Bespoke Form of Contracts: A Scourge or Necessity?

Bespoke Form of Contracts: A Scourge or Necessity? Chapter 1 Introduction Research Rationale The use of standard forms of contract, FIDIC Red book (Red Book Engineer/ employer designed Contractor executed) was introduced in the UAE during the late 80s and early 90s, more specifically on Dubai Municipality infrastructure projects by the Dubai Municipality, later been transformed to RTA in 2006. Ever since FIDIC based bespoke forms introduced in the UAE, it has been used extensively in the construction industry, the Red book based FIDIC forms are extensively used in different types varying from lump sum to re-measurement contracts by many large organizations. Every project is associated with risk and is inevitable and the impact is spread across the project. Whilst the intention to introduce a standard form of contract was to achieve a balance in terms of risk sharing between the parties, conversely at a later stage clients started amending the standard form of contracts to safe guard their interests. Many such bespoke versions did not achieve the intended purpose as it became one sided due to the alterations. The one sided contracts, in other words i.e. by drafting partial contracts to safe guard the employers risks and financial positions will have a tendency to impact the construction cost. If the risk is high, the cost increases proportionally (Mohamed Hartman, 2000, p 15) UAE as a country has high potential and growth compared to the neighboring Gulf countries in the recent years (2003 2008), which led to many fast track infrastructure and building projects, most of those are innovative, having ambitious aspirations to become international land marks, having the common feature of shorter durations. One of the main reasons for adopting fast track projects was to reduce the financial burdens (loans and repayment period) and to minimize the risk for escalation due to the construction boom in the region. Also in a raising market, the cost of the construction was proportional to the duration of the project as the contractors were including the risk for escalation in their bids. A few examples for such land mark projects with shorter duration captured the attention are Burj Khalifa tower, Dubai Metro, Palm Island and Dubai Mall. The multinational construction interface between the parties and culture stipulated the importance of using standard forms of construction contracts in the UAE, one of the main reasons to use standard forms of contracts are the familiarity among the parties, which has been used across many developments worldwide, even practiced at courts, assumed to be understood by parties, the risks are apportioned in a balance way and understood by even the stake holders, reduced legal and construction cost. As mentioned above, one of such standard form of contract, FIDIC 1987 4th edition red book was introduced by Dubai Municipality in early 90s with amendments to the original form (bespoke version is called as Dubai Municipality general conditions of Contract), later been followed by many public and private sector clients in UAE. Many such amendments in the creation of bespoke versions of FIDIC forms have defeated the intended purpose of achieving a balanced version of contract By the mid of 2006, many clients started using bespoke versions of new FIDIC i.e. FIDIC 99 Contracts, however there is a significant difference between these two forms (FIDIC 1999 FIDIC 1987) of contracts in many areas. Like any other place in the world, the competitions in the construction industry among the contractors are very high in UAE also. Many clients in the region, whilst using open or selective tendering (as they invite tenders from their own tender pool), before and after the current economic crisis, do have the habit of awarding the works to the lowest bidder. In order to overcome the competition in the market, the contractors at times started under quoting the works, were trying to recover through variation and claims at a later stage. This situation resulted in arguments and disputes due to the wrong interpretation of the forms of contract used by different parties, in addition, the unbalanced and void bespoke versions contributed much to these kinds of disputes. Many such disputes were revolving around the poor interpretation and understanding of the variations clauses, leading to claims and disputes on fast track projects. The intended purpose of this dissertation is to identify The essential clauses needed to administer a contract The importance of making right interpretations while using contracts An overview of the bespoke versions of contracts Research Methodology A detailed analysis of Variation clause in Nakheel Conditions of Contract ( bespoke FIDIC 1987) and the possible interpretations by various parties to the contract, briefly stating the difference between 1999 1987 based forms clauses that relates to variation and varied work clauses. Identify the potential difference between the two bespoke versions i.e. FIDIC 1999 1987 4th edition Nakheel Conditions of Contract on major clauses. A case study on a dispute from ALDARs Conditions of Contract (bespoke of FIDIC 1999) on variations while using the bespoke versions of contract Proposed study chapters The intended