Bespoke Form of Contracts: A Scourge or Necessity?
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The use of standard forms of contract, FIDIC Red book (Red Book - Engineer/ employer designed - Contractor executed) was introduced in the UAE during the late 80's and early 90's, more specifically on Dubai Municipality infrastructure projects by the Dubai Municipality, later been transformed to RTA in 2006. Ever since FIDIC based bespoke forms introduced in the UAE, it has been used extensively in the construction industry, the Red book based FIDIC forms are extensively used in different types varying from lump sum to re-measurement contracts by many large organizations.
Every project is associated with risk and is inevitable and the impact is spread across the project. Whilst the intention to introduce a standard form of contract was to achieve a balance in terms of risk sharing between the parties, conversely at a later stage clients started amending the standard form of contracts to safe guard their interests. Many such bespoke versions did not achieve the intended purpose as it became one sided due to the alterations. The one sided contracts, in other words i.e. by drafting partial contracts to safe guard the employers risks and financial positions will have a tendency to impact the construction cost. If the risk is high, the cost increases proportionally (Mohamed & Hartman, 2000, p 15)
UAE as a country has high potential and growth compared to the neighboring Gulf countries in the recent years (2003 - 2008), which led to many fast track infrastructure and building projects, most of those are innovative, having ambitious aspirations to become international land marks, having the common feature of shorter durations. One of the main reasons for adopting fast track projects was to reduce the financial burdens (loans and repayment period) and to minimize the risk for escalation due to the construction boom in the region. Also in a raising market, the cost of the construction was proportional to the duration of the project as the contractors were including the risk for escalation in their bids. A few examples for such land mark projects with shorter duration captured the attention are Burj Khalifa tower, Dubai Metro, Palm Island and Dubai Mall.
The multinational construction interface between the parties and culture stipulated the importance of using standard forms of construction contracts in the UAE, one of the main reasons to use standard forms of contracts are the familiarity among the parties, which has been used across many developments worldwide, even practiced at courts, assumed to be understood by parties, the risks are apportioned in a balance way and understood by even the stake holders, reduced legal and construction cost.
As mentioned above, one of such standard form of contract, FIDIC 1987 4th edition red book was introduced by Dubai Municipality in early 90s with amendments to the original form (bespoke version is called as Dubai Municipality general conditions of Contract), later been followed by many public and private sector clients in UAE. Many such amendments in the creation of bespoke versions of FIDIC forms have defeated the intended purpose of achieving a balanced version of contract
By the mid of 2006, many clients started using bespoke versions of new FIDIC i.e. FIDIC 99 Contracts, however there is a significant difference between these two forms (FIDIC 1999 & FIDIC 1987) of contracts in many areas. Like any other place in the world, the competitions in the construction industry among the contractors are very high in UAE also. Many clients in the region, whilst using open or selective tendering (as they invite tenders from their own tender pool), before and after the current economic crisis, do have the habit of awarding the works to the lowest bidder. In order to overcome the competition in the market, the contractors at times started under quoting the works, were trying to recover through variation and claims at a later stage. This situation resulted in arguments and disputes due to the wrong interpretation of the forms of contract used by different parties, in addition, the unbalanced and void bespoke versions contributed much to these kinds of disputes. Many such disputes were revolving around the poor interpretation and understanding of the variations clauses, leading to claims and disputes on fast track projects. The intended purpose of this dissertation is to identify
- The essential clauses needed to administer a contract
- The importance of making right interpretations while using contracts
- An overview of the bespoke versions of contracts
- A detailed analysis of Variation clause in Nakheel Conditions of Contract ( bespoke FIDIC 1987) and the possible interpretations by various parties to the contract, briefly stating the difference between 1999 & 1987 based forms clauses that relates to variation and varied work clauses.
- Identify the potential difference between the two bespoke versions i.e. FIDIC 1999 & 1987 4th edition - Nakheel Conditions of Contract on major clauses.
- A case study on a dispute from ALDAR's Conditions of Contract (bespoke of FIDIC 1999) on variations while using the bespoke versions of contract
Proposed study chapters
The intended study focus on the meaning of construction contracts, their existence and the different forms of contracts. The literature review is covered in the first four Chapters, Chapter 2 covers the use of different forms of FIDIC contracts, including a brief history of their start in the UAE, Chapter 3 focus on the essential clauses needed for the administration of any forms of Construction contracts, Chapter 4 an analysis of Nakheel's conditions of contract (bespoke FIDIC 1987 4th edition) variation clause, the possible interpretations by different parties to the Contract, Chapter 5 a comparison between Two bespoke forms of Nakheel's Conditions of contract (FIDIC 99 and FIDIC 87 4th edition) on major clauses, Chapter 6 - a survey to identify whether the employers achieved the intended purpose by using bespoke versions, Chapter 7 analysis of the data collected ,chapter 8 recommendation.
An overview of the construction Contracts
Construction contracts are generally classified as Oral (when the act will not apply) or written (if the other criteria are met, the act applies). The form of written contracts are again classified into
i. A simple exchange of correspondences;
ii. A tailor made written agreement;
iii. A standard form such as JCT,Fidic etc;
iv. Standard terms and conditions of the business.
Contract in broader term is defined or expressed as conformity between two or more person i.e individuals, businesses, organizations or government agencies to carryout, or to abstain from doing things in exchange for something of value. Contracts can be oral or written, using formal or informal terms. If one party to the contract fails to live up to its part of the bargain, there shall be a "breach" and certain remedies for solving this is available. The expressions of the contract - who, what, where, when, and how of the contract - describe the binding promises of each party to the contract. In other words the significance of the agreement becomes important only when a breach occurs by the counterpart and it becomes necessary to protect the right of the other party (http://law.freeadvice.com/general_practice/contract_law/contract_agreement.htm) and the breach of contract is recognized by the common law and the remedies are available as well.
