iPleaders

Salient features of the conditions of a construction contract

March 28, 2021
1105 Views
Construction contracts

Image Source - https://rb.gy/vt7yib

This article is written by Nalini Moorthy.

Introduction

The “Fédération Internationale Des Ingénieurs-Conseils” of which the abbreviation is FIDIC is a body that has become renowned for its activities in respect of drafting model contracts to be utilized in the civil engineering, building and construction sphere. 

Its first contract entitled the “The Form of contract for works of Civil Engineering construction” was issued in 1957.  The same which was aimed at the sector in respect of civil engineering was soon came to be referenced widely by the colour of the front page of the title which was red i.e. “The Red Book”. Subsequent standard contracts by FIDIC have become distinguishable by the colour page of their covers thusly. 

The Red Book contract which was published was a collaborative effort with FIDIC being joined by the IFBP. The subsequent works in respect of the standard form contracts so published by FIDIC were the fruits succeeding wide-spread discourse on the relevant issues involving several stakeholders including the IFAWPCA, AGCA, FIIC and MDBs among others. Given the extensive affirmation so provided by these important bodies, this format of contract has become the most important amongst the international standards so available. 

The current FIDIC contract under discussion shall be that of the Pink Book which essentially details the MDB Harmonised Edition in respect of the “Conditions of Contract for Construction For Building And Engineering Works Designed By The Employer.” For the sake of clarity, the document shall hereinafter be referenced to as “MDB”

However, before examining the same in a clause-by-clause manner, there shall be an examination of what exactly a contract is and a general background in respect of construction contracts, their main requirements and the approaches utilized in respect of the same. This is such that we may properly comprehend the MDB for the  contract format conditions which it provides.  This shall then be followed by a conclusion of the key-takeaways. 

What are Construction Contracts and the essentials of a Construction Contract?

The term Contract has been statutorily defined as an agreement that is admissible by the law. The term Construction Contract refers to a contract between a Contractor and an employer who is also alternatively referenced to as a client that is entered into for the primary purpose of constructing, modifying or otherwise renovating something for the former party referenced herein within a specified time period for a specified cost and to certain set standards. 

Akin to other contracts, construction contracts to be admissible by the law are to fulfil the necessity of being agreements wherein work is agreed to be executed for the payment of a particular contract price. Formal offers and acceptance are also important for the validity of contracts including construction contracts. There are few inalienable clauses that are to be present in construction contracts and these include those of the distinguishing of the parties that are going to be involved, the work that is to be executed, the costs which are to be paid in respect of such work that is to be completed, the time frame within which such is to be finished and clauses in respect of compensation due as a result of time delays that may inevitably occur.

While the absence of the first clause so mentioned will not make the agreement invalid, the determination of such costs shall thusly be left to the discretion of the court. Apart from these, there must be a valid consideration with no economic duress proven, clauses  in respect of insurance, termination and assignment and an “intention to create legal relations.”

What are the different approaches in respect of Construction Contracts?

Usually, it is the owner who decides upon the project built and obtains the requisite designs either in-house or by utilizing the services of a third-party designer who adhering to the specifications so provided by the owner will design the project. After this step, the design so produced by such designer shall serve as a supervisory reference for the contractor who is actually tasked to execute the construction of the project.

The form of contractual arrangements between the parties herein will be entirely contingent upon the nature and size of the construction that is to be undertaken, with parties sometimes playing a dual role in respect of their duties in the eventual contract. It is to be noted that the eventual contractual agreement between the said parties shall be dependent shall lie on the decision made by the owner in consultation with his advisors. 

It is in this backdrop that we shall briefly examine the quintet of construction contract approaches that are primarily adopted by the parties to a construction contract. 

The first of these approaches is that of the General Contract Method which basically comprises of a contract wherein there are two main parties namely the Owner and the General Contractor with the owner having separate contractual arrangements with the designer and the contractor respectively.

Additionally, the work, when of a specialized nature, may necessitate the employment of sub-contractors by the Contractor to complete such specialized parts of the construction. The three main stages of this approach are the design-plan process, the estimation process and the eventual building stage of the project. This contracting method is usually preferable for small-scale construction projects. The owner is given a clear-cut representation of the final cost price of the project before construction is underway of the project.

