Comparative Consideration Fourth Edition of FIDIC

Introduction

Anyone involved in the construction industry will be acutely aware of the effect of disruption and delay on a contract. The consequence often is that substantial inefficiencies are introduced to the performance of the work resulting in increases in cost. Notwithstanding this, most standard form contracts fail to address the issue either adequately or at all.

All modern standard form contracts provide for extending the date of completion under certain defined circumstances but few contracts, if any, adequately address the questions of how the extension of time is to be determined and how to value compensation arising there from, and are entirely silent on the issue of disruption. Indeed, as far as disruption is concerned, very often reliance has to be placed on the breach of a tacit term of the contract that the employer will not do anything which interferes with, or frustrates, the contractor’s performance of its work. Significantly, the basis on which the term is implied is obscure and lends itself to considerable dispute.

A comparative consideration of the Fourth Edition of FIDIC (“ the Red Book” ) and the FIDIC General Conditions (First Edition) (1999) (“GCC 1999″) is instructive in considering the extent to which standard form contracts currently in regular use deal with disruption and delay.

Clause 44 of the Red Book, for instance, uses the words “being such as fairly to entitle the Contractor to an extension of time for completion…” (FIDIC 2007), but gives no guidance as to the method by which the fair entitlement is to be calculated, or how the contractor is to be compensated if he is delayed by an event for which the employer is responsible. Furthermore, it gives no guidance whatsoever as to how the question of disruption is to be dealt with. Clause 8.4 of GCC 1999 provides for an extension of time for completion “if and to the extent that completion for the purpose of sub-clause 10.1 is or will be delayed”, but equally gives no guidance as to how the extent (in the absence of agreement in relation to variations) is to be measured. These issues are complex and are often at the heart of substantial disputes.

The growth of these contracts has largely been dictated by the moulding of the risk allocation between the contractor and the employer. The purpose, although not always achieved, is to provide certainty and clarity as to what the respective parties’ obligations are and to remove the more contentious arguments arising from implied, or tacit terms. In adopting this approach the parties provide remedies for situations which might arise and which would commonly be regarded as breaches of contract. The problem, however, has been that the contracts themselves often inadequately identify the risk, or, having identified the risk, fail to provide the appropriate mechanisms for regulating it.

The risk allocation for delay is generally governed by two considerations of principle: responsibility for the delay and identity of the party who is best able to control the risk. It is accordingly important that the apportionment of the risk is well defined and that the clause makes it clear whether it is intended to be a comprehensive remedy for the delay or is restricted only to certain defined circumstances.

If the risks are unbalanced, or the mechanisms for restoring balance, where the risk has eventuated, too onerous, or non-existent it is inevitable that there will be conflict between the parties which will inherently redound to the disadvantage of the performance of the contract generally. For instance, a contract with draconian notice provisions will propagate disputes and higher prices. On the other hand a properly balanced contract with appropriate mechanisms for regulating the risk will generally encourage co-operation and a fair price. Unfortunately, in the author’s view, GCC 1999 departs from the Red Book among other things by transferring risk substantially on to the shoulders of the contractor. This might be welcomed by employers as providing greater cost certainty, but weighed against this is the consequence that reputable tenderers will increase their price because more risks have to be priced and less reputable tenderers might under-price merely to obtain the job with consequential poorer performance.

Causation and the allocation of risk

The most common causes of delay and disruption are the failure to issue instructions timeously, the failure to give access to the site, unforeseen conditions and the issuing of variation orders.

The employer impliedly warrants that he will not interfere with the progress of the work. However, this obligation is very often regulated by the contract. For instance cl.6 of the Red Book and cl.1.9 of GCC 1999 contemplate that not all the drawings or instructions that are necessary for the completion of the work will be provided at the commencement of the work and provide a remedy if, after notice, absence of the drawing or instruction causes delay or disruption. Another example is provided by cl.42 of the Red Book and cl.2.1 of GCC 1999 which contemplate that the employer might not give possession of the site as required and provide a remedy in the event that he does not.