On the other hand, the strongest contract, in terms of enforceability, shall have an offer, acceptance with considerations for the exchange, the terms of such an agreement shall be without ambiguity, and is signed by the parties to the contract who has the proper capacity to enter into the contract. Weaker contracts can be classified as verbal agreements or contracts agreed by parties in direct violation of state or federal laws of the country. There are several aspects related to valid contracts; in fact, an entire course in law school is often devoted to contract law (http://www.wisegeek.com/what-is-a-contract.htm).
John Adriaanse (2007) quoting Lord Diplock who classified construction contract as “ the sale of goods, work and labor for a lump sum price payable by installments as the goods are delivered and the work done. Decisions have to be made from time to time about such essential matters as the marking of variation orders, the expenditure of provisional and prime cost sums and the extension of time for carrying out the work under the contract”. He also stated that “a construction contract is best described as a complex web of competing interests”. At the same time Charles.S. Philip (1999) defining contracts as “binding agreement between two or more persons or parties \ construction contracts are defined as agreements, oral or written, executed between Clients and Contractors for construction / maintenance work done for compensation”. In another definition “we must understand that a construction contract is merely a set of criteria, or expectations, that bind the contracting parties” (Gilbreath, 1992)
The basic elements of a contract are an offer, acceptance of the offer with considerations. This can even be described as 'concurrence of wills' or 'ad idem' or meeting of the minds of two or more parties (http://www.alway-associates.co.uk/legal-update/article.asp?id=165).Consideration, on the other hand, makes sure that e that something is exchanged. In certain situations, the law requires the consideration to be adequate, which is, a relatively reasonable price, or ostensible, where even a Dirham will do.
Contracts may or may not be enforceable by law. The good example is; the agreement between the parent and child cannot be enforceable by law whereas the agreement for a loan probably enforceable by law. On the other hand whether a contract is enforceable by law or not depends on many factors, the primary and most important factor being whether the parties to contract anticipated / intended the contract to be legally enforceable or not.
Most of the construction contracts are bilateral contracts, some cases the unilateral contracts becomes bilateral with considerations. Contracts can be bilateral or unilateral. In a bilateral contract, each part makes promise or promises to the other party. A good example is while selling a home, the buyer promises to pay the seller AED 1 Million in return the seller agree / promise to deliver the title of such property. Where as in a unilateral contract only one party to the contract make the promise. A good example is the reward contract. X promise to pay a reward to Y if Y find X's stolen car. Here Y is not obliged to find X's stolen car, but X is obliged to pay the reward to Y only if Y finds X's car. The consideration for the agreement is Y's trust on X's promise or Y giving up his legal right to anything he wanted at the time he was in the process of finding of the car.
Here, conditions precedent to X's obligation to pay is the finding of the car, although this is not a legal condition precedent as technically no binding contract has arisen until the time car is found (because Y hasn't agreed / accepted X's offer until he find the car, referring back to the basis of contract as it requires offer, acceptance and considerations), the terminology “condition precedent” is used in contract law to establish a condition of promise in an agreement. For example, If Y has promised to X to find the car, and X has promised to pay Y when the car was found, X's offer has been considered as a condition attached to it, and an offer and acceptance have been occurred. This is an incident in which a condition precedent attached to a bilateral contract.
In the construction industry, the significance of having a balanced contract agreement has become essential to avoid disputes and to facilitate a smooth administration during the construction period. According to Lord Latham's report 1994, “constructing the team”, construction is a very unique process, the construction industry is different than the manufacturing and other industries, each project is unique with its nature and conditions, having heterogeneous conditions and situations, however definition of Latham for contracts not limited here, but include the design activities, advise and other legislations (Adriaanse 2007) which specify many details that a construction contract should take care of.
The Importance of using Standard forms of Contract
The adversarial nature ([Cheung et al., 2006] and [Cheung and Yiu, 2007]) and inborn risks (El-Sayegh, 2008) of the construction industry contributes to the speedy developments of construction disputes. Construction disputes are originated by many sources (Cheng et al., 2009). One of the main sources is the lack of understanding on the Contracts. Deprived interpretation and poor understanding of the construction contracts make the contracts clauses ([Broome and Hayes, 1997], [Cutts, 2004] and [Styllis, 2005]) and legalese ([Cutts, 2004] and [Candlin et al., 2002]), which results in differences between the parties to the contract on their legal rights and responsibilities. It is to be noted that this statement is justified in a study conducted by Mohamad and Zulkifli (2006), where majority of the contractors reported about the problems in understanding the contract documents. It is to be concluded that contractors need to be well versed in the interpretation and understanding of clauses stated in contracts.
Dispute resolution methods at the early stages of disputes are the soft-skill resolution technique, i.e. avoidance (White, 2002), which offers a practical approach to prevent the predictability of conflicts that may occur in a project by understanding the form of contract used. The main objective of dispute avoidance technique is to promote teamwork and to create a harmonious atmosphere (Cheung, 1999). Thus, a proper appreciation of the construction contracts to the stakeholders will prevent a dispute from rotting, although a total elimination may be impossible.
The importance of this chapter is to make a improved insight into the need for clarity of contract documents. Furthermore, it will assist contract drafters and experts review and clarify the clauses of the contract form in an understanding way to the parties. After the parties understand and consent to the clauses stated in the contract, the parties would recognize their obligations and contractual rights as required in the contract.
2.2 The need for contract clarity
The need for this research comes up out of many conflicts identified in the construction industry due to the usage of different versions of contracts with amendments. A good example is, the senior officials of a leading developer in Dubai alleged that false ceiling collapsed and burst the pipes above the false ceiling at the buildings were related to the supervision problem and lack of access to the project site by the engineers (Developer Eyes ‘supervision authority'2007). The engineers were not allowed on site due to some health and safety construction complications at certain times. This resulted inadequate supervision for the works. The problem heated up although the standard contract form clearly points out that the engineer, as being responsible for the overall supervision and direction of the project. Additionally, the Engineer's representatives had the right of access to the works and construction site of the contractor (Clause 23 of bespoke Form). An explanation for this dispute was, contractor misinterpreted the conditions of contract and also failed to understand the legal obligations outlined in the contract. Thus, the question of clarity of contract conditions in the contract must be resolved.