However, the hands-off approach for the owner wherein he has little contractually stipulated supervision over the construction phase of the project may be disadvantageous to the owner who is experienced in construction management. The diminished profit margins, which often occur due to the necessity of involvement of multiple sub-contractors for the construction, may also prompt the main Contractor to short-change sub-contractors or be less exacting of the work standards that were to be met. 

The second approach that shall be examined is that of the Separate Contracts Method wherein the owner essentially performs the role of the General Contractor and he enters into separate contracts with each of the sub-contractors to ensure the specialized portions of the work to be done in respect of the construction project are accordingly completed.

This approach is the most preferable choice if the owner is equipped with the essential skills or has within reach the management capabilities to handle such construction project. While such method is more profitable to the owner in that he does not have to part with the portion of profits that would have originally been paid to the General Contractor, the owner opens himself to greater liability as compared to the first method so discussed, hence making the same an oft not used approach in respect of such contracting methods. 

The third approach to be examined is that of the Self-Performance Method which entails that part of the work in respect of the construction to be done is completed by the owner himself or through his employees with the former providing the necessary inputs for the completion of such work and acting in a supervisory role. When such is adopted, it is oft common for the design to also be completed in its near entirety in-house, making the role that is to be performed by a designer.

The advantages in respect of this method is that of the costs saved due to the lack of necessity of a formal contract and other ancillary expenses usually incurred while executing and inspecting the final construction. This approach however has a limited scope in its usefulness in that it is only preferrable in respect of small scale, mostly uncomplicated constructions like maintenance etc. The same has been criticized especially when utilized by public authorities in respect of work to be done and the differing rates so payable by contractors to their own work staff for like assignments. 

The fourth approach to be examined is that of the Design-Build approach. In this method, there is a single contract that covers both the design and the building phase of the project. Such an approach is preferable in respect of large-scale projects and the contract is often drafted in a manner that allows the disputes between the designer and the builder to be solved without the direct involvement of the owner. While advantageous in several ways, the lack of checks and balances built in due to the duality of the roles of the parties sometimes serves as a cause of concern for cautious owners who may refrain from such a contractual approach. 

The last of these approaches is that of the professional construction management approach wherein a firm involved in such construction management service is hired to perform the identical function done by the Contractor in the General Contract method. This firm may even be tasked with advising the owner about the design firm that is to be chosen to design the final construction project. The firm will oversee the design process to ensure that the result of the same is cost effective before the commencement of the building phase.

The firm may be compensated in either a flat manner or a value dependant manner and the designer is usually compensated in terms of the latter. This approach is preferrable in respect of large-scale projects wherein flexibility is oft required along with considerable combined expertise in the construction aspects of designing. In its skeletal form, such an approach would not entail any direct labour by the firm itself but usually, such contracts usually tend to differ based on the in-house capabilities of the firm itself.

The owner is required to be cautious of any conflicts of interest that may arise should the firm take on a more direct role in the building process in respect of the contract and ensure that such firm is trustworthy before such extended construction work can be devolved upon it. 

The MDB Pink Book & Clause by Clause Analysis

The MDB which stands as a derivate of the FIDIC 1999 “Red Book” is distinctive in that the same was the result of a joint collaborative effort with an independent interest outside of what typically consists of the routine stakeholders who are consulted by FIDIC during the drafting of the various construction related contracts by it.

The IRDB and other MDB’s were the main such interests so consulted after their heavy reliance on the GCC in respect of the model documents in respect of the bidding process was utilized by way of the particular conditions that were to be considered and their formal adaptation of the “Red Book” was observed. There was then a formal collaboration undertaken by the aforementioned parties with FIDIC to devise an MDB specific version that was licensed to the banks in respect of the projects so funded meant to utilize the same. 

The MDB document consists of 20 distinct clauses which is further accompanied by an appendix discussing the procedural rules and the general conditions of the Dispute Board Agreement and an Index of all the sub-clauses within the document. 

The first clause of the MDB discusses the General Provisions that are important in respect of the document including clauses in respect of the common definitions so used (divided subject-wise), an elucidation of how the text of the MDB is to be interpreted, the mode of deliverance of communications etc. 