study focus on the meaning of construction contracts, their existence and the different forms of contracts. The literature review is covered in the first four Chapters, Chapter 2 covers the use of different forms of FIDIC contracts, including a brief history of their start in the UAE, Chapter 3 focus on the essential clauses needed for the administration of any forms of Construction contracts, Chapter 4 an analysis of Nakheels conditions of contract (bespoke FIDIC 1987 4th edition) variation clause, the possible interpretations by different parties to the Contract, Chapter 5 a comparison between Two bespoke forms of Nakheels Conditions of contract (FIDIC 99 and FIDIC 87 4th edition) on major clauses, Chapter 6 a survey to identify whether the employers achieved the intended purpose by using bespoke versions, Chapter 7 analysis of the data collected ,chapter 8 recommendation. An overview of the construction Contracts Construction contracts are generally classified as Oral (when the act will not apply) or written (if the other criteria are met, the act applies). The form of written contracts are again classified into i. A simple exchange of correspondences; ii. A tailor made written agreement; iii. A standard form such as JCT,Fidic etc; iv. Standard terms and conditions of the business. Contract in broader term is defined or expressed as conformity between two or more person i.e individuals, businesses, organizations or government agencies to carryout, or to abstain from doing things in exchange for something of value. Contracts can be oral or written, using formal or informal terms. If one party to the contract fails to live up to its part of the bargain, there shall be a breach and certain remedies for solving this is available. The expressions of the contract who, what, where, when, and how of the contract describe the binding promises of each party to the contract. In other words the significance of the agreement becomes important only when a breach occurs by the counterpart and it becomes necessary to protect the right of the other party (http://law.freeadvice.com/general_practice/contract_law/contract_agreement.htm) and the breach of contract is recognized by the common law and the remedies are available as well. On the other hand, the strongest contract, in terms of enforceability, shall have an offer, acceptance with considerations for the exchange, the terms of such an agreement shall be without ambiguity, and is signed by the parties to the contract who has the proper capacity to enter into the contract. Weaker contracts can be classified as verbal agreements or contracts agreed by parties in direct violation of state or federal laws of the country. There are several aspects related to valid contracts; in fact, an entire course in law school is often devoted to contract law (http://www.wisegeek.com/what-is-a-contract.htm). John Adriaanse (2007) quoting Lord Diplock who classified construction contract as â€Å" the sale of goods, work and labor for a lump sum price payable by installments as the goods are delivered and the work done. Decisions have to be made from time to time about such essential matters as the marking of variation orders, the expenditure of provisional and prime cost sums and the extension of time for carrying out the work under the contract†. He also stated that â€Å"a construction contract is best described as a complex web of competing interests†. At the same time Charles.S. Philip (1999) defining contracts as â€Å"binding agreement between two or more persons or parties construction contracts are defined as agreements, oral or written, executed between Clients and Contractors for construction / maintenance work done for compensation†. In another definition â€Å"we must understand that a construction contract is merely a set of criteria, or expectations, t hat bind the contracting parties† (Gilbreath, 1992) The basic elements of a contract are an offer, acceptance of the offer with considerations. This can even be described as concurrence of wills or ad idem or meeting of the minds of two or more parties (http://www.alway-associates.co.uk/legal-update/article.asp?id=165).Consideration, on the other hand, makes sure that e that something is exchanged. In certain situations, the law requires the consideration to be adequate, which is, a relatively reasonable price, or ostensible, where even a Dirham will do. Contracts may or may not be enforceable by law. The good example is; the agreement between the parent and child cannot be enforceable by law whereas the agreement for a loan probably enforceable by law. On the other hand whether a contract is enforceable by law or not depends on many factors, the primary and most important factor being whether the parties to contract anticipated / intended the contract to be legally enforceable or not. Most of the construction contracts are bilateral contracts, some cases the unilateral contracts becomes bilateral with considerations. Contracts can be bilateral or unilateral. In a bilateral contract, each part makes promise or promises to the other party. A good example is while selling a home, the buyer promises to pay the seller AED 1 Million in return the seller agree / promise to deliver the title of such property. Where as in a unilateral contract