In addition, the court usually try to find out the intentions of contracting parties using plain, ordinary and popular meanings of the words. Scott vs Wawanesa Mutual Insurance Company brought out the clarity issue to the court attention (1994). The judge held that if the language of an insurance contract is ambiguous, the contra proferentem doctrine applies, that is the rule against the party who impose the inclusion of the ambiguous clause in the contract. On the other hand, if the wordings are unambiguous, the courts would not give any different meaning from what is expressed in its clear terms, unless the contract is highly unfair or hold an effect contrary to the intention of the parties (Duhaime, 2007 Duhaime, L., 2007. Part 7: interpretation of previous termcontracts.next term Duhaime Law, Victoria, Retrieved 22 May 2008, from <http://www.duhaime.org/LegalResources/Contracts/tabid/339/articleType/ArticleView/articleId/92/Part-7-Interpretation-of-Contracts.aspx>.Duhaime, 2007). Thus, clarity of contract clauses is very important for the construction industry too. This shows the importance of understanding the contract by the contracting parties.
Besides, the legalese takes place in the contract. The use of highly formal and technical language in legal documents disturbs interpretation (Feinman, 2003). Legal drafters made most damage by shrouding the mysteries of contracts with complex language and technical legal terms (Cutts, 2004). The deficiencies of legalese are mainly due to the unnecessary length and complexity. Sometimes, there are more serious errors that go unnoticed (Hill, 2001) because the interpretation of the contract clause was not actually written or interpreted in the contract (Thomas et al., 1994). Legalese would result the contracting parties fail to appreciate the contractual rights and obligations in a project (Semple et al., 1994). In the end, it shatters the working atmosphere of the project (Wang and Yang, 2005), resulting claims and delay to the project delivery.
2.3. Understanding the importance of standard form
Construction contracts are well written agreements duly signed by the parties to the contract to define their contractual positions, relationships and obligations (Zaghloul and Hartman, 2003). The conditions of the contract are critical to ensure that the parties are put up by rules and regulations (Semple et al., 1994). The reduced understanding of the construction contract usually lead to construction disputes, as highlighted by many researches such as ([Thomas et al., 1994], [Semple et al., 1994], [Broome and Hayes, 1997] and [Mohamad and Zulkifli, 2006]). It is simply because of the reason that the parties could not achieve their contractual expectations (Harmon, 2003).
Dubai Municipality's be spoke forms of contract was followed and amended by various developers in the UAE industry. The origin of the contract can be traced to FIDIC Red Book 1987 standard form of contract. It had several amendments and revisions over the years by many developers and private sector clients in the UAE. The latest version of this form of contract was formulated in 2001 (Dr.Sam, 2004). The old-fashioned language used in it makes it difficult to understand and make the right interpretations. This is mainly due to lack of clarity and use of legalese in the contract clauses. Table 1 and Table 2 give a summary of clarity and legalese problems identified in the contract clauses of this Form.
2.4 History of FIDIC and other Standard forms of Contracts used in UAE Industry
The most brilliant designs for any civil engineering or building project would remain in the documents and paper unless turned into reality by operations. This transaction process requires i.e. from the design to the reality requires the selection of the contract that reflects the aspirations of the parties as well as the demands of the successful project. The essential skills required for a Contract Administrator is the selection and management of proper form of contract and for each project, both the key criteria needed to be considered and risks should be identified and allocated, before the selection of the proper form of contract. This can be done from a range of standard forms of contract.
In the UAE, the FIDIC form of contract (red book) was introduced in the early 90's for the infrastructure projects by Dubai Municipality, later been followed by many major clients such as Emmar, Nakheel and Damac. The standard form of contract identifies the roles and responsibilities of the parties, their agrents and provides rules to protect direct parties from doing wrong. The selection of the form of contracts depends on various criteria such as the responsibility and position of the parties involved in the contract. For example, factors such as , magnitude and nature of the works, procurement method (Lump sum, Measurement, Cost reimbursement), Design responsibility ( whether by the Employer, Part by the contractor or fully by the Contractor), roles and relationships (Client, Contractor, Design team and Specialists), the type of cost control document used (such as bill of quantities, schedule of rates, priced specification or contract sum analysis),Payment method (stage, time related, turnkey) and Time (Open, fixed, acceleration and Damages). (Martin Brook, third edition, p 33-44)
The various such forms of contracts available are JCT written by the Joint Contract Tribunal, NEC - New engineering contract, a form recommended by Michal Latham's report (1994) for the use of both public and private sector clients because of its flexibility and written in simple English, ICE - provided by the Institution of Civil Engineers, GC/Works/1 for Government Contracts, ACA Project Partnering Contract- PPC 2000, FIDIC..etc.
A brief history of the FIDIC form of contract along with available forms are described below as the dissertation is focused on the FIDIC, the most commonly used for both building and Civil Engineering projects in the UAE.
The Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) organisation was founded in 1913 by France, Belgium and Switzerland. The UK joined only in 1949. The first edition of the Conditions of Contract (International) for Works of Civil Engineering Construction was published in August 1957 having been prepared on behalf of FIDIC and the Fédération Internationale des Bâtiment et des Travaux Publics (FIBTP). The form of the early FIDIC contracts was prepared in line with the fourth edition of the ICE Conditions of contract.
One difference with the initially published FIDIC contract was that they were based on the design being provided by the Employer or his Engineer to the Contractor. It therefore became best suited for various civil engineering as well as to various types of infrastructure projects such as roads, bridges, dams, tunnels and utility works such as water, sewerage etc. At the same time it was not so suited for contracts having major items of plant that were manufactured away from site. This led to thought of having the “Yellow Book” (the traditional one is known as the “Red Book” it was called as Red book because of the red color of the cover page) published in 1963 by FIDIC for mechanical and electrical works. This had the provisions for testing and commissioning which was more appropriate for the manufacture and installation of plant. The revised (second edition) was published in 1980.
