Volume 8 - June 2012

SLQS JournalThe Forum of Sri Lankan Quantity Surveyors Across the Globe

Volume 8 – June 2012

Editorial Committee

Dhammika T. Gamage NDT(Civil Eng.), ICIOB, ACIArb, AAIQS, AIQS-SL, FIIE(SL), IEng, FACostE, FCInstCES

Lakshman Gunatilake GCGI, MBA (Sri J.), FCMI, FQSi, MCInstCES, ACIArb, MIIE(SL), IEng, PMP

Manju Sri Adikari BSc. (Hons), MRICS, MCIArb, MIIE (S.L.) I Eng, GCGI (UK)

Nishantha Fernando, BSc(QS) Hons, MRICS, MAA

Prasanna Pushpajith DipSurv., MSc, MRICS, ACIArb

Sudeera A. Widanage., BSc(QS) Hons, MRICS

Editorial Policy

We, the editorial committee reserve the right to select, reject, edit, and excerpt articles at our sole discretion. We will publish no article which, in the opinion of the editorial committee, can be reasonably interpreted as insulting or offensive to any individual or group. We will not return unsolicited manuscripts. The opinions expressed in articles contained in the SLQS Journal are the opinions of individual authors and not necessarily those of the SLQS Journal editorial committee. Articles are provided for the general interest of the quantity surveying and contract administration community, but the

information contained therein does not constitute legal advice and should not be relied on as such. Neither the SLQS nor the individual authors assume any responsibility for the accuracy of information reported.

The editorial committee assumes no responsibility for failure to report any matter inadvertently omitted or withheld from it. The mode of citation utilised within the articles and for the bibliography would be the Chicago method.

Email your own creations to journal@slqs-uae.org with your passport size photograph and brief profile of yourself which should not be more than 35 words.

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CONTENTS Editorial

Four Reasons for Adopting Adjudication Process in UK Construction IndustryMurugesu Sathiyaseelan LLM (with Merit), FRICS, MCIArb

Demystifying a Mechanism to Deal with Open Market VacillationsDr. Chandana Jayalath D.Sc, M.Sc, B.Sc (QS) Hons, PG Dip (Cons Mgt), PG Dip (Intl’ Mediation), FRICS, FIQS (SL), MCIArb

Performance security and possible alternative mechanism for performance security in the economic downturnSampath Marasinghege, B. Sc Hons (QS)

Why most UAE clients go for Lump Sum building contractsS.M. Asanka Sanjaya Kumara, BSc (Hons), NCT(QS)

Letter of Intent (LoI) and its importance in the construction industryC. J. Quickson BSc (Hons), LLM (Constr. Law & Arb) , AAIQS, MRICS, CCE, MCIArb

Internal Auditors are at Site!Saman Jayasiri Sirisoma Welagedara, BSC (Hons) , MRICS

The Steps an Arbitrator should take before and During a Full Oral Hearing Priyankara Premarathna, HND QS, ACIArb

Which Procurement Route? Prasanna Jayaweera, B.Sc (Hons) QS, MRICS, CCC, ICIOB

On and Off Site Recoveries Vajira Kosala Hettiarachchi

Prevention PrincipleSenerath Wetthasinghe LL.M., AIQSSL, AAIQS, MQSi, FCIArb

Drafting a Construction Contract AgreementKidneswaran Kajanantha, B. Sc. in QS (Hons.), AAIQS, MRICS

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Editorial

Dear Sri Lankan Quantity Surveyors,

As we start experiencing summer’s burn in the UAE, Europe and North America are being buffeted by the heat of desperately flailing economic waves. The emerging BRICS economies are also about to experience theburn of the same global economic waves, with India being the first of the member nations to feel the heat.The professionals associated with the UAE’s construction industry – one of the most impacted by the global economic downturn - cannot think of any easy shelter from this scorching heat. Therefore, we, as sound contract administrators, have a duty to deliver with due diligence, in order to avoid any actions that could further worsen the existing crisis. On that note, we hope the 2012 Olympics will bring a cooling breeze to the economic shores of the UK.

We are pleased that we managed to release the overdue 8th Volume of this journal and hope that it brings you as much gratification as the ones preceding it.

Murugesu Sathiyaseelan’s promotion of the adoption of adjudicationas a most cost-effective and speedy alternative to lengthy arbitration and litigation can be considered one of the more appropriate topics to whisper within the construction industry. Similarly, Dr. Chandana Jayalath’s article complements the sentiments expressed earlier perfectly. Likewise, Sampath Marasinghege’s proposal is another effective tool to eliminate the fear of undue encashment of performance securities.

While Prasanna Jayaweeracomprehensively discusses procurement routes and strategies in general, Asanka Sanjaya Kumara focuses on the specific desire for lump sum building contracts among UAE clients. The articles by Senarath Wetthasinghe, C. J. Quickson and Priyankara Premaratna display an excellent trend in career progression, towards construction dispute resolution, with the first in particular being a comprehensive treatment of the Prevention Principle. The article by Saman Welagedaraprovides a look at regular contract administration practices.Vajira Kosala Hettiarachchi’s well-written article goes on to add further merits to the Samaratunga Formula. Kidneswaran Kajanantha’s article has so cleverly documented Prof. Sam’s seminar that it evokes the feel of the very auditorium in which the seminar used for the article was delivered.

On a cheerful note, you may once more see a new name, that of Mr. Sudeera A. Vidanage, amongst the members of the editorial committee, whose thanks go to him for his commitment to delivering this excellent reference to you.

To bring this editorial to its terminus, we ask all our readers to recall that this journal is your property. As such, its performance is indeed your concern and all feedback and articles are not only appreciated, but an active part of being a member of the SLQS and the construction community. We anticipate your academic pleasure and hope that you assist us in ensuring it for future readers as well, by providing high-quality articles of your own in the near future.

On behalf of the editorial committee,

Dhammika T. Gamage

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Murugesu Sathiyaseelan LLM (with Merit), FRICS, MCIArbExecutive Surveyor working with Gardiner & Theobald since August 2003, Counsellor and APC Panel Chairman of RICS UAE

Four Reasons for Adopting Adjudication Process in UK Construction Industry

When a conflict arises between parties in construction industry and if the parties cannot resolve such conflicts by themselves, it will be handled entirely by others (by a judge). This means the matter will be referred to courts (litigation).

Adjudication is similar to litigation and has developed in recent years in the UK as Construction adjudication or adjudication. The Oxford English Dictionary defines the word ‘adjudicate’ as:

‘(Of a judge or court) decide upon (claim, etc)’ and ‘sit in judgment and pronounce sentence’ Adjudication is a procedure that results in a decision that binds the parties and will, in all usual circumstances, be enforced by the court.

Many doubts were expressed while the Act was being passed in the Parliament as to the appropriateness of adjudication for the resolution of disputes and whether it would have the desired effect. Enforcement was a matter of great concern.

Concerns relating to the enforceability of the adjudicator’s decisions were put to rest by the courts when Mr Justice Dyson, as he then was, gave his judgment in the Macob Civil Engineering Ltd v Morrison Construction 1999 case.

The case established inter alia the following issue:

Whether adjudication is in reality a speedy and convenient dispute resolution process, and whether in the practice of the UK construction industry adjudication has become, as Mr Justice Dyson considered it to be in 1999, more than merely “an intervening provisional stage in the dispute resolution process”

which has to be critically analysed considering the above issue about the adjudication principles.

It is, therefore, appropriate to consider the following major issues of the case:1. Is it a speedy process?2. Is it an intervening provisional stage in the dispute

resolution process?3. Why are principles of natural justice required in

adjudication?4. Is adjudication convenient for dispute resolution?

Is it a speedy process?In the 1990s, arbitration was seen as unduly slow and expensive and incapable of providing an effective remedy for contractors and subcontractors who were unable to obtain payment for work carried out (John Uff, Construction Law, 9th Edition, Sweet & Maxwell, London, 2005, page 63).

Also, litigation is a very lengthy process. Before any one starts litigation the parties were asked to look into any other available alternative dispute resolutions available in the contract to settle disputes.

Since Lord Woolf produced his report Access to Justice in 1994, more and more interest has been shown in keeping the cases out of court and resolving them by more appropriate and less costly means. As in the case of litigation in recent years construction adjudication was developed to deal with construction industry disputes.

Adjudication was introduced as a statutory right in construction contracts in the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996), which came into force in the UK construction industry on May 1, 1998.

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Adjudication is a dispute resolution process employed in the construction sector which as per 23(2) Pt 1 Scheme (The Scheme for Construction Contracts Regulations 1998) and Section 108(3) of the Act (Housing Grants, Construction and Regeneration Act 1996) states that:

‘The Contract shall provide that the decision is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement.’

‘The parties may agree to accept the decision of the adjudicator as finally determining the dispute’

The adjudicator must reach his decision as per s.108 and as per regulation No. 19 of Pt1 Scheme (The Scheme for Construction Contracts Regulations 1998) as described below:

• Regulation-19(1)(a)–28daysafterthedateofreferral notice

• Regulation-19(1)(b)–42daysafterthedateofthe referral notice if the referring party consents

• Regulation-19(1)(c)–Anyotherperiodexceeding28 days after the date of referral notice as the parties may agree after the giving of notice

After the Act came into force many criticisms that as per the statutory rights the adjudication has to be carried out within a narrow time frame which could be unreasonably tight so as to result in injustice. Parliament is aware of this.

The Macob Civil Engineering Ltd v Morrison Construction 1999 case which was the first enforcement case to come before the court. In this case paragraph 14 [defines the above statement?] and also states that the time frame for adjudicator is very tight (see s.108 of the Act).

Lord Abernethy in Ritchie Brothers Ltd v David Philip Ltd 2005 stated that the Parliament’s intention in providing for the right to refer disputes to adjudication was to introduce a speedy mechanism by which to settle disputes in construction contracts on an interim basis. The aim of the scheme was clearly to reach a decision within a short time. The time limit act is mandatory.

The following are a few of the subsequent cases among many that followed the judgment in the Ritchie Brothers case:

• Epping Electrical Co Ltd v Briggs & Forrester Ltd 2007,

• St Andrews Bay Development Ltd v HBGManagement Ltd 2003,

• BarnesandElliottLtdvTaylorWoodrowHoldingsLtd 2003,

Hence, it is opined that the adjudication process is a speedy mechanism for settling disputes among other dispute resolution processes and was one of the intentions of Parliament in enacting the scheme as stated in the Macob case.

Is it an intervening provisional stage in the dispute resolution process?

The intention of the Parliament was to introduce a speedy mechanism to settle disputes in the construction industry on a provisional interim basis and the adjudicator’s decision was to be enforced pending final determination of disputes by arbitration, litigation or agreement of the parties. Section 108 (3), 23 (2) Pt 1 Scheme as stated in the Macob case paragraph 29 states:

“29…. What the defendant could not do was to assert that the decision was a decision for the purposes of being binding and enforceable pending any revision by the arbitrator. In so holding, I am doing no more than applying the doctrine of approbation and reprobation. A person cannot blow hot and cold: see Lissenden v CAV Bosch Ltd (1940) AC 412, and Halsbury’s Laws (4th edn) vo.6 para 957 and 958. Once the defendant elected to treat the decision as one capable of being referred to arbitration, he was bound also to treat it as a decision which was binding and enforceable unless revised by the arbitrator.”

The Adjudicator’s decision is of a temporarily binding nature which is clearly set out in Regulation No. 23 (2) of Pt1Scheme–thedecisionshallbebindingonthepartiesand they must comply with it until such time as the dispute is finally determined by litigation, arbitration (if arbitration is provided for in the contract), or agreement between the parties.

In Herschel Engineering Ltd v Breen Property Ltd 2000, the adjudicator’s decision was not final or binding on the parties; unless the parties agreed otherwise, the adjudicator’s decision could be superseded by that of either an arbitrator or the court.

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Also, it is worth reproducing the passage (paragraph 8) from another case of Costain Ltd v Strathalyde Builders Ltd2004-Judicalcontrolofadjudicator’sdecision:

“8) ……the decision of an adjudicator is provisional in nature and may be undone by subsequent arbitration or court proceedings……. It is the essence of adjudication that the determination should be capable of speedy enforcement …… adjudication is conducted according to very short time limits ………. Under the typical adjudication provisions found in building contracts adjudication is given specific powers to take the initiative in deciding the parties’ dispute.”

“……the procedure that is followed in practice is accordingly relatively similar to that followed in arbitration, although matters are conducted in a more speedy and summary manner”

It could be argued that this may be the reason for the Parliament not to abolish other dispute resolution processes like arbitration and litigation of construction disputes as stated in the Macob case.

Therefore in view of above, that adjudication decisions were simply ‘an intervening provisional stage’ may have been what Parliament anticipated and intended, as suggested by Dyson J in the Macob Case.

Why are principles of natural justice required in adjudication?

Further to the above two issues, -a speedy process andan intervening provisional stage in the dispute resolution processwhichis likelytoresultininjustice-itcouldbeargued that adjudication did not require a fair hearing by complying with principles of natural justice (PNJ).

In Discain Project Services Limited v Opecprime Development Limited 2001, it was deemed that the adjudicator must comply with PNJ and that the courts will supervise such compliance.

Mr. Justice Dyson observed in Macob Civil Engineering Ltd v Morrison Construction 1999 that the procedure is a matter of concern:

Is adjudication convenient for dispute resolution?

The adjudication process is convenient to the parties in many ways as discussed in detail below:

The decision of an adjudicator is binding only until the dispute is finally resolved by other available means, but it appears that well over 90% of decisions are either accepted or result in settlement and in either event do not lead on to further proceedings (John Uff, Construction Law, 9th Edition, Sweet & Maxwell, London, 2005, page 63.)

It is noteworthy that in a recent case -WimbledonConstruction Company Ltd v Derek Vargo 2005- theJudge set out the following principles which should be used in deciding that the adjudicator’s decision ought to be enforced:

1. Adjudication is a quick and inexpensive method of arriving at a temporary result,

2. Adjudicators’ decisions are intended to be enforced summarily and the successful party should not be kept out of his money,

3. The probable inability of the successful party to repay the sum awarded may constitute “special circumstances” rendering it appropriate to stay the enforcement proceedings,

4. If there is no dispute that the successful party is insolvent then the decision will not be enforced.

The judge decided to enforce the adjudicator’s decision even though it is unlikely that the other party would repay as per the adjudicator’s decision.

In view of above, these types of provision are not available in other types of dispute resolution. The parties have greater freedom to agree with or reject the decisions unlike in litigation or arbitration. Also, it is a process which could proceed while the litigation or arbitration process is going on.

The adjudication process will help to proceed with the project during the time of dispute and address any cash flow difficulties experienced by contractors and subcontractors (Latham, M., Constructing the Team:Final Report of the Government/Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry, HMSO, London, 1994, at p.91).

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Hadley Design Associates Ltd v Westminster City CouncilQueen’s Bench Division (Technology & Construction Court) 09 July 2003

Keywords: Construction contracts; implied terms; Notice; Termination; Unfair contract terms

Summary: H, a firm of architects and surveyors, brought an action against a local authority for wrongful termination of a contract.

Abstract: Architects argued thatlocal authority had given them a assurance that their contract will be terminated only on default or the local authority ran out of money. Based on tis perception Architects were induced to enter into a contract showing the reprentation of the same. However, despite this assurance contract contained certain implied terms regarding termination. Case also focused to the applicability of Unfair Contract Terms Act 1977.

Judege: Judge Richard Seymour Q.C

Held: There was no evidence of a collateral agreement limiting the reasons for termination, no evidence that the local authority had made assurances in respect of termination, the contract did not contain implied terms for conditional termination and local authority had not violated Unfair Contract Terms Act 1977. Therefore, the local authority had been entitled to terminate the contract by giving the notice which it had without needing any reason for doing so.

Then the arbitration or litigation can proceed once the project is completed.

ConclusionIn view of above many of the recent cases which were appealed to enforce the adjudicator’s decision was enforced following the Macob Civil Engineering Ltd v Morrison Construction 1999 BLR 93; 64 Con LR 1; (1999) CILL 1470, case (which was the first case enforced in 1999 by Mr. Justice Dyson).

The Macob Civil Engineering Ltd v Morrison Construction case asserted that the following intentions of Parliament were achieved:

1) Speedy and convenient dispute resolution process (apparently find it difficult to accept).

2) Adjudication should be conducted in a manner which those familiar with the grinding details of the traditional approach can follow.

3) Enforcing the adjudicator’s decision (intervening provisional stage until the dispute is finally resolved) pending the final determination - “Pay now andArgue Later”.

In the UK construction industry most of the standard forms of contract have adopted the Adjudication process by HGRCA (s.108) which is a more cost effective and speeder alternative to arbitration and litigation and convenient. In JCT ’98Clause41A; the resolutionofdisputes arising under the contract resolved through Adjudication, the decision of the adjudicator is binding on the parties until the dispute of difference is referred to arbitration (clause 41.A.7.1)

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Dr. Chandana Jayalath

D.Sc, M.Sc, B.Sc (QS) Hons, PG Dip (Cons Mgt), PG Dip (Intl’ Mediation), FRICS, FIQS (SL), MCIArb Consulting Engineering Group, Doha, State of Qatarjayalathchandana@gmail.com

Demystifying a Mechanism to Deal with Open Market Vacillations

Whenever the majority of contractors are locked into lump sum fixed-priced contracts, open market vacillations are a risk to them, particularly in contracts of long duration. This is not only unfair by the contractor but also unhealthy for the industry in the long run. A surge in material costs may considerably affect their bottom lines where profit margins are not as high as they once were. As a result, contractors have been searching for recovery means through claims on their own basis whenever a mechanism to deal with price escalation is absent in the contract. Many contractors use the consumer price index (CPI) as the basis of their claims although the purpose of the index is something else.

Indeed, it may be cheaper in long run for the employer to pay for what did happen rather than what the contractor thought might happen in those areas of doubt which the contractor cannot influence. In line with this principle of construction economics, a method to deal with price escalation allows the tenderers to overcome the risk of providing an additional mark-up for unforeseen price variations. The benefit of the doubt would then be passed on to the employer in a deflation since any contract price adjustment is applicable both ways. Since the aim behind any mechanism should be to reasonably reimburse the contractor for those eventualities he could not reasonably foresee in advance, it must eventually reflect an equitable risk sharing between the employer and the contractor.

Similarly, many standard forms of contract provide a mechanism for contract price adjustment due to open market escalation in specified construction inputs such as major building materials, hire charges of plants, and wages for labour. The choice of these inputs largely depends on the cost significance in the overall share for the quoted tender price. Therefore, the adjustments to the contract price shall be made in respect of not only

a rise but also a fall in the cost of materials and other inputs affecting the cost of the execution of the works. Together with the traditional methods of calculating this escalated component using contemporary records, there are formula methods such as NEDO, Osborne, Baxter, Haylett, and ICTAD, to name a few. In all cases, the fluctuated component is ascertained on the difference between the indices of costs of construction labour and materials at the time of tendering and the current values of those indices at the time of escalation in accordance with a predetermined relative proportion for each cost index.

