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  Construction Law

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 Abstract

Introduction

Construction programme requirements in the UK

FIDIC Red Book

NEC3 ECC contracts

Comparative Analysis of FIDIC Red Book and NEC3 ECC Contracts

Conclusion

  

Abstract

 

Given the increasingly volatile and inherently risky nature of the construction business the Parties involved in the construction agreements place a high premium on construction planning and the form of construction contracts to be adopted to ensure timely completion within the agreed budget limitations. The boom in international construction business necessitated internationally accepted forms of standards contracts and this need has been satisfied with the enactment of standard forms of construction contracts, such as FIDIC Red Book and NEC3 ECC. The objective of this essay is to assess the importance of planning in construction and to explore the requirements for construction contracts  under the internationally accepted forms of FIDIC Red book and the NEC3 ECC.


Introduction

 Planning in construction projects assumes a  particularly fundamental role in the management and the execution of a construction operation. It entails defining the scope of work, identifying activities involved and resources needed, establishing project duration, determining sequence and construction methods, and setting out strategies for controlling resources. Construction planning ensures that work can be fulfilled within budget and time constraints[1] and it is often cited as ‘prerequisite’ for success in construction operations[2]. Improper planning on part of the Contractor is often found  to be a contributing factor in project delays[3]. Thus, the construction planning is not area which can be overlooked in the construction process, since everything pretty much depends on it[4].  The construction planning comprises of two stages; pre-tender stage and contract stage[5]. Following paragraphs will revisit the different forms of contracts used in the ‘contract stage’ of construction planning.

Construction contract programme requirements in the UK

Under a construction contract one party, commonly known as the Contractor, undertakes to carry out works for another party, commonly called the Employer, involving the erection, alteration, repair or demolition of buildings or other structures on land.  These contracts are usually termed as a construction contracts and where they relate to the contraction of a building in a plot of land and distinguished from civil engineering contracts which relate to the works of infrastructure such as roads, bridges and the like[6]. The main matters for which construction contracts normally makes provision are the extent of the obligation undertaken by the contractor and the means by which those obligations may be varied gradually: the time for completion and interim control of the progress of the works; the machinery for the payment of the contract; supervision of the works on behalf of the employer; insurance against the range of risks and the remedies available to the parties in respect of the default. In addition to the employer and the contractor, the contract includes other collateral contracts where the contractor needs to hire accomplished architect or engineer[7]. It is also common that construction contracts are administered by the employers’ representatives, commonly known as an agent, who are conferred authority to act on behalf of the supervisor[8].

Different countries have different legal frameworks governing the construction contracts. The legal framework which governs construction industry in UK is the Housing Grants, Construction and Regeneration Act 1996. This act is also referred to as the Construction Act 1996[9]. Construction contract is defined as ‘an agreement undertaking construction operations, inclusive of subcontracted work and ‘surveying work or advice on building, engineering, decoration or landscape’ in ss 104 and ss105 of the Construction Act 1996[10].  The 1996 Act was enacted to ensure ensures prompt payments during the supply chain and quick and straightforward  adjudications on the disputes that might aries. As it is set out in the Construction Act 1996, the payment under the construction contracts are carried out under strict compliance with these rules[11]:

(1)A party to a construction contract is entitled to payment by installments, stage payments or other periodic payments for any work under the contract unless—
(a)it is specified in the contract that the duration of the work is to be less than 45 days, or
(b)it is agreed between the parties that the duration of the work is estimated to be less than 45 days.
(2)The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due.
(3)In the absence of such agreement, the relevant provisions of the Scheme for Construction Contracts apply.
(4)References in the following sections to a payment under the contract include a payment by virtue of this section.

 

However, the ordinary contract law rules apply to the construction contracts as well and therefore the basic rules of offer and acceptance must be fulfilled; acceptance must be unambiguous and unconditional and any deviance from the terms of the contract are regarded as a counter offer as in the case of Trollope & Colls Ltd and Holland, Hannen & Cubitts Ltd v Atomic Power Construction Ltd[12]. In the event of late completion, construction contracts provide provision to the amount of damages either in the form of liquidated damages or penalty[13]. The seminal case Amalgamated Buildings Contractors Co Ltd v Waltham Holy Cross UDC corroborates the importance of time clauses in construction contracts[14]

 

FIDIC Red Book

FIDIC, (Federation  Internationale  Des  Ingenieurs-Conseils) is an international standards organization based in Geneva, Switzerland. Its myriad forms of construction contracts have gained an unprecedented popularity in the international construction undertakings[15]. FIDIC contracts are preferred for  being balanced- equitable apportioning of risks, rights, and obligations, well-tried- has long been used in contracts, accepted– recognized, in wide use for international contracts, supported– recommended or necessitated by international organizations and  effective– succinct and clear provisions, time limitations, and dispute resolution. The Red Book of FIDIC, in particular, offers rules and regulation which are sufficient and essential to the construction contracts and has been in use in the international construction activities for over 40 years now[16]. Below considered are some features of FIDIC Red Book contracts.