The revised editions of both Red book and yellow books FIDIC was published in 1987. A most important feature of the revised edition of Red Book (or “Old Red Book”)was provision for the Engineer to act impartially while giving a decision or in any action which affect the rights and obligations of the parties, whereas the previous versions assumed this implicitly. Although this talk concentrates on the new FIDIC forms, it should be remembered that the Old Red Book remains the contract of choice throughout much of the Middle East, particularly the UAE.
A new form of contract was published (known as the “Orange Book”) in 1995 for the use on projects procured as design and build or turnkey, dispensing with the Engineer, providing for an “Employer's Representative” who, while determining the value, costs or extensions of times need to: “determine the matter fairly, reasonably and in accordance with the Contract”.
However, in 1999 FIDIC published new versions of the Red and Yellow books together with a Green and silver Books called as the short form of contract and turnkey contracts respectively. One of the significant differences between the 1999 edition and 1987 4th edition was the arguably diminishing role of the Engineer; a fair interpretation is making the Engineer as an assistant to the Employer. The other differences between these two versions will be discussed in the following chapters of this dissertation.
3.1 The important clauses and terminologies needed contract administration and a comparison with the bespoke version selected for the dissertation work
During the process of making bespoke versions of contracts by amending the articles of the standard forms shall be done with extreme care as they run the risk of damaging the consistency as well as the integrity of the contract and the other contract related documents. Most of the standard conditions of contracts are developed over many years and been highly complex to deal with the unforeseen problems and legal decisions including statute law and an ever changing world. The contract must state clearly the documents that are having the status of the contractual documents, following are the documents that shall be considered as the contract documents.
i. The signed agreement
iii. General and particular conditions of contract
v. Bills of Quantities
There are certain clauses required in the contract to facilitate the smooth administration of any contracts. The following are the commonly found and essential clauses required in construction contracts between the employer and the contractor irrespective of the forms and types of contracts. A detailed analysis with its importance is analyzed in this chapter for the dissertation purpose.
Possession - the date by which the employer shall provide possession to the contractor of the site to enable the work to begin, In FIDIC 1987, the commencement of work is described under the clause 41.1. The commencement shall be given with in the period agreed in the appendix to tender and failure to provide possession to the site within a reasonable time is interpretted as the breach from the employer.(CEM course material, Construction Law, chapter..). Under FIDIC 1987, the employer will, with the Engineer's notice to commence the works, give to the Contractor the possession of the site (E.C Corbett, FIDIC 4th Legal Guide, p 238-239). Failure to give possession is dealt under clause 42.1, under such circumstances, the Engineer shall, after due consultation with Employer and Contractor determine Contractor's entitlement for extension of time and also the associated cost, which shall be added to the Contract price, notify the Contractor with copy to the Employer (E.C Corbett, FIDIC 4th Legal Guide, p 238-239). Hence this clause is essential while drafting an agreement or contract for the administration.
Completion - The date, by which the contractor shall have the obligation to finish the work, this can be extended under various provisions if the employer or his contract administrator / engineer grant extension of time. Under FIDIC 1987, upon substantial completion of the work, the Contractor serve notice to the Engineer with copy to the Employer for the taking over certificate, and if the work in the view of the Engineer is substantially completed, issue a taking over certificate with in 21days. This is a very essential clause in any form of contract as in the absence of a completion date in the contract; the contractor shall be required to finish the work only within a reasonable time(ref: John Uff..).
Non - completion - this clause shall deal with the situations when the contractor fails to complete the work by the agreed completion date or the extended completion date. If the work is not completed within the specified time, due to any reasons that the contractor is not liable or any concurrent delays, the contractor get the benefit of having an extension time with associated costs. However for Contractor's own delay, the contractor shall not be entitled for the entitled for any extension of time, the remedy available in the contract is to make payment to the employer as liquidated damages or penalty as mentioned in the contract. Hence it is very essential to have a non-completion clause in agreements and contracts.
Liquidated damages / Penalty - Liquidated damages are usually amount is fixed and genuine pre-estimate of the loss in cases of breach, easy to calculate on building or commercial projects, however not easy on infrastructure projects. Whereas penalty is also a fixed amount, the contractor needs to pay this if a breach occurs. However in UAE, the term penalty is applicable as the same is followed in civil court. Whereas, under the English Law, Liquidated damages are applicable, if the sum mentioned in the appendix to tender is penalty and not the liquidated damages, the Contractor under the English law can challenge it, however under the UAE Law Civil code, Article,.. the penalty is applicable. Most of the Countries penalties are not acceptable. Refer, for example, a few leading cases on penalties, Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd  AC 79, 86-87, where the House of Lords recognized the principles on how to decide a damage clause that is actually a penalty and thereby unenforceable. “ This case was cited by the High Court of Australia in Ringrow Pty Ltd v BP Australia Pty Ltd  HCA 71, section 12, and by the Supreme Court of Ireland in O'Donnell v Truck and Machinery Sales Limited 1998 4 IR 191. The Supreme Court of Canada has adapted a similar approach in Elsley v. J.G. Collins Ins Agencies,  2 S.C.R. 916, 946, and does not allow for any recovery of an amount exceeding the actual damage” (J.Frank McKenna (2008) 'Critical Path.' Reed Smith, p1-6). Hence this clause is essential in a contract or agreement.
Defects liability- The defects are to be rectified with the period mentioned in the contract. Failure to rectify the defects within a reasonable time will enable the employer to engage a third party to do the work and deduct the amount from the contract sum. Under FIDIC 4th edition, clause 62 deals with the defects liability period. The issuance of the defects liability certificates signals the completion of the Contract and under FIDIC form, such a certificate shall be issued within 28days from the completion of Defects liability period, in both forms of FIDIC 99 as well as in 87 including the bespoke versions, the defects liability period shall not be extended beyond 2 years from the taking over certificate (E.C Corbett, FIDIC 4th Legal Guide, p391-392).
