International Construction Contract Law

Lukas Klee

• Publisher: Wiley-Blackwell
• Year: 2018
• ISBN:
  9781119430520
• Edition: 2
• Topic: Law
• Subtopic: Construction Law
• Index: Law

The updated second edition of the practical guide to international construction contract law

The revised second edition of International Construction Contract Law is a comprehensive book that offers an understanding of the legal and managerial aspects of large international construction projects. This practical resource presents an introduction to the global construction industry, reviews the basics of construction projects and examines the common risks inherent in construction projects. The author — an expert in international construction contracts — puts the focus on FIDIC standard forms and describes their use within various legal systems. This important text contains also a comparison of other common standard forms such as NEC, AIA and VOB, and explains how they are used in a global context.

The revised edition of International Construction Contract Law offers additional vignettes on current subjects written by international panel of numerous contributors. Designed to be an accessible resource, the book includes a basic dictionary of construction contract terminology, many sample letters for Claim Management and a wealth of examples and case studies that offer helpful aids for construction practitioners. The second edition of the text includes:

• Updated material in terms of new FIDIC and NEC Forms published in 2017

• Many additional vignettes that clearly exemplify the concepts presented within the text

• Information that is appropriate for a global market, rather than oriented to any particular legal system

• The essential tools that were highlighted the first edition such as sample letters, dictionary and more

• A practical approach to the principles of International Construction Contract Law and construction contract management. Does not get bogged down with detailed legal jargon

Written for consulting engineers, lawyers, clients, developers, contractors and construction managers worldwide, the second edition of International Construction Contract Law offers an essential guide to the legal and managerial aspects of large international construction projects.

1
International Construction Projects

1.1 The unique nature of the construction industry

The construction industry does not have clearly defined borders and its characteristics range from simple to complex. Construction supplies basic materials (such as aggregate, cement, steel reinforcement, and pre‐packaged mixtures) right up to cutting‐edge technology developed and used by experts. The industry has contributed to, and is a vital element of, almost everything we see around us. For example, the diversion of water courses, land reclamation, houses, shopping centers, offices, factories, health care facilities, and large infrastructure‐related civil engineering works such as bridges, tunnels, highways, airports, and harbors. Others installations include water treatment plants, dams, nuclear power plants, wind power plants, and projects in the field of electricity generation. The contribution made by the construction of factories, warehouses, and production lines that serve other industries, (including mining and research centres) cannot be ignored. The particular activities relate not only to new construction works, but also repairs, extensions, reconstructions, and demolitions.

The diverse nature of the construction industry reflects the complexity of contemporary society as a whole, leading then to necessary specialization of particular activities in construction. A construction project is further composed of complex processes, services, and supplies reaching beyond the scope of this industry alone. For example, insurance, financing, bonds and guarantees, purchase of plant and equipment, security guards, operations, and maintenance of work processes.

1.2 Individuality of construction projects

A construction project is a specific process or, rather, a sum of many processes. Mostly, it is an individual process. There are variables relating to the positions of its participants, their assignments and relationships, external conditions (concerning the economy, the nature of the site, climatic conditions, project risk, and hazard levels in general), project management and delivery methods, procurement methods, and public support.

Construction projects face hazards of various kinds, caused either by humans or natural elements. Therefore, people, time and environmental elements play a major part here. The construction project itself tends to be a unique setup of processes with unpredictable impacts caused by individual hazards. For large construction projects, their duration will often exceed two years. These projects are realized over extensive areas and are often difficult to safeguard perfectly. Therefore, a construction project is not a production line you can just program to smoothly create a product, within a well‐defined time, quality, and financial outlay.

Design errors, extremely adverse climatic conditions, unforeseeable on‐site conditions in physical or social terms, site access‐related issues, building permit problems, delays due to the requirements of environmentalists, and variations are just some examples of potential complications.

Effective risk management must be the aim of everyone involved in a construction project. In other words, to identify patterns and potential problems, variations, hazards, and risks in order to manage them effectively. This can only be achieved through the perfect preparation of each particular project. This is the theory.

However, in practice, the lowest bid price tends to be the most important criterion in public tender evaluations nowadays. This is also a reason why contracts (for works or for design) that determine particular project relations must anticipate and involve transparent, efficient, and reasonable solutions to potential problems and complications.