only one party to the contract make the promise. A good example is the reward contract. X promise to pay a reward to Y if Y find Xs stolen car. Here Y is not obliged to find Xs stolen car, but X is obliged to pay the reward to Y only if Y finds Xs car. The consideration for the agreement is Ys trust on Xs promise or Y giving up his legal right to anything he wanted at the time he was in the process of finding of the car. Here, conditions precedent to Xs obligation to pay is the finding of the car, although this is not a legal condition precedent as technically no binding contract has arisen until the time car is found (because Y hasnt agreed / accepted Xs offer until he find the car, referring back to the basis of contract as it requires offer, acceptance and considerations), the terminology â€Å"condition precedent† is used in contract law to establish a condition of promise in an agreement. For example, If Y has promised to X to find the car, and X has promised to pay Y when the car was found, Xs offer has been considered as a condition attached to it, and an offer and acceptance have been occurred. This is an incident in which a condition precedent attached to a bilateral contract. In the construction industry, the significance of having a balanced contract agreement has become essential to avoid disputes and to facilitate a smooth administration during the construction period. According to Lord Lathams report 1994, â€Å"constructing the team†, construction is a very unique process, the construction industry is different than the manufacturing and other industries, each project is unique with its nature and conditions, having heterogeneous conditions and situations, however definition of Latham for contracts not limited here, but include the design activities, advise and other legislations (Adriaanse 2007) which specify many details that a construction contract should take care of. Chapter 2 The Importance of using Standard forms of Contract 2.1 Introduction The adversarial nature ([Cheung et al., 2006] and [Cheung and Yiu, 2007]) and inborn risks (El-Sayegh, 2008) of the construction industry contributes to the speedy developments of construction disputes. Construction disputes are originated by many sources (Cheng et al., 2009). One of the main sources is the lack of understanding on the Contracts. Deprived interpretation and poor understanding of the construction contracts make the contracts clauses ([Broome and Hayes, 1997], [Cutts, 2004] and [Styllis, 2005]) and legalese ([Cutts, 2004] and [Candlin et al., 2002]), which results in differences between the parties to the contract on their legal rights and responsibilities. It is to be noted that this statement is justified in a study conducted by Mohamad and Zulkifli (2006), where majority of the contractors reported about the problems in understanding the contract documents. It is to be concluded that contractors need to be well versed in the interpretation and understanding of claus es stated in contracts. Dispute resolution methods at the early stages of disputes are the soft-skill resolution technique, i.e. avoidance (White, 2002), which offers a practical approach to prevent the predictability of conflicts that may occur in a project by understanding the form of contract used. The main objective of dispute avoidance technique is to promote teamwork and to create a harmonious atmosphere (Cheung, 1999). Thus, a proper appreciation of the construction contracts to the stakeholders will prevent a dispute from rotting, although a total elimination may be impossible. The importance of this chapter is to make a improved insight into the need for clarity of contract documents. Furthermore, it will assist contract drafters and experts review and clarify the clauses of the contract form in an understanding way to the parties. After the parties understand and consent to the clauses stated in the contract, the parties would recognize their obligations and contractual rights as required in the contract. 2.2 The need for contract clarity The need for this research comes up out of many conflicts identified in the construction industry due to the usage of different versions of contracts with amendments. A good example is, the senior officials of a leading developer in Dubai alleged that false ceiling collapsed and burst the pipes above the false ceiling at the buildings were related to the supervision problem and lack of access to the project site by the engineers (Developer Eyes ‘supervision authority2007). The engineers were not allowed on site due to some health and safety construction complications at certain times. This resulted inadequate supervision for the works. The problem heated up although the standard contract form clearly points out that the engineer, as being responsible for the overall supervision and direction of the project. Additionally, the Engineers representatives had the right of access to the works and construction site of the contractor (Clause 23 of bespoke Form). An explanation for this dispute was, contractor misinterpreted the conditions of contract and also failed to understand the legal obligations outlined in the contract. Thus, the question of clarity of contract conditions in the contract must be resolved. In addition, the court usually try to