Variations - any variations should be authorized by the employer before the contractor is entitled for the payment. Variations are common to traditional procurement path than the Design and Build system (Ashworth, 1998). In construction due to the complexity of construction works it is almost impossible to complete a project without changes to the plans or the construction process itself however good and the complete the design details are at the start of the project. Baxendale and Schofield (1996) define variation as any change to the basis on which the original contract was signed. Construction plans are formed form of designs, drawings, quantities and specifications earmarked for a specific construction site and Variations are imminent in any construction project due to various reasons from finance, design, aesthetic, geotechnical, geological, weather conditions to feasibility of construction. Hence it is essential to have a provision to instruct and evaluate variations while forming a contract or agreement.
Payment - there shall be a method of payment required for the construction contracts, either monthly or in stages. Various contracts mention various types of payment mechanisms; however, in default construction contracts specify the obligation of making interim payments to the contractor. Both under FIDIC 1987 4th editions and its bespoke versions in the UAE market deal with various payment provisions under clause 60. Failure to provide interim payments or delay in such interim payments can be considered as a breach of contract by the employer(ref:..)
Retention - a percentage mentioned in the contracts documents shall be withheld by the employer from every interim payment certificates to protect employers' position if the works are either defective or incomplete. It is an incentive to the contractor to return to the site or to correct the defective work. Usually the first half of the retention will be returned to the contractor upon the issuance or performance / taking over certificate and the second half along with the final payment certificate. This mechanism is revealed in construction contracts. Hence this clause is very important in all agreements.
Insurance for the works - depending on the nature of the work the insurer's position changes. For example, if the modification works are to be carried out on an existing building, the employer shall insure the building where as if the contract is for the erection of a new building, then the contractor insures. However, insurance is essential in all contracts as it mitigate the risk to a certain extent, hence this clause is very essential in any agreement to identify and establish the position of the parties and to deal with the situations.
Determination - this provision sets out the various circumstances entitling either party to determine the contract and provide the tool for determining the rights of the respective parties thereafter. Usually in FIDIC based contracts, the Engineer carryout the determinations, who need to be impartial while doing the determination. Engineer's determination is challengeable by both Employer and the Contractor. This clause is essential in a contract for making neutral decisions by a person who is not a party to the contract during disputes, disagreements and conflicts.
Dispute resolution - there shall be a dispute resolution mechanism set out in the contract to facilitate the smooth and timely administration. Most of the contract forms contain arbitration clauses, however contracts falling under Housing Grants Construction and Regeneration act 1996 of UK shall provide a provision for the adjudication, and this will not stop the parties to proceed with litigation or arbitration after the adjudication. Various forms of contracts including bespoke versions have various dispute resolution mechanisms in the contracts. Both versions of FIDIC 1999 and 1987 red book provide provisions for disputes, however 1999 provide a provision for Dispute Adjudication Board to deal with the disputes arising out of contact. Hence it is essential to have this clause in the contracts.
4.1 A detailed analysis of a Nakheels conditions of contract Variation and claims clauses highlighting the probable claims by different parties while using the bespoke versions of the contract
FIDIC forms of contract have been used in the Middle East since the 1970s. It is quite illogical that the FIDIC form of contract and the articles have been drafted on the basis of English common law principles, however in Gulf countries, both Public and Private sector clients on these countries like UAE, Oman, Kuwait, Kingdon of Saudi Arabia etc source their law from the civil law and shariah law. Historically, public sector clients in these countries have led the way for FIDIC, used in response to tendering laws and the followed the requirements of various government ministries. It is to be noted that in the UAE, Emirate of Abu Dhabi has officially adopted the FIDIC form, however in the Emirate of Dubai (particularly the Dubai Municipality) has been using the bespoke FIDIC since later 80s.
Most of the claims and arguments formulated in construction contracts in the UAE and Middile East are related to the variations and its evaluations. With the usage of powerful English language and different interpretation of the clauses by different parties always made the contraction contracts an arguable and hot subject. The FIDIC red book was heavily amended to suit to the requirements in line with the public law in UAE , also some of the clients modified the articles to suite / safe guard their financial interests, transferring the risk to the contractor. This is more visible on some of the areas which lead to many claims at a later stage. It is an arguable point that these amendments really safe guarded such risks or not, which will be discussed in the following chapters. Although there are many such clauses amended by many clients, for the dissertation purpose, the variation clause from Nakheel conditions of Contract (FIDIC 1987) is analyzed in detail with a case study from a bespoke version of the new form (FIDIC 1999) chosen for the dissertation purpose.
While considering the role of the Engineer under the FIDIC contract conditions, his inherent dichotomy role is highly appreciable. The Engineer is assumed to be independent to administer the contract between the parties in a fair and reasonable way, the obligations being to certify works in accordance with the contract, act as an independent adjudicator in the event of a dispute. Furthermore, Engineer is deemed to acts as the Employer's agent to receive the payment for his services to the Employer, it is clear that he owes the Employer a duty of care. This is an unintended dichotomy by the FIDIC drafting committee at the time, has been pointed out to the extent that the various government authorities in UAE and neighboring countries such as the Emirate of Abu Dhabi, and Kuwait, give themselves sole discretion in instructing variations including the cost involved with risks which are not attributable to either the Contractor or the Employer.
In this chapter, however, the interpretation of the variation clause under FIDIC 4th edition 1987 is analyzed with difference in interpretations showing the possible disputes that may arise during the administration.
4.2 Nature of Variations
The nature of variations is usually defined by a variation clause in the contract. However, a point to note is what constitutes a variation in a contract is not only found in one clause but in a range of clauses. Nakheel Conditions of Contract based on FIDIC 1987 handles variations in Clause 51 and the rest are found in other clauses of the contract. The presence of such variation clauses in the contracts including standard forms as well as in bespoke versions, is close to an admission that no project is completed without changes.