Unforeseen conditions invariably give rise to claims for disruption and delay particularly in civil engineering contracts. For example, in the absence of a contract regulating the risk of unforeseen ground conditions, it is generally regarded as residing with the contractor. However, the risk is often transferred contractually to the employer.

In the US case of PT & L Construction Company Inc v State of New Jersey Department of Transportation, it was said that “The great risk for bidders on construction contracts is adverse sub-surface conditions”. In another US case, Youngdale & Sons Inc v United States, (Cushman et al. 2008: 166) it was said that

“Traditionally, one of the major risk factors expected and considered by contractors in determining the amount they should bid on a particular construction project is the type or nature of sub-surface or latent physical conditions that may be encountered during the construction of the project”.

In the United States, the subject has warranted the attention of the US National Committee on Tunnelling Technology of the National Research Council. In the executive presentation, the committee said the following:

“The bidder works from fragmentary indications of what lies below the surface and, as the project progresses, he may encounter a series of new and unpredicted conditions. The tunneler may find himself working through a dozen different kinds of strata and rock, each of which may require a different method of excavation and a different system of tunnel supports. He may encounter extraordinary flows of water, or very little water. He may run into forgotten foundations of old buildings, pockets of methane gas, or high-pressure steam lines. He may, during the course of a single project, encounter clay or cobble, fractured rock, squeezing ground, or running sand. He may have to work underwater or in water-saturated soils where it would be necessary to compress the air in the tunnel and men could work only two hours out of eight, to comply with medical standards for working under pressurised conditions. There is one characteristic of tunnelling to which owners, engineers, contractors, designers, and particularly the workman can attest with impunity: the only certainty in tunnelling lies in its uncertainty.” (Burtonshaw-Gunn 2009: 47)

Most standard form engineering contracts regulate the risk of a contractor encountering unforeseen conditions. Clause 12 of the Red Book and cl.4.2 of GCC 1999 provide the contractor with a remedy if he encounters physical conditions, other than climatic conditions on the site, which were not foreseeable by an experienced contractor and provided he has given notice thereof.

The prominence given to the apportionment of risk under these circumstances is well illustrated by Humber Oils Terminal Trustees Ltd v Hersent Offshore Ltd. By virtue of the fact that, as stated earlier, the risk of adverse ground conditions is generally regarded as resting with the contractor, the court reasoned that the risk only passed to the employer after notice was given. The risk remained with the contractor until he complied with the requirements of the notices.

The disruption caused by variation orders also has inherent problems associated with it. For instance, are the costs occasioned by the impact of the variation order to be valued as part of the variation or does the contract provide a mechanism which requires the employer to assume the risk of both the insular inefficiency created by the variation as well as the domino effect that it has on other elements of the works either specifically or generally? For instance, the Red Book authorises the engineer to make any variations of the form, quantity or quality of the work that is necessary or appropriate. In terms of cl.52.1, any additions to the contract price are required to be valued at the rate and prices set out in the contract but if the varied work does not contain rates or prices applicable to the varied work the rates and prices shall be used on the basis for valuation so far as may be reasonable, failing which, suitable rates or prices shall be agreed between the parties.

Unfortunately GCC 1999, although providing a possible mechanism in cl.13.3 for the evaluation of the impact of the variation, does not address the problem. A new rate can be established for an item of work, where no rate or price is appropriate because the item of work is not of similar character, or is not executed under similar conditions, on any item in the contract. The shortcoming of cl.13.3 is that any proposal made by the contractor, if invited by the engineer to do so, as to how the variation is to be valued is subject to the engineer’s approval.

The clauses are specific in relation to the pricing of the varied work itself. Consequently if the nature of the varied work has its own identifiable inefficiency then clearly that must be taken into account when establishing a suitable rate for doing the work.