find out the intentions of contracting parties using plain, ordinary and popular meanings of the words. Scott vs Wawanesa Mutual Insurance Company brought out the clarity issue to the court attention (1994). The judge held that if the language of an insurance contract is ambiguous, the contra proferentem doctrine applies, that is the rule against the party who impose the inclusion of the ambiguous clause in the contract. On the other hand, if the wordings are unambiguous, the courts would not give any different meaning from what is expressed in its clear terms, unless the contract is highly unfair or hold an effect contrary to the intention of the parties (Duhaime, 2007 Duhaime, L., 2007. Part 7: interpretation of previous termcontracts.next term Duhaime Law, Victoria, Retrieved 22 May 2008, from .Duhaime, 2007). Thus, clarity of contract clauses is very important for the construction industry too. This shows the importance of understanding the c ontract by the contracting parties. Besides, the legalese takes place in the contract. The use of highly formal and technical language in legal documents disturbs interpretation (Feinman, 2003). Legal drafters made most damage by shrouding the mysteries of contracts with complex language and technical legal terms (Cutts, 2004). The deficiencies of legalese are mainly due to the unnecessary length and complexity. Sometimes, there are more serious errors that go unnoticed (Hill, 2001) because the interpretation of the contract clause was not actually written or interpreted in the contract (Thomas et al., 1994). Legalese would result the contracting parties fail to appreciate the contractual rights and obligations in a project (Semple et al., 1994). In the end, it shatters the working atmosphere of the project (Wang and Yang, 2005), resulting claims and delay to the project delivery. 2.3. Understanding the importance of standard form Construction contracts are well written agreements duly signed by the parties to the contract to define their contractual positions, relationships and obligations (Zaghloul and Hartman, 2003). The conditions of the contract are critical to ensure that the parties are put up by rules and regulations (Semple et al., 1994). The reduced understanding of the construction contract usually lead to construction disputes, as highlighted by many researches such as ([Thomas et al., 1994], [Semple et al., 1994], [Broome and Hayes, 1997] and [Mohamad and Zulkifli, 2006]). It is simply because of the reason that the parties could not achieve their contractual expectations (Harmon, 2003). Dubai Municipalitys be spoke forms of contract was followed and amended by various developers in the UAE industry. The origin of the contract can be traced to FIDIC Red Book 1987 standard form of contract. It had several amendments and revisions over the years by many developers and private sector clients in the UAE. The latest version of this form of contract was formulated in 2001 (Dr.Sam, 2004). The old-fashioned language used in it makes it difficult to understand and make the right interpretations. This is mainly due to lack of clarity and use of legalese in the contract clauses. Table 1 and Table 2 give a summary of clarity and legalese problems identified in the contract clauses of this Form. 2.4 History of FIDIC and other Standard forms of Contracts used in UAE Industry The most brilliant designs for any civil engineering or building project would remain in the documents and paper unless turned into reality by operations. This transaction process requires i.e. from the design to the reality requires the selection of the contract that reflects the aspirations of the parties as well as the demands of the successful project. The essential skills required for a Contract Administrator is the selection and management of proper form of contract and for each project, both the key criteria needed to be considered and risks should be identified and allocated, before the selection of the proper form of contract. This can be done from a range of standard forms of contract. In the UAE, the FIDIC form of contract (red book) was introduced in the early 90s for the infrastructure projects by Dubai Municipality, later been followed by many major clients such as Emmar, Nakheel and Damac. The standard form of contract identifies the roles and responsibilities of the parties, their agrents and provides rules to protect direct parties from doing wrong. The selection of the form of contracts depends on various criteria such as the responsibility and position of the parties involved in the contract. For example, factors such as , magnitude and nature of the works, procurement method (Lump sum, Measurement, Cost reimbursement), Design responsibility ( whether by the Employer, Part by the contractor or fully by the Contractor), roles and relationships (Client, Contractor, Design team and Specialists), the type of cost control document used (such as bill of quantities, schedule of rates, priced specification or contract sum analysis),Payment method (stage, time rela ted, turnkey) and Time (Open, fixed, acceleration and Damages). (Martin Brook, third edition, p 33-44) The various such forms of contracts available are JCT written by the Joint Contract Tribunal, NEC New engineering contract, a form