Agreement Made Between Contractor and Employer

A construction contract is an agreement made between a contractor and an employer; the former agreeing to supply work and materials to complete the project to the specifications and for the benefit of the latter.  As a matter of course, there will be third parties involved with construction contracts, such as subcontractors and – more specifically to this report – architects/engineers.

This report aims to examine the different roles of the Employer’s Agent under the JCT 05 form of contract and the Project Manager under the NEC 3 contract.  The report will also look at the conflicts of interest that surface as a result of using these contracts in practise.

JCT and NEC

In the past the majority of construction work undertaken in the UK (and overseas) has utilised traditional contract methods; however, recent years has given rise to more bespoke contract forms and a number of alternative procurement routes such as design & build, turnkey, etc.  Whereas traditional construction contracts under JCT are seen to do little to aid long-term relationships, contracts such as NEC were established as a means of providing flexibility and simplicity.  Sir Michael Latham gave NEC a substantial boost with his 1994 ‘Constructing the Team’ report which touted it as the recommended contract form for building and maintaining positive relationships in the industry.

The Employer and the Contractor are the key parties to a JCT contract.  Whilst in the Standard Building Contract (SBC) the contract is administered by the Architect/Contract Administrator, in the Design & Build contract the role is fulfilled by the Employer’s Agent (EA).  The law of agency decrees that the Agent undertakes the Employer’s duties on their behalf, and it can be said that the Employer’s Agent is the personification of the Employer with very limited discretion or independence.  To this affect Article 3 of the JCT stipulates the Agent’s full authority to ‘receive and issue applications, consents … act for the Employer under any of the conditions’, and so on.

By contrast, under the NEC 3, the Project Manager (PM) is afforded a more extensive and proactive role as opposed to merely acting as Agent.  Whilst there is an absence of an express provision, there is the notion and expectation that the PM must act fairly and impartially from the Employer’s interest.

The case of ‘JF Finnegan Ltd. v Ford Sellar Morris Developments Ltd.’ (1991) helped to confirm the notion that an Agent of the Employer has ‘no duty to act fairly between the parties and has no duties to anyone save the employer.’

This contrasts with the purpose of the PM, who is duty-bound to promote the NEC philosophy based on the Clause 10.1 principle of parties acting ‘in a spirit of mutual trust and co-operation’.  As Latham promoted, the PM must try and foster a collaborative working environment and team spirit between Employer and Contractor.

As far as references to the EA within the JCT are concerned, Clause 2.7.3 requires the Contractor to ensure certain documents are made available to the EA when necessary, and Clause 3.1 ensures the EA’s right of access to the works and other premises.  As well as these, Clause 2.1.4 binds the Contractor to accept any decision of the Employer ‘issued or made under or pursuant to the contract’, and therefore any agent of the Employer.  For their own part, the Employer is under an implied obligation that he will not unreasonably withhold approval for works without requisite grounds for doing so, as in the case of ‘Dallman v King’ (1837).

The differences in the approaches of the contract forms can be clearly evidenced in their separate obligations regarding delay.  Under JCT (Clause 2.10), the Contractor is obliged to inform the Employer (or his representative) of any delay if they believe a Relevant Event has occurred.  However, there is no reciprocal obligation for the Employer.  Whereas, the more proactive, team-friendly approach adopted by the NEC 3 is that both Contractor and PM should notify each other as soon as they become aware of any potential delays.

It is through examples such as this that the JCT has become regarded as more of an adversarial contract which could do more to embrace partnerships in the way that Latham prescribed, and this is reflected in the role of the EA as opposed to that of the PM.  Indeed the NEC 3 can be seen to favour neither party and instead emphasise up-to-date programmes and communication; for example, through the obligation on the part of the PM to maintain a Risk Register (Clause 16.1).  Having said that, there is the contrary view, as stated by Kate Williams (2007) that ‘the NEC is not truly a partnering contract, although it is perceived as such’.  She argues that whilst the PM is required to act in the spirit of fairness and co-operation, he in fact acts on behalf of the Employer and must ‘manage the contractors in accordance with the Employer’s interests’.  This would seem to suggest that despite the differing philosophies of the two contracts, in practise they serve much the same function as regards the role of the PM and EA.

Conflicts of Interest

As these contracts have become more widely used, certain conflicts of interest have surfaced with regard to the role of the Employer’s representative.  In commenting on these conflicts Tolson (2007) said that ‘one of the common misconceptions I come across on building contracts is which hat is worn by those who represent the employer’.

Whilst the JCT D&B contract purports that the EA must obey the Employer’s instructions with minimal discretion, they can often find themselves being called upon to issue certificates.  This gives rise to a potential conflict between the interests of the Employer and the Contractor.  This is especially problematic in a scenario where the Employer is acting unreasonably (e.g. withholding payment) since the EA is bound by their implied duty to maintain and preserve the Employer’s interests.