Although a formula method is fairly straightforward and simple to administer, it is difficult to introduce in countries where there is no promotional entity to publish construction indices acceptable as a single source authentic cost database for budgeting, estimating, bidding and cost validation. Since accurate input proportions and reliable cost indices are integral elements in such a mechanism, a traditional approach in an easy-to-understand manner, (by removing complications) helps in the pursuit of a reasonably compensable amount. As such, the first task must be to lay down a couple of parameters, as follows:

1. For example, the projects the duration of which exceeds one (1) calendar year may only be considered for reimbursement of any price escalation on the assumption that the contractors are in a safer, if not better, position to foresee the likely price escalation at the time of bidding for shorter durations. This can be changed to six months, if necessary and the projects eligible for price escalation defined accordingly.

2. The contract price adjustment will be made only on the selected items in the Bill of Quantities. Many admin issues such as site delivery, calculating

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wastage, materials excess, and double or multiple handling (on and off site) do not arise whenever the adjustment is made in relation to the physical quantity of permanent work at site in which the ‘fluctuated’ materials have been consumed. In case the escalation is ascertained on the material purchase, then it may be a case where payment may be made even before they are consumed in the works.

3. Once the escalation mechanism is connected with the physical quantity of work done instead of materials purchased, it avoids a glaring anomaly where the payment on escalation caused by the increase in prices of certain materials may be made at a time when such materials were not used at all. Also, it avoids over compensation on over purchased materials, materials wastage in transit, usage and in application, and redundant materials at the practical completion.

4. A couple of specified materials of a selected set of work items can only be considered for price adjustment on the basis of cost significance. As per the Pareto principle, it is usually 20% of the bill items that represent 80% of the cost on the total project which is true of building projects and not far wrong of civil projects.

5. The adjustments to the contract price can only be considered in respect of price fluctuations varied by more or less than for instance 10% of the prices which prevailed fourteen days prior to the scheduled date of submission of tenders compared with the prevailing prices at the time of procurement (in accordance with the materials procurement plan as approved by the engineer from time to time). In a price drop the employer will gain the benefit of price reduction once the cut off limit is exceeded. However, if the current price is within a margin of 10% above or below the basic price, then the basic price shall remain unaltered, meaning there will be no claim on price escalation. However, the contractor has to use due diligence in procuring materials in required quantities at the right time and deliver the materials without causing unreasonable wastage, since the burden of any occasional slip may definitely fall on him.

6. Only the net difference in prices shall be considered in the adjustment exclusive of profit and overheads of the contractor. The whole idea is to prevent profiting out of economic losses but bring the losing party

back to the original position financially had there been no fluctuation. Accordingly, the adjustment to the contract price shall be calculated by applying the net difference in prices to the quantity of work done during the period where ‘fluctuated’ materials were consumed under respective specified items of permanent works.

7. The adjustment shall only apply up to the estimated quantities in respect of lump sum contracts (except where the quantity changes have been considered a variation eligible for contract price adjustment) and actual quantities in respect of traditional re-measure contracts.

8. It can also be reasonably assumed that the rates for varied works are already inclusive of any escalation except those priced with existing bill rates.

9. The materials incorporated into permanent works shall only be considered for cost reimbursement partly because temporary works can be of multiple uses in other projects. Therefore, any temporary works, plant and equipment, tools and consumables, as well as small items are not matters for concern.

10. Omitted works and employer- supplied materials can also be ignored in the adjustment of contract price.

In administering, a detailed tender price break-up plays an important role in deciding on the price quoted for materials, showing separately the other cost elements such as labour, plant, tools, wastage, site and head office overheads, and profit, as well as trade discounts on bulk purchases. Hence, the purchase price at actual procurement will establish the current rate excluding the cost of delivery to site.

However, there are mechanisms that mandate the contractors to follow employer- supplied fixed rates for selected materials with a list of accredited suppliers. One would argue that accreditation helps in reaching the economic order quantity (EOQ). EOQ is essentially an accounting formula that determines the point at which the combination of order costs and inventory carrying costs are the least. The result is the most cost effective quantity to order. However, the EOQ model is based on the assumptions that the demand rate is constant, recurrent and known (assumed to continue the same level of demand for an indefinite future time with no random variance); the lead time is constant and known (lead time from order placement to order delivery is always

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a fixed number); no stock outs occur and materials are ordered and produced in a lot [of batch?] and the lot is placed into the inventory all at one time. The unit cost is constant and no discounts are given for bulk purchases. The purchasing cost per unit is unaffected by the quantity ordered and the carrying cost depends linearly on the average inventory level. This approach to determine EOQ which involves optimizing costs of holding stock against costs of ordering stock has been subject to much controversy. In addition to concerns about the validity of some assumptions, more recently, criticisms emerged of the underlying rationale of the approach itself. In order to keep the EOQ model relatively straightforward, it is necessary to make assumptions related to stability of demand, existence of fixed identifiable ordering cost, and the cost of stockholding and so on. While none of these assumptions is often strictly true, at times these assumptions do pose severe constraints to the model. Although the most fundamental criticism of the EOQ approach comes from Japanese inspired JIT philosophies, it would be too difficult a task for construction commercial managers to find out representative costs of ordering and stockholding in the light of these cost variables. Where the forces of supply and demand tolerate the price equilibrium, obligating the contractor to procure materials from sources designated by the employer is not only a gross intervention into contractor’s internal transactions which are commercial by nature but also an intervention in the supply chain. The theory of supply and demand as an organizing principle for explaining how prices coordinate the amounts produced and consumed applies to price and output determination in the market on the condition that no buyers or sellers are large enough to have price-setting power. Market equilibrium occurs where quantity supplied equals quantity demanded at a price below equilibrium, and when there is a shortage of quantity supplied compared to quantity demanded, it poses a price hike-up in the accredited sources more than in the open market. According to Milton Friedman and many other monetarists, market economies are inherently stable if left to themselves. Friedman effectively claims that the social responsibility of business should be “to use its resources and engage in activities designed to increase its profits (through) open and free competition without deception.” In Adam Smith’s view, the ideal economy is a self-functioning market system that automatically satisfies the economic needs of the populace. Smith describes the market mechanism as an ‘invisible hand’

that leads all individuals, in pursuit of their own self-interest, to produce the greatest benefit for society as a whole. Demand-and-supply analysis can be used to explain the behaviour of any type of market including construction which is oligopolistic in nature for many cost significant items. An intervention in the supply chain by a major construction client (contributing a considerable proportion of the gross domestic product (GDP) through accreditation) is therefore a serious concern. In a nutshell, large scale procurement through accredited sources can be detrimental in the long run.

Another pitfall in such a mechanism is that the BOQ items with materials supplied by accredited suppliers shall be priced in two different places in the tender document: supply cost to be priced under a separate schedule and all other cost elements under respective BOQ items. This method of pricing Bill of Quantities not only changes the standard way of pricing (inter alia based on pricing preambles) but also makes the evaluation of variations difficult. This is an unnecessary infiltration of the pricing strategies the contractors may employ from project to project on different bases. Duplication of the costing of materials may occur since the cost of a particular material can be included under several bill items, except in a very few cases. Instructing the bidders to be careful about duplication would not suffice. Restricting premature ordering from compensation is another drawback, which is again an intervention in the contractor’s procurement policy, forgetting the principle of economies of scale which any prudent contractor follows in materials procurement. This restricts the benefits of premature bulk purchases for many forthcoming projects and in line with replenishment of stocks at site level so that the accredited supplier’s price may have gone up more than other sources in the market.

Thus, in devising a defect free mechanism, care must be taken not to disturb the ‘freedom of business’. For instance, the contractor has the liberty to procure materials from a source of his own choice while the employer also reserves the right to specify the source of procurement in some instances. It is the duty of the contractor, not the employer, to establish the basic prices against the specified materials under specified bill items forming part of the tender. Prices could be ex-factory, imported or open market as the case may be, and it is a pre-tender function of the consultant to specify the materials, compute the input proportions and list them

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in the tender document and verify the base prices with a tender price break-up in support. Care must also be taken in specifying materials eligible for compensation since the use of materials may differ according to the type of project. A reference list of construction material would be in the case of residential building projects of steel, cement, concrete, sand and stone whereas in infrastructure projects it would be of concrete, timber material, sand and stone, bridge columns, expansion joints, asphalt products, drainage pipes, pre-fabricated concrete components, etc. Therefore, price adjustment clauses must be approached with care and should be diligently drafted, specifically identifying the individual building materials most at risk of price fluctuation. The consultant should also check the authenticity of the escalation information as a post-contract function. Also, the consultant must keep records of variances in prices so that a claim for contract price adjustment in a deflation can be made on the employer’s behalf. Once the price difference has been identified, it shall be a separate claim in its own right.

Contract rates are not subject to change due to price escalation, meaning that the rates shall not be revised depending on the level of fluctuation. Also, a claim on price escalation is separate from a claim for liquidated damages by the employer since a delay in procurement due to delay in progress has a knock-on effect that does not prejudice the contractor’s eligibility for contract price adjustment on open market price escalation. By the same token, the contractor reserves the right to claim on price escalation even during the extended period/s since he has been permitted to complete the work on a new date.

Equally important is the notification procedure to hold the contractor responsible for notifying the employer of a price increase and its impact on the contract sum

and vice versa. The contractor shall upon the occurrence of any event which may or may be likely to give rise to adjustment of the contract price give notice to the engineer and shall keep such invoices, accounts, documents or records as are necessary to enable adjustment. Also, the contractor shall keep the engineer informed in advance of the procurement of such specified materials at the most economical prices available at the time of purchase to be made compatible with the procurement plan and actual progress.

However, the importance of deciding on an optimum contingency level can not be compromised on the sophistication of the price escalation mechanism in place. Usually being 10% of the total of quoted sums for billed items, a contingency is an allocation for unforeseen events during the currency of works. Price escalation is one such phenomenon where the contingency allocation is used without recalling additional funds. Therefore, it is important to decide on the level of contingency in a rational way as a pre-tender function of the consultants. However, qualitative forecasting methods utilize managerial judgment, experience, intuition, rules of thumb and guesswork so that the decision model is basically implicit and subjective. Trend projection techniques may be appropriate in situations where the consultant is able to infer, from the past behavior of a variable, something about its future impact on inventory, scheduling, seasonal variations and cyclical patterns. Dr. Chandana Jayalath is a Chartered Quantity Surveyor, working in the Middle East. His latest industrial experience is in contract advice, claims review and dispute settlement related to public infrastructure projects. He is the author of “Contractual Dimensions in Construction” in addition to more than 150 articles published online.

Viking Grain Storage v T H White Installation (1980)

The contract concerned the supply of grain silos. The grain developed mould whilst stored, due to inadequate ventilation.

Held that the defendants were liable for not provideding goods fit for their purpose.

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Sampath Marasinghege, B. Sc Hons (QS)Is a Quantity Surveyor graduated from University of Moratuwa, Sri Lanka in 2002. He is currently working for Damac Properties LLC as a Quantity Surveyor.

Performance security and possible alternative mechanism for performance security in the economic downturn

Introduction

It is common in most present day construction contracts that the contractor is required to provide a performance security in the form of a bank guarantee to the employer upon issue of letter of award as a means of guaranteeing the contractor’s ability to perform its obligations and the contractor’s financial viability under the construction contract.

However, due to the impact of the current economic slump, triggered by the financial crisis, which has severely affected the construction industry in the United Arab Emirates (UAE), some small scale (mostly sub contractors) and medium scale contractors are unable to provide performance securities as stipulated in the contract. The main reason for this is that some financial institutes in the UAE, mainly banks, do not provide performance securities during the economic downturn owing to uncertainty building up in the construction industry over the last few years. As a result, employers and contractors have sought possible alternative mechanisms for performance securities in order to overcome such situations and conduct the contract smoothly.

This paper discusses the possible alternative mechanism for performance securities which can be adopted when contractors are unable to provide performance securities and its advantages as well as disadvantages. However, it has to be noted that the contractor shall obtain and provide a performance security (if required) under FIDIC conditions of contract 1987, 4th edition.

What is performance security?

As stated above, performance securities are provided as a useful means of creating financial security for the employer against the contractor’s failure to perform his contractual obligations. Generally, a performance security is an arrangement under which the performance of one party by another party is assured by a third party.

Performance securities are traditionally categorized as being of two types. The first is what is known as a conditional performance security whereby the guarantor (usually a bank) is only liable to make payment under the security upon proof of the conditions stated in the security. The principal characteristics of conditional performance security are:

1. It is a contract of guarantee whereby the guarantor, i.e., the bank accepts ‘joint and several’ responsibility for the performance of the contractor’s obligations under the contract; and

2. The guarantor only becomes liable upon the operation of the proof of a default/breach of the terms of the contract, and the employer (beneficiary) sustaining loss as a result of such default/breach.

The second characteristic is known as an unconditional or “on demand” performance security where the guarantor is liable to make payment merely upon receipt of a demand for payment from the employer without proof of breach or default by the contractor. These securities exhibit the following characteristics:

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1. It is a pledge by the guarantor, i.e., the bank, to indemnify the employer merely when demand is made upon him by the latter, and

2. It entitles the employer to call upon the guarantor for payment whether or not there has been default under the contract provided only that the call is not fraudulent.

The duration and amount of a guarantee depends upon the terms on which it is given in the contract. Generally, in a FIDIC form of contracts, a performance security remains in force until the contractor has completed the works and remedied any defects.

Furthermore, a performance security is not an insurance policy which normally is a contract of indemnity under which the insured is indemnified in the event of loss, subject to the adequacy of the sum insured. There are also three parties under a performance security (i.e., the contractor, the employer and the guarantor, namely, the bank) as opposed to two under an insurance policy (i.e., the insurer and the insured). Once a performance security is issued, it cannot be cancelled until the stated discharge date or until the subject matter of the indemnity has been completed satisfactorily, whereas an insurance policy can be cancelled before its expiry date with the employer issuing a letter to the bank confirming his consent.

Possible alternative mechanism for performance security

FIDIC forms of contract encourage the contractors to provide performance security in the form agreed by the employer. However, due to the uncertainty building up in the construction industry in the UAE some employers and contractors agree on the need for some alternative mechanism for performance security as guarantors, and that banks or financial institutions do not provide such a performance security.

The following mechanisms are identified as alternatives for performance security currently used in the UAE construction industry:

Additional Retention for Performance Security

Apart from the general retention stipulated in the contract, additional retention money which is equivalent

to the percentage stated in the contract for performance security can be held from each monthly statement as an alternative mechanism for performance security. However, it is obvious that the maximum limit of additional retention should be equivalent to the amount of performance security stated in the contract.

The major disadvantage of this mechanism can be summarized as follows:

1. Performance security retention money is accumulated based on the actual work done and the total amount equivalent to performance security can therefore be retained only after certification of work;

2. Unlike the performance security, there is no financial guarantee from the commencement of the project;

3. It is not possible to retain the total amount equivalent to performance security in the event major work is omitted from the contract;

4. In the event the contractor is unable to perform his contractual obligations during the contract period, the employer does not have an opportunity to make full payment as performance security and the total amount will be limited to the amount of additional retention money; and

5. Holding up the additional retention from contractor’s monthly statements means that it directly affects their monthly cash flows.

There are some advantages of this mechanism that can be identified as follows:

1. It is not required to pay additional bank charges to obtain and extend (if required) the performance security; and

2. There is an opportunity to invest this additional retention for any other investment from the employer/developer’s perspective.

w

Accepting a security cheque from the contractor as a performance security is another alternative mechanism currently practiced in the construction industry in UAE. Most main contractors currently obtain security cheques from their subcontractors as a performance security because small scale contractors are unable to obtain traditional performance securities from the financial institutes (i.e., banks) because of their financial position.

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Not only main contractors but also most employers now accept security cheques from their contractors as a performance security owing to the economic downturn. The amount of the security cheque is equivalent to the amount of performance security stated in the contract. Security cheques can be provided as an undated cheque or a dated cheque. However, it has to be noted that the security cheque provided for performance security is a dated cheque. There is a validity period for dated cheques set by the Central Bank of UAE (as per current rules, it is six months from the date of issue) and the dated cheque needs to be re-issued by the contractor prior to its expiry.

The following advantages can be identified in this alternative mechanism for performance security:1. As stated in the aforementioned alternative

mechanism, there are no additional bank charges to obtain security cheques; and

2. Since the amount of security cheque is equivalent to the amount of performance security from the commencement of the project, the employer has an opportunity to make full payment at any stage of the project.

However, there are several disadvantages in this alternative mechanism that can be summarized as follows:

1. Generally, a performance security is an arrangement under which the performance of one party for another party is backed up by a third party. In this alternative mechanism, however, there is no financial guarantee provided by the third party to the first party, i.e., the employer, but the second party. i.e., the contractor provides the guarantee by himself. There is a financial risk to the employer by a dishonoured cheques though contractors provide security cheques;

2. If the security cheque is a dated cheque, it is required to validate the cheque before its expiry;

3. There is a possibility that the contractor may decline to provide dated cheques prior to their expiry at any stage of the project; and

4. Cheques need to comply with the rules and regulations issued by the Central Bank of UAE. Normally, these rules and regulations can be amended by the Central Bank from time to time and employers therefore need to verify the validity of security cheques provided by the contractors.

Conclusion Due to the global economic downturn impacting the construction industry in the UAE, financial institutes (i.e., banks) decline to provide performance securities for some contractors and therefore employers and contractors have sought some alternative mechanism for performance security.

Employers and contractors in the UAE construction industry are testing some alternative mechanisms as discussed above over the last few years. There are several advantages and disadvantages in each mechanism. There is a financial risk to the employer in accepting any alternative mechanism rather than obtaining a performance security in the form of a bank guarantee. Therefore, it is necessary to identify the most suitable alternative mechanism to the contract in the event a traditional performance security cannot be obtained.

As stated above, FIDIC based contracts do not encourage the parties entering into the contract to accept any alternative mechanism for performance security. However, when both parties need to accept any alternative mechanism for performance security, necessary contractual amendments are required to be carefully incorporated into the contract.

Gillies Ramsay Diamond v PJW Enterprices Ltd (2003)

A claim for professional negligence against Diamond, who had provided general consultancy services in relation to a building project, was referred to adjudication. It was found that these services included arranging construction operations for others and/or contract administration and therefore the matter could referred to adjudication, despite the absence of an adjudication clause in the contract.

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S.M. Asanka Sanjaya KumaraBSc (Hons), NCT(QS) Asanka is a Quantity Surveyor graduated from The University of Reading, UK in year 2011. He completed his National Certificate of Technology course in Quantity Surveying at Technical College, Sri Lanka in year 2005. Asanka has worked as a Quantity Surveyor in Sri Lanka, UAE & Morocco during the last decade. He is currently working for Depa Interiors, Dubai, as a Senior Quantity Surveyor.

Why most UAE clients go for Lump Sum building contracts

The United Arab Emirates (UAE) is a constitutional federation of seven emirates (States), which was formally established on December 2, 1971 and one of the most prosperous and politically stable countries in the Middle-East region. The petroleum industry plays an important role in the UAE economy, and a construction boom started during the first decade of the 21st century. It [gifted] a number of large scale construction projects such as shopping malls, manmade islands, new airports, roads, a sophisticated railway transport service, hotels, office buildings, and thousands of residential units including luxury apartments and villas.