recommended by Michal Lathams report (1994) for the use of both public and private sector clients because of its flexibility and written in simple English, ICE provided by the Institution of Civil Engineers, GC/Works/1 for Government Contracts, ACA Project Partnering Contract- PPC 2000, FIDIC..etc. A brief history of the FIDIC form of contract along with available forms are described below as the dissertation is focused on the FIDIC, the most commonly used for both building and Civil Engineering projects in the UAE. The Fà ©dà ©ration Internationale des Ingà ©nieurs-Conseils (â€Å"FIDIC†) organisation was founded in 1913 by France, Belgium and Switzerland. The UK joined only in 1949. The first edition of the Conditions of Contract (International) for Works of Civil Engineering Construction was published in August 1957 having been prepared on behalf of FIDIC and the Fà ©dà ©ration Internationale des Bà ¢timent et des Travaux Publics (FIBTP). The form of the early FIDIC contracts was prepared in line with the fourth edition of the ICE Conditions of contract. One difference with the initially published FIDIC contract was that they were based on the design being provided by the Employer or his Engineer to the Contractor. It therefore became best suited for various civil engineering as well as to various types of infrastructure projects such as roads, bridges, dams, tunnels and utility works such as water, sewerage etc. At the same time it was not so suited for contracts having major items of plant that were manufactured away from site. This led to thought of having the â€Å"Yellow Book† (the traditional one is known as the â€Å"Red Book† it was called as Red book because of the red color of the cover page) published in 1963 by FIDIC for mechanical and electrical works. This had the provisions for testing and commissioning which was more appropriate for the manufacture and installation of plant. The revised (second edition) was published in 1980. The revised editions of both Red book and yellow books FIDIC was published in 1987. A most important feature of the revised edition of Red Book (or â€Å"Old Red Book†)was provision for the Engineer to act impartially while giving a decision or in any action which affect the rights and obligations of the parties, whereas the previous versions assumed this implicitly. Although this talk concentrates on the new FIDIC forms, it should be remembered that the Old Red Book remains the contract of choice throughout much of the Middle East, particularly the UAE. A new form of contract was published (known as the â€Å"Orange Book†) in 1995 for the use on projects procured as design and build or turnkey, dispensing with the Engineer, providing for an â€Å"Employers Representative† who, while determining the value, costs or extensions of times need to: â€Å"determine the matter fairly, reasonably and in accordance with the Contract†. However, in 1999 FIDIC published new versions of the Red and Yellow books together with a Green and silver Books called as the short form of contract and turnkey contracts respectively. One of the significant differences between the 1999 edition and 1987 4th edition was the arguably diminishing role of the Engineer; a fair interpretation is making the Engineer as an assistant to the Employer. The other differences between these two versions will be discussed in the following chapters of this dissertation. Chapter 3 3.1 The important clauses and terminologies needed contract administration and a comparison with the bespoke version selected for the dissertation work During the process of making bespoke versions of contracts by amending the articles of the standard forms shall be done with extreme care as they run the risk of damaging the consistency as well as the integrity of the contract and the other contract related documents. Most of the standard conditions of contracts are developed over many years and been highly complex to deal with the unforeseen problems and legal decisions including statute law and an ever changing world. The contract must state clearly the documents that are having the status of the contractual documents, following are the documents that shall be considered as the contract documents. i. The signed agreement ii. Tender iii. General and particular conditions of contract iv. Drawings v. Bills of Quantities vi. Specification vii. Schedules viii. Program There are certain clauses required in the contract to facilitate the smooth administration of any contracts. The following are the commonly found and essential clauses required in construction contracts between the employer and the contractor irrespective of the forms and types of contracts. A detailed analysis with its importance is analyzed in this chapter for the dissertation purpose. Possession the date by which the employer shall provide possession to the contractor of the site to enable the work to begin, In FIDIC 1987, the commencement of work is described under the clause 41.1. The commencement shall be given with in the period agreed in the appendix to tender and failure to provide possession to the site within a reasonable time is interpretted as the breach from the employer.