The more difficult consideration arises when the inefficiency is not contained and introduces generally or into specific areas of the works elements of inefficiency. If the contract is silent thereon, the only recourse that the contractor will have will be to rely on a tacit term entitling him to claim damages under those circumstances. The Red Book, however, provides an example of where the domino effect of disruption is taken into account but only to an extent. Clause 52.2 provides that if the nature or amount of any varied work relative to the nature or amount of the whole of the works or to any part thereof, is such that the rate or price contained in the contractor or any item of the works is, by reason of such varied works, rendered inappropriate or inapplicable, a suitable rate or price shall be agreed. Significantly this provision has been omitted from GCC 1999.

The problem with the clause lies in its restriction to identifying a rate or price for other items of work which are rendered inappropriate by reason of the varied work. It is sometimes impossible to identify with precision the specific items of work impacted by the disruptive effect of a variation order and particularly within the 14 days required by cl.52.2. Very often it is only once effect is given to the variation order itself that the impact is identified. The consequence cannot necessarily be valued by considering the impact on individual items. Such matters as out-of-sequence working, change in the methods of working and the preliminary items in the bill of quantities would, among other things, come under scrutiny.

Clause 12.3 of GCC 1999 does not prescribe that a notice must be given by the contractor. However, cl.20.1 refers to “any extension of Time for Completion and/or any additional payment” and it would seem therefore that the contractor must give notice in terms of cl.20.1 not later than 28 days after the variation has been instructed. The valuation, however, is restricted to the varied work itself and takes no cognisance of the knock-on effect thereof (FIDIC 2007).

One wonders about the wisdom of not providing an alternative, namely, that where it is either convenient or appropriate the contractor can be recompensed by the payment of an amount of money which would compensate him generally for the loss he suffered as a result of the inefficiency caused by the variation order. This would cater for the difficulty of identifying all the items that are affected and allow the parties, under appropriate circumstances, a method of evaluating the claim fairly having regard to the contractor’s make up of the rates and prices generally. This approach would recognise that the loss and expense resulting from delay and disruption can be caused by a number of different events and that it is often impossible to separate all the consequences of each of the events.

The omission of any provision in GCC 1999 leaves a considerable gap as to how a contractor should deal with the knock-on effect of variations. The need to rely on tacit terms of the contract belies any intention of bringing certainty to the parties’ relationship.

An area of considerable debate when considering questions of causation is where there are concurrent or overlapping delays. Various approaches to the problem have been mooted such as apportionment, segregation, dominant cause, the application of the “ but for” tests and the agreed allocation of risks approach. The author does not deal with the situation where there are two causes of delay which are of markedly different causative effect as in those cases one is regarded as the effective cause. The focus of these tests is on competing causes of delay which are of approximate equal causative effect. Neither the Red Book nor GCC 1999, unfortunately, gives guidance as to which of these methods ought to be adopted.

The apportionment basis for assessing a contractor’s entitlement to extensions of time had attracted little support probably as a result of the fact that the standard form contracts in general use do not allow an apportionment. However, in Laing Management (Scotland) Ltd v John Doyle Construction Ltd, the Extra Division, Inner House Court of Session favoured utilising an apportionment method in determining a contractor’s entitlement to compensation for delay and disruption where it cannot be said that the events for which the employer is responsible are the dominant cause of the loss. The approach of the courts in the other common law countries have, in the absence of legislation, refused, by and large, to apportion contractual damages between joint wrongdoers.

The American courts have adopted the segregation approach. Under this regime neither party will recover financially unless they can segregate the delay and establish the extent thereof associated with each competing cause. As was said by Cowen S.C. J. in the Blindsman case :

“Generally Courts will deny recovery where the delays are ‘concurrent or intertwined’ and the contractor has not met its burden of separating its delays from those chargeable to the Government.” (The American 2000: 68)

The effect of the application of this principle is that where a delay occurs which would entitle the contractor to an extension of time concurrently with another delay which would not entitle him to an extension of time, the contractor receives an extension of time but without any compensation. The employer is also not entitled to recover financially. If, however, the contractor was able to show that some part of the delay was caused exclusively by an event entitling him to an extension of time and compensation he will be entitled to an extension of time as well as compensation.