Most of the building projects and civil engineering projects started in early 2000 and many of them have been delivered within the first decade. The UAE was a haven for construction people until the industry was hit by the economic crisis that affected most of the countries in the world during the last two years of the decade.

Almost all construction methodologies available in the world were practised during the peak time and some of them were successful while others were not. However, it has been noticed that while most of the building projects in the UAE were constructed under lump sum contracts the civil engineering projects were constructed under re-measurement contracts.

It is emphasized, like in other countries in the world, that the UAE construction industry has faced a greater risk of ‘Time’, ‘Cost’ and ‘Quality’ of construction projects. During the peak time in the industry, there were many cases reported of the developer/client having sold the building properties even without approved drawings from the local authorities.

Apparently, most of the clients wanted to proceed with

lump sum contracts in the traditional procurement path which was more popular during those days in the market. Theoretically, design should be finalized to get the maximum benefit from a lump sum contract; otherwise, a re-measurement contract is the most appropriate option.

The contractor will have had time to assess the ‘buildability’ of the project, to organize his supply chain and sub-contractors and generally to have satisfied himself that the job can be completed at a profit, for the contract price and within the contract period. In the UAE, of course, precisely the opposite is usually the case. First, the price and programme are fixed against an outline design, and then a contract of some kind, often just a letter of agreement, is signed. Only after that is the design developed to a level of detail which enables the contractor to see exactly what he has committed himself to. The result, not surprisingly, is a book of variations which quickly runs out of control and a completion date without basis in reality.

The essence of a lump sum contract is that, in return for an agreed firm price, the contractor provides all that is necessary to ensure that the finished plan complies with the contract document and specification, achieves the required levels of performance and is completed on time. The specification, performance requirements and guarantees, and all other technical and commercial contractual conditions must be agreed on in detail before the contract is awarded. Once the contract becomes effective, the lump sum price is payable regardless of the actual cost incurred by the contractor. The contractor must, therefore, include contingencies in his price for estimating errors, uncertainties such as cost escalation and currency fluctuations, the cost of which, on the basis of his experience, will inevitably be incurred from time to time. Such costs arise from design, procurement of

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construction errors, and other unforeseen costs that that the contractor might incur, but has no protection against under the terms of the contract. When considering those contingencies, the eventual cost may turn out to be significantly different from his estimates originally made for the work. The contractor takes the risk that over-expenditure will result in a smaller profit than expected or even a loss, in the knowledge that, if all goes well, his profit may be greater than expected.

Lump sum contracts can be divided into two major parts;i. Lump sum contracts with quantities are based on

drawings and firm Bills of Quantities (BOQ), andii. Lump sum contracts without quantities are usually

based on drawings and specifications together with schedule of work.

Common advantages of lump sum contracts • Competitivefairness-alltendersarebasedonexactly

the same information, and there is no interpretation of information.

• Costcertainty-thetotalcostisknownattheoutsetof the contract.

• Programmecertainty-thetime-frameisestablishedat the outset of the contract.

• Wellestablished-thishasbeenthemostcommonlyused route, and everybody knows its pros and cons.

• Minorchangesandadaptationsforaspecificprojectare easy to implement with an established method of valuation.

• Themethodiscapableofconversiontoaguaranteedmaximumprice(GMP).

Common disadvantages of lump sum contracts • Changesaredifficultandcostly.• Need tohave substantially completeddesignprior

to bidding.• Contractor inclined to choose lowest methods /

materials to comply with specifications.• Bidding/Estimation process is expensive and

lengthy.• Contractorsmay includehighcontingency for the

rates due to the risk.• Limited contractors are sufficiently experienced

to capture the complete scenario of the contract in order to submit a competitive price without compromising the sustainability of the project and contractor’s organization.

As a result of a recent survey conducted among 111 UAE construction professionals to find out the reason/reasons for selecting lump sum contracts in the UAE building industry, the following were identified:

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Participants were informed to disregard variationsituations during the survey (assumed there are no variations). According to the above Figure 1, 93% of respondents believe ‘cost certainty’ to be the main reason for the selection of lump sum contracts if there are no variations.

The next two highest percentages of 85% & 83% respectively were received for ‘easy post-contract management’ (assumed there are no variations) and ‘easy to forecast client cash flow’.

‘Less post contract paper work’ also a major reason for selecting lump sum contracts if there are no variations.

62% of participants state ‘limited overall project duration’ and 60% say ‘to achieve faster construction’ and ‘limited post-contract duration’ as the other factors.

As per Figure 1, 65% and 62% of participants believe that lump sum contracts will cause post-contract disputes and it is difficult to manage variations. Therefore, handling of post-contract variations has been identified as a key problem of lump sum contracts.

56% of participants think that the clients choose lump sum contracts because of the consultant’s recommendation.

According to the above table, lump sum contracts are less riskier to the client than re-measurement contracts.

Cost certainty can be expected from a lump sum contract if the design is finalized. All the types of evidence and comments made throughout the survey clearly shows that the UAE clients have chosen lump sum contracts for building projects as a tool for transferring financial risk to the contractor. It is obvious that clients should have ‘cost certainty’ in price and sell their property in advance as a method of low risk and low cost fund raising.

The clients in the UAE wanted to achieve cost certainty of their projects by using lump sum contract during the last decade, but could not achieve it due to variations that occurred because of improper tender documentation, such as incomplete design and specification. This led to lots of disputes in the industry and many cases have ended up with unexpected cost overruns.

Risk allocation between the client & the contractor in different procurement routes (Figure 2)(Takashi Saito,1999)

References

1. Skaik,Samer.2008.UAE:TimeforGMPcontracting?.http://www.cmguide.org/archives/2362. Saito,Takashi.1999.The characteristics of Japanese construction procurement by the risk management approach. London: Cobra 1999-RICS

Research.

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C. J. QuicksonBSc (Hons), LLM (Constr. Law & Arb) , AAIQS, MRICS, CCE, MCIArb

Letter of Intent (LoI) and its importance in the construction industry

1.1. Introduction to Letter of intent and its legal aspect

It is a fact of modern building contracting that a significant number of both main and sub contracts are let under a letter of intent; the intention being to conclude a written contract shortly afterwards. Letters of intent are not confined to the construction and engineering industries. However, most of the reported and unreported cases concern those industries and so for convenience the terms ‘Employer’ and ‘Contractor’ are used below.

In the present context, the term ‘Letter of Intent’ is used to describe a letter from the Employer to the Contractor which includes the following elements:

a. The Employer indicates an intention to enter into a formal, written contract with the Contractor for the Contractor to carry out the work described in the letter of intent.

b. The Employer requests the Contractor to start work at once or at any rate before the parties execute the formal, written contract.

However, the expression is not a term of art. This was held in the leading case of ERDC Group Limited v Brunel University where HHJ Humphrey Lloyd QC stated about the letter of intent as follows:

“Letters of intent come in all sorts of forms. Some are merely expressions of hope; others are firmer but make it clear that no legal consequences ensue; others presage a contract and may be tantamount to an agreement ‘subject to contract’;’ others are contracts falling short of the full-blown contract that is contemplated; others are in reality that contract in all but name. There can therefore be no prior assumptions, such as looking to see

if words such as ‘letter of intent’ have or have not been used. The phrase ‘letter of intent’ is not a term of art. Its meaning and effect depend on the circumstances of the case”.

Pending the execution of the formal, written contract, a Letter of Intent containing the two elements identified above will normally take effect in one of three ways as described below under types of Letter of Intent in use – Types (a), (b) & (c).

For all practical purposes, where the Letter of Intent results in a contract which incorporates the conditions of the FIDIC, JCT or other standard form referred to in the Letter of Intent, it will make little difference whether the Letter of Intent is analysed as falling into type (b) or type (c). What matters is whether the conditions are incorporated or not under the above types.

Therefore, the types of Letter of Intent can be reclassified as follows, which will help to discuss further in detail the LoI under the following categories.

Type (a) A pure letter of Intent: As a request by the Employer to the Contractor which, if actioned by the Contractor, entitles the Contractor to a restitutionary remedy, namely, payment of a reasonable sum (a quantum meruit) for the value of any work done or any materials supplied. Type (b)A letter of intent incorporating interim contractual arrangements: As a request by the Employer to the Contractor, which if actioned by the Contractor, creates an interim contract between the parties on terms that fall short of the terms and conditions of the relevant standard form.

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Type (c)A letter of interim sufficient to form a contract for the entire project: As a request by the Employer to the Contractor, which, if actioned by the Contractor, creates an interim contract between the parties on most or all of the terms and conditions of the relevant standard form

OR

As a final contract between the parties incorporating the terms and conditions of the formal, written contract notwithstanding the failure of the parties to execute the formal, written contract.

Dividing the Letters of Intent into the above three categories will depend on the intention of the parties, which is found by an objective interpretation of:

a. The language of the Letter of Intentb. The surrounding circumstances, including anything

the parties wrote, said or did subsequent to the Letter of Intent.

1.2. Critical analyse of its impact on disputes aroused from letters of intent

This section will provide, how the decisions made by judges from the cases in the past years due to the disputes arouse from the letters of intents, under the above 3 types, as discussed in the previous section.

Through these discussions, it will be easy to get the feedback and results of how the parties drafted the Letter of Intent in the past years and how it had been interpreted by the parties.

a. Cases classified under Type (a)The court prefers to avoid putting a Letter of Intent into this type at all. Where a letter of intent authorises work, materials or services to be provided pending the conclusion of some further agreement and the letter is accepted, the court will try to establish a contract for that which the letter requires since that would be consistent

with the parties’ presumed expectations. In the case of Durabella Ltd v J Jarvis & Sons Ltd1 where Judge HHJ Humphrey Lloyd QC held that ‘It is in my judgment clear that Jarvis intended that its formal order was being postponed solely so that it could record the results of the survey and measurement, i.e., the quantity to be paid for at the agreed rate”.

However, a contract cannot exist unless it is clear that, viewed objectively, the parties were in fact agreed on all the matters which they considered necessary and which are necessary to form a contract.

Further in the case of Trentham (G Percy) Ltd v Archital Luxfer Ltd2, where Steyn LJ said in an often quoted dictum that the fact that a transaction is performed on both sides will often make it unrealistic to argue that there was no intention to enter into a contract. However, Steyn LJ went on to state that the position might be different where there was an express provision in a letter that there was to be no contract at all until the occurrence of a particular event, such as the execution of a formal contract.

In the case of Jarvis Interiors Ltd v Galliard Homes3, where Lindsay J (with Schiemann LJ and Evans LJ agreed) noted the “broad disposition to find a contract if one can”.

However, in some cases the terms of the Letter of Intent and/or the facts may be inconsistent with an intention to enter into any contract at all. Which of these types fall under this category Type (a)? An example is British Steel v Cleveland Bridge, 4where it was held that there was no “if ” contract when, in a case such as the present one, the parties were still in the state of negotiation.

The case of Jarvis Interiors Ltd v Galliard Homes5 is a more recent example. The Court of Appeal found that in the absence of a contract under seal, there was no contract at all. Note, however, that Galliard did not advance the argument that the Letter of Intent, when acted on, created a contract – Evans LJ clearly thought this argument would have succeeded.

1 Durabella Ltd v J Jarvis & Sons Ltd (2001)83 Con LR 1452 Trentham (G Percy) Ltd v Archital Luxfer Ltd[1993] L Lloyd’s Rep 25at page 273 Jarvis Interiors Ltd v Galliard Homes [2000] BLR 33 (CA)4 British Steel v Cleveland Bridge 24 BLR 945 Jarvis Interiors Ltd v Galliard Homes [2000] BLR 33

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As discussed above, where the cases fall into Type (a), the effect of the Letter of Intent is to authorize the Contractor to carry out the work. However, the Contractor will be entitled to stop work at any time without notice.

Similarly, the Employer will be entitled to instruct the Contractor to stop work at any time without notice. Similarly, in the absence of a contract, the Employer will not be able to counterclaim for breach of contract, e.g., for the cost of defective work. However, it seems that the defects can be taken into account when assessing what the work is worth as decided in the case of British Steel v Cleveland Bridge6 24 BLR 94

b. Cases classified under Type (b)Under this category, it was held by HHJ Thornton QC in the case of Hall & Towse South Ltd v Ivory Gate Ltd7, where he stated that by starting work Hall & Towse accepted the offer contained in the Letter of Intent resulting in a provisional contract. The contract was a bilateral one that required Hall & Towse to complete the works in a reasonable time for a reasonable sum. As far as reasonably possible, valuations were to be carried out in accordance with the JCT provisions referred to in the Letter of Intent.

In Mowlem PLC (trading as Mowlem marine) v Stena Line Ports Ltd8 it was common ground that each Letter of Intent in a series created an interim contract which superseded each earlier contract. Each Letter of Intent imposed a ‘cap’ on the amount which the Employer would be liable to pay. The Employer argued that this was simply an ‘if ’ contract with the result that the Contractor was entitled to stop work at any time. The issue was whether the Contractor was entitled to be paid a reasonable sum in excess of the ‘cap’ for work he carried out which, he said, exceeded the value of the ‘cap’. HHJ Richard Seymour QC held that all the work was subject to the final interim contract and so the ‘cap’ applied to it.

The initial contract in Westminster Building Co Ltd v Beckingham9 was an “if ” contract, where there was a

simple contract between the parties created by the Letter of Intent, which provided that such work as was carried out in accordance with the specification and the drawings would be remunerated on a quantum meruit basis.

Hall v Towse South Ltd v Ivory Gate Ltd10 and ERDC Group Ltd v Brunel University (TCC), HHJ Humphrey Lloyd QC, 29th March 2006 are further examples of cases where the court found a bilateral contract whose terms fell short of the intended bilateral contract.

In the case of Hackwood Ltd v Areen Design Services Ltd11, Field J held that when the Letter of Intent was construed against the background of the surrounding circumstances, it was the intention of the parties to enter into an interim contract incorporating all the JCT terms and conditions save to the extent that those terms were inconsistent with the terms of the letter.

Cases classified under Type (c)In this Category, the proper conclusion is that the parties intended to contract on the full terms of the ‘intended contract’ referred to in the Letter of Intent notwithstanding that they never in fact executed a formal written contract. Depending on the facts, in particular on the precise language of the Letter of Intent, this may result either in a conclusion that the parties entered into an Interim Contract pending execution of the formal contract or that there was a Final Contract because the parties expressly or impliedly dispensed with the requirement for the execution of a formal contract.

In the case of Harvey Shopfitters Limited12 v ADI Limited , the crucial phrase in the Letter of Intent was “If, for any unforeseen reason, the contract should fail to proceed and be formalised, then any reasonable expenditure incurred by you in connection with the above will be reimbursed on a quantum meruit basis”. Harvey argued that this meant the parties intended the contract should be “formalised” by formal contract documents being signed, in the absence of which Harvey was entitled to a quantum meruit. The Court of Appeal rejected this argument. The

6 British Steel v Cleveland Bridge 24 BLR 947 Hall & Towse South Ltd v Ivory Gate Ltd (1997) 62 Con LR 1178 Mowlem PLC (trading as Mowlem marine) v Stena Line Ports Ltd [2004]EWHC 22069 Westminster Building Co Ltd v Beckingham [2004]EWHC 138 (TCC)10 Hall v Towse South Ltd v Ivory Gate Ltd (1997) 62 Con LR 11711 Hackwood Ltd v Areen Design Services Ltd [2005] EWHC 2322 (TCC)12 Harvey Shopfitters Limited v ADI Limited 2003] EWCA Civ 1757

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Court of Appeal found that the words meant that the only circumstance in which Harvey would be entitled to a quantum meruit was if the contract did not proceed and was not finalised. The contract did proceed and so Harvey was not entitled to a quantum meruit.

Allen Wilson Shopfitters v Buckingham13 is another case where HHJ Coulson QC concluded that the signing and returning of the Letter of Intent by the contractor led to a contract incorporating the JCT conditions referred to in the Letter of Intent.

SummaryAs discussed above under 3 Types, the more recent cases show that the court is inclined to find a contract if it can (at least in construction/engineering cases) since the court believes this will usually accord with the intention of the parties (Hall & Towse v Ivory Gate, Durabella v Jarvis, Jarvis v Galliard).

However, when the Letter of Intent and the surrounding circumstances show that the parties were continuing to negotiate about matters that were or that they regarded as essential to the existence of a contractual relationship between them, there will be no contract (Durabella v Jarvis; British Steel v Cleveland Bridge4). The same will be true if the Letter of Intent expressly states that there will be no contract between the parties until the occurrence of a stated event and that event does not occur or if the Letter of Intent contains some other express term negativing the existence of a contract (dictum of Steyn LJ in Trentham v Archital; Jarvis v Galliard).

As discussed above, we can come to a conclusion based on the cases as follows, how the court / judge will interpret and act based on the terms, wordings and intention of the parties used in the Letter of Intent.

The court is well aware that in the construction industry the parties all too often simply fail to get round to executing a formal contract incorporating the terms of a standard form the parties contemplated should govern their relations.

As in Type (b), where the Letter of Intent indicates an intention to enter into a contract on a standard form, where the contractor starts work on the basis of the letter

and where all that is outstanding is the execution of the written form, then the court is likely to conclude:(i) The parties entered into a bilateral contract (final or

perhaps interim).(ii) The contract incorporated the terms of the standard

form as discussed above under the case of Harvey Shopfitters v ADI, Westminster Building v Beckingham and Allen Wilson v Buckingham.

The following factors are, [without more,?] unlikely to lead to the opposite conclusion:(i) The absence of an executed contract (Hackwood v

Areen; Westminster Building v Beckingham; Harvey Shopfitters v ADI; Allen Wilson v Buckingham).

(ii) The use of the future tense in the letter of intent (Hackwood v Areen).

(iii) The fact that the parties continue to negotiate about those terms of the final contract (Hackwood v Areen) that the court regards as immaterial.

(iv) The absence of agreement on points the court regards as immaterial.

Also, under Type (c) where the Letter of Intent indicates an intention to enter into a contract on a standard form, where the contractor starts work on the basis of the letter and where the parties do not execute the written form, one or more of the following factors may lead to the conclusion that the parties entered into either an interim bilateral contract, but one which did not incorporate the terms of the relevant standard form, or a simple interim unilateral contract:

a. An absence of agreement on all the matters which the parties considered necessary and which were necessary to form a final contract: Durabella v Jarvis. Such a failure may result in the conclusion that there wasn’t a contract at all.

b. The fact that the parties continue actively to negotiate about material matters such as the scope of the work and materials to be supplied, the date for completion, the price, etc. In some circumstances, such negotiations may also indicate the absence of any intention to contract at all, as in British Steel v Cleveland Bridge.

c. The language in the Letter of Intent which is inconsistent with the incorporation of the terms of the standard form or which makes it clear that

13 Allen Wilson Shopfitters v Buckingham [2005] EWHC 1165 (TCC)

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pending something further happening, there is a simple unilateral right to be paid for work done. For example, an express provision that pending the execution of the formal contract, the Contractor is to be paid a reasonable sum for the work executed and the Employer is entitled to terminate the Work at any stage. In some circumstances, however, such a provision may prevent a contract arising. Or language that makes it clear the Contractor is instructed to commence only a limited amount of work (Eugena v Gelande14 where the judge stated that as far as the works not covered by the language of Letter were concerned, Eugena was not entitled to payment: there was no express or implied term in the Letter providing for payment and there was no express or implied request for Eugena to carry out the work which would found a claim for a quantum meruit)

Where the proper conclusion is that there is a bilateral Interim Contract, but one which does not incorporate all the terms of the standard form referred to in the Letter of Intent, it seems the court is likely to be ready to conclude that any relevant terms were incorporated subject to evidence of a contrary intention, as discussed above in the cases Hall & Towse v Ivory Gate; Hackwood v Areen.