Among these terms, the following are of greatest import: 

Contract – it collectively references both the Contract Agreement between the Parties as well as the other ancillary documents preceding and succeeding the drafting and execution of such agreement including the Specification, Drawings so made etc. 

It is to be noted that the documents which form part of the Contract are not just those as included within the definition of such term under the MDB document but those which were executed between the parties to the same. 

In respect of the MDB, the following are the documents of important so collectively comprising of the Contract in their order of precedence including the Contract Agreement, the LOA, the Tender, other addendums that may have been includes, the Particular Conditions, the General Conditions (i.e., the MDB document so being discussed, the Specification, Drawings, Schedules and other documents that may comprise as part of the Contract. 

Contract Data references the documents so submitted by the Employer comprising of Part A in respect of the Particular Conditions. 

In respect of the interpretation of the MDB document it is to be noted that apart from the general principles which are usually noted in respect of the jurisdictional and language applicability and the precedence of documents to be adhered to, other important considerations are that of the inclusivity of the term gender, the synonymity of the singular and plural and that of tender and bid in the varied forms so used within the MDB and the necessity of agreements to be both in written form recorded in a permanent manner. 

The MDB document requires that for the Contract to come into existence between the parties to the same, there must have been an exchange of both the LoT (Letter of Tender) and the LoA (Letter of Acceptance). The date of such Contract so binding between the parties is either on the data when such latter Letter is either issued or received. 

In respect of the MDB document, the resolution of disputes is by virtue of Sub-Clause 20.6 M to be done via the UNCITRAL Rules of Arbitration, or by other means, should the parties mutually decide on the same. 

The ruling language is that so stated in the Contract DATAT without any explicatory notes on the significance of such. 

The phrase “Comply with applicable laws” in respect of the MDB can be understand more clearly in respect of the obligation of the Contractor to provide notices and pay taxes and fees so necessitated by the law that applies to the Parties along with their responsibility to comply with procurement of clearances permits etc. so required in respect of the project to be done. 

The division of such responsibility and the assistance that has to be provided by the Employer to the Contractor in respect of part of the same aforementioned been clearly outlined in clause 1.13, 2.2 and 6.12. 

Under sub-clause 1.13, the Contractor shall, unless manages to prove his diligence in performing the responsibilities when accomplishment of such was nevertheless impeded, is obligated to indemnify the Employer in respect of any of his failures in respect of the legal compliances so detailed therein.

In respect of the MDB – the “Product” that is to so be designed is dependant on the Contract so existent between the Parties and not defined substantively in any part thereof. Akin to the other FIDIC forms which have preceded it, certain provisions of provide hints of what the product consists of like the Specifications and Drawings, the Tender, the respective Requirements of the Contractor and Employer etc. 

The main Parties to the Contract are the Contractor and the Employer respectively, with the Engineer having been employed and appointed by the latter party. 

Clause 2 of the MDB along with the sub-clauses therein detail the different responsibilities and rights in respect of the Employer and these have been briefly elucidated below: – 

Clause 3 deals with the Engineer and details his appointment, duties , manner of the exercise of his authority, manner of delegation, manner of the provision of instructions in respect of modifications to Drawings for execution in respect of the Contract, his duties in respect of informing the Contractor in the event of his replacement by the Employer and his responsibilities in respect of the Determination of any dispute between the parties if such has been provided for in the Contract between the Parties. 

Clause 4 of the MDB deals with the Contractor, the second Party to the Contract. 

It details his general responsibilities in respect of execution and completion of the construction that he has been contracted to perform have been provided, the rendition of the Performance Security so required by him, the appointment of his representative, the vicarious liability incurred in respect of Subcontractors and other obligations in respect of co-operation, safety and protection, confirming the adequacy of Contract Price and like responsibilities.

Clause 5 deals with the concept of Nominated Subcontractors and apart from defining the same, establishes the procedure to be followed should the Contractor object to such nomination and the Payments and Evidence of Payments that is to be established in respect of such contractors before the same may be claimed under the Contract Price by the Contractor. 

Clause 6 details the appointment of Staff and Labour by the Contractor and the various duties he is to fulfil in respect of such appointment for issues including their wage payments, welfare, conditions of labour etc. 

