This is especially so where cut and fill excavations are considered. The contractor may also be involved in hiring additional plant at higher charges and employing workpeople at overtime rates, in order to keep the project on schedule.
The contractor must, as a matter of good practice, always put in writing:
■ Applications for instructions, drawings, etc.
■ Application for the nomination of subcontractors
■ Progress of the works and any delays
■ Notification of any claims under the contract in respect of:
– variations
– extensions of time – loss and expense
■ Confirmation of any oral instructions from the architect
The contractor should also ensure that any certificates that are required under the terms of the contract are issued at the appropriate time. These may have some effect upon the validity or otherwise of a contractor’s claim at a later stage.
42 Settlement of Disputes ADJUDICATION
The dispute resolution techniques that are described in JCT 98 include adjudication, arbitration and litigation. The courts may also need to be called upon to enforce settlements that are reached by other methods. The parties may also decide to agree amongst themselves to use other alternative methods to settle their differences, such as alternative dispute resolution. This is considered towards the end of this chapter.
It is claimed to be a non-adversarial technique, although its rise in popularity in the construction industry appears now to have waned in favour of more established techniques.
Adjudication was first introduced into the UK in the mid 1970s. Its application was restricted to disputes that occurred between the main contractor and the directly employed or domestic subcontractors. The process involved using an independent third party, an adjudicator, to help resolve a dispute that had arisen. The adjudicator could be appointed as part of the subcontract conditions, but invariably was only appointed after the dispute had occurred. The main advantage of using an adjudicator was the rapid response of the decision. The decision was binding, although as in all disagreements the parties had the right to take the dispute to a higher authority. Adjudication was subsequently introduced into the JCT form with contractor’s design and more recently into JCT 98. This followed one of the principles of better practice recommended by the Latham Report.
Adjudication is described in clause 41A of JCT 98 and this clause is discussed in Chapter 29. The referral of a dispute to an adjudicator must be made within 7 days (clause 41A2) and a decision must be given to the parties concerned, in writing, within 28 days (clause 41A5). The period for the decision can be extended for a further 14 days if the parties to the dispute agree. The adjudicator, like anyone in hearing disputes, must act impartially to determine the facts and law that are applicable to the dispute.
Adjudication is described in clause 41A of JCT 98 and this clause is discussed in Chapter 29. The referral of a dispute to an adjudicator must be made within 7 days (clause 41A2) and a decision must be given to the parties concerned, in writing, within 28 days (clause 41A5). The period for the decision can be extended for a further 14 days if the parties to the dispute agree. The adjudicator, like anyone in hearing disputes, must act impartially to determine the facts and law that are applicable to the dispute.