Where the Letter of Intent results in an Interim Contract or Contracts for only part of the Works:

(i) The Contractor will be entitled to the payment at the agreed rates for that part of the Works.

(ii) Where the Contractor carries out additional work, the question of what further payment, if any, he will be entitled to will depend on the circumstances.

a. Where a Contractor carries out the additional work

at the Employer’s request, the normal inference is that the parties intend the Employer shall pay the Contractor a reasonable sum for it (Latchlin v General Med15 Jacob LJ giving the judgment of the Court said “In the absence of any other facts, the giving to, and carrying out of, instructions by a professional normally gives rise to an implied promise to pay – because no other explanation of those facts makes commercial sense – necessity compels the conclusion”).

b. Where, however, the Letter of Intent places a ‘cap’ on the amount of the Employer’s liability, the Contractor will not be entitled to further payment above the ‘cap’, subject to the Employer being barred from relying on the ‘cap’ by waiver, estoppels, etc. (Mowlem v Stena; Eugena v Gelande).

c. However, when the letter is properly construed it, the ‘cap’ may be ineffective (AC Controls v BBC , where HHJ Thornton QC concluded that when the detailed provisions of the Letter of Intent were properly construed, the financial limit did not apply and ACC was entitled to claim the full value of the work it had carried out.

(iii) The other rights and obligations of the parties will depend on the terms of the Interim Contract (Eugena v Gelande).

As a conclusion and as per the critical evaluation with the case laws under above 3 Types, it is vital that Type (c) [will fulfil in both cases, Neither, the parties are forming the formal contract nor the parties are not forming the formal contract.?] Therefore, the LoI in Type (c) will diminish and avoid the possibilities of disputes arising between the parties, but it depends on the proper drafting of a LOI.My next article as a continuation of this will focus on the requirements of a LOI to form a binding agreement.

14 Eugena v Gelande [2004] EWHC 3273 (QB),15 Latchin v (1) General Mediterranean Holdings SA (2) Mr. Auchi [2003] EWCA Civ 1786.

Sauter Automation Ltd v Goodman (Mechanical Services) Ltd (1840)

A sub-contractor’s quotation was expressed as ‘subject to our standard terms and conditions’ which included a retention of title clause. The main Contractor sent an order stating ‘terms and conditions in accordance with the main contract’. The Sub-contractor, without further communication, delivered the goods.

Held that this amounted to an acceptance by them of the main Contractor’s counter offer.

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Internal Auditors are at Site!

After a comfortable period during a construction boom, we are now in a recession. Everyone is pinching every penny. Owners are looking for the reasons for mistakes made in the past. Managements are keen to monitor day-to-day activities of their employees closely. Thus, the auditors are now at site!

The Quantity Surveyor is the most important member of the construction project team, from the perspective of the auditors. Why?

1. He has the most historical records.2. He is responsible for the money spent on the project. 3. He is the commercial and contractual advisor to the

client.4. He is the last member of the project team to leave.

Hence, the Quantity Surveyor has to be prepared to face audit queries at regular intervals. How does he prepare to face them?

What is an internal audit? Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish objectives by using a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

What are internal auditors looking for?

Internal Controls What do you know about internal controls which are applicable to your scope of work? There are five interrelated components in internal controls:• Theorganization’soperatingenvironment• Goals,objectivesandrelatedriskassessments

• Controlsandrelatedpoliciesandprocedures• Informationsystemsandcommunicationmethods• Activitiestomonitorperformance

An effective control system provides reasonable, but not absolute assurance for the safeguarding of assets, the reliability of financial information, and compliance with laws and regulations. Reasonable assurance is a concept that acknowledges that control systems should be developed and implemented to provide management with the appropriate balance between the risks in a certain business practice and the level of control required to ensure business objectives are met. The cost of control should not exceed the benefit to be derived from it. The degree of control employed is a matter of good business judgment.

In a project audit, what kind of controls would internal auditors like to see?

1. Financial reconciliation2. Shared savings calculations3. Contingency, allowances, credits4. Closeout reporting

Policies and Procedures Internal auditors follow a guideline in connection with the company’s policies and procedures. If your office is about to be audited, you should be able to understand the procedures and processes established in the company. Most leading companies have well documented procedures and processes that are easily accessible to all employees. You should be able to read and understand the areas relevant to your scope. If anything is not clear, it is management’s responsibility to explain to you. So please be clear.

Saman Jayasiri Sirisoma WelagedaraBSC (Hons) , MRICSInternal Audit ManagerDubaiPropertiesGroupDubai

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Be aware, however, that if something is not in the approved procedures or processes, it is the operation team’s responsibility to bring such activities to management’s attention to take the appropriate measures. Otherwise, auditors will look for ‘best practices’, which will be subjective and debatable. It shall be in your individual interest to have a comprehensive procedure in your duties. Internal auditors would like to see what you have done to reach your conclusion where debatable issues are involved. Take additional care in documenting the process you have followed (whether approved or not). Now, where are you? You do everything stated above in your day-to-day duties. An internal auditor is looking for whether you are well aware of internal controls and they are adequately applied. How do you apply internal controls to your day-to-day business?

1. Risk assessment

Modern internal audits are mainly based on risks. Your project will be audited based on a risk assessment done by internal auditors. If your department has a risk assessment process, internal auditors will request a copy of the risk register maintained by you. An updated risk register would make things easy and it will be a good approach towards a successful audit from your point of view. Internal auditors consider management to be nonexistent without risk management.

2. Be within your limits and check others also

Most companies have their approved Delegation of Authority (DOA) in place. Keep a copy with you at all times. When you draft an internal approval request or a variation order, check the DOA. Make sure that you are signing for something within your limits. Check other signatures for the same. If you find any exception, report to your manager immediately. Violation of DOA will be a serious concern to internal auditors because overriding one’s own procedures is the biggest violation in a business.

3. Keep tracking

All your activities are related to a process. A payment

certificate would come to your table after passing a number of stations. In the same way it will go to more tables to complete its process. Sometimes, you are responsible for the overall time taken for the process! So how do you track your documents? How do you control meeting your deadlines? Be smart and enter all critical documents, such as payment certificates, variation orders, draft internal approvals, etc. in a tracking system. Add a pop up mechanism to remind you to follow up. Internal auditors are concerned about delays!

When is the Contractor’s All Risk insurance expiring? Did you send a reminder to the contractor? Include all insurance policies in the tracking system. Then you are managing insurances, not merelykeeping records!

4. Keep records of communication

You are dealing with various stakeholders of the company and external customers. Every transaction you make may be important to the company. Keep records of communications, especially those related to critical transactions. Letters, e-mails, reports, presentations, memos, etc. are important to track your dealings. They would also help you safeguard yourself. Request others to confirm any verbal communication by e-mail or letter whenever you feel it important to do so. Never take action on verbal communications unless confirmed in writing!

You may engage in negotiations to finalize a claim. Make sure to document every negotiation step. You will be the person who is responsible for drafting the final agreement. Internal Audit would request you to provide documented negotiation records. Attend the commercial meetings regularly. It is one of your basic responsibilities. Take notes in the meeting and compare them with the minutes of meetings. Never agree to something not discussed and agreed on!

5. Be wise in justifications

You are the commercial judge in a construction project which is exposed to a huge number of variations. Most of these variations would cause additional costs to the client. Hence you should be able to give proper justification for the variations.

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The common reason that ‘It was not in the contract’ may not be sufficient for internal auditors. They may be interested in determining ‘why it was not in the contract”. Be ready for such questions.

Your internal approval form should be able to provide the story of the variation or claim. Internal auditors like to read the history: How did this happen? Who initiated it? How did you select the best option? Did we get the best market price? Why are there no cost savings? etc., etc. Internal auditors would like to see the best practices in place in the finalization of claims! Three quotations may not be practical at all times, but try to be reasonable to convince the auditors. Well-justified variations of claims will not be questioned!

6. Do reconciliations regularly

What is the net position of the contractor’s accounts? How much retention money has to be released? How much do you have to recover from advance payments? What are the back charges? Are you confident about all adjustments? Discounts? When did you update your records? Internal auditors are looking for a clear picture of accounts. An updated reconciliation would save time for auditors as well as the auditee!

7. Be proactive in mitigation of losses

Mitigation actions to avoid or reduce losses are expected from every employee of the company. Whether it is within your scope or not, at least the minimum possible effort needs to be expended in the vicinity of a loss or damage to the company. Internal auditors would like to write ‘possible minimum preventive or mitigation action taken’ by the stakeholders. Also, in a contractor’s claim finalization, this will be very important as his basic obligation!

8. Be sure and comfortable about your documentation You are handling thousands of documents and most

of them are critical to the project. You have to be sure about the completeness of your documents. Your filing system should be able to provide your

documents with good protection. Missing papers in a document may lead to unwanted questions. A good checklist for at least variation orders, payment certificates and claim determination would help you relax!

9. Do your own assessments You can do your own evaluation of the duties. If you

made reasonable deadlines, no complaints from the client, contractor or your supervisor would arise and you are ok. Keep records of appreciations.

10. Be accountable and responsible Always try to be responsible in your work. You

are accountable for all good or bad things in your work. If you have taken over any work from another person, try to obtain a comprehensive handing-over note from him. Prepare your list of requirements and send it to him before he prepares his handing-over note! Pay attention to all risky areas like variations, additional work, etc. Release him after you are comfortable with the information and knowledge transferred to you. If you are not happy with the handing over and if there are significant issues which may lead you into trouble in providing justifications or reasons, keep your management updated with appropriate records.

Finally, Internal Auditors are at site to protect you. Human errors and mistakes are unavoidable in our day-to-day work. However, such human errors or mistakes should not harm your professional career or personal life. Auditors will look at your work from a different angle and highlight the areas of concern before you are exposed to an external party. It is your responsibility to make sure that the project has reasonably delivered the best in the industry. Internal auditors would help you in various ways to improve your working environment.

Your work is very important to the company and trusted, efficient employees are the most important asset of a business. Do not forget that you are like contract administrators in the riskiest business in the world. Audited projects will receive great respect in all aspects and at the end of the day you are safer than before. So, be happy, the auditors are at site!

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Priyankara PremarathnaHND QS, ACIArbActing Manager of Commercial and Procurement Department of Palm Utilities Dubai.

The Steps an Arbitrator should take Before and During a Full Oral Hearing

IntroductionThis paper briefly describes the steps an arbitrator should take before and during a full oral hearing to ensure that the parties have a reasonable opportunity to present their case when the arbitrator is properly appointed, the submissions have been properly completed, and disclosure and exchange of witnesses’ statements (including expert evidence) have already taken place.

An arbitration tribunal is a panel of one or more adjudicators, which is convened and sits to resolve a dispute by way of arbitration. The tribunal may consist of a sole arbitrator, or there may be two or more arbitrators, which include a chairman. The parties to a dispute are usually free to agree on the number and composition of the arbitral tribunal. In some legal systems an arbitration clause in the contract provides for two or any other even number of arbitrators. The appointed arbitrators will select an additional arbitrator as a chairman of the tribunal to avoid a deadlock arising.

The parties are generally free to determine their own procedure for appointing the arbitrator or arbitrators, including the procedure for the selection of a chairman. If the parties decline to specify the mode for selecting the arbitrators, then the relevant legal system will usually provide a default selection process.

Preliminary MeetingArbitrations usually have a preliminary meeting. Following the exchange of preliminary claim statements, general supporting documents, and in the case of quantum disputes a final offer, the arbitrator will then contact the parties and arrange a preliminary meeting. At the preliminary meeting the arbitrator and parties will discuss the procedure appropriate for a particular dispute. In the absence of agreement between the parties on procedure,

the arbitrator has the discretion to impose procedures consistent with the object of these rules to insure a fair, expedient, and final resolution of the dispute with a minimum of expense to the parties. It is an opportunity for the tribunal to meet the representatives and establish the procedures to be followed. It is important for the decision makers of the disputing parties to be present at the preliminary meeting, so that there is a minimum of recesses/adjournments for obtaining instructions. The primary objectives of a preliminary meeting are usually as follows:

a. To determine the issues in the dispute. b. To determine the matters, if any, on which they are

in agreement. c. To determine what documents, correspondence,

books, or records shall be produced, when and by whom, and whether experts are to be called.

d. To determine the law which will govern the procedures and the substance of the arbitration, unless such law has already been specified in the arbitration agreement.

e. To consider whether “on site” inspections shall be part of the proceedings.

f. To decide upon the powers of the arbitrator with respect to remedies, including interim relief and conservatory measures.

g. To indicate the number of witnesses likely to be produced.

h. To estimate the length of time the hearing might take.

i. To determine whether a stenographic record or other type of recording of the proceedings should be kept or if any particular services, such as interpreters, translations or security measures should be provided.

j. To determine the manner in which the arbitrator’s fee and the expenses of the arbitration will be

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calculated, secured, and paid, including any deposits to be advanced unless such arrangements have not been stated in the Contract or the Arbitration Agreement..

k. To fix the date, time and place of the hearing. l. To make such other determinations as may be

necessary before the hearing. m. To decide which of the points referred to in (a) to (l)

above are to be covered by an engagement agreement and to complete and sign such agreement either at the meeting or prior to the formal hearing.

n. At the preliminary meeting, the arbitrator shall disclose any personal interest in the matters in dispute and any previous relationship with any of the parties to determine if there is any objection to his/her continuing to act.

A preliminary meeting is very important due the fact that arbitration shall be conducted in accordance with any decisions reached at the preliminary meeting. The parties will [come to the agreement, committed herein would be monitored and measured throughout until the award has been made, enforced, and implemented.?] This meeting sets the basis for proceeding with the arbitration in accordance with the applicable law.

Pre-Hearing Meeting/ConferenceThe purpose of the pre-hearing meeting is to provide the parties with basic information about the pre-hearing process and its requirements, and allow the parties a reasonable opportunity to comment on items listed in the agenda. The main hearing will be shortened or simplified as a result of parties being better prepared and having relevant information disclosed beforehand to each other. The pre-hearing conference can also result in a more focused tribunal hearing.

The Chairman will issue a procedural order following the conference that contains his ruling on disputed or otherwise unresolved issues.

The tribunal may direct the parties to participate in pre-hearing conferences to consider:

a. The settlement of any or all of the issues;b. The identification and simplification of the issues;c. Facts and evidence that may be agreed upon;d. The dates by which any steps in the proceeding are

to be taken;

e. The estimated duration of and dates for the hearing;f. To arrange the bundles of documents;g. To review the requirement of postponement of the

hearing date;h. To ensure that the parties require additional time to

present their case;i. Any other matters that may assist in the just and

most expeditious disposition of the proceeding, including

The Notice of the Pre-hearing Conference may require parties by specified dates to exchange or file documents, pre-hearing submissions or provide such other information as the tribunal deems appropriate, and such notice shall include:

a. The date, time, place, format and purpose of the pre-hearing conference;

b. Notice that each party or person who has applied for party status, to whom the notice is given, is required to attend in person or through a representative who has binding authority to make agreements and undertakings on behalf of that party or person respecting the matters addressed at the pre-hearing conference;

c. Notice that if a person to whom the notice is given does not attend in person or through a representative, the conference may continue in the absence of that person and that person will not be entitled to any further notice in the proceeding;

d. Notice that some or all of the issues may be settled at the pre-hearing conference; and,

i) Place for hearingii) Exchanging documents among the parties.iii) Identifying and resolving preliminary

objections or procedural issues including particulars, disclosure or production of documents, interrogatories, witnesses’ statements, expert witnesses, expert reports and exchanges of submissions;

iv) Deciding procedural issues including the dates by which any steps in the proceeding are to be taken or begun.

v) Considering applications for party status;vi) Determining whether a settlement conference

is appropriate in the circumstances; andvii) Determining the form of the Notice of

Hearing, who should give it and bear its costs for it, and to whom and in what manner the notice should be given.

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e. Notice that orders may be made at the pre-hearing conference that will be binding on all parties, including parties added at the pre-hearing conference, with respect to the proceeding, including setting the dates for a hearing

During the pre-hearing, the tribunal shall check if the documents that are transmitted are properly lodged, received, and acknowledged by all parties and copies are available in bundles in the required number. Minutes of the preliminary meeting are a vital document too. This would enable the tribunal to ensure that action has been taken and complied with.

The tribunal shall issue a pre-hearing conference memorandum setting out the results of the pre-hearing conference, setting forth orders, agreements, and undertakings made at the pre-hearing, and setting out the dates of the hearing and the issues that are to be determined. After the pre-hearing conference has been held, no substantive issues, other than those set out in the pre-hearing conference memorandum, may be raised or addressed without leave of the tribunal.

HearingThe hearing is normally held on a date fixed by the tribunal, either at the request of one or both of the parties or on its own initiative. The administrative arrangement may be made by of the parties, normally the claimant with the agreement of the other party.

An “arbitration hearing” can be either procedural or evidentiary. As in court systems, a “procedural hearing” focuses exclusively on how the proceedings are to be conducted. By contrast, an “evidentiary hearing” is the equivalent of what in the courts of many countries would be called a trial, with the presentation of evidence in the form of documents and witnesses. Although, evidentiary hearings are generally available as a means to assist the arbitral tribunal in deciding contested factual issues, arbitration rules do not usually require them and leave the means of decided disputed factual issues to the discretion of the tribunal. Many decisions of arbitral tribunals are made without any hearing at all. Arbitral tribunals can make decisions solely upon documentary evidence, which may or may not be accompanied by witness statements, Witnesses’ statements represent the testimony a witness

would give if called to testify, and on which the witness is subject to questioning by the arbitral tribunal and, at times, cross examination by the other party.

It is important to arrange the following in order to conduct an efficient hearing whilst giving both parties a reasonable opportunity to present their case.

a. Logistical matters. (a room for hearing, accommodation for witnesses and experts)

b. Record keepingc. Interpretation and translationd. Refreshments

a. Logistical mattersThe arbitral tribunal will decide and agree upon where hearings and further meetings will be held. One or both of the parties or the arbitral tribunal may book the hearing room as appropriate. Usually [in two party disputes are booked the rooms for the hearing.?] The hearing will take place in one room, and another two rooms will be allocated for each party for private discussions and meetings and keeping related document and accommodating support staff and a room for the arbitral tribunal for private meetings and discussions.

b. Record keepingWhere the parties and arbitral tribunal have arranged for the services of a tribunal secretary or transcribers, records of the hearing shall be produced at the end of each hearing day. The parties and tribunal will crosscheck this document at the end of the each day. In addition, stationary shall be available for the party counsels and lawyers to take their own notes. Space shall be allocated for the safe retention of the records and exhibits presented and admitted, which remain in the custody of the tribunal.

c. Interpretation and translationIn the event of the language of the arbitral proceedings is foreign to one or more party or arbitrator, the service of translators or interpreters will be allowed. The additional costs of this service are to be borne by the relevant party.

d. RefreshmentsNormally one of the parties will ensure that refreshments are available during the hearing process.

