Contracts for Construction and Engineering Projects

Donald Charrett

• Publisher: Informa Law from Routledge
• Year: 2021
• ISBN:
  9781000505702
• Edition: 2
• Topic: Derecho
• Subtopic: Derecho contractual

Contracts for Construction and Engineering Projects provides unique and invaluable guidance on the role of contracts in construction and engineering projects. The work explores various aspects of the intersection of contracts and construction projects involving the work of engineers and other professionals engaged in construction, whether as project managers, designers, constructors, contract administrators, schedulers, claims consultants, forensic engineers or expert witnesses.

Compiling papers written and edited by the author, refined and expanded with additional chapters in this new edition, this book draws together a lifetime of lessons learned in these fields and covers the topics a practising professional might encounter in construction and engineering projects, developed in bite-sized chunks.

The chapters are divided into five key parts:

1. The engineer and the contract

2. The project and the contract

3. Avoidance and resolution of disputes

4. Forensic engineers and expert witnesses, and

5. International construction contracts.

The inclusion of numerous case studies to illustrate the importance of getting the contract right before it is entered into – and the consequences that may ensue if this is not done – makes this book essential reading for professionals practising in any area of design, construction, contract administration, preparation of claims or expert evidence, as well as construction lawyers who interact with construction professionals.

Chapter 1 Overview

DOI: 10.4324/9781003206897-1

1.1 Introduction

The theme of this book is that contracts are at the heart of the work of engineers and other construction professionals and should guide and inform their work on engineering and construction projects. The contents explore various aspects of the intersection of contracts and construction law with the work of engineers and other professionals involved in construction, whether as project managers, designers, constructors, contract administrators, schedulers, claims consultants, forensic engineers or expert witnesses. It is aimed at professionals practising in any area of design, construction, contract administration, preparation of claims or expert evidence, as well as construction lawyers who interact with construction professionals in drawing up contracts or resolving disputes. It includes discussion and case studies on issues relevant to construction contracts globally, with particular relevance to common law jurisdictions.

Contracts are the bedrock of commercial relationships around the world. They are fundamental to the implementation of any engineering or construction project and are important for many reasons. First, a contract defines the legal relationships that apply to the commercial interactions that occur whenever a professional carries out work on a project. Second, a contract defines the rights and obligations that are created when parties enter into a contract. Third, a contract provides the legal avenue for enforcing each party’s rights and obligations. Fourth, each party to a contract accepts risks, explicitly or implicitly, by entering into the contract, and the risk “allocation” in a contract can mean the difference between a successful and an unsuccessful project. Fifth, a comprehensive construction contract is also a contract management manual, by clearly defining the scope of work, each parties’ rights and obligations, and the notification and approval processes required for appropriately managing those rights and obligations. Sixth, a thoughtfully written contract will promote important socially desirable objects, such as protection of the environment, avoidance of corruption, elimination of worker exploitation and advancing health and safety. Seventh, a well-written contract will specify clear, structured procedures for dealing with risks when they materialise, in a way that minimises the likelihood of disputes. Finally, if disputes do occur, a well-written construction contract provides for their resolution in the timeliest and most cost-effective manner.

This book is not intended to be a legal textbook for professionals administering engineering and construction contracts. For that, the reader is referred to Contracts for Infrastructure Projects: An International Guide by Loots and Charrett. This book does, however, seek to explain and illustrate the myriad ways in which contracts are at the heart of the work of engineers and other construction professionals, no matter what aspect of design, construction or dispute resolution they are involved in. It uses many case studies to illustrate the importance of getting the contract right before it is entered into, and the consequences that may ensue if that is not done, or if the work is not executed in accordance with the requirements of the contract.

A recurring theme in this book is that every engineering or construction project involves an interaction between time, cost and quality. A successful project is one that fulfils its stakeholders’ expectations, and, inter alia, requires all three elements to be achieved to the satisfaction of the contracting parties. The relevant contracts play a central part in this, by defining what is expected of all parties. Ultimately, project success will only be fully realised if contract success is achieved by the fulfilment of the parties’ expectations in respect of time, cost and quality. Fulfilment of the necessary “technical” quality in the sense of the required functional performance of a facility is not sufficient to guarantee a successful project. Performance within the required time and within cost expectations is also necessary for successful contract and project performance.