Clause 7 deals with the manner of execution and inspection and testing process that is to be applicable in respect of the workmanship of the Contractor. 

Clause 8 deals with the procedure in respect of the Commencement of the Works, Delays that may occur in respect of the same and how suspension of the Works or Part thereof can be initiated and when such may be renewed. 

Clause 9 deals with the Contractor’s obligations to perform and succeed the requisite tests required to show the competency of the Works or Parts thereof so executed. 

Clause 10 deals with the procedure in respect of Taking Over of the Works or Parts thereof by the Employer which may either occur voluntarily after the Contractor submits request for the issue of the associated certificate and when such is initiated by the Employer himself. 

Clause 11 of the MDB references the responsibility of the Contractor to remedy the defects and the costs and penalities associated thereof should he fail to do so accordingly. 

Clause 12 deals with the procedure associated with the Measurement and Evaluation of the Works so completed such that the payments in respect of the same may be appropriately determined. 

Clause 13 of the MDB details the procedure to be adhered to in respect of Variations and Adjustments made to the design and execution of the Works by the Contractor and the procedure to be followed in the computation of costs that are to be paid thereof. 

Clause 14 deals with the payments in respect of the Contract Price and details the different procedures for such payment including what is to be included in such payments; whether made in an interim manner or the final payment, penalties in respect of delays, retention money that is owed to the Contractor, the currency in which such are to be made and so on. 

Clauses 15 and 16 detail respectively the procedure for termination by the Employer and suspension and termination by the Contractor of the Contract and the respective conditions therein that have to be fulfilled before such may be instituted. 

Clauses 17 and 18 detail the risks and responsibility each party bears in respect of the other and the insurances that have to be taken on by each party. 

Clause 19 details the conditions in respect of force majeure procedure including how such is defined in respect of the MDB, how notice of the same is to be provided, the consequences therein, the option of Termination and Release so provided for the parties and so on. 

Clause 20 details the procedure in respect of the Claims that may be made by either Party and the procedure for the resolution of the Dispute and Arbitration procedure to be followed therein. This is inclusive of the procedure for the appointment of the board, how the Dispute Board’s decision may be obtained and so forth. 

The Appendix details the General Conditions that are applicable in respect of the Dispute Board Agreement that is to be drafted including the obligations of the members, the Parties to the dispute, the Payments to be made, resolution of disputes etc. 

The Annex provides the procedural rules applicable to the Dispute Board. 

Conclusion

A preliminary analysis of the different factors so affecting cost overruns and what actually reduces the instances of the same is key to avoiding the cost overruns overall in infrastructure projects. Accuracy in forecasting by utilizing enough foresight in respect of the same, ensuring the lack of cloud over title and reconfirming absence of eminent domain, providing enough time for the necessary estimates and maintenance of standards and relationships between the Parties are essential to ensure that the risk of cost-overruns in respect of the factors causing the same are avoided. 

As has been observed in the aforementioned sections, the general conditions in respect of contracts entered into by the Employer for Works he aims to construct and they are detailed in a manner that clarifies much of the scope of what is necessitated to actually reduce the disputes that could potentially occur in the contract between the parties. The detailed procedure in respect of the Dispute Settlement Mechanism also reduces the possibility of litigious action between the parties and provides alternatives such that the same is minimized while respecting the rights of the parties.  

References

  1. Udom, K. (2014, February 1). A brief introduction to FIDIC contracts. NBS. https://www.thenbs.com/knowledge/a-brief-introduction-to-fidic-contracts
  2. Bowmans – A Guide to Construction Contracts 
  3. Baker, E., Mellors, B., Chalmers, S., & Lavers, A. (2013). FIDIC contracts: law and practice. CRC Press.
  4. Qc, W. R., & Darling, P. (2021). Wilmot-Smith on Construction Contracts (4th ed.). Oxford University Press.
  5. Conditions Of Contract For Construction For Building And Engineering Works Designed By The Employer. 
  6. Hinze, J. (2010). Construction Contracts (3rd ed.). McGraw-Hill Education.
  7. The Indian Contract Act 1872

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Exit mobile version