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In addition to the above-mentioned logistical requirements, the following procedural requirements have to be maintained by the arbitrators. Matters of procedure are normally determined either by the law of the seat of the arbitration, or by the tribunal itself under its own inherent jurisdiction (depending on national law). Procedural matters normally include:

• Modeofsubmitting(andchallenging)evidence• Timeandplaceofthehearing• Languageandtranslations• StenographicRecorderorInterpreter• Disclosureofdocumentsandotherevidence• Useoflegaladvisers• Theappointmentofexpertsandassessors• Maintainingtiming• Maintainingwhatisagreedoninthepre-hearing• Cross-examinationrules• Sequenceoforalargumentsandtakingevidence• Oathsandaffirmations• Expertwitnesses• Defaultofaparty

Arbitration Fees and expenses

The parties may make provision for the arbitrator’s fees (although in some jurisdictions, whether the parties agree to submit an existing dispute for arbitration, they may not provide that each party bear its own costs). Although the parties may provide differently in the appointment of the arbitrator, the usual rule is that the parties are jointly and severally liable for the arbitrator’s fees. If the arbitrator is not paid, then they may sue either or both parties for unpaid fees.

The expenses can be categorised into two elementsa) cost of the arbitrationb) cost of the parties

a) Cost of the arbitration:This includes only the following:i. The fees of the Tribunal ii. The travel and other expenses of the arbitratorsiii. The cost of expert advice and of other assistance iv. The travel and other expenses of witnesses approved

by the tribunalv. The cost of legal representation and assistance vi. Any fees and expenses of the appointing authority

b)Cost of the parties:This includes the following:i. Expenses of lawyers.ii. Money spent on preparing and presentation of the case.iii. Cost of stenographic records or other type of

recording of the proceedings, iv. Cost of interpreters, translations or security measuresv. Other professional fees and expenses: accountants,

expert witnesses, hotel, travel expenses.vi. Copying and bundling charges.vii. Expenses of telephones, fax, electronic mail.viii. Legal costs and expenses.ix. Executive time.

In many jurisdictions, after making the award, the tribunal will order that the losing party pays the legal costs of the winning party, and this may include the arbitrator’s fees. However, this does not affect the joint and several liabilities referred to above; but it does mean that the winning party may maintain a separate action against the losing party for the unpaid costs, or to be reimbursed for arbitrator’s fees that the winning party has been forced to pay, but which the losing party was ordered to pay.

The expenses of witnesses called by any party shall be paid by the party calling such witnesses. The parties shall be jointly and severally liable for all other expenses of the arbitration, including the fees and expenses of the arbitrator, the expenses of any witnesses or the cost of any proof produced at the request of the arbitrator, and the fees and expenses of the Institute, unless they agree otherwise or the arbitrator in the award apportions such costs or expenses differently. The Institute may require the parties to deposit in advance such amounts as it considers necessary to defray the costs of the arbitration. Upon completion of the arbitration and delivery of the award the Institute shall provide an accounting to the parties.

BIBLIOGRAPHY:i. UNCITRAL Arbitration Rules (1976) – United Nations (UN)ii. UNCITRAL Model Law on International Commercial

Arbitration ( United Nations Document A/40/17, Annex 1)iii. Introduction to International Commercial Arbitration, Dr

Emilia Onyemaiv. Construction Arbitration – Second edition 1998, Vincent Powel

– Smith, John Sims and Christopher Dancaster – Publisher: Blackwell Science

v. Handbook of Arbitration Practice, Second edition 1993, Ronald Bernstein, Derek Wood – Publisher: Sweet and Maxwell

vi. Law and Practice of International Commercial Arbitration, Third edition, 1999, Alan Redfern and Martin Hunter – Publisher: Sweet and Maxwell

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Prasanna Jayaweera B.Sc (Hons) QS, MRICS, CCC, ICIOB Senior Quantity Surveyor, Parsons Overseas Limited.

Which Procurement Route?

Abstract

“Procurement Strategy” and “Procurement Route” are two popular terms encountered in the construction industry. What do they mean? Some may argue that both have the same meaning. However, it is not so. As defined by the United Kingdom’s Office of Government Commerce (OGC), Procurement Strategy identifies the best way of achieving the objectives of the project and value for money, taking account of the risks and constraints, leading to decisions about the funding mechanism and asset ownership for the project. The aim of a procurement strategy is to achieve the optimum risk, control and funding for a particular project.

Overall Procurement Strategy includes a number of aspects like the working arrangement (procurement route), Tendering Process (Method of contractor selection) and Form of Contract to be used, etc. Therefore, the Procurement Route is a part of the Procurement Strategy that delivers the overall Procurement Strategy.

Selection of a suitable procurement route is of paramount importance for the success of any development. In this process, there are a number of parameters like project objectives, market conditions, internal regulations of the Employer’s organization, etc. to be considered. On the other hand, several procurement routes are available in the industry. Each of these routes will suit certain situations and has their own advantages and disadvantages, including different ways of risk allocation between the parties. The identification of applicable parameters to any particular development project, analyzing their priority, evaluating alternative procurement routes and selecting the best procurement route to cater to those identified project parameters is the key to success.

The development project considered in this article is a part of the large mixed use development project in Dubai, United Arab Emirates. The overall project included the development of a canal which turns the whole project site into to a number of islands. The infrastructure works of the whole of the project and the canal works had already been completed. This article only focuses on the procurement of the building works. The part of the overall project considered in this article was called “Advanced Product” and was to be constructed earlier than the whole project and supposed to be a model of the overall project. It had a total built-up area of 520,270 m2 covering office, residential, food and beverage, retail, circulation, service areas and parking areas, etc.

This article is intended to identify Employer’s needs, project objectives and the best way of achieving the objectives of the project, taking account of the risks and constraints, and ultimately achieving the optimum balance of objectives, risks and control.

Identifying and prioritizing project objectives and restraints

The first step in selecting a suitable procurement method was to identify and prioritize the project objective and the restraints to be identified in consultation with the Employer. Then these objectives and restraints were prioritized with an in-depth assessment of them in order to reach the optimum compromise between these overall project objectives and restraints. Accordingly, they were prioritized in three categories as the highest priority, medium priority and the lowest priority.

Highest Priority Keeping the overall time from the start of the design to the project completion as a minimum.

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Due to the high demand in the market it was one of the Employer’s highest priorities that the project would be delivered in the shortest possible time.

Achieving the pre-determined milestones by the Employer’s development team.

The Employer’s development plan had already set the following project specific milestones.

Start enabling works including shoring, excavation and dewatering - within 4 months.Commencement of Main Construction works - within 6 months.

The Employer’s objective was to minimize the overall duration between the commencement of design work and the actual site possession by the Main Contractor. This was due to the fact that it would attract more investors by boosting their confidence that the project would be completed on time. Therefore utilization of early packages and concurrent engineering between the design and construction activities were very important.

Certainty about the time for completion of the project.

Time certainty was also identified as a critical factor. Since this development was to be delivered to the potential buyers on time, certainty about time was very important to the Employer.

Assuring the Quality of the design and quality of the construction.

Quality of the works and quality of concept design and aesthetics were considered as influencing factors of high priority. Quality of the Project shall reflect the project importance and the satisfaction of the Employer and other stake-holders. Since this was the “Advanced Product” of the large overall development, the quality of this work was very important for a good image and the attractive sales income from the overall project.

Keeping the Contractual Relationships as simple as possible.

Less complex contractual arrangements and single point responsibility for construction were two requirements of the Employer.

Medium priorityCertainty about the project cost. Cost certainty was also a very important factor

considering the fact that the project budget was dependent on the Employer’s business plan. Therefore, any measures that could give cost certainty prior to the Employer’s commitment to the Contract and control costs of the project effectively would be of high importance

Price competition and obtaining lowest possible tender price.

Price competition among the tenderers was very important to obtain a good market price. In addition, internal financial regulations of the Employer’s organization required a minimum of three (3) quotations prior to the appointment of any Contractor.

Lowest Priority Flexibility in accommodating future variations. It should be possible to accommodate the variations

that would become necessary due to insufficient tender information from the design team at the tender stage and variations due to future design changes. Further, there shall be the flexibility in catering to the changes that might be initiated by the potential buyers / investors.

Early involvement of the Contractor and getting the benefit of his know-how to improve buildability in design

The Employer’s wishes to have the Contractor on board as a part of the building team. The Contractor’s involvement in the early stage of the process and the design gets the benefit of the Contractor’s know-how in achieving buildability solutions.

Overview of the available Procurement RoutesOf many procurement routes practised in the industry the following four main procurement routes have been considered for this project.

The Traditional MethodThe Traditional Method is characterized by the fact that the design is fully completed by the time a Contractor is appointed (refer Figure No 2). In this method the Employer appoints an Architect/Engineer as his principal agent together with a team of consultants (comprising an Architect, Engineer, Surveyor, and so on) to prepare the

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tender documents. These include the complete design drawings, specifications, Bills of Quantities (BOQ), and other tender documentation to allow the selection of a Contractor. In this method a number of pre-qualified Contractors will be invited to submit a price for completing the project within a pre-defined duration by pricing the measured BOQ and other tender documents prepared by the Engineer / Quantity Surveyor. The Contract is generally awarded to the Tenderer with the most competitive tender offer.

The Employer would expect the Contractor to provide a firm price within four to six weeks. The Employer having evaluated the tenders, the most suitable Contractor will be appointed to carry out the construction.

This procurement route requires a fully detailed design prior to tendering. All major decisions of the Employer shall ideally be made prior to tendering, although provisional sums can be used for parts of the works of which the design has not been finalized. The project cost can be easily estimated, planned and monitored by the Quantity Surveyor from the inception stage through to the completion of the project.

Main advantages1. Competitive fairness as the complete design provides

a clear equal basis for tenderers.2. Relatively low tender preparation costs to the

Contractor.3. Changes can be easily introduced during design and

full cost impact can be envisaged.4. The project is clearly defined. Therefore, there is

a greater certainty about the overall cost and time before the Employer commits himself to contract and penalties for late completion can be properly established.

5. Design is fully prepared before commencement of work on site. Hence proper coordination of different trades is possible.

6. Construction costs are likely to be lower than other methods of procurement since the Contractor can assess the extent of his scope and potential risks at the tender stage.

7. A detailed basis exists for evaluating future time and cost variations.

Main disadvantages1. Slow to start on site. (Construction is not concurrent

with design development).2. Design risk rests with the Employer.

High Priority No Priority – 1 (Highest priority)

1 Overall time from start of design to completion to be kept to a minimum.

2Achieving the pre-defined project specific milestones – utilization of early de-sign packages and concurrent engineering (refer section 4.4)

3 Time certainty prior to Employer commitment to Contract.4 Required quality of end product is assured.

5Contractual relationships shall be relatively simple (with single point responsi-bility for construction)Priority – 2 (Medium priority)

6 Cost certainty prior to Employer’s commitment to Contract.7 Price competition (minimum of 3 quotations)

Priority – 3 (Lowest priority)

8Flexibility for future changes (variations due to Employer changes and design related changes)

Lower Priority 9Early involvement of the Contractor and getting the benefit of his know-how to improve buildability in design

Figure No. 1 – Prioritizing project / Employer requirements and constraints

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3. The time period from the start of design to completion of the construction is longer than the other methods.

4. The design process does not get the benefit of the Contractor’s involvement with the design team in achieving compliance with the cost plan or buildability solutions.

Design and BuildThe Design and Build procurement route is characterized by the development of tender documents which describe the Employer’s requirements, but do not provide a fully developed design solution before the Contractor is appointed (refer Figure No. 3).

Tender documents usually take the form of a design brief, advanced to an outline scheme design or even the scheme design stage, which could describe building functions, the required floor areas, services performance criteria and basic finishes, etc. A single Contractor is then appointed (either by limited competitive tendering or through negotiations), who will develop and complete the design solution to fulfill the Employer’s requirements, by employing his own design team to do so. A main feature of this method is simplified contractual relationships as the Contractor is appointed to take sole responsibility for design and construction. The tenders are obtained based on the Employer’s requirements which can be simple or detailed. The Contractors then respond with their tender proposals which include design and construction.

The Design and Build Contractor provides a single point of responsibility to the Employer for delivering to time, cost and stated quality, thereby simplifying the process

from the Employer’s perspective. However, Design and Build offers only little flexibility for making changes, which can be both costly and causing programme implications. This arrangement requires greater control of the Employer’s requirements and a clear statement of his requirements at the outset.

The Contractor is responsible for design, construction planning, organization, and control. These activities can

proceed concurrently to a greater extent than is possible with the Traditional Method. Accordingly Design and Build projects show some characteristics of fast track construction when required. Works on the site can be commenced as soon as local authority approval has been obtained and sufficient information regarding the early site operations is available. The design does not need to be finalized before at least some of the works on site commence.

Main advantages1. There is a single point of responsibility for design

and construction; hence team work and non-adversarial attitudes are encouraged.

2. The design process benefits from the Contractor’s involvement with the design team in achieving compliance with cost plan or buildability solutions.

3. Cost certainty prior to Employer’s commitment to the Contract.

4. A larger element of risk rests with the Contractor.5. The overall time for start of design to completion

can be kept to a minimum.

Main disadvantages1. Design is not fully prepared before commencement

on site and therefore the potential changes and variations later required by the Employer can be very costly and may prolong the construction period.

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2. Difficult to compare tenders and evaluate for competitiveness where widely differing design solutions are introduced by the tenderers.

3. Difficult to ensure the required quality of the end product.

4. Placing a larger risk (both design and construction) with the Contractor can result in overpricing of the risks and greater cost to the Employer.

Management Contracting

The Management Contracting procurement route is characterized by the Employer’s appointment of a Management Contractor early in the process to advise on the design programming and buildability (refer Figure No. 4). The Management Contractor divides the works into packages, programmes and obtains tenders for them.. Then the work packages are let on a competitive tender basis on lump-sum, firm-price contracts entered into with the Management Contractor.

Works can be commenced as soon as the Employer has approved the design proposals. In this method the Management Contractor is appointed much earlier than the Contractor in the Traditional Method. He becomes a member of the design team and contributes his construction knowledge and management expertise.

Decisions regarding the appointment of sub contractors are made jointly (by the Designers, Employer and the Management Contractor) thus making use of a wider range of experience.

Main advantages1. Facilitates fast rack development.2. The design process benefits from the Management

Contractor’s involvement with the design team in achieving compliance with cost plan or buildability solutions.

3. Concurrent construction and design is inherent resulting in overall time saving.

4. Late changes can be easily accommodated as work is let on a package by package basis.

5. Both the Management Contract and Package Contracts are let competitively (price competition).

6. Unlike in Construction Management, single point of responsibility lies with the Management Contractor and the Employer has the benefit of a simple contractual relationship.

Main disadvantages1. Minimum risk to the Management Contractor and

higher risk to the Employer.2. No time or cost certainty prior to Employer’s

commitment to the Contract.3. Design is not fully prepared before commencement

on site, therefore more potential for changes and variations.

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Construction Management

The Construction Management procurement route is characterized by the appointment of a construction manger to advise the Employer on a fee basis (refer Figure 5). The Employer then independently enters into Contracts with numerous trades (package) Contractors rather than with a main Contractor (as in Management Contracting). This needs closer involvement of the Employer with the project throughout its life. The lines of communication between the Employer and the package Contractors carrying out the work packages are shorter than with other systems, thus ensuring a faster response for matters that require the Employer’s decisions.

As a member of the design team, the Construction Manager would be expected to co-ordinate the design and construction programmes and ensure that the interfaces between trade packages were properly considered. This arrangement can place the Employer at considerable risk.

The Construction Manger, who is appointed for a fee with no contractual risk with trade Contractors, will be responsible for planning, management and co-ordination of the project and for establishing competitive bids for all elements of the work. The actual Contracts are then placed directly by the Employer.

The Construction Manager acts as the main Contractor but he does not carry out any construction activities; instead he manages and co-ordinates the performance of the trade Contractors.

Main advantages1. The best price is obtained for each package Contract

through competitive tendering which will help to control the overall price to some extent.

2. Facilitates fast track development.3. The design process benefits from the Construction

Manager’s involvement with the design team in achieving compliance with cost plan or buildability solutions.

4. Concurrent construction and design are inherent resulting in overall time saving.

5. Late changes are easily accommodated as work is let package by package.

Main disadvantages 1. No cost certainty at the outset. 2. Minimum risk to the Construction Manger and

higher risk to the Employer. 3. No time or cost certainty prior to the Employer’s

commitment to Contract. 4. Design is not fully prepared before commencement

on site, therefore more potential changes and variations.

5. The Construction Manager’s liability to the Employer for the performance of the works Contract is limited to the amount recovered from the defaulting trade Contractors.

7. Needs effective control of time and information.8. Contractual relationships are complex.

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Selection of Suitable Procurement Strategy

Having reviewed the advantages and disadvantages of the above four different procurement routes and compared them with the list of project objectives and restraints a suitable procurement route was selected. The design and built procurement route was not considered in this final selection as the project concept design was almost completed and the project was a part of the main development which had its own theme and architecture. The remaining three main procurement methods were evaluated against the list of the project priorities that had been identified based on the discussions with the Employer (refer figure No. 1] Comparision of the Procurement Route). The objectives and restraints were given the weighting factor so that those with the highest priority get 5, medium priorities get 3 and normal priority gets 1. Then each procurement route was assigned with marks from 1 to 10 as per their suitability to accommodate each objective / restraint. This scoring matrix was prepared in order to demonstrate the suitability of each procurement route in different situations and to select a suitable method accordingly. However, it is advised that the selection of a procurement method shall not be based only on such a scoring system which can be subjective. Instead it should be also based on consideration of the objectives and restraints of the particular project with each procurement method considered with some common sense and professional experience.

It was noted that the Traditional Method takes the longest duration from the commencement of the Design to the completion of the construction. Further, it was unable to provide early engagement of the Main Contractor on site.

It is seen from the Comparison of the Procurement Route table that Management Contracting was the most suitable procurement route for the project. On the other hand, the Management Contracting minimizes the overall time from start of design to project completion. It has the highest potential to achieve the predefined milestones of early commencement. Another benefit of Management Contracting is that the package contracts for various trades can be awarded to package Contractors who are specialized in that trade. Also, in this method the Management Contractor’s know-how can be utilized in project design development.

It is noted that the Construction Management route was also capable of catering to most of the project requirements. But it places a huge contractual burden on the Employer. It requires the Employer to enter into a number of direct Contracts with package Contractors. This may take the Employer’s valuable resources to be engaged with these contracts. Also, there is no single point of responsibility for Construction.

Accordingly, Management Contracting was identified as the most suitable procurement method in this project scenario. However, it has the following disadvantages that have to be controlled and minimized.