1.3 Roles and relationships

In the course of time, five main groups of construction project participants have emerged as major players in the construction industry. These groups are directly involved in construction projects or have an influence or a particular function within the industry. They are the contractors, designers, regulators, employers and users (Murdoch and Hughes, 2008). Lenders (banks), insurance, and reinsurance companies must also be mentioned as further (indirect) construction project participants because of their significant influence on construction projects. We will now discuss these important roles in the construction project.

1.3.1 Contractors

Most frequently, contractors can be encountered as either global or local construction companies. Construction companies differ in specialization and size—from small contractors for specialized activities up to supranational organizations that enjoy major industrial and political influence.

In the field of large construction projects, contractors often collaborate within joint ventures, setting up delivery chains at numerous levels. A general contractor enters into relationships with the subcontractors who further delegate parts of their obligations down to other specialized trade contractors, and so on down the chain. A particular delivery method will influence the positions of the individual contractors.

1.3.2 Designers

The role of a designer is to provide the employer with solutions, drawings, and specifications. Working on a construction project, the designer will often provide project management, contract administration and supervision services to the employer. When hearing the word “designer,” one usually imagines an individual, but less often a company providing the services in support of construction project realization. Today, the latter prevails, as design works becomes ever more demanding and too large to be dealt with by an individual on their own.

1.3.3 Regulators

In the construction industry, regulators apply their professional expertise, for example, in the following areas:

• land planning and related processes;
• building permit applications;
• health and safety;
• environmental issues;
• quality assurance;
• to ensure fair business competition; and
• to ensure proper management of public resources.

1.3.4 Employers

Project realization by the contractor is a service to the employer. Someone about to build a house for their family may be an employer. A developer, who is funding a shopping center construction to sell to potential operators, may be an employer. The employer themselves may be a future owner or an operator.

A taxpayer, who is financing public projects via a public authority in the fields of transportation, infrastructure, construction of prisons, health care facilities, and so on, can also be considered an employer. An employer's characteristics depend, therefore, on whether the related funds are public or private. Significant differences between the private and public employers can be encountered. For example, in France, the contractor cannot suspend the works if the employer does not pay for the works performed in a public project. The so‐called “l'exception d'inexécution” known in private projects in France cannot be used. According to Article 48‐3 CCAG Travaux 1976, the contractor can suspend the works only after three unpaid monthly invoices (Wyckoff, 2010).

In contracts, the employer is often referred to as “the owner,” “the buyer” or “the client,” and so on. For the purposes of this book, we will mainly use the term “the employer.”

1.3.5 Users

All of us are users of products that are the result of construction efforts—whether we like it or not. Our views on construction projects are often subjective and vary for many different reasons. Other vital aspects are how the public perceive the inconvenience and nuisance that can occur during the course of construction or if the public really think that there is a need for a particular building. Specific traditions and cultural influences of the relevant society are a significant factor as well.

As a field of activity, the construction industry is traditionally burdened by uncertainties that may cause distrust between the employer and the user.

1.4 Contract administration

Construction contracts are different from other commercial agreements because of the high degree of uncertainty. While the contract documents will provide a definition of the scope of works to be performed, a high degree of project complexity still leaves a lot of room for uncertainty along the way to the final result. This makes the task of administering the contract an important part of the larger process of “managing uncertainty.”

Furthermore, the question of “moral hazard” is sometimes mentioned (Winch, 2010), that is, the difficulties the employer can face in ensuring that the contractor will perform the contract in good faith and bring it to its desired outcome. As a rule, the contractor possesses better technical and managerial skills than the employer. The absence of a proper contract that will provide clear terms and procedures regarding all relevant aspects and an efficient risk allocation may leave the less‐informed employer exposed to the risks associated with moral hazard and suffering from a potentially severe compromise regarding the desired outcome.

On the other hand, large public procurement construction projects are often accompanied by political irresponsibility on the employer's side, mainly when problems are encountered. Nobody wants to be responsible for cost overruns and delays. To avoid responsibility, employers sometimes shift the risk of negative consequences of badly prepared projects onto contractors (e.g., delayed expropriation risk or bad ground conditions risk in underground works). Such “one‐sided contracts” actually negatively affect the smooth implementation of projects and consequently are considered disadvantageous to the borrowers due, among other things, to the late completion of the project (JICA, 2011). If this is done systematically, it is...