The nature of variations are documented by authors in their literatures (for example, Trickey and Hackett, 2001; Fellows and Fenn, 2001; Potts, 1995; Atkinson, 1992; Turner, 1984; Wainwright and Wood, 1983 and Porter, 1980). It includes various forms of contracts, such as the JCT 98 form (Joint Contracts Tribunal 1998); the GC/W 98 form (Government Contract/Works, 1998); the FIDIC form (Federation Internationale des Ingenieurs-Consils); and the ICE form (Institution of Civil Engineers). From their literatures it can be concluded that major variations are not only due to additions but also include omissions and substitutions; changes in level, position & quality, character, form kind, dimension and line, specified sequence or method of timing of the construction; changes due to limitations or restrictions to the access, working space or hours; removal from sites of any material that are not specified in the contracts; opening up for inspection of any work that are covered up; and the replacement of any person employed in connection with the contract.
Extent of variations
Atkinson (1992) argues that, should only one party benefit from the variation that party should avail some advantage under the contract, provide some service, or Pay a sum of money for the benefit of the other party. In simple words, variations are followed by negotiations for compensation for the direct loss and likely loss due to disruption.
Contract clauses under Nakheel conditions of contract clearly state how a variation should be initiated, in other words, who is authorized to issue and what is called a variation order. Nakheel hasn't amended the variation clause used in FIDIC 1987 4th edition. In their contract all the orders shall be written and issued by the Engineer who shall be the consultant for the project. However, it is not say that an Engineer has the authority to issue anything purporting to be a variation. An excessive variation ordered by an Engineer would not be regarded as a variation under the contract (Fellows, 2001). Engineers do not hold the authority to vary the work to an extent that the extra work outside the scope of the original by the parties at the time of signing the contract. Instructing a contractor to construct an air port, when initially the contract was for a commercial building only; or changing the construction of two blocks to five blocks of flats shall be deemed excessive and definitely not a variation (Wainright and Wood, 1987 and Turner, 1984). Therefore, altering the terms and conditions of the contract will require to cancel the contract and replace it with a new one (Atkinson, 1992). In general, variation to terms and conditions can occur under the following conditions:
i. Increase in cost due to inflation or taxations.
ii. The varied work different in character or is executed under different conditions to that priced in the BoQs.
iii. Variation order makes contract rates or prices inapplicable in the opinion of the contractor.
Condition (a) shall not be misinterpreted in such a way that any changes to the tax regime would require a new contract to be signed, for example, the Botswana Government announced the introduction of new VAT well in advance, i.e approximately 14 months (Mmegi, 2001). Under such situations it is not necessary to void a contract signed two months before the introduction date of 1stJuly 2002, claiming a new tax regime, as both parties should have thought about its introduction.
4.4 Cause of variations
Various literatures reveal that mainly the client, contractor and other stakeholders, cause variations in the construction industry. In addition, there are many other reasons that may cause the above mentioned stakeholders to kick off variations some of them are financial, design, aesthetic apprearance, changes in drawings, climatic conditions, geological and geotechnical reasons (Hibbard, 1986; Turner, 1984).
4.5 Effect of variations
Variations have numerous effects on the project, some are tangible and others intangible (Hibberd, 1986). Procedures prescribed by the various contract forms are not sufficient to include a myriad of affects caused by such variations during the execution of the construction contract. For example, When an additional work is carried out, under normal circumstances has the effect of extending the contract period. It is may be possible to quantify the additional work, however it is not easy to quantify the effects of the extended contract period. Furthermore, while an omission occurs, it may not be an easy task in compiling the quantities and prices of the items omitted from the BoQ. The omission probably disrupt the continuity of work in certain ways like the type of labour and plant or both of them may become idle due to a disruption of the project programmed earlier or sequence activities (Oxley and Poskit, 1996). Therefore, while doing the valuations of work done, the effect of variations on the project must be considered although issues relating to valuation of variations are beyond the scope of study, Trickey and Hackett (2001) identified the challenges of variations as the establishment of the value of the:
i. variation itself
ii. effect of the variation on other work, and
iii. loss and expense directly arising from the progress of work that are materially affected due to the execution of the variation
4.6 Interpretation of the Variation clause under Nakheel's old form, highlighting the possible areas of disputes and interpretations
The Variation clause 51 (Refer Appendix 1) as follows;
"(a) increase or decrease the quantity of any work." This includes a nominal increase in the quantities over the bills of quantities. However under such instances, Engineer would not instruct a change in quantities in a re-measurement contract. As per sub-clause 51.2, it is clear that no such instruction is required; and the explanation under that sub-clause would lead to an argument as to whether a nominal change in quantities amounts to a variation.
"(b) omit any such work (but not if the omitted work is to be carried out by the Employer or another contractor)." It is to be noted that this omissions must be genuine. Otherwise, an Employer removes that part of the works from the Contractor where he finds an alternative contractor able to do that part of the work cheaply.
An example, Australian High Court decision of Commissioner for Main Roads v Reid (1974) 12 BLR 55, it was held that the Contractor has the right to do all the works under the contract subject to the right of the Employer to instruct proper variations. Here it is hard to interpret whether such omissions instructed are due to the financing problems or not? Or is that because the Employer has had the work done upon the completion of the contract works necessarily indicate that he is in breach? Here we need to judge the apparent intention of the Employer while giving the instruction to omit the work. Without doubt, this clause does not remove the difficulty entirely.
An alternative view by the Australian High Court was that the Employer shall be entitled to omit any part of the work he wishes, provided the Contractor shall be duly compensated for the same. This has the merit of avoiding wrong interpretations of clauses that do not have exclusions such as in these forms of contract variation clauses. While valuing the variation, the Engineer need to compensate the Contractor for the loss of Profit and associated overhead recovery by, for example, deducting 85% of the price of the omitted work instead of 100%. Usually under re-measurement contracts, this is not an easy task, therefore, either 10% is added or some components of the remaining work need to be re-rated.