01. There is a high risk to the Employer as to cost certainty.

02. Overall cost is higher than the Traditional method. 03. The success of the project depends largely on the

Management Contractor’s managerial skills.

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Conclusion

The selection of a suitable procurement strategy is a key factor in successful project delivery. It has to be done carefully by analyzing the project requirements and available procurement routes, their characteristics and striking a compromise between project requirements. The project considered in this paper is an advanced phase of a large mixed use development project. Accordingly, the

project objectives have been identified and prioritized. Major procurement routes of the Traditional method, Design and Build, Management Contracting and Construction Management have been considered for the project. Out of these procurement routes it has been evident that Management Contracting is the most suitable method of procurement. It meets many of the Employer’s high

No Project Objective / Restraint Construction Management

Traditional Method

Management Contracting

Priority – 1 (Highest priority)

1 Overall time from start of design to completion to be kept to a mini-mum. 10 1 10

2 Achieving the pre-defined project specific milestones – utilization of early design packages and concurrent engineering (refer section 4.4) 10 1 10

3 Required quality of end product is assured. 10 10 9

4 Time certainty prior to Employer commitment to Contract. 3 4 4

5 Contractual matters shall be relatively simple (with Single point respon-sibility) 1 10 10

Sub Total 34 26 43

Weighted Sub Total (Sub Total x 5) 170 130 215

Priority – 2 (Medium priority)

6 Cost certainty prior to Employer’s commitment to Contract as project budget is fixed. 1 9 2

7 Price Competition (minimum of 3 quotations) 10 10 10

Sub Total 11 19 12

Weighted Sub Total (Sub Total x 3) 33 57 36

Priority – 3 (Normal priority)

8 Flexibility for future changes (variations due to buyers / investors chang-es and design related changes) 9 10 8

9 Benefit of Contractor involvement in design process for the buildability and practicality of design alternatives. 10 1 10

Sub Total 19 11 18

Weighted Sub Total (Sub Total x 1) 19 11 18

Grand Total 222 198 269

Figure No Comparison of the Procurement Routes

Note: Each item is awarded a points score out of ten. A higher score implies greater advantages.

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HDK Ltd (t/a Unique Home) v Sunshine Ventures LtdQueen’s Bench Division- 23 November 2009

Keywords: Additional claims; Breach of contract; contracts; Defects; Defects; Non-completion; Repudiation

Summary: Wrongful determination of a contract on the basis of a failure on the part of the contractor to complete the work in time and in relation to defects in the work carried out.

Abstract: Claimant claimed chargesfor breach of contract from thedefendant. Defendant counter claimed for damages for balance of money due to him. There was lack of documentation providing evidence of the terms of the agreement. Claimant requested to compete the outstanding woks as soon as possible after 2 months contract was terminated.

Held: Claim and the counterclaim dismissed. The correspondence on behalf of the claimant / defendant had failed to address the necessary ingredients of notice making time essence. Defendant would have been bound to have completed all the works for which he had contracted but he had been relieved from these obligations from a wrongful termination. Therefore, wrongful determination of the contract provided a complete answer for the claims against defendant in respect of incomplete or alleged defective works.

priority requirements, including achieving project milestones and commencing construction early. Though the Construction Management route is also capable of catering to most of the project objectives / restraints, it places a huge contractual burden on the Employer.

Though Management Contracting is recommended as the most suitable route of procurement for this project, the Employer is warned about certain disadvantages inherent in Management Contracting. Therefore, it is recommended that these disadvantages and risks are carefully monitored, controlled, transferred through possible means or any unfavorable impact of these disadvantages minimized.

The above scoring matrix was prepared in order to demonstrate the suitability of each procurement route. However, it is advised that the selection of a procurement method shall not only be based on such a scoring system but also on some common sense and professional judgment.

6.0 Bibliography

1. Amos, S.J., 2007, Skills and Knowledge of Cost Engineering, AACE International.

2. Ivor H. Seeley, 1984, Quantity Surveying Practice, the Macmillan Press Ltd.

3. Keating Donald, 2001, Keating on Building Contracts, Sweet & Maxwell Limited.

4. M Skitmore, DE Marsden, 1988, Which procurement system? Towards a universal procurement selection technique, Construction Management and Economics, 1466-433X, Volume 6, Issue 1, pages 71 – 89.

5. RICS, 2003, The Surveyors’ Construction Handbook, Royal Institute of Chartered Surveyors.

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Vajira Kosala HettiarachchiQuantity SurveyorRotary Gulf Limited Electro-Mechanical Works LLCAbu Dhabi

On and Off Site Recoveries

IntroductionTime is an essential and important factor in any construction project. At the time the project starts, any Employer’s main aim is to complete the Works successfully within the specified time period which is called “Time for Completion”. Normally this is given in the number of dates. The time factor starts from the “Commencement Date” and upon substantial completion of the Works, the Employer will take over the works and issue the “Taking Over Certificate” to the Contractor, subject to a defects liability period.

In most cases the above will not occur as expected due to various reasons such as Works getting delayed and the Contractor not being able to finish the Scope of Works within the time frame allocated. Accordingly, time for completion becomes extended or “prolonged”.

A delay can occur for many reasons. The Employer and Contractor or any other factor can be held responsible for the delay in completion of Works. Such delays are called “culpable delays”.

If the Employer is culpable for the delay such as the Engineer not issuing drawings on time, the Employer’s direct contractors hindering progress, etc, then Contractor is not responsible for the delay. Then contractor is entitled to an “Extension of Time”. Also, the contractor will be entitled to the “prolongation cost” for the prolonged time period.

In the event of any delay under the contractor’s culpability then “liquidated damages” will be deducted from the Contractor’s payment certificate by the Engineer since the contractor is depriving the Employer of his earnings in the prolonged time period.

The Prolongation Cost ClaimThe prolongation cost claim includes all the costs incurred during the prolonged time period. The costs include all the costs incurred or are to be incurred both on and off site including overhead and other charges, in FIDIC (Fédération Internationale des Ingénieurs-Conseils) type of contracts. Items such as idle hours, abortive works, financing charges due to reduced revenue, loss of productivity, subcontractor’s claim, late release of retention, site overhead costs for the prolonged time period, etc, will be included in the prolongation cost claim.

Contractor’s contract administrator needs to secure the contractor’s rights in order to obtain approval for his claim. First the contractor has to study and understand the whole of the contract documents including drawings and specifications, Bills of Quantities with a knowledge of the Method of Measurement and Conditions of Contract. Then the Contractor is issued a notice to reserve his right including the facts which are relevant to the delay to demonstrate his entitlement. Detailed particulars are the contemporary records specific to the delay which is separated according to each event of delay.

Sometimes the specific contemporary records cannot be maintained in a construction project. In such situations general contemporary records such as signed daily diaries of the key persons (Resident Engineer), Minutes of Meetings about delays, site overheads records during the prolonged time period can be used.

There are two main heads of loss and expense that are usually considered in the event of a delay:• On-site costs -The cost of on-site maintenance

which is exclusively attached to the particular contract

• Off-site costs -The cost of financing head officeoverheads

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Site OverheadsThe Contractor’s indirect expenses which are directly charged to the particular project are called ‘preliminaries‘ or ‘general Items’. On-site overheads cover the cost of the items a contractor must provide during construction, including:

• Salaries of site supervisory staff and labourersincluding accommodation and travelling expenses

• Generalconstructionplantsandsmalltools• Supplyandmaintenanceofscaffoldings• Services such as water, electricity and telephone

services, etc., • Siteoffice,workshopsandstoringfacilities• General Site office expenses including photo

copying, consumables• BondsandGuarantees,etc.

Actual costs The right method of assessing on-site costs due to a delay is to evaluate the actual costs incurred. Therefore, the contemporary records will play a vital role in justifying the claim and the Engineer should audit all costs that should be included in the direct costs with regard to the particular construction activities.

The actual cost of staff and labour will generally be provided by wages or salary sheets and the cost of all external plant and services will be substantiated by invoices. Where contractor- owned plant is involved, invoices are not likely to be available, so an analysis of the costs claimed will have to be made separately.

Where the Principal has maintained good site records, the checking of the actual times claimed against a contractor’s records is the ideal way of establishing costs and the best way of accurately assessing the costs.

A contractor is required to mitigate costs in the event of delay. Excessive expenditure due to poor management or inefficiency, if proven, is not recoverable. Specificinstances of obvious waste or mismanagement would need to be identified in the costs or noted from site observations.

Figure 1 below shows the actual preliminaries graph for a project time period. The area below the curve shows the total cost of the preliminaries for the project time period.

Figure 1: Site Overhead Cost Distribution

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In general, interim payments for the preliminaries for a contractor will be calculated based on the pre-agreed preliminary split which identified the mobilization, demobilization and running costs, etc. which is shown in the above diagram by a dotted line as an average. For instance, consider any delay that occurs at point C in the above graph, and the project cost remains constant during the time period “D” and curve shifts as shown. In the event of the Employer’s culpable delay the contractor will be paid the actual time related cost which is equivalent to the rectangular area “B”. However, the actual cost incurred due to the delay is equivalent to the rectangular area “A” which is much larger than area “B”.

Off-site costs (Head Office Overhead)Theamountrequiredtosupporttheheadofficeexpensesduring the prolonged period for the particular project is consideredasHeadOfficeOverhead..

HeadOfficeOverheaddependsonthetotalgeneralandadministrativecostoftheheadofficeduringtheperiod.In addition, the number of projects going on during the same time period is also considered. The Head OfficeOverhead cost percentage is determined depending on the above factors.

Ifparticularheadofficeoverheadsareprovedtohavebeenincreased by a delay then they are recoverable.

By multiplying the total cost by the overhead and profit (OHP) percentage, OHP can be calculated. However, this practice is a wrong practice followed in the construction industry and the facts that prove it is wrong are discussed in detail below.

The following section discusses the various internationally acceptable facts which constitute the Head OfficeOverhead cost in the construction industry. Even though they are acceptable, the Engineer is required to be very vigilant as described below when auditing those scenarios.

Executive and administrative staff salaries and allowances areacceptableHeadOfficeOverheadcosts.Theparticularstaff shall not be dedicated to a particular project but to all projects.Ifthatisthecasethepercentageonheadofficededication should be considered. Rent and maintenance charges and insurance bonds related to head office arealso considered.

Utility bills such as phone, fax, and bank charges are acceptable Head Office Overhead costs. Depreciationof company assets and furniture and equipment are not capital expenditure but the depreciation value is included in the Head Office Overhead cost. Some companiesprint their stationery in bulk, for instance, the stationery required for the next 10 years. In that situation the particular time period has to be considered for Head OfficeOverheadcostcalculations.

Further, travelling charges both local and international including vehicle maintenance and fuel relevant to the particular project are accepted Head Office Overheadcosts. Sometimes companies need a management consultant to build up the Quality Management Process in the company. Such professional consultancy fees also accepted as theHeadOfficeOverhead costs.But it isimportant that a claim for the consultant’s cost for a projectwillnotbeaHeadOfficeOverheadcost,whereasit is included in the project cost. Auditing expenses and marketing expenses, for example, advertising are another acceptableHeadOfficeOverheadcost.

Generally, very few projects may be won by a company out of a number of projects for which it bids. The company has the opportunity to include all tendering costsintheHeadOfficeOverheadcostofthewinningprojects. The interest on company borrowings amount shallnotbeincludedintheHeadOfficeOverhead.Inthe event of the final account not being settled, there is an amount that exists due to a dispute between Employer and Contractor which will considered as a provision in the account until it is settled. This is called a bad debt and the bad debts of other projects should not be considered intheHeadOfficeOverheadcost.

Entertainment costs, professional membership fees, for instance RICS or AACEI membership, or licensing fees, professional training fees are among other acceptable HeadOfficeOverheadcostsoftheCompany.Sometimesthose sponsorship fees are paid based on the profits earned by the Company. Accordingly, it is not considered as a HeadOfficeOverheadandtheabovecostisconsidereda share of the profit. Therefore, it will not be considered asHeadOfficeOverhead . Idle resources of theHeadOfficeare also acceptableHeadOfficeOverhead costsexcept the project related staff and plant, for instance, the asphalt plant during the intermediate stage between two projects.

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Formulas for recovery of Head Office Overhead in a delay eventThere are several formulas frequently used by contractors for the purpose of calculating the recovery loss of off-site overheads due to a delay event.

As an example, consider a project which has a contract price of $ 3,000,000.

Let’s say the above project has an original duration of 300 days and a delay by 30 days has occurred due to some reason

TheHeadOfficeOverhead cost can be calculated forthe prolonged time period of 30 days by the following formula:

By applying the example figures to the above equation;

Theabove formulawillgive theHeadOfficeOverheadcost as $ 30,000 to be included in the EOT claim. But to derive this figure a reasonable percentage of Head OfficeOverhead cost cannot be easily extracted fromthe total contract sum. This is because normally bidders spread Head Office Overhead throughout the rates,preliminaries, etc. The above formula was introduced by Mr. Alfred Hudson in 1891 in his famous book Hudson’s Building and Engineering Contracts, which is called the Bible of Contracts Administration.

Hudson’s formula can be written as follows:

Where; H.O. & Profit % = the percentage of Head Office Overheads and Profit allowed in the Tender/Contract

The segment,

To apply this formula a reasonable H.O. & Profit % is necessary which is not easy to derive as aforementioned.In addition to the Hudson Formula, there are Emden, Eichleay, and Hanklaan formulas also in practice to calculatetheHeadOfficeOverheadrecoveryincaseofa delay event.

Emden derived theHeadOfficeOverhead percentageby dividing the total overhead cost and profit of the contractor’s organization by total turnover which is called ‘h’. The Emden Formula calculates the Additional Payment due by;

Eichleay formula Eichleay’s formula was developed by Eichleay of the United States in the Appeal of Eichleay Corporation, and approved in the United States case of Capital Electric Company v United States.

Step 1

= XContract Price x HOOH %Time for Completion

Period of Delay

= X3,000,000 x 10 %300 days

30 days

= X Xh

100Contract SumContract Period

(Week)

Period of Delay (Weeks)

= X X

H.O. & Profit %100

AdditionalPayment Due

Period of Delay

(Weeks) Contract SumContract Period (Week)

XH.O. & Profit % Contract Sum,100

represent the al-locable Overhead Portion (AOP)

=XContract Billings

Total Contract Bill-ings for the Contract

Period

TotalHeadOfficeOverhead for the Contract Period

Allocable Overhead

Figure 2: Project Timeline

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Step 2

Step 3

Hank Laan Formula

However, all those formulas have several weaknesses as well as they produce erroneous answers which have to be justified with many arguments. Therefore, to avoid these weaknesses in the above formulas a new formula was introduced by Prof. I. Samarathunga during his recent research.

Samarathunga formula;

Where; H is the actual total overhead cost of theHeadOfficeduringtheExtensionofTime(EOT) period; and CP is the contract price of delayed project divided by its original time for completion and multiplied by the EOT period.

SCP is the sum total of the contract price of each of concurrent project divided by its original time for completion and multiplied by whole part or period of EOT of the delayed project.

Example calculation ofHeadOffice overheadusing the Samarathunga formula:

Consider 4 numbers of projects are going on during the EOT period of a particular project. Time lines are shown in Figure 3.

Project 1 which, is the delayed project EOT period of 20 days, and $ 50 million worth of project with the original Time for Completion of 50 days

Project 2 $ 50 million worth of project with the original Time for Completion of 50 days

Project 3 $ 30 million worth of project with the original Time for Completion of 60 days

Project 4 $ 80 million worth of project with the original Time for Completion of 40 days

For project 2, the whole delay period lies inside the period, 5 days of project 3 lie inside the EOT of Project 1 and project 4 has 10 days. Now our SCP calculation comes

For project 1 = ($ 50m ÷ 50days) × 20 days = $ 20m

For project 2 = ($ 50m ÷ 50days) × 20 days = $ 20m

For project 3 = ($ 30m ÷ 60days) × 5 days = $ 2.5m

For project 4 = ($ 80m ÷ 40days) × 5 days = $ 10m

=Allocable Overhead

Days of Performance

Daily contract Head OfficeOverhead

X =Daily contract Head OfficeOverhead

Days of Compensable Delay

Additional Payment Delay

X =Contract Billings Total Company

Billings

TotalHeadOfficeOverhead (During the period of delay)

Additional Payment Delay

H x CPSCP

=Additional

Payment Due

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ConclusionsHeadOfficeOverheadcostsaresubjectiveandnot a straightforward calculation. Therefore, numerous formulas were introduced in the construction industry. However, all of them have encountered crucial defects while each formula is attempting to provide an answer to the same question but each l producing different figures which differ broadly in values.

Comparing all the formulas introduced so far with regard to Head Office Overhead

calculations Prof. Samarathunge’s formula which was introduced recently is more reasonable in calculating HeadOfficeoverhead recovery inthe event of prolongation cost calculations.

However, it is noted that none of the above formulas will give an approximation of the true Head Office Overhead recovery in delaysituations. Therefore, it is advisable to use the formulas in an appropriate manner.

Now SCP can be calculated as = $ 20 + $ 20 + $ 2.5 + $ 10 = $ 52.5Also CP = ($ 50m ÷ 50days) × 20 days = $ 20m

Forinstance,theactualHeadOfficeoverheadcostfortheEOTperiodis$500,000foundfromtheHeadOfficeaccountsrecords.

SoourHeadOfficeoverheadrecoverycanbecalculatedbyusingtheSamarathungaformulaas,

HeadOfficeoverheadrecovery = $500,000×($20÷$52.5) = $ 190,476

Figure 3: Project time line

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Senerath WetthasingheLL.M., AIQSSL, AAIQS, MQSi, FCIArb DirectorCost Engineering Services (Pvt) LtdSri Lanka

Prevention Principle

1. Rationale for the Principle

In the construction industry, there are numerous instances where acts or omission of one party have hindered the other party from completing its obligations within the stipulated time. In such instances, a question arises whether the party responsible for the impediment can insist on the other party to perform its obligations or alternatively, recover damages — liquidated or un-liquidated — for non-performance. This matter was considered in Holme v Guppy1 where the defendant sought to deduct liquidated damages from the plaintiff contractor for delaying the completion of joinery work in a brewery, which was agreed would be completed within a period of four and a half months without any extension of time provision, despite the contractor being prevented from starting the work by the defendant’s other workmen. Park J delivering his judgment said:

“There are clear authorities that if a party be prevented, by refusal of the other contracting party, from completing the contract until the time limited, he is not liable in law for that default.”

This principle is widely known as the ‘prevention principle’, which, arguably, had first been stated in the Comyns’s Digest2 and emanates from a disliking of the courts, in the nineteenth century, for liquidated damages provisions in contracts, which they viewed with greatest suspicion3.

Affirming the prevention principle, Denning LJ in Amalgamated Building Contractors Ltd v Waltham Holy Cross Urban District Council 4 said that the building owner could not insist on a condition if it was his own fault that the condition had not been fulfilled.

Legal authorities have alternatively expressed this principle as ‘a party cannot benefit from its own breach’. The prevention principle was so expressed by Besanko J in his judgment in the Australian case SBS International Pty Ltd v Venuti Nominees Pty Ltd 5, where he said:

“There is relatively little difficulty in applying the principle of prevention in cases in which the principal is responsible for all of the delay. In those circumstances, the principal cannot recover because it cannot benefit from its own wrong.”