(CEM course material, Construction Law, chapter..). Under FIDIC 1987, the employer will, with the Engineers notice to commence the works, give to the Contractor the possession of the site (E.C Corbett, FIDIC 4th Legal Guide, p 238-239). Failure to give possession is dealt under clause 42.1, under such circumstances, the Engineer shall, after due consultation with Employer and Contractor determine Contractors entitlement for extension of time and also the associated cost, which shall be added to the Contract price, notify the Contractor with copy to the Employer (E.C Corbett, FIDIC 4th Legal Guide, p 238-239). Hence this clause is essential while drafting an agreement or contract for the administration. Completion The date, by which the contractor shall have the obligation to finish the work, this can be extended under various provisions if the employer or his contract administrator / engineer grant extension of time. Under FIDIC 1987, upon substantial completion of the work, the Contractor serve notice to the Engineer with copy to the Employer for the taking over certificate, and if the work in the view of the Engineer is substantially completed, issue a taking over certificate with in 21days. This is a very essential clause in any form of contract as in the absence of a completion date in the contract; the contractor shall be required to finish the work only within a reasonable time(ref: John Uff..). Non completion this clause shall deal with the situations when the contractor fails to complete the work by the agreed completion date or the extended completion date. If the work is not completed within the specified time, due to any reasons that the contractor is not liable or any concurrent delays, the contractor get the benefit of having an extension time with associated costs. However for Contractors own delay, the contractor shall not be entitled for the entitled for any extension of time, the remedy available in the contract is to make payment to the employer as liquidated damages or penalty as mentioned in the contract. Hence it is very essential to have a non-completion clause in agreements and contracts. Liquidated damages / Penalty Liquidated damages are usually amount is fixed and genuine pre-estimate of the loss in cases of breach, easy to calculate on building or commercial projects, however not easy on infrastructure projects. Whereas penalty is also a fixed amount, the contractor needs to pay this if a breach occurs. However in UAE, the term penalty is applicable as the same is followed in civil court. Whereas, under the English Law, Liquidated damages are applicable, if the sum mentioned in the appendix to tender is penalty and not the liquidated damages, the Contractor under the English law can challenge it, however under the UAE Law Civil code, Article,.. the penalty is applicable. Most of the Countries penalties are not acceptable. Refer, for example, a few leading cases on penalties, Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79, 86-87, where the House of Lords recognized the principles on how to decide a damage clause that is actually a penalty and thereby unenforceable. â€Å" This case was cited by the High Court of Australia in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, section 12, and by the Supreme Court of Ireland in ODonnell v Truck and Machinery Sales Limited 1998 4 IR 191. The Supreme Court of Canada has adapted a similar approach in Elsley v. J.G. Collins Ins Agencies, [1978] 2 S.C.R. 916, 946, and does not allow for any recov ­ery of an amount exceeding the actual damage† (J.Frank McKenna (2008) Critical Path. Reed Smith, p1-6). Hence this clause is essential in a contract or agreement. Defects liability- The defects are to be rectified with the period mentioned in the contract. Failure to rectify the defects within a reasonable time will enable the employer to engage a third party to do the work and deduct the amount from the contract sum. Under FIDIC 4th edition, clause 62 deals with the defects liability period. The issuance of the defects liability certificates signals the completion of the Contract and under FIDIC form, such a certificate shall be issued within 28days from the completion of Defects liability period, in both forms of FIDIC 99 as well as in 87 including the bespoke versions, the defects liability period shall not be extended beyond 2 years from the taking over certificate (E.C Corbett, FIDIC 4th Legal Guide, p391-392). Variations any variations should be authorized by the employer before the contractor is entitled for the payment. Variations are common to traditional procurement path than the Design and Build system (Ashworth, 1998). In construction due to the complexity of construction works it is almost impossible to complete a project without changes to the plans or the construction process itself however good and the complete the design details are at the start of the project. Baxendale and Schofield (1996) define variation as any change to the basis on which the original contract was signed. Construction plans are formed form of designs, drawings, quantities and specifications earmarked for a specific construction site and Variations are imminent in any construction project due to various reasons from finance, design, aesthetic, geotechnical, geological, weather conditions to feasibility of construction. Hence it is essential to have a provision to instruct and ev