It is interesting that the Protocol recommends:

“14.1 Where Contractor Delay to Completion occurs concurrently with Employer Delay to Completion, the Contractor’s concurrent delay should not reduce any EOT (extension of time) due” and

“1.10.1 If the Contractor incurs additional costs that are caused both by Employer Delay and Contractor Delay, then the Contractor should only recover compensation if it is able to separate the additional costs caused by the Employer Delay from those caused by the Contractor Delay.” (FIDIC 2007)

The “but for” test is the one most favourable to contractors, but it has not received much support. Hence it is unlikely to be applied unless the parties provide a contractual regime which adopts the test. The dominant cause approach has, on the other hand, received some support over the years. The rationale is that it is the approach most consistent with the intention of the parties as expressed by the contract. The application of the test is easy when there is a clear dominant cause but almost impossible when the principal agent is confronted with competing causes of approximately the same causative effect. The test was disapproved of in H Fairweather & Co Ltd v LB Wandsworth, but the reason for such disapproval is difficult to discern. However, it was adopted in Laing Management (Scotland) Ltd v John Doyle Construction Ltd as being “the application of common sense to the logical principles of causation” (Shiers et al. 2007: 821).

The allocation of risk test recognises that there can be more than one causative event to any delay or period of delay. In allocating the risks between themselves, the parties have recognised this and have agreed that if the contract provides relief in respect of one of those causes, then the contractor is entitled to an extension of time and compensation. The court in Royal Brompton Hospital NHS Trust v Hammond supported this test, which is also consistent with the structure of the standard form contract.

From the foregoing it is clear that there is no consistency as to the approach that a court or arbitrator will take when considering concurrent delays. The obvious answer to the conundrum is that the parties should regulate the test contractually and thereby remove any doubt as to which party assumes the risk of concurrent delays and the method by which time and costs are to be determined. The Red Book and the GCC 1999 are deficient in this regard.

Man-made disasters which could have been prevented

Particularly large and complex engineering, civil engineering and construction projects have the potential to become major disasters leading to huge destructions and multiple fatalities to workers and the public, both during execution or afterwards while in use or operation. Although the likelihood of such incidents may be low, the potential consequences can be catastrophic. The following few examples of major physical and financial damages illustrate the case:

explosion of the Space Shuttle Challenger in January 1986, where all seven members of the crew perished after 110 seconds of the launch;

collapse of the walkway at Port Ramsgate in September 1994, where six passengers died and seven others were severely injured;

collapse of the NATM tunnels at Heathrow Airport in October 1994, which caused major short-term disruption to the airport and severe setback to the Heathrow Express Rail Link although, by mere good fortune, no personal injuries were caused;

collapse of the roof of the Transvaal Water Park in Moscow in February 2004, where at least 28 people died and more than 110 were severely injured;

collapse of the roof at Paris Charles de Gaulle airport in May 2004, killing five and injuring three people;

collapse of the roof of an exhibition hall in Poland in January 2006 due to excessive snow loading, resulting in the deaths of 12 people and substantial injuries to 50 people;

collapse of the roof of a skating rink in Southern Germany under snowloading, killing 11 people in January 2006;

collapse of the snow-covered roof of an exhibition hall in a 30-year old building in Moscow in February 2006, causing the deaths of 31 people, the failure being thought to be the consequence of inadequate maintenance, or improper design.

All these incidents were known to be, or thought to be, the results of construction and engineering technical failures, which may be attributable to corporate, organisational, managerial, or professional inadequacies.

It is not surprising that these types of accidents were notable as their consequences were particularly dramatic and newsworthy. The investment in time, money and resources in these projects is vast and although the number of fatalities or major injuries can sometimes be nil, as in the case of the construction of the NATM tunnels at Heathrow Airport, different circumstances can give rise to substantially variable outcomes. These incidents are inevitably followed by adverse publicity which is damaging for the reputation of those involved in the project and could have a long-lasting effect on the perceived competence, future business prospects and level of market or public confidence in those associated with the failure.