Further, in SMK Cabinets v Hili Modern Electrics Pty Ltd6 the court held that ‘some broad notion of justice as that a man should not be allowed to recover damages for what he himself has caused’.

The essence of the prevention principle, therefore, is that a party cannot impose a contractual obligation on the other party where it has impeded the other party from performing that contractual obligation7 or alternatively, one cannot benefit from its own wrong.

Consequently, if the employer impeded the contractor in executing its obligation under the contract, in the absence of a contractual provision to fix a new completion date, the employer could not impose liquidated damages if such impediment prevented the contractor from completing the work within the time for completion8.

A debate as to the basis of the prevention principle9 is prevailing in legal circles. In his judgement in SBS International10, Besenko J said that the basis of this principle had been variously described as:

• animpliedterm,• impliedsupplementcontract,

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• waiver,or• estoppel.

Further, it was described as, probably, a rule of construction and not an absolute rule of law11.

Irrespective of the basis of the prevention principle, this principle has an effect on an employer’s right to recover liquidated damages for delayed completion and, thus far, it has been the most effective and most used defence against the imposition of liquidated damages12.

However, it is the view of the judiciary that this principle could be excluded by express terms in the contract13. In Percy Bilton Ltd v Greater London Council14, the conditions of contract of which was the RIBA form of contract 1963 edition15, Lord Fraser of Tullybelton said: “(1) The general rule is that the main contractor is

bound to complete the work by the date for completion stated in the contract. If he fails to do so, he will be liable for liquidated damages to the employer. (2) That is, subject to the exception that the employer is not entitled to liquidated damages if by his acts or omissions he has prevented the main contractor from completing his work by completion date … (3) These general rules may be amended by the express terms of the contract. (4) In this case, the express terms of Clause 23 of the contract do affect the general rule.”

Similar views were expressed by Judges Brooking and Cole in their judgements in SMK16 Cabinets and Turner Corporation Ltd (Receiver and Manager Appointed) v Austotel Pty Ltd17 respectively.

2. Operation of the Principle

It is evident from the above judgments that in the absence of an extension of the time clause which specifically provides for extensions due to acts of prevention, an employer will lose its right to claim liquidated damages for delay if that delay was caused by an act of prevention by the employer. In such a situation, the contractor is required to complete the works within a reasonable time18.

Variations whether authorised under the original contract or subsequently agreed are considered as acts of prevention for the purpose of this principle.

In Holme20, Park J further said:

“There is nothing to show that [Holme] entered into a new contract by which to perform the works in four months and a half, ending at a later period … The plaintiffs were therefore left at large; and consequently, they are not to forfeit anything for delay.”

Even though ‘time at large’ is not a legal term, ever since the proclamation of the judgment of Holme21, this phrase has been used many a time by contractors, where they have been prevented from completing the works by the completion dates by acts or omissions of employers, claiming that there is no set contractual date for completion22.

The decision of Holme 23 has been upheld in a number of subsequent cases24 — old and new, where acts of prevention by the employer had caused delays in time for completion.

A view contrary to that of Holme25 was expressed in Jones and Another v The President and Scholars of St John’s College, Oxford 26 and Tew v Newbold-on-Avon School Board27, where the contractors agreed to complete the works including additional works within times stipulated in their contracts.

Notably, in the above two cases the contractors had agreed to complete extra works in addition to the original works within the time for completion set in the contracts and therefore they could not establish that extras ordered by the employers prevented them from completing the works by the completion dates.

From the judgments of the rest of the above cases, it can be further observed that the contract between the parties either did not contain a provision to extend the time for completion in the event of prevention by the employer or despite the presence of such provision it did not encompass the act of prevention which contributed to the delay in completion.

The courts have construed the provisions of extension of time clauses strictly against the employer (contra proferentem)28 as they are included in the contract by the employer for its own benefit. On several occasions29 the courts have criticized the generality or ambiguities in the

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wording used in extension of time clauses and have held that wordings such as ‘events beyond the control of the employer’ had rendered the liquidated damages regime inoperable. As stated by Salmon LJ in Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd 30:

“The liquidated damages and extension of time clauses in printed forms of contract must be construed strictly contra proferentem. If the employer wishes to recover liquidated damages for failure by the contractors to complete on time in spite of the fact that some of the delay is due to the employers’ own fault or breach of contract, then the extension of time clause should provide, expressly or by necessary inference, for an extension on account of such a fault or breach on the part of the employer.”

The standard form contracts — JCT, ICE, FIDIC, etc. — drafted after the second half of the twentieth century include provisions to extend the time for completion for, predominantly, the employer caused delays, thereby preserving its right to deduct liquidated damages31.

Clause 44.1 of the FIDIC Red Book and other bespoke forms considered herein32 provides for extending the time for completion for ‘any delay, impediment or prevention by the employer, among others. By introducing a specific provision to extend the time for the employer’s ‘delay, impediment or prevention’, these contracts have evaded, to a certain extent33, the problems encountered in the extension of time provisions in older standard forms34. Under the provisions of this clause, the engineer or the employer’s representative (in Nakheel Forms) has an obligation to determine the contractor’s entitlement to extension of time arising out of the above situations fairly, in due consultation with the employer and the contractor. Hence, such determination of the engineer must reflect its fair perception on, and evaluation of, the contractor’s entitlement and its impartiality in the dealings as required by Clause 2.635 – Engineer to Act Impartially. However, with the exception of Dubai Municipality (DM) and Road and Transport Authority (RTA) forms, Clause 2.1 – Engineer’s Duties and Authority - has been substantially modified in the others to include that the engineer should obtain prior approval of the employer for such determination. Such onerous provision has cast serious doubts on the engineer’s fairness and impartiality as required by Clause 44.1 in determining the contractors’ entitlements to time extensions.

The provisions of Clause 44.2 - Contractor to Provide Notification and Detailed Particulars - of the bespoke forms oblige the contractor to provide with its detailed particulars for its claim for an extension of time, reference to the programme of works that has to be submitted under Clause 14. This programme relates only to the ‘time for completion’. This fact is confirmed by Clause 14.2, where it states that if the engineer considers the actual progress of the works does not conform to the programme, ‘a revised programme showing the modification to such programme necessary to achieve completion of the works within the Time for Completion’ is to be provided by the contractor.

Therefore, if no extension of time has been granted and the time for completion has already passed, which is a usual situation in many of the contracts in Dubai, no programme can be submitted or accepted under the provisions of Clause 14.2. This also entails that the contractor cannot comply with the requirements of Clause 44.2, thereby preventing it from submitting detailed particulars in substantiation of its claim. Although there is no case law regarding the inclusion of reference to the programme of works in extension of time clauses - most probably because none of the standard form contracts such as FIDIC, ICE, or JCT contain references to programme of works in the extension of time clauses - it is opined that such inconsistencies would be construed strictly against the employer under the contra proferentum rule.

A question that has arisen quite often in the application of the prevention principle is to what extent the employer’s act of prevention actually invalidated the liquidated damages. Early authority on this point favoured the view that any act of prevention by the employer invalidated the entire liquidated damages regime. In Holme36 , the delay in completion was five weeks; the employer was responsible for four weeks of delay and the contractor for one week of delay. The court found that the employer was not entitled to any liquidated damages due to its act of prevention. Further, Wallace notes that:

“[u]nless there is a sufficiently specific clause, it is not open to the employer, where the contract date has ceased to be applicable, to make out a kind of debtor and creditor account allowing so many days or weeks for delay caused by himself, and, after crediting that period to the builder, to seek to charge him with damages at the liquidated rate for the remainder37.”

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More recent authority38 suggests that the employer’s delay and the contractor’s delay could be in some circumstances divisible for the purposes of determining and enforcing liquidated damages, but remains circumspect in light of Peak’s39 authority. In Rapid Building Group v Ealing Family Housing40 , Lloyd LJ remarked that: “[I] was somewhat startled to be told in the course of

the argument that if any part of the delay was caused by the employer, no matter how slight, then the liquidated damages clause in the contract ... becomes inoperative.

I can well understand how that must necessarily be so in a case in which the delay is indivisible … But where there are, as it were, two separate and distinct periods of delay with two separate causes, and where the dispute relates only to one of those two causes, then … the employer should be able to claim liquidated damages in relation to the other period.”

Nevertheless, Lloyd LJ went on to note that:

“[i]t was common ground before us that is not a possible view ... in the light of the decision of the Court of Appeal in Peak’s case, and therefore I say no more about it.”

Thus, the classic case of Peak41 remains dominant, and authorities seem to suggest that where an act of prevention goes to part of the delay but not to the whole, the entire liquidated damages clause will be invalidated. This view has been reinforced in SBS International Pty Ltd42, where Besanko J held that, in a situation where delay to the completion date was caused by the contractor as well as the principal, it was not open to a court to apply the liquidated damages clause to the delay specifically caused by the contractor.

A number of Articles in the UAE Civil Code provide the same comfort to a contractor that the prevention principle provides. For example, Article 296 provides that:

Any condition purporting to provide exemption from liability for a harmful act shall be void.

Accordingly, despite an agreement between the parties to the contrary, either party is liable for its harmful acts or omissions. Harmful acts, it is opined, include financial and economic harm in addition to physical harm.

Article 878 provides that:

The contractor shall be liable for any loss or damage resulting from his act or work whether arising through his wrongful act or default or not, but he shall not be liable if it arises out of an event which could not have been prevented.

Further Article 246(ii) provides that:

The contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith.

The above provisions would ensure that the employer could not benefit from its own actions in delaying the works.

3. Notices and Prevention Principle

One of the more contentious issues concerning the operation of the prevention principle is its interaction with notice provisions, which are conditions precedent to the granting of an extension of time. The definition of a condition precedent notice provision was provided in Bremer Handelgesellschaft Schaft MBH v Vanden Avenne Izegem PVBA43 , where the House of Lords held that if a notice provision were to be considered as a condition precedent it must state the precise time within which the notice was to be served and must make plain by express language that unless the notice was served within that time, the party required to give notice would lose its right to an extension of time under the contract.

Thus, the issue is whether the prevention principle is subject to an administrative act — such as the provision of notice by the contractor — or whether it can operate independently of such procedural requirements of particular contracts.

Case law on this point has been divided until recently. In Gaymark v Walter Construction44, the contract provided that a notice of delay was to be given within 14 days of the cause of delay arising. The Supreme Court reaffirmed an arbitral award that found that, even though the contractor had not complied with notice requirements, because at least some of the delay was caused by the employer, the right to claim liquidated damages was lost and time was set at large. Gaymark45 suggests that the

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prevention principle overrides conditions precedent. This view has been subjected to strong academic criticism46. In a paper47 submitted to the Society of Construction Law (SCL), Hamish Lal critically analyzed this view referring to the recent Scottish case of City Inn Ltd v Shepherd Construction Ltd48. In that he argued that if:

(i) the notice requirements did not place an ‘excessive burden’ upon the contractor; and

(ii) there were no ambiguity between the clauses (bespoke49 and standard);

then the notice provision should prevail over the prevention principle although there may be some debate about what constitutes an ‘excessive burden’ upon the contractor.

Further, in a recent paper50 submitted to SCL, Lal justifying his aforesaid proposition said:

“The employer may not always know he has caused delay: indeed the employer allocates the risk of delays, their identification and assessment to the contractor. It is unfair and may encourage poor project management to allow the contractor to simply miss notice requirements and assert his right to EoTs at times (only) suitable to him.”

He further suggested that jurisprudential tensions between time-bar clauses and the prevention principle could be better resolved by arbitrators by adopting one of the following approaches:

(i) The prevention principle is a “rule of construction” and not a “rule of law”, so that express terms ... can simply exclude its operation; or

(ii) The prevention principle does not apply, because the ‘proximate cause’ of the contractor’s loss is not the employer but the contractor’s own failure to operate the contractual machinery, so there is no ‘act of prevention’.

The decisions in recent cases51, tacitly endorsing Lal’s propositions, have established that notice provisions which are conditions precedent must be satisfied before the prevention principle can have application. In Turner 52, Cole J stated that the builder could not:

“claim that the act of prevention which would have entitled it to an extension of the time for Practical Completion resulted in its inability to complete by that time. A party to a contract cannot rely upon preventing conduct of the other party where it failed to exercise a contractual right which would have negated the affect [sic] of the preventing conduct.”

Recent versions of NEC53 and FIDIC54 have made the notice provisions conditions precedent and there is a growing trend to include such provisions in, especially, bespoke construction contracts55.

Notably, most of the standard form contracts are less onerous on the notice provisions. For example, FIDIC forms prior to 1999 and JCT forms do not require contractors to give delay notices within a specific time nor do they forfeit contractors’ right in the event of failure to notify. In the light of the judgment proclaimed in Bremer56, it is opined that notice provisions in these forms may not be construed as conditions precedent.

Clauses 44.2 — Contractor to Provide Notification and Detailed Particulars — and 44.3 — Interim Determination of Extension — of the bespoke forms considered here provide times57 for the contractor to submit notices and detailed particulars. Further, Clause 44.2, with the exception of that in Department of Civil Aviation (DCA) form, provides, inter alia, that the engineer or the employer’s representative should not make any determination of the contractor’s entitlement if it failed to provide notice or detailed particulars within the stipulated times. In DCA form Clause 44.4 provides that the contractor shall be deemed to have forfeited his entitlement to an extension of time if it failed to comply with any of the provisions of Clauses 44.2 or 44.3. From these provisions it is evident that the notice provisions in the bespoke forms have placed an ‘excessive burden’ on the contractor by constituting detailed particulars, which do not have a nexus with notice provision, a condition precedent to the contractor’s entitlement to time extension. As discussed earlier, imposition of such ‘excessive burden’ on the contractor by the notice requirements debar the enforceability of same in situations where the employer’s acts of prevention have delayed the contractor’s performance.Although the UAE Civil Code does not specifically provide for the contractor to notify delays, on some occasions, such as notifications for an anticipated increase in the

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Bills of Quantities, the Civil Code demands immediate notification thereof from the Contractor (Article 886(1) of the Civil Code refers). Further, as Articles 258 and 259 of the Civil Code uphold the intention of the parties if they are clearly defined without any ambiguities, it is opined that condition precedent clauses in a contract would be upheld under the UAE jurisdiction.

1 (1838) 3 M. & W. 387.2 Rae, S.W. (2006). “Prevention and damages: who takes the

risk for employer delays?”. Construction Law Journal. p10 - Condition (L6) of A Digest of the Laws of England (1822).

3 Wallace, I.N. Duncan. (1970). Hudson’s Building and Engineering Contracts – 10th Edition. Sweet & Maxwell. p624.

4 [1952] 2 All ER 452. 5 [2004] SASC 151. 6 (1984) V.R. 391.7 Eggleston, B. (1997). Liquidated Damages and Extension

of Time in Construction Contracts, 2nd Edition. Blackwell Science. p81.

8 Wallace, I.N. Duncan. op. cit. p624.9 Rae, S.W. op. cit. p1.10 SBS International Pty Ltd v Venuti Nominees Pty Ltd [2004]

SASC 151.11 See Alghussein Establishment v Eton College [1988] 1 WLR

587, HL.12 Eggleston, B. op. cit. p81.13 Rae, S.W. op. cit. p1.14 [1982] 2 All ER 623.15 Also known as JCT 1963 Edition.16 SMK Cabinets v Hili Modern Electrics Pty Ltd (1984) V.R.

391.17 (1997) 13 B.C.L. 378.18 J and J Fee Ltd v The Express Lift Co Ltd, [1993] 34 ConLR

147.19 Westwood v Secretary of State for India (1863) 1 New Rep. 262

and Thornhill v Neats (1860) 8 C.B. (N.S.) 831 respectively.20 Holme v Guppy (1838) 3 M. & W. 397.21 Ibid.22 Lowsley, S. & Linnett, C. (2006). About Time – Delay Analysis

in Construction. RICS Business Services Limited. P161.23 Holme v Guppy (1838) 3 M. & W. 397.24 See Russell v Sa Da Bandeira (1862) 8 C.B.(n.s.) 831, Westwood

v Secretary of State for India (1863) 1 New Rep. 262, Dodd v Churton [1897] 1 Q.B. 162, Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 1 BLR 111, Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 W.L.R. 601 HL, and Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No 2) [2007] EWHC 447 (TCC).

25 Holme v Guppy (1838) 3 M. & W. 397.26 (1870-71) L.R. 6 Q.B. 115.27 (1884) 1 C. & E. 260.28 Wallace, I.N. Duncan. op. cit. p625.29 See Wells v Army and Navy Co-op. Society (1902) 86 L.T. 764,

Gallivan v Killarney U.D.C. [1912] 2 L.R. 356, and Bramall & Ogden Ltd. v Sheffield City Council (1983) 29 BLR 73.

30 (1970) 1 BLR 111.31 Rae, S.W. op. cit. p2.32 Forms of Contract of Dubai Municipality, Road Transport

Authority, Dubai Properties, Department of Civil Aviation and Nakheel.

33 Such provision does not cover delay caused by the employer’s personnel or agents. Compare provisions of Sub-Clause 44.1(d) with Sub-Clause 8.4(e) of FIDIC 1999.

34 For example, JCT 1963. 35 Clause 2.7 in DCA Conditions.36 Holme v Guppy (1838) 3 M. & W. 397.37 Wallace, I.N. Duncan. op. cit. P625.38 City Inn Ltd v Shepherd Construction Ltd [2007] CSOH 190.39 Peak Construction (Liverpool) Ltd v McKinney Foundations

Ltd (1970) 1 BLR 111.40 (1984) 29 BLR 5.41 Peak Construction (Liverpool) Ltd v McKinney Foundations

Ltd (1970) 1 BLR 111.42 SBS International Pty Ltd v Venuti Nominees Pty Ltd [2004]

SASC 151.43 [1978] 2 Lloyd’s Rep 109, HL.44 (1999) 16 BCL 449.45 Gaymark v Walter Construction (1999) 16 BCL 449.46 Duncan Wallace, I.N. (2002). “Prevention and Liquidated

Damages: A Theory Too Far?”. 18 BCL 82.47 Lal, H. (2002). Extension of Time: The Conflict between the

‘Prevention Principle’. Society of Construction Law, UK. Paper No. 103.

48 [2001] SCLR 961, Outer House, Court of Session.49 Both Gaymark and City Inn had bespoke notice clauses.50 Lal, H. (2007). The Rise and Rise of Time-Bar Clauses for

Contractors’ Claims: Issues for Construction Arbitrators. Society of Construction Law, UK. Paper No. 142.

51 See Turner Corporation Ltd (Receiver and Manager Appointed) v Austotel Pty Ltd (1997) 13 B.C.L. 378, City Inn Ltd v Shepherd Construction Ltd,[2001] SCLR 961, Outer House, Court of Session, Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No 2) [2007] EWHC 447 (TCC), and Steria Limited v Sigma Wireless Communications Ltd, [2008] BLR 79.

