HENRY HATHAWAY identifies some of the critical reasons why contract disputes arise and suggests some ways to address concerns before they become problems.
A considerable part of my instructions in practice relates to providing advice in respect of construction terms supplied as part of the tendering process on behalf of clients. Given my previous career in civil/structural engineering, it forms an enjoyable part of the business. It provides an opportunity to discuss not only the actual terms or amendments to standard form contracts but also to incorporate how the works will proceed or certainly that being the intention.
The common intention that rests at the forefront of any contract must be to avoid disputes or contention during or after the course of any given project. It will not take the reader much convincing to realise that disputes in construction are costly and weary. However, construction still remains a rife area for such disputes and in general, the reasons repeat, and the trends and patterns again occur and are available to see. A cursory sample of the disputes that I deal with can be summarised and, when engaged with, form the basis of initial advice usually to highlight the areas to attempt to avoid any such disputes.
There are many reasons why disputes arise, and the following provides some headings to assist in avoiding them.
Getting the formation of the agreement right
Generally speaking, if a dispute arises under a contract, the first starting question will be to ascertain what it was that the parties agreed to and, if so, what were the applicable terms to which they contracted. When said, this sounds straightforward. However, it is not always the case. When a contract is the subject of a dispute, either in terms of its own interpretation or by way of application of the incorporated terms and contents themselves, the clear point that needs to be kept in mind at the outset of a dispute is the question of whether or not there is a contract, and, if so, what are the precise terms and what in fact did the parties agree to do or, in some cases and, as importantly, what is excluded. Drawings, specifications and the terms themselves need to be examined, and the rules of incorporation then need to be applied to ensure that there is certainty about what the parties have contracted for. If not, then the parties will need to answer this question at a later stage, and it may not be so easy.
Payment terms and understanding the payment process
The Construction Contracts Act 2013 has been in place now for some time. Every construction contract must provide an adequate mechanism that is compliant for payment. It is generally surprising that these concepts have not been adopted or translated throughout, and if a contract does not have such provisions, then the statute implies terms through the Schedule. Parties ought to know the contents of the Act and ensure that the payment terms that they expressly refer to are compliant with the Act with provisions for Section 4 and Section 5 incorporated and met.
It should set out the commencement date and completion date along with dates for the Payment Claim Date and the due date, which is free from ambiguity and leads to the Payment Claim Notices being compliant and not fail for procedure.
These are not difficult tasks, but in times when a payment dispute does arise, questions will be raised as to whether or not the payment regime is provided for or whether a claim for payment could fail. Worse, if a valid Payment Claim is made, is the payee aware of the consequences of failing to issue a Response and where then the full amounts may become due regardless of the merits?
Programmes and records
The next point after establishing the terms and contents of an agreement is to consider whether the project or works have been recorded in terms of timeframes and resources. The level of detail required in such instances will revolve around the scale and complexity of the project and what proportionate response is required. As a starting point, the first question will be whether the entries in the contract sum analysis have a corresponding activity on a programme with a corresponding timeline as well as the intended resource to be applied. This ought to be set out and agreed upon at the outset at the time of formation of the contract and will then form a baseline as to what they intended to perform. This baseline then is updated throughout and sets out how the common baseline intentions have developed, and key elements such as delays and/ or variations are recorded and impacted throughout. This is an area that becomes very complex and very expensive if required to be undertaken retrospectively. The complexity will then lead to other delay methods (time impact, window analysis etc) and can be a formidable challenge.
Working with clients from the outset and with training, it has been found that the input into a continuous approach does not require a large resource and adequately in proportion does record the details required. Various records are then taken to support the views and help assist with evidence. Having a solid baseline programme of activities and regular monitoring on a proportionate scale will assist all parties when either (a) bringing a claim for an extension of time or (b) defending a claim for an extension of time. Waiting until the problem or dispute develops can be an extremely costly exercise and resource-heavy.
Compliance and understanding of the terms of the agreement.
A common theme throughout is to understand what is being contracted for, and this is established during the period just immediately at the time of the formation of the contract. The premise or reasoning is quite straightforward; A party will be bound to the terms it has entered into, and it is wholly irrelevant whether it has read them. If a term exists and is valid, then it will most likely apply (save for exceptions), and during a dispute, there will be little sympathy for non-compliance with a term incorporated. The rules are not there to make good a bad bargain, and simply the terms will be given effect. This poses a challenge for construction companies during the process of tendering or entering into contracts. A company must negotiate terms, and often there can be a different size of entity to be engaged with and have a greater negotiation position. A company is faced with the issue of whether it can accept terms or amendments to standard forms of contracts. A simple rejection or redline process could end up with no agreement at all. Remembering that any such clauses will apply if a company is not successful in removing a term or clause, then its next stage ought to be whether the effect can be diluted or include risk mitigation. If the clause cannot be removed, then the company ought to undertake a risk assessment of the likelihood of the effect of the clause occurring and what risk this would present. When entered into, the project team as a whole ought to have a summary of the terms and the effects on their performance. For example, where a time bar or condition precedent exists to bring about a claim (either time or money), if the exact procedure has not been followed, then this could prove problematic if a (genuine) claim is made after the time stipulated. The question being here if the site operational team ever knew the term existed in the first place. A summary of the contract terms can be useful to provide to site management.
The purpose is to attempt to avoid conflict in construction and with payment. Quite rightly, companies implement vast amounts of sums towards Health & Safety. Not only is the health and wellbeing of the utmost priority, the training and coaching forms part of a risk mitigation given that where a Health & Safety incident might occur, it can present a financial risk. Entering into contracts on terms not understood or without the necessary training for employees also presents a risk towards the financial position of a company and can pose a threat.
Compliance with the Terms of the Contract and with the necessary good application is an excellent first step to approach any final account negotiation and with the necessary degree of information. It is with this level of understanding and preparation that can place a company into a good negotiating position and avoid the need to instantly resort to disputes.
Henry Hathaway is a solicitor who practices in both Ireland and England and Wales and specialises in construction law. He is a qualified civil engineer and spent 12 years working in the industry. He regularly advises on contract formation and provides practical advice when entering construction contracts and regularly provides training and seminar days to companies to assist knowledge and application in order to assist them in avoiding disputes in construction.
If you require further information in relation to contract formation or would like to discuss training and development in this area, contact firstname.lastname@example.org
This is one in a series of articles by Henry Hathaway for Irish Construction News, Click Here to read other articles
Disclaimer: This content is provided for information purposes only and does not constitute legal advice. It is provided to present information to the broader construction industry and provide awareness. Independent legal advice should always be sought prior to application, and no solicitor/client relationship is formed, and no duty of care nor liability arises from any of the contents of this article.