This clause should be read in conjunction with clause 40.3 (Suspension lasting more than 84 days) where the Contractor may, after giving notice, treat the suspended part of the works for more than 12 weeks as having been omitted.
"(e) execute additional work...necessary for the completion of the Works". The Contractor can object that he has already agreed to do the necessary things under the contract. For example, clause 8.1 (Contractor's responsibilities) and clause 12.1 (Sufficiency of tender). In reality, this obligation is almost nullified by the re-measurement mechanism of the contract and the clauses such as clause 13 (Work to be in accordance with the contract) and clause 20 (Care of Works).
"(f) Change any specified sequence or timing": Here, the word "specified" means deal only with required variations set out as per the contract document. It does not permit the Engineer to order acceleration. Clause 46 (Rate of progress) clarify this point.
"No such variation shall...vitiate...". Under the common law in the U.K. and elsewhere, a variation that changes the whole character of the works cannot be interpreted as a variation. A contract for an airport may not be varied to a sea port. The cases of Suisse Atlantique v N.V. Rotterdamsche (1967) 1 AC 361 and Chadmax Plastics v Hansen and Yuncken (1985) B&CL 52. The word "such" refers back to (a) to (f) of old form of contract variation article, thus the Contractor is protected. The essential requirement that “in his opinion, be necessary and for that purpose” would also safe guard the contractor as the employer or his personal i.e the Engineer cannot instruct a variation if the work is not necessary to complete the project. Any such instructions outside the power of the Engineer therefore need to be negotiated.
While making the interpretations on the whole clauses, the Employer has a provision to reject the variation as unauthorized instruction under Engineer's authority; this sub-clause has the limitation in ordering necessary and appropriate variations. While the Employer has the benefit of the work, having an ability to recover from the Engineer for any such breach from his professional Indemnity insurance, the Contractor has incurred the cost of executing the variation; the Employer's argument on this natter cannot be justified. On the other hand if the Employer had notice of the variation before the commencement, did nothing to prevent it, he will be doubtlessly assumed to approve the Engineer's action. Endorsement can be seen in the subsequent conduct of the Employer. Even if the Employer does not receive a copy of the notice under clause 52.2 from the Contractor (Power of Engineer to fix rates), he would receive/ notified the same through one of the copies of the Contractor's monthly statement under clause 60.1. Thus the lack of response about the information of the variation can be interpreted as a confirmation even if the information given was too late to prevent the work being executed. Furthermore, under the articles 318 & 319 of the UAE civil code, unjust enrichment is unlawful. If the Engineer reject such a claim from the Contractor purely based on these grounds where are rate are prices are inappropriate with respect to the time, it could be, as a matter of the UAE law, the Employer is unjustly enriched by benefiting from the additional work, consequently the claim may succeed in the eyes of the UAE law even if the notice procedures were not complied with irrespective of both old and new forms being used.
The next arguable point in instructing variation is whether the Employer's position to challenge a variation issued by the Engineer other than on the ground that it was not necessary or appropriate? If the Engineer is indebted by his TOR (terms of reference) to obtain the approval of the Employer before instructing any variations and that obligation is mentioned in Part II to clause 2.1 (Engineer's duties and authority), it became clear in clause 2.1 that the Employer may not challenge the variation for lack of approval. To a certain extent, the matter should be resolved between the Employer and the Engineer. Conversely, If Part II is silent; this sub-clause expressly authorizes the Engineer to issue appropriate variations. Variations are not specifically referred to in clauses 1.5 (Notices, consents etc.) or 2.6 (Engineer to act impartially) of the old form, hence it is challenging that the variation has been instructed by the Employer's agent and therefore has in effect been authorized or given the authority by the Employer who should not be allowed to seek to escape his own action. Nevertheless, under both clause 67.1 (Engineer's decision) and clause 67.3 (Arbitration), the Engineer's instructions are open to for both parties to challenge. The Employer can therefore challenge in certain situations that the subject variation was part of the original contract works and thus not a variation at all. However under the new form, clauses 188.8.131.52 (Employer's personal) clearly states the Engineer as Employer's personal, hence the employers argument is weaker compared to the older versions. On the other hand, it Employer's right to challenge under both forms are limited to questions of the Engineer's authority where the Employer is in disagreement with the necessity or appropriateness of the variation or claims that the work was already part of the contract.
In view of the extensiveness of the Contractor's obligation under the red book to comply with the Engineer's instructions "on any matter, whether provided in the Contract or not, related to the works" under clause 13.1, it is visible that the Employer's views are poorly furnished under the particular sub-clause. The view of the Engineer is expressly mentioned in old form clause 2.6 (Engineer to act impartially) and challengeable under clause 67.1 (Engineer's decision) and clause 67.3 (Arbitration) as well as on new form under the clauses 3.2(Delegation by the Engineer) and clause 20(claims, disputes and arbitration). The Contractor's position is established as he has the right to challenge the Engineer's opinion on the correctness of a variation arising from the Employer's approval.
"..any variation...that may, in his opinion, be necessary...". A question often arises in practice is Engineer's obligation to instruct in any circumstances. There are 19 clauses under the old form which authorize, however the following clauses impose an obligation to instruct. The other clauses are:-
i. Clause 5.2 (Priority of contract documents) where the Engineer is obliged to instruct in respect of ambiguities;
ii. Clause 27 (Fossils) here it is Engineer's obligation to instruct the Contractor upon the find; and
iii. Clause 48.1 (Taking-Over Certificate) where the Engineer is either to award the certificate or instruct the Contractor as to the work to be completed prior to substantial completion.
Apart from the particular situations addressed by the above three clauses, the Engineer's general discretion is restricted. On the one hand, the Engineer need to instruct variations that are in his view be necessary; on the other, he has the obligation to instruct variations for any other reasons that are appropriate. The old form allow the Engineer to order variations up to 14days after the expiry of the defects liability period where as the under the new form the authority is limited up to the issuance of the performance certificate only.