52 Turner Corporation Ltd (Receiver and Manager Appointed) v Austotel Pty Ltd (1997) 13 B.C.L. 378.

53 Clause 61.3 of NEC3.54 Clause 20.1 of FIDIC 1999.55 The notice provisions in all of the bespoke contracts considered

here are conditions precedent.56 Bremer Handelgesellschaft Schaft MBH v Vanden Avenne

Izegem PVBA [1978] 2 Lloyd’s Rep 109, HL.57 DM, RTA and DP forms: Notice – within 28 days after the

arisen of the event, Particulars – under clause 44.2, within 28 days after notification; under clause 44.3, in intervals of 28 days and final particulars within 28 days of the end of the event. DCA forms: Notice – within 7 days after the arisen of the event, Particulars – under clause 44.2, within 28 days after notification; under clause 44.3, in intervals of 14 days and final particulars within 14 days after the arisen of the event. Nakheel forms: Notice – within 7 days after the arisen of the event, Particulars – under clause 44.2, within 21 days after notification; under clause 44.3, in intervals of 28 days and final particulars within 21 days of the end of the event.

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Kidneswaran Kajanantha B. Sc. in QS (Hons.), AAIQS, MRICS Graduated from the University of Moratuwa, Sri Lanka; has more than 6 years of UAE experience in Quantity Surveying related Contract Administration, currently working as a Quantity Surveyor for DAMAC Properties Co. LLC

Drafting a Construction Contract Agreement

IntroductionA contract agreement can be in a form of writing, oral or by action. However, the law does not urge a contract agreement to be in writing. Parties can make an agreement by word of mouth. But in the latter case, if it is to be enforced, at times in a court of law oral contracts raise some difficulties.

Nevertheless, construction contracts are always in writing. Now let us look at how the construction contract is to be drafted. A sound contract agreement shall include eight (8) major components as follows:

1. The title of the contract agreement2. The date3. The names of the parties4. The preamble5. The body of the contract (Recitals)6. Covenant (It is a promise)7. Terms of the contract8. Execution

The titleThere is no contractual or legal significance in the title of a contract. As stated earlier, the contract itself need not be in writing. But, the title in a contract is just for internal purposes to distinguish one from the many other contracts that an organization could have entered into.

The dateThe significance of the date can be described as follows:1. As generally people have the habit of putting the

date after their signature and a contract is not signed by both the parties on a same date, one cannot make out later what the date of this agreement is.

2. There could be a very important time duration running from this date like the advance to be paid.

3. Most importantly, there are certain things running from this date which have a Limitation of Time. “Limitation of Time” means that the law would not entertain an action brought by one party under the contract against the other party after the expiration of a certain time limit. It varies from the type and jurisdiction of various contracts. For example, according to English law, in simple contracts the time limitation within which a party can bring an action against the other party is six years whereas in the specialty contract such time limitation is 12 years.

These are the three significances why a date has to be included in a contract agreement.

The names of the partiesThe significance of stating the names of the parties in a contract is that there are a lot of other parties that would be referred to in a contract. For example, in a construction contract there are the engineer, project manager, employer’s representative, subcontractors, etc. and they are not a party to the contract. In order to distinguish the contracted parties from other parties we have to state the parties’ names in a contract. There is no privity of contract between one of these parties and any of the others. The “privity of contract” is the existence of a legal relationship in a contract. That means a contract cannot confer rights or impose obligations arising under it on any other person except the parties to it.

Please note that when a contract is drafted in this way, i.e., in the process of including all the components of a contract there should not be a full stop in between because they are not sentences and it will continue until all such sections of a contract are complete.

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The PreambleThe preamble starts with “whereas…..” and the purpose of the preamble is that it states the objective of the document. It is the introductory part of the contract agreement. We also use the preamble to say what has happened in the past prior to the contract being made. This is because after the preamble starting from the recitals what we say is that what is going to happen or what each party going to do in the future. And certain things which have happened in the past, e.g., “The Employer has accepted the tender” before signing the contract can be included in the preamble. If we want to write something which must have happened before signing the contract it can be written as for example “It is deemed to be included by the contractor…” etc.

Now we come to the first two ingredients of a contract to make it valid. They are the “Offer” and the “Acceptance”. Before moving on to that, first we have to understand the following:

• Invitationtoofferisnotanoffer.• Offeroristhepersonwhomakestheoffer.• Offereeisthepersontowhomtheofferismade.• Offerorcanincludeanyconditionsthathelikesto

offer.• The acceptance should be absolute and

unconditional.• Conditionalacceptancebecomesacounteroffer.• Intheabovecircumstancethecounterofferhasto

be accepted by the offeror; otherwise, there is nocontract formed.

The Recitals and the CovenantsIt generally starts with “Now this agreement witnesses as follows…..” and then it continues with the “Articles”.

We start with the word “covenant”, which is a promise. Now we write the covenants as “In consideration of the payments to be made by the employer to the contractor as hereinafter mentioned as the contractor hereby covenants with the employer to execute and complete the work and remedy any defects therein”.

With this comes the third important ingredient in a contract without which a contract is invalid. It is “Consideration”. The consideration in this context is money. Consideration could be a kind like constructing something, could be by action, also by inaction.

• Considerationshouldalwaysmovefromapromiseeto a promiso.

• Promisoisthepersonwhomakesthepromise.• Promisee is the person to whom the promise is

made.• Therefore,weshouldunderstandthattheemployer

is the promisee here. • Whywehave to identifyherewho is thepromiso

and who is the promisee is because it is always the promisee who would seek a remedy due to breach of the contract by the promiso by not keeping the promise.

We still cannot stop with this while drafting a contract agreement. If we stop with this what will happen is that the contractor can build the building as how he wants rather than how the employer would want how it is to be executed and completed and all that should be written here. For example, it can be written here as “According to a particular standard (specify a standard)” or we can say that “In conformity in all respects to the provisions of the contract”.

Now we complete the sentence and therefore put a full stop for the first time. By doing so, we tried to tie up all the sections of a contract from the “date” to this “covenant”.

Is our contract complete now? No, because a contract is a mutual promise. We have seen only one promise being made by the contractor. Does the employer promise to pay here? No. So, that mutual promise can be drafted in the article as No. two (2). Here we write the article as “The employer hereby covenants to pay the contractor the consideration with the execution and completion of the works and remedying any defects therein”. So, the employer is the promiser and the person who will go to the court to enforce the contract for the breach of promise is the contractor as he is the promisee here. What the employer will pay under this promise is the contract sum.

With this we come to the fourth ingredient for a contract to be valid, which is the “Certainty”. If it is simply stated as “The employer would pay a sum of money which he considers payable” here there is an uncertainty. In this case a contract would become void or voidable. • Void:Avoidcontractisinvalidfromthebeginning

after the court declares that it is invalid. So the parties never had an obligation.

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• Voidable:Inthiscontractpriortothedateonwhichthe court declares that the contract is invalid, there wasacontract.Onlyafterthatdateisthecontractinvalid. Therefore the parties’ accrued right for entitlements exists.

Therefore, if any of these ingredients are missing, the court would say that the contract is invalid and depending on the situation it will also say whether it is void or voidable.Further, while drafting a construction contract if we stop with that, what would happen? The employer would pay only the amount stated in the covenant. If any variation is instructed the contractor would not get any further money and so in the case of a claim as well. In order to address this problem, it can be written in an unambiguous manner here as for example “Dhs. 100 million or any other sum becomes payable in accordance to the contract”.

Having said that, if the contract is for two years the contractor has to wait for two years until he completes the whole building to receive even a single dollar from the employer because according to the law, the employer doesn’t have a liability to pay any money until he gets the product. It is similar to buying a commodity in a market. Therefore, if the payment is to be made on an interim basis or if an advance payment is to be made, it must be written in the contract.

Now the contract is formed as a mutual promise is there in place. However, if we want to include further articles there on time, quality and cost aspects we can keep on writing in any number of articles. This process is called as “Incorporation”.

By undergoing this process we can incorporate other documents like conditions of contract, specification, etc. into the contract and make it binding for both parties. They can be incorporated by adding a further article in the following manner:

In the next article we can write that ‘the following documents shall be deemed to form and read and construed as part of this agreement”. Now we can list out all the documents to be incorporated.

ExecutionWith that we come to the execution of the contract document. We can start that with “In witness whereof

the parties……….” and then on behalf of each party the authorized personnel have to sign and stamp. Let us look at the fifth ingredient of a valid contract, which is “Capacity”.

Only those who have the capacity can enter into acontract. For instance, minors do not have the capacity to enter into a contract and certified people cannot enter into a contract as well. When signing on behalf of the company, a person not authorized by the company cannot sign a contract. He should posses a Power of Attorney for signing a contract on behalf of a company. A senile person (old) cannot enter into a contract.

The law lays down general rules. But, the general rules have exceptions. When it was said that a contract need not be in writing it is not that all contracts need not be in writing. The law requires certain things always to be in writing. Those dealing with land ownership transfer, land deeds, etc. should always be in writing to be enforced at times. So, this is an exception to the general rule. And similarly, when you say a consideration should be there and without that there is no contract there are some exceptional cases where without a consideration still some contracts are valid.

Terms of the ContractLet us look at the terms of the contract. They are the things stated in the two covenants. As we did not state them there itself we have to write them in a separate document and incorporate them, e.g., conditions of contract. Let us assume a third party has drafted them and sent them to us for scrutiny and now we have to study and confirm that our company’s interests are protected. In this juncture, what are the things that one is supposed to look for? For this purpose, let us have a checklist that can be used for this purpose. Generally, there are three major areas that we have to look for to check whether the terms are clearly stated in the document or not, namely, time, cost and quality.

Time1. Commencement date We have to see if the

commencement date is stated properly. 2. Time for Completion3. If the extension of time clause is present.4. If the penalty clause is present in the contract.5. Time control procedure.6. Taking over procedure.

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Price1. The type of contract (lump sum, re-measurable,

etc.)2. Payment application and payment certificate

procedure including time limits, 3. Variationsandprovisionalsums4. Additional cost claims - entitlements and procedures5. Price control procedure6. Final account procedure

Quality1. Drawings and specifications should be clearly

incorporated2. Sample requirements and how it should be tested3. Inspection procedures, approvals and rejections,

rectifications and remedies4. Quality control procedure5. Contractor’s liability to maintain the works after

the substantial completion of the project, defects liability period, etc.

There are certain things that do not fall into these heads of time, cost and quality. Some of them are as follows:1. Insurance If it is not clearly written into the contract the

employer cannot insist on the contractor submitting insurances. He cannot say that it is normal practice because sometimes the employer himself arranges for such insurances. Therefore, the contractor could refuse to insure saying to the employer that “It is your site and I am building for you, so you had better insure them”.

2. Bonds For example, the requirement of a performance bond

shouldbewrittenintothecontract.Otherwise,theemployer cannot ask for it later.

3. Subcontractors Contractors are responsible for the default of

the domestic subcontractors. In FIDIC type of contracts the contractors are again responsible for the default of the nominated subcontractors. But in JCT type of contracts the employers are responsible for the nominated subcontractors and they can get theExtensionofTime(EOT)fortheirdefault.So,itshouldbewrittenintothecontract.Otherwise,thesituation would be difficult.

4. Language and the law5. Termination clauses6. Who is going to administrate the contract?

7. How is the contract going to be administrated? Can the responsibilities be delegated? etc.

8. The dispute resolution process.

These are some of the important areas that we have to look into either when we draft a contract or check a drafted contract and they are not exhaustive either.

If we don’t take care of these requirements written into the contract then there could be ambiguities at times. For example, the law applicable should be mentioned in the contract because the parties are allowed to consider any law as applicable written into the contract. In the UAE only the government departments are required to use the UAE laws but private bodies don’t have such restrictions. If it is not mentioned in the contract and certain disputes cannot be resolved by the contract itself, then one has to refer it to the court to decide upon which law is applicable. In such a circumstance under the “conflict of laws” provisions it might take years to come to a conclusion only about that.

Also, when we draft a contract, consistency needs to be there.Otherwise,againtherecouldbeambiguities. Ifacertain thing is written in a place in one way and in another place in another way then there will be an ambiguity. So, drafting a contact is not that easy. However, we do not need to actually draft them from scratch. There are various standard forms of contract existing already drafted by experts and they are recognized over the years internationally, withstood the test of time, cases have been decided in the courts and weaknesses are identified. Therefore, we can use them when we write our own bespoke style of contracts.

We cannot just take a copy of such a standard form of contract and include into it as a contract document because the copy right has been retained by the author. So, what we can do is that we can “incorporate by reference”.

There are also guidelines for forming Part II- the conditions of particular applications of the contract. The conditions of contract have standard conditions and certain standard conditions need to be amended to suit the particular nature of a project.

There are some clauses in the general conditions that mention “As stated in the particular applications of the contract”. These are known as cross-referred clauses. So, clauses need to be amended in Part II – the particular

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conditions of contract. Further, it is necessary to modify all the relevant clauses accordingly to suit the agreed terms between the parties and the type of contract.

Further, we can add any new clauses if we need to do so in Part II– the particular conditions of contract other than modifying some of those 210 sub-clauses if we considered the bespoke document of FIDIC 1987 4th edition conditions of contract for construction. Appendix to form of tenderThe appendix to the form of tender highlights the key project information like time, penalties, insurance requirements, etc. It is filled by the contractor. In some clauses it refers to certain provisions according to the “Appendix to the form of tender”. In that case it is important to include that information in the Appendix to the form of tender.

For example, according to Sub-Clause 10.1, of FIDIC 1987 4th edition conditions of contract for construction, if the contract requires the contractor to submit a performance security in the sum stated in the Appendix to tender, and if it is not stated in the Appendix to tender the value of the bond it could be interpreted that there is no necessity for a bond. So, these are the areas that need to be looked into carefully when drafting a contract.

Another example is “Time to Issue Notice to Commence”. As per the above stated FIDIC form of contract Sub-clause 41.1, it states that the “Contractor shall commence the Works as soon as is reasonably possibleafterthereceiptbyhimofanoticetothiseffectfrom the Engineer, which notice shall be issued within the time stated in the Appendix to tender after the date of the Letter of Acceptance”. Sometimes the Letter of Acceptance(LOA)couldspecifyacommencementdate.Here, the contractor may argue that the Works cannot not be started in the absence of a “Notice to Commence” as per Sub-clause 41.1. So, if we want to specify the commencementdateinadifferentmanneritshouldbestated as “Notwithstanding the provision in Sub-Clause 41.1”

Dealing with subcontractsLet us now look at the subcontract. If the main contract is formed on FIDIC 4th edition then it is recommended that the FIDIC 4th edition subcontract form be used. Otherwise, there could be “incompatibility in

terminology”. If you use the Institute of Civil Engineers (ICE) blue form, it defines “maintenance period” and “maintenance certificate” whereas in the FIDIC form main contract it is “defects liability period” and “defects liability certificate”. So, if the subcontract says that the subcontractor’s 2nd half of the retention would be released after the maintenance certificate issued it means the subcontractor would never get his retention money. Why? Because there is nothing called a “maintenance certificate” in the FIDIC form of contract. So, we have to use a subcontract which is compatible with the main contract in terminology.

One controversial area is whether the penalty tothe subcontractor should be limited to 10% of the subcontract price or 10% of the main contract price if the main contractor’s penalty is 10% of the main contract price. Let us take this scenario. The consultants invite tenders to select a nominated subcontractor (NSC) and the NSC is told about the conditions. And the “Appendix to form of tender” is also given and it says the limit of liquidated damages (LD) is 10% of the sub-contact price. The subcontractor is selected and the main contractor is told to take this subcontractor on board and enter into a subcontract with him. The main contractor would refuse to do this in the first place. This is because, as per Sub-clause 59.1, the main contractor can make objection to nomination of a subcontractor if he is declining to enter into a subcontract with the main contractor containing the conditions in line with the main contract. Here, the Employer has a problem and to overcome that the employer can compromise with the main contractor saying that “you take this subcontractor on board and if he defaults I would not penalize you up to 10% of the contract price and your maximum penalty will be limited to 10% of the subcontract Price”. The law permits that a main contractor could fine a subcontractor for the same damages that he has to pay under the main contract. It could be many times the subcontract price sometimes.

Further, how can the main contractor recover that loss? As much as possible the main contractor can recover by encashing the performance security and advance payment guarantees, hold up all the due money and the balance payment and for the balance he can sue him in court. It will be a debt due from the subcontractor to the main contractor. And in order to tie up with that the employers and the engineers when they invite NSC to tender the provisional sum works FIDIC 4th edition

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should have been incorporated therein. It doesn’t state what the penalty is or talk about LDs. In addition to that, the subcontractor should be made available for inspection of the main contract except the prices and other sensitive, commercial and confidential matters. Mainly a copy of the Appendix to tender of the main contract together with Part II conditions of the main contract should be provided for the subcontractor during the tender. Further, the contract says the subcontractor is deemed to have full knowledge of the provisions of the main contract less such details of the contractor’s prices. And it goes on to state the obligation of the subcontractor. He should not cause the main contractor to be in breach under the main contract. And if the subcontractor commits any breaches of the subcontract he shall indemnify the contractor against any damages for which the contractor becomes liable under the main contract as a result of such breaches.

Now we move on to the 6th, 7th and 8th ingredients of the Contract.

The 6th ingredient of the contract is possibility. A contract is invalid if parties enter into a contract to do impossible things.And then we come to legality, the 7th ingredient. Parties cannot enter into a contract for any unlawful thing.

And the 8th ingredient of the contract is “intention to create legal relations”. In olden days’ contracts it is stated

in the contract either at the beginning or at the end that it is the parties’ intention to be bound by the contract. But, nowadays the court doesn’t look into it in commercial contracts because parties will enter into a contract to be legally bound only. But, in domestic types of contracts it isimportanttostatethat.Otherwiseitwillnotbelegallybinding.

In addition to these eight ingredients which are necessary for a contract to be valid in common law jurisdiction, in the United Arab Emirates one additional requirement is to have “ good faith and fair dealings”. So, the parties are required to prove the existence of good faith and fair dealings in such instances where the other party challenges. And sometimes because of this necessity for good faith and fair dealings in this part of the world, “consideration” is not much looked into because it is believed that in the presence of good faith and fair dealings there cannot be a cheating of that nature.

Reference:Prof. Indrawansa Samaratunga. “Sound Contract Administration - Drafting Contract Agreement”, delivered at Al Futtaim Training Centre, Dubai, for the Sri Lankan Quantity Surveyors, UAE.

Editor’s Note:The author has baseed his work on a transcription of the above seminar conducted by Prof. Indrawansa Samaratunga.

ActionstrengthLtd(t/aVitalResources)vInternationalGlassEngineeringIN.GL.ENSpA House of Lords 03 April 2003

Summary: Estoppel; oral contracts; enforceability of oral contract of guarantee under Statute of Frauds 1677.

Abstract: A has agreed to supply labour to enable I to build a factory for G. A appealed against a Court decision that that evade the effect of the Statute of Frauds 1677 s.4. A creditor cannot claim that a guarantor should deny from relying on the Statute of Frauds 1677 s.4 by reason of having encouraged the creditor to act to his damage by a promise to pay.

Held: Dismissed the appeal, that the oral contract of guarantee between A and G was not enforceable under s.4 of the 1677 Statute, as a written agreement was required for a contract to be enforceable.