 In terms of payment, the Red Book is considered to be a ‘re-measurement contract’. There are two prices mentioned in the Red Book; they are ‘accepted contract amount’- the amount accepted in the Acceptance Letter, and ‘contract price’- the price that the Employer pays the Contractor at the end. They are usually different given the fact that FIDIC contracts allow for readjustment (S 14.1)[17]. FIDIC contracts allow stage payments and the price is payable on Bill of Quantities. Clause 16 of the Red books affords the right for  contractors to suspend Work in cases of either delayed payment (S 14.7), delayed interim payment certificates (S 14.6), or failure on the part of Employer to comply with employer financial arrangements  (S 2.4)[18].

 Subsection 8.2 of the Red Book stipulates that the Contractor complete all the Work by the Time for Completion. If the Contractor fails to complete the Works by the time stipulated, then the Contractor will be subject to pay delay damages (liquidated damages in English common law) in accordance with the sum stated in the Appendix to tender. However, pursuant to S. 20.1 the Contractor is entitled to request an extension of the Time for Completion from the engineer provided that the Contractor gives the notice of claim for extension of the Time Completion within 28 days (should) becomes aware of the event underlying the claim[19]. If the notice is given too late, then the Employers will be discharged of all the liabilities in relation to the claim.

Dispute resolution provisions (DRPs) are furnished in the Sections 20.2 to 20.8 of the Red Book[20]. These dispute resolutions of the Red Book are complicated since they  adopt a so-called ‘multilateral’ mechanism of dispute resolution provisions[21]. Should any disputes arises parties can refer to the Contact Engineer under Section 20 of the Red Book. Under Section 20.1 parties should serve their claim-  to the contact engineer, who has 42 days to either reject or approve the claim. This allows prompt resolutions on site by the Contact Engineer.  In case the parties cannot settle the disputes through the Contact Engineer, then they can resort to Dispute Adjudication Board (DAB)- a board comprising one to three members, selected by the parties to the contract. The parties refer their disputes in writing to DAB[22] and the  DAB is entitled to additional information, further access to the site with a view to deciding on the dispute. Moreover, the DAB is required to give its decision in 84 days. If either Party is dissatisfied with the DAB decision, they are required to serve a notice of dissatisfaction to the other Party within 28 days. If neither of the parties serve notices of dissatisfaction after 28 days of DAB decision, then the DAB decision will be binding on both of the parties. Next DRP available to the Parties is ‘amicable settlement’[23]. At this juncture the Parties are urged to settle disputes amicably. If not, then their last recource is international arbitration- the Rules of Arbitration of the International Chamber of Commerce (ICC)[24].

NEC3 ECC contracts

NEC3 ECC, another form of standard construction contracts, has been garnering popularity and support in the international construction industry. It has recently been used in high -profile projects, such as the London Olympics. NEC3 ECC offers great flexibility in terms of payment with Options ranging from A to F. Additionally, the Employer can choose as many secondary Options as he or she sees fit. Option A is  a ‘lump sum’ contract (priced with activity schedule), Option B is a remeasurement contract (priced with bill of quantities), Option C is a target contract with a lump sum, Option D is a target contract with a bill of quantities, Option E is a cost reimbursable contract, and Option F is a management one. Option A offers the best price certainty  while, Option B and D offer the least price certainty[25]. When it comes dispute resolution, NEC3 ECC offers two options to the Parties; Option W1 and Option W2. Option W2 is intended to resolve disputes in compliance with the Construction Act 1996, whereas Option W1 is meant for disputes where the Construction Act 1996 does not apply. Through both options, the Parties refer their disputes arising in relation to the contract to adjudication. If either Parties are not satisfied with the decision, then they can resort to nominated tribunal– arbitration or court- nominated in the contract. NEC3 contracts have  an ‘early warning procedure’ clause which imposes a legal obligation on Parties to advise each other of any matter that might affect the completion, the cost and the quality of the Work. This is usually perceived by many as the ‘jewel in the crown’[26]. Additionally, the Project Manager can call up a risk reduction meeting, and the other parties is obliged to attend.  This is an important facet of ECC contracts[27].