Clause 51.2 The Engineer's instruction need not be a written one as clause 2.5 (Instructions in writing) provide provision for oral instructions. Any such oral instructions need to be confirmed in writing by the Contractor after the instruction has been given and in fact it can be obtained from an arbitrator (E.C.Corbett, 1987). Also no specific instruction is required for nominal changes in quantities from those stated in the bill of quantities. As this is a re-measurement contract, such changes in quantities need no special treatment. However, It can be argued that changes in quantities due to the unavoidable and incorrect bill items, sometimes referred as “automatic" changes in quantities, are variations.
It can be further argued that this will entitle the Contractor to make an attempt to escape from the rates furnished in the contract and make eligible to claim additional payment under clause 52.2 (Power of Engineer to fix rates) where the actual quantities executed at site have exceeded those set out in the Bill of Quantities. Furthermore, while recalling under clause 55.1 (Quantities), the quantities in the Bill "are not assumed to be taken as the actual and correct quantities". The actual quantities are available upon re-measurement under clause 56.1 (Works to be measured), also states that the value of the Works can be obtained in this fashion. The Contractor is thus paid under clause 60.2 (Monthly payments) for the quantities executed at site.
Under clause 52.1 (Valuation of variations), variations are to be valued at the rates mentioned in the contract if "applicable". Under 52.2 (Power of Engineer to fix rates), if the Contractor prove that "the nature or amount of any varied work" makes the Bill rate "inappropriate or inapplicable", he is entitled to obtain a new rate to evaluate variations. Therefore, the first hurdle for the Contractor is to prove that the change in quantities amounts to "varied work".
An Employer on the other hand argue that the purpose of clause 52.3 (Variations exceeding 15%) is to compensate the Contractor, if appropriate, provided there are serious difference between the estimated and actual quantities. This would be defeated if the Contractor is entitled to claim a new rate whenever the actual and estimated quantities are changed. The Employer may argue that FIDIC draftsman indicate that the changes and quantities are not variations as there are no instructions required under such circumstances.
It is understood that the Employer's arguments are not justifiable. An increase or decrease in the quantities included in sub-clause 51.1(a) is the subject matter of a variation. The inclusion of "automatic" changes in this sub-clause and in clause 52.3, both alarmed with variations point out the draftsman's thinking.
For cases that are with different conclusions, refer Arcos Industries v Electricity Commission of New South Wales (1973) 2 NSWLR 186 12 BLR 65, where the New South Wales Court of Appeal's outcome was about the shortfall in quantities in the Schedule of Rates Quantities with estimated quantities and what was mentioned as a "total price" not amounting to a variation; the Privy Council in Mitsui v Attorney-General of Hong Kong (1986) 33 BLR 1, decided that quantities in excess of the anticipated were variations; and J. Crosby & Sons v Portland UDC (1967) 5 BLR 121 where the English High Court judge decided that an increase in quantities under ICE 4th Edition amounted to a variation.
A further application of the issue is whether automatic changes in quantities would lead to variations in relation to extension of time. Under clause 44.1 (Extension of time for completion), "the amount or nature of extra or additional work" is the base ground for extension. It may be arguable from the Employer's side that although no express statement of variation is made in clause 44.1, the relationship between clause 44.1(a) and clause 51.1(a) in their wordings and (e) is sufficient to make it plain that extensions of time can be granted for variations depending upon the use of float available in the program.
It has been suggested that automatic changes in quantities comes under the definition of varied work. If this is not correct, the next question is whether these automatic changes in quantities could however make the contractor eligible for an extension of time in appropriate circumstances. The term "additional" was found in clause 51.1 (e) whereas the term "extra" was used only in clause 52.2 (Power of Engineer to fix rates) in relation to extra payment. To what then does "extra...work" refer? Extra to which work and how? The answer could be extra to that work that the Contractor is contracted to perform. If the Contractor agreed to carry out whatever quantities that are necessary to complete the work, (hence no need for an instruction under the current sub-clause), that would rule out any extension of time. If the answer is extra to the quantities of work that the Contractor priced for in the Bills of Quantities, then an increase in quantities will provide the contractor an extension of time.
It is suggested as justifiable if an extension of time can be granted in relation to provisional quantities. For example, if the parties were uncertain about the amount of rock found in excavations, and a provisional quantity was furnished for excavating rock, the Contractor, in deciding a suitable allowance in his programme for the excavation of rock, would more than reasonable in alighting on the provisional quantity shown. Thus, when the quantity has increased, it is required to grant an extension of time. Under normal circumstances were the works that are not changed at all from what was anticipated but the quantities happened to be different not a very large extent, it is difficult to justify the extension of time granted. The answer, it is suggested, therefore lies within the interpretation that includes automatic changes of quantities within clause 44.1, despite whether varied work within clauses 51 and 52. The Engineer has sufficient discretion in clause 44.1 to grant or refuse extensions of time. For allowance, the Contractor need to make in his programme for works that are the subject of provisional sums, see under clause 58.1 (Definition of "Provisional Sum").
Just as the same adjustment made under clause 52.3 this may adverse to the Contractor as the increase in the work result in an over-recovery to his plant and overhead costs, subsequently the Engineer under clause 52.2 may decide that the rate in the bills need to be adjusted downwards owing to the increase in quantity.
These three very brief examples illustrate the care which must be exercised by both employers and contractors (and indeed main contractors and sub contractors) in amending standard form Conditions of Contract. It is often the case that the amendment of one provision has ramification throughout the Contract Conditions or that the amendment made does not adequately achieve the objective which originally prompted the amendment. Careful consideration must be given to whether consequential amendments arising from the principal amendment are required to maintain the integrity of the Conditions of Contract as a whole, and whether the proposed amendment is effective in reflecting the intention of the parties(http://www.mcmullan.net/eclj/amend.html)
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