The book comprises edited versions of papers written by the author (or, in the case of four of the papers, co-written with others), that have been published in various engineering and construction law journals. The kind permission of my co-authors and the publishers of those journals to reproduce the papers in this book is gratefully acknowledged. These papers were written at different times and for different audiences, and there is therefore some unavoidable repetition. However, this also means that each chapter is self-contained in relation to its theme.

Although written on a variety of topics, the common theme of the papers in this book is the significance and importance of the contract in relation to the work of the engineer and other construction professionals. My interest in this subject originally derived from my work as a consulting engineer and a director of a medium-sized Australian consulting engineering practice engaged in design of major infrastructure, and facilities for the mining and offshore oil and gas industries. In later years, my role included many commercial aspects involving contracts, such as contract review, professional indemnity insurance, international joint ventures, company restructuring and involvement with major legal disputes. That interest in contracts was subsequently given a sound academic basis when I left the engineering profession to obtain a Bachelor of Laws and a Master of Construction Law at Melbourne University. As a barrister and solicitor admitted to the Supreme Court of Victoria, I practised as a solicitor at a major Australian law firm for a few years and, since 2004, I have been a barrister at the Victorian Bar, practising in construction law as counsel, arbitrator, mediator, Supreme Court referee and Dispute Board member. My perspective as a lawyer involved in construction disputes has inevitably been influenced by my years as a consulting engineer, and the experience gained from being a participant, and not just an observer, of the operation of construction contracts.

Terms with a specific meaning are in bold where they are first used or defined; many are capitalised. These terms are listed and defined in the Glossary at the end of the book. Notwithstanding the disparate sources of the chapters, usage of defined terms is generally consistent throughout the book, although some of the defined terms are specific to one chapter.

In this book, the Contract means the construction contract being referred to. The parties to it are the Employer (the party for whom the work is done), and the Contractor (the party who carries out the work). A construction contract is any contract where one person (including a corporation) agrees for valuable consideration to carry out construction of a physical structure (including building or engineering works) for another. A third-party Engineer frequently administers a construction contract. The works refers to the work, materials and plant which the Contractor is or may be required to carry out and complete or provide under the Contract, and includes variations, rectification of defects, temporary works and equipment. A design contract is a contract for the preparation of a design to be constructed under a construction contract.

The book is in five parts:

• Part 1: The engineer and the contract
• Part 2: The project and the contract
• Part 3: Avoidance and resolution of disputes
• Part 4: Forensic engineers and expert witnesses
• Part 5: International construction contracts.

1.2 Part 1: The engineer and the contract

This part explores a number of the ways in which an engineer has a role in the execution of a contract. That role takes many different forms: in the execution and management of the works under a construction contract; in striking the appropriate balance between the competing demands of time, cost and quality; in managing contractual risks; and, at the heart of an engineer’s design role, in the design contracts that s/he enters into. On a particular project, e.g. a building project, the “engineer” may in fact be an architect or other construction professional.

Chapter 2 discusses the various roles of an engineer in the promotion, execution and management of the works, and in the administration of a construction contract as the Engineer (in this book the term “engineer” has its ordinary meaning as a person who undertakes any engineering function, whereas the term “Engineer” is used for the person who administers a construction contract). The Engineer’s role as administrator and supervisor of the Contract has evolved over the years from a position essentially independent of both parties, to one that is now generally the agent of the Employer. However, even in contracts in which the Engineer is the Employer’s agent in all matters, s/he nevertheless has to act fairly in the execution of certain certifying functions. The changed role of the Engineer is reflected in the separation of the various roles of the engineer, widespread use of design and construct and EPC contracts, the development of new forms of contracts such as alliances, and new forms of dispute resolution and avoidance such as Dispute Boards.

Chapter 3 is a discussion of the three elements that form part of every construction project, every construction contract and every design contract: time, cost and quality. There is an inherent tension in satisfying expectations of all three elements in equal measure. The history of many major projects shows that management of project costs within expectations can be difficult, as can the delivery of a project on time to the required quality. Failure, as a difference between expected and observed performance, applies to any of the elements of time, cost or quality, and may lead to a dispute. The importance of aligning expectations with what the Contract requires is discussed as an important aspect of dispute avoidance.