 Comparative Analysis of FIDIC Red Book and NEC3 ECC Contracts

The simplicity and the clarity of NEC3 ECC contracts is one of their advantages over FIDIC contracts. Misunderstanding and misinterpretation lead to more and more disputes. Thus, the NEC3 ECC contracts endeavor to deploy the simplest and clearest language possible in their contracts[28].  The FIDIC utilizes abstruse structure and vocabulary which can be dated back to 1860s, which hinders comprehension and leads to disputes among the parties.  However,  the plain English NEC3 ECC uses has not been met with universal acclaim. It has its opponents who assert that plain English negates the legal certainty of the contract.[29] Another  main facet of NEC3 contracts is their  flexibility in relations to payment mechanisms.  While FIDIC Red book contract provides re-measurement option of payment only, NEC3 provides re-measurement,  lump  sum,  cost  reimbursable,  and  target  cost options. NEC3 ECC forms also offers greater flexibility when it comes variations[30]. Another off-putting aspect of FIDIC is that under FIDIC Red Book an Engineer assumes two roles.  Firstly,  the Engineer assumes the role of agent of the Employer.  Secondly,  the Engineer  is  an impartial third party person, expected to determine and decide on the claims of the Contractor. This process definitely leads to conflicts of interest.[31] To make contracts less subject to conflicts of interests, NEC3 ECC forms separate the tasks into four different personalities: project manager, supervisor, designer and adjudicator- not being the agent of the Employer. In this case, NEC ECC3 is more attractive given the fact that the adjudication process is more objective and less prone to conflicts of interests.[32] Even though FIDIC Red Book offer equitable and fair apportioning of risks, which is viewed as employers as fair compromise, NEC3 ECC offers more dynamic and much more proactive risk management with risk registers, early warning and risk reduction meetings[33]. As mentioned above this is really the jewel in the crown of the NEC3 ECC contracts.  Another important aspect of both contracts forms which need to be considered is the force majeure. Both standard forms intend to transfer the force majeure risk to the employers. However, they fail to provide a definitive and exact list of events that might be considered as force majeure.  This makes parties more like to resort to litigation[34].

Conclusion

It has become evident that a suitable construction contract is conducive to the smooth progression and  of any construction. Both internationally used forms, FIDIC Red Book and NEC3 ECC, contain the sufficient clauses and encourage fair allocation of risks. While FIDIC Red Book contracts have been preponderantly prevalent in the international use, NEC3 contracts are also gaining traction given some of their tangible benefits. Once both forms of construction contracts have been reexamined, it has become clearer that both entail their own advantages and disadvantages.

[1]Nicholas J. Carnell, Causation and Delay in Construction Disputes, Wiley-Blackwell; 2 edition (July 15, 2005)

[2] Construction Planning and Manageability Prediction, Tetsuya Miyagawa

[3] Causes of Construction Delay: Traditional Contracts, Abdalla M. Odeh, Hussien T. Battaineh, International Journal of Project Management 20 (2002) 67–73

[4] Garold O, Project Management for Engineers and Construction, McGraw-Hill Science, 2000

[5] P.S Gahlot, Construction planning and management, New Age International (P) Ltd. 2002

[6] Atkinson D, Causation in Construction Law: Principles and Methods of Analysis, Daniel Atkinson Limited, 2007

[7] Furst S, et al,  Keating on Construction Contracts: Main Work, Sweet & Maxwell, 2012

[8] Atkins Ch, Hudson’s Building and Engineering Contracts, Sweet & Maxwell, 2010

[9] Keith Pickavance, Construction Law and Management (Practical Construction Guides), Routledge, 2007

[10] The Housing Grants, Construction and Regeneration Act 1996

[11] The Housing Grants, Construction and Regeneration Act 1996

[12] Trollope & Colls Ltd and Holland, Hannen & Cubitts Ltd v Atomic Power Construction Ltd. 1963

[13] John E. Stannard, Delay in the Performance of Contractual Obligations, OUP 2007

[14] Amalgamated Buildings Contractors Co Ltd v Waltham Holy Cross UDC [1952])

[15]Comparing the Suitability of FIDIC and NEC Conditions of Contract in Palestine, Haytham Besaiso, University of Manchester, 2012

[16] Keith P, Construction Law and Management (Practical Construction Guides), Routledge, 2007

[17] S. 14.1 of FIDIC Red Book 1999

[18] Hewitt A, The FIDIC Contracts: Obligations of the Parties, Wiley, 2014

[19] S. 20.1 of FIDIC Red Book 1999

[20]  B Ellis, M Ben, Ch Scott, L Anthony, FIDIC Contracts: Law and Practice, Sweet & Maxwell, 2010

[21]  Nael G. Bunni, The FIDIC Forms of Contract, Wiley, 1999

[22] S. 20.4 of FIDIC Red Book 1999

[23] S. 20.5 of FIDIC Red Book 1999

[24] S, 20.6 of FIDIC Red Book 1999

[25] Brian Eggleston, The NEC3 Engineering and Construction Contract: A Commentary, Wiley, 2008

[26] Frances Forward, The NEC Compared and Contrasted, Thomas Telford Ltd, 2002

[27] G. Hide, Managing a programme under the NEC(ECC) form of contract, ICE

[28] Comparing the Suitability of FIDIC and NEC Conditions of Contract in Palestine, Haytham Besaiso, University of Manchester, 2012

[29] Benefits of the NEC ECC form of contract: A New Zealand case study, J. Nevan Wright, Warwick Fergusson, International Journal of Project Management 27 (2009) 243–249

[30] Rob Gerrard, A comparison of NEC and FIDIC, NEC 2014

[31] Comparing the Suitability of FIDIC and NEC Conditions of Contract in Palestine, Haytham Besaiso, University of Manchester, 2012

[32] Ian Heaphy, NEC V FIDIC, Society of Construction Law Hong Kong, International Construction Law Conference 2010,

[33] A Comparison of the Suitability of FIDIC and NEC Conditions of Contract in Palestine.pdf

[34] The NEC3 Engineering and Construction Contract: A Commentary
By Brian Eggleston


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