Factors contributing to building failures

What are the main factors that contribute to the failures of large engineering and construction projects leading to major disasters? This question has been addressed on numerous occasions and yet the same issues persist.

Major incidents are primarily attributed to technical and design failures:

The UK Health and Safety Executive’s (“HSE”) investigation into the collapse of the walkway at Port Ramsgate found that the physical cause of the collapse was failure of the weld securing the end of the righthand seaward stub axle to the walkway. The walkway was designed such that it was likely to be torsionally stiff without allowing for the roll of the pontoon, but the design calculations proved to be flawed and inadequate.

The HSE found that the direct cause of the Heathrow Airport tunnel collapses was a chain of events involving: substandard construction in the initial length of the concourse tunnel; grout jacking that damaged the same length of tunnel plus inadequately executed repairs to it some two months before the collapse; the construction of a parallel tunnel in failing ground; major structural failure in the tunnels, progressive failure in the adjacent ground and further badly executed repairs during October 1994.

However, technical problems are not usually the only causes of the major accidents. The investigations found that there were serious flaws in the decision-making process; the absence of effective arrangements for the management of the project by the client, the designer and the manufacturer; and organisational failures, which were rooted in failures in “ defensive” systems that did not adequately deal with hazard identification, risk avoidance and reduction, or the control of remaining residual risks. Errors were made, leading to: poor design and planning; a lack of quality during construction; a lack of engineering control; and most importantly a lack of safety management. In the case of the Challenger incident, there were further contextual factors including the pressure on NASA to achieve an early launch after several abortive attempts and the presence of the first civilian crew member resulting in an abnormally high level of public interest (Shiers et al. 2007).

It is often perceived that large construction projects are associated with economic pressures, where clients demand performance of the complex projects to tight deadlines and with limited resources. Such pressures can often lead to a culture of corner-cutting and the disregard or compromise of health and safety procedures. Taking into account that the consequences of the failure of larges-cale projects are particularly dramatic, it seems unreasonable for the decision-makers to create these pressures, and yet bad practices continue. In the case of the collapse of NATM tunnels at Heathrow Airport, for example, the HSE stated that the collapses could have been prevented but a cultural mind-set focused attention on the apparent economies and the need for production rather than on possible risks.

The study of major failures indicates that there is also a tendency for the decision-makers to disregard the warnings about the potential problems and risks. In the case of the walkway collapse at Port Ramsgate, the HSE found that the port refused to re-schedule the project or make any amendment to the structure which would entail extra time, in the knowledge that it was not totally safe. Both Port Ramsgate and FEAB (a contractor shipbuilding company) were warned about this by the former port engineering consultant who proposed that the walkway should be physically attached to the upper vehicle bridge which would be safer and even cheaper. However, his warnings and suggestions were ignored.

It is true to say that there is often no single item that can be pinpointed as the sole cause of a failure, which usually results from a combination of conditions, mistakes, oversights, misunderstandings, ignorance, and incompetence or even dishonest performance. Overall, factors contributing to the causes of the accidents include lack of resources and time pressure, failures of parties engaged in the project to carry out their respective functions adequately, including failure to carry out risk assessments, and failure to make provisions for effective monitoring, which would allow defective performance or non-compliant practices to remain undetected. Even when defects become apparent to certain individuals the lack of sufficient systems of liaison and communication prevent effective action being taken to remedy them.

All the above problems could largely be attributed to inadequate management of health and safety of construction projects in all aspects and at all phases of development from briefing, planning, and design, through to production and delivery and functional operability. The importance of the effective management of health and safety in construction has been recognised for some time. A new profession of construction management came into existence in the 1970s promising to deliver projects faster and for less cost. However, at that time services were not clearly defined. Many people practising “construction management” were trained only as developers or technical managers and when something went wrong, these “ professionals” often were neither willing nor able to accept liability for their errors and omissions (Shiers et al. 2007).