Chapter 4 considers the objectives and expectations of the parties in construction contracts, and how these relate to successful and unsuccessful contracts. Risk, in the sense of a chance of not achieving the contractual objectives, is central to the terms and operation of a contract. The scope of a contract involves not only a definition of the extent of the obligations of each contractual party, but also considerations of time, cost and quality of contractual performance. Each of these characteristics entails risks that the contractual objectives will not be achieved. However, it is suggested that risk of non-performance can be reduced by clear definition of scope, on the assumption that the clearer the objective definition of the contractual scope, the closer the parties’ subjective expectations will be aligned with the contractual objectives. The extent to which a contract recognises and “allocates” risks, and the parties’ understanding of and management of risks may be a major factor in whether the Contract ultimately results in a dispute. The Abrahamson Principles are widely known as the basis of “fair” risk allocation. The central theme of this chapter is that contracts have a central role to play in risk minimisation by:

• Selection of the appropriate form and terms of the contract
• “Allocation” of risks to the contractual party best able to control them, and
• Promoting the cooperative management of risks by the formal execution and reporting requirements of the Contract.

A different aspect of risk is considered in Chapter 5 – design risk. This chapter looks at the nature of design and its influence on a constructed facility. As an intellectual exercise, design “deliverables” are intellectual property. Identified design risks discussed are scope, time, cost, design quality, intellectual property, interfaces and designer’s insolvency, as well as client risks identified by the International Federation of Consulting Engineers (FIDIC). Who should bear these risks and management of risks by the Employer and the designer are discussed.

Contracts for design services are discussed in Chapter 6, jointly authored by Dan Washington. Procurement of design is considered, taking into account the allocation of risk. Contract terms addressing risk transference are reviewed and illustrated by examples of risk transfer in design contracts that, in the authors’ view, are inappropriate. The chapter emphasises that design contracts involve activities that are conceptually different to construction and require different types of contracts.

Chapter 7 considers several engineering concepts that are important for understanding the art and science of engineering, and the contractual obligations of designers and design and construct contractors. The application of design Standards, and the concepts of reliability, limit state design and robustness are important aspects of structural design. The chapter explains the difference between design life and service life, an issue that may be important in the context of design and construct contracts. The “default“ legal obligation to prepare a design with due skill and care is contrasted with the common contractual obligation for a constructed facility to be fit for purpose. These issues are illustrated by reference to recent case law.

Chapter 8 continues the theme of the tension between a design prepared with due skill, care and diligence, and a design that is fit for purpose. This issue was at the heart of the UK case of MT Højgaard v E.ON Climate and Renewables UK Robin Rigg East Ltd. This important case commenced in the Technology and Construction Court, was overturned in the Court of Appeal, and the first instance judgment was restored by the Supreme Court. The differences of opinion on the meaning of the terms of the contract for the design and construction of a wind farm off the coast of Scotland by nine senior and experienced judges, highlights many of the difficulties faced by engineers and other professionals who are daily involved in understanding and administering contracts. Construction contracts for major facilities are voluminous, complex, many-authored and sometimes opaque. Experienced personnel can reasonably differ on the meaning of a construction contract, even learned judges!

Design and construct contracts are considered in Chapter 9. Such contracts differ from construct-only contracts that were more commonly used in the past, in that the designer is engaged by the Contractor, not the Employer. This chapter addresses one of the issues peculiar to design and construct contracts – which party bears the risk that the final as-constructed cost exceeds the estimated cost of the preliminary design on which the successful tender was based. This requires scrutiny of the contractual relationships between the Contractor and its designer, and the different ways in which these are implemented. The principles involved in such final design cost risk are illustrated by reference to the limited case law that has dealt with this issue.

Engineers typically design facilities by reference to published Standards, which are generally considered to represent the “state of the art” of the competent and skilful practitioner. Chapter 10, co-authored by the late Prof Andrew Potts, addresses the question as to whether engineers can rely on such Standards to discharge their duty of exercising due skill, care and diligence in design. The process of writing Australian Standards is reviewed, noting the broad spectrum of stakeholder interests involved to incorporate the current “state-of-the-art” – the art and science that would be applied by competent and experienced practitioners involved in the relevant practice of engineering, not necessarily the science of engineering as known to academics researching at the cutting edge of known technology. The statutory and contractual significance of Standards are discussed, as well as the designer’s duty of care under the common law an...