The leading authority is the case of ‘Sutcliffe v Thakrah’ (1974) which held that the EA’s precise function is the important factor – if the EA has a degree of discretion and also acts as a Certifier then the position is different.  In this case, the House of Lords held that an architect was not immune from liability in negligence to his Employer.  They stated that such an Agent had two types of function to perform; firstly being bound to act on the Employer’s instruction, and also in other matters requiring professional skill (such as issuing certificates) to ‘form and act on his own opinion’.  The Lords made the point that both Employer and Contractor base their contract on the understanding that the Agent will act in a ‘fair and unbiased manner’ on such matters, whilst exercising ‘due care and skill … holding the balance between his client and the contractor.’

This dual function approach can also be seen with the PM’s role under the NEC 3.  Some obligations require them to act in the sole interests of the Employer (when accepting alternate quotations for instance), and others require them to act as an ‘independent certifier’ when carrying out certification, issuing variation instructions, giving extensions of time and so on.

The role of a Certifier is distinct from the EA, although in practise the roles are often merged, which creates the potential for conflicts.  If the Certifier fails to act in accordance with the two functions specified in ‘Sutcliffe’ then they risk disqualification and the invalidity of any issued certificates.

A useful definition of the Certifier was provided in the summing up of Lord Radcliffe in ‘Burden Ltd. v Swansea Corporation’ (1957) – “…it is obvious that his general function is to act on behalf of the owner … but in those parts of his duties which relate to the giving of certificates for payment, I think that he stands apart from the owner and enjoys to some extent an independent authority of his own.”

As the Employer’s Agent and Project Manager have become more commonplace in construction, it is the case that the boundaries between their roles and the roles of Certifier have become somewhat blurred and two recent cases in particular highlight this continuing ‘grey area’.

The case of ‘Scheldebouw BV v St. James Homes (Grosvenor Dock) Ltd.’ (2006) passed the ruling that where a decision-maker in a construction contract has no independence from the Employer (in other words, the EA), they must use ‘professional skill and best endeavours’ to reach a fair and honest decision rather than retaining in mind purely the Employer’s interests.

The presiding judge Mr. J Jackson said that three propositions had emerged regarding the decision-makers’ position.  Firstly, that their role and duties are determined by the terms of their contract.  Secondly, that they are not, and cannot be regarded as, independent of the Employer (as is the case with the EA due to the law of agency).  Lastly, that when performing their decision-making function (making reference to the dual functions stated in ‘Sutcliffe’), they must act in an independent, impartial, fair and honest way.

The difficulty arising from this however is the current lack of any duty to such an effect in the JCT D&B contract.  A contract administrator acts in such an independently-minded way when deciding issues directly affecting both Employer and Contractor.  Similarly, under the ICE Conditions (7th Edition) there is an express duty placed on the Engineer to act in an impartial manner in such situations; likewise in the FIDIC Red and Yellow Books – the Engineer is bound to make a ‘fair determination’.  In contrast to these documents, the JCT D&B contract places no such duty on the EA when they are expected to take on the role of Certifier.  Instead the EA has to act carefully to ensure that they alleviate the risks of any conflict of interest arising, whilst also acting within the terms of the authority.

The decision-making function of the PM was explored in the case of ‘Costain Ltd.; O’Rourke Civil Engineering Ltd.; Bachy Soletanche Ltd.; Emcor Drake & Scull Group plc v Mr Fady Bassily’ (2005).  The case was related to the PM supposedly being unduly influenced by the Employer when assessing payable sums, which raised concerns amongst the Contracting consortium for whom the payments were intended.

One of the main issues that arose was the duty to which the PM was required to act under – whether he should act impartially as between Employer and Consortium or whether he had the duty to act solely in the interest of the Employer.  Mr. J Jackson, also presiding over this case, referred back to the functions stated in the ‘Sutcliffe’ case and maintained that such functions had subsequently been accepted and implemented with regard to the duties of architects, engineers and other certifiers under conventional forms of contract such as JCT.

He therefore held that since the PM has to exercise his independent judgement on a frequent basis under the guise of acting in a ‘spirit of mutual trust and co-operation’ that the separate ‘Sutcliffe’ functions of agency and decision-maker must surely apply under the NEC.  Since the NEC provides the position of PM as being somewhat akin to an ‘independent certifier’ through the interest of fairness, as has been discussed, the case served to clarify that this was the correct legal position.

Conclusion

In conclusion, it can be seen that despite the existing case law there is still some uncertainty and potential for conflicts of interest to arise from the separate roles of Employer’s Agent and Project Manager.  It is perhaps inevitable that in situations requiring their independence these 3rd parties will feel the interests of their Employer weighing slightly heavier upon them than those of the contractor, however, there is enough supporting case law for them to be able to stand firm and not compromise their independence on those key decisions.