It was presumed that in the United Kingdom this problem would be solved by providing a legal footing for health and safety management in construction.

Consequences of failure

First of all it is important to be reminded that, although the CDM Regulations and related Approved Code of Practice have been made to give effect to the EC Directive, their legal status is based on UK legislation, namely the Health and Safety at Work etc. Act 1974. Hence we are dealing with criminal liability under the Health and Safety at Work Act 1974, which provides that “it is an offence for a person to contravene any health and safety regulations … or any requirement of prohibition imposed under any such regulations”.

As has been established above, the client could be held liable for breaches of the CDM regulations, in particular reg.6 by failing to appoint a planning supervisor and a principal contractor, reg.8 by not ensuring that planning supervisor, designers and contractors are competent to perform a job for which they have been appointed subject to the test of “ reasonableness” , and reg.10 by failing to ensure, so far as is reasonably practicable, that the construction phase of the project does not start without a health and safety plan. The client could also be liable under reg.11 for failure to ensure that the planning supervisor for the project is provided (as soon as is reasonably practicable but in any event before the commencement of the work to which the information relates) with all information about the state or condition of any premises on which construction work is intended to be included in the project.

In the first three years, for example, the HSE brought 12 prosecutions against clients, two against planning supervisors, three against designers and three against contractors. Prosecutions of clients have arisen out of a failure properly to check competence and resources and for failing to check there was a compliant health and safety plan in place before work started. For example, Park Lane Properties and Estates was the first client to be prosecuted by the Health and Safety Executive under the CDM Regulations. It was charged with failing to appoint a planning supervisor and not developing a health and safety plan on a project in Greater Manchester. The level of penalties imposed has depended on the seriousness of the breach and circumstances in which the breach arose, together with the potential for serious risk. Unfortunately, the HSE does not gather information or statistics which are specifically related to the number and grounds of prosecutions against clients. There are, however, some reasonable explanations as to why this is the case (Shiers et al. 2007).

Often the client himself could be involved in the project as a designer, planning supervisor, principal contractor or a contractor, which means that duties imposed under the Regulations on these people would be imposed on the client and subsequently breaches of these duties would lead to criminal liability under the 1974 Act.

As an employer, the client owes duties to his employees and others under the 1974 Act and Health and Safety Management Regulations 1999. If the client employs independent contractors he will have to conduct risk assessments and provide information not only to his employees but also employees of independent contractors as long as they are involved in his undertaking. Failure to do so can result in criminal sanctions.

In respect of civil engineering or construction work for large construction projects the clients would normally employ competent people to perform their functions and produce health and safety plans which comply with legal requirements, yet these clients could still be held liable as well as other parties involved in the project in the event of failure. Liability will often be imposed when the client learns about the problem but chooses not to do anything to remedy it, or puts unnecessary pressure on contractors and others who are involved in the project, or does not ensure that sufficient resources are available for the successful completion of the project, etc.

Accidents usually have multiple causes and if, as a result of the investigation the HSE find that the client has caused and contributed to the cause of the accident by, for example, not introducing a proper health and safety management system, or failing to establish proper communication and co-ordination between the parties, it is very likely that the client will be prosecuted and sanctioned. The client will not be prosecuted automatically, but only when the evidence can establish the causation, or, in other words, the link between the acts or omissions of the client and the accidents.

The situations are aggravated where failures lead to major incidents causing collapses, injuries and deaths. It is most likely in such situations that the level of fines imposed on the guilty parties, which often include clients, designers, contractors, and so on, is extremely high. This is evident from the prosecutions brought by the HSE (Shiers et al. 2007).

For example, in the case of the walkway collapse at Ramsgate Port the HSE brought charges under s.3 of the 1974 Act for failing to take all reasonably practicable steps to safeguard members of the public who used the walkway against all four organisations involved in the project, namely the client Port R