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K&L Construction Law Blog

Legal issues, news, and regulations concerning the construction industry

Preparing for a New Era in the Design and Construction Industry

Posted in Articles and Publications, The Americas

By Justin L. Weisberg, K&L Gates, Chicago

The construction industry is currently on the precipice of substantial changes impacting all participants involved in the design and construction of modern projects.  Economic volatility has resulted in significant pressure on all participants to increase efficiency and deliver projects at reduced costs.  New technology, including BIM, is impacting the very responsibilities and interactions of project participants.  Over the past decade, environmental and sustainable design considerations have gone from nonexistent to a driving factor in the design and construction of numerous projects.

While Design Bid Build (“DBB”) was historically the leading method of project delivery, progressive methods have made substantial gains over the last decade.  Progressive project delivery methods include Design Build (“DB”), Construction Manager at Risk (“CMAR”), and Integrated Project Delivery (“IPD”).  These progressive methods take advantage of construction expertise during the design phase of the construction project.

Traditionally, the selection of the prime contractor for a construction project (“Contractor”) under the DBB process did not occur until the design was complete, requiring a Contractor in most cases to provide a competitive lump-sum bid.  The DBB process did not provide for Contractor input during design and provided an incentive for the bidding contractors to capitalize on design errors.  In contrast, progressive project delivery methods provide for the selection of the Contractor at the beginning of the design process.  The early selection and retention of the Contractor allows the selected Contractor to provide input from a construction perspective before the design is complete.  The architect or engineer of record for a given project (“Designer”) generally focuses on the project as it will exist when completed.  Designers historically did not get involved in the means and methods of construction, which involved taking the concept on the drawings to reality in the field.

Construction sequencing, shoring, and hoisting were all left to the Contractor.  The Contractor was responsible for the planning and administration for the scheduling delivery and storage of tons of materials and equipment on the project site.  The Contractor was also responsible for the development of infrastructure to provide for access, transportation, drainage, water, power, facilities, offices, and shelter during construction.  Finally, planning, scheduling, and estimating were significant activities generally within the province of the Contractor.

Selecting a Contractor before completion of the design allows the Designer to receive input from the Contractor of potential design decisions that can have a substantial impact on cost and schedule.  For example, the decision to implement a uniform design of bathrooms for all patient rooms in a hospital can facilitate the efficient prefabrication of the bathrooms before delivery to the field.

The selection of the Contractor at the inception rather than after completion of the design process requires a different process from traditional DBB.  A bidding process is not possible without drawings and a project scope.  Consequently, selection of the Contractor for a progressive delivery project cannot be based upon the lowest qualified bid.  Instead, the  the party procuring the design and construction services (“Owner”) must analyze the capability of the DB, CMAR, or Contractor, including any existing relationship, the DB’s, CMAR’s or Contractor’s relative experience, and its reputation.

The compensation of the DB, CMAR and Contractor under a progressive construction method also differs from a traditional DBB project.  Given that there is no defined scope at the time the Contractor is hired, a realistic and fair lump-sum contract is simply not achievable.  Therefore, negotiated contracts that are based upon the Contractor’s actual cost plus a fee are being utilized with greater frequency.  In addition, at some point during the design phase of a project, there is enough information about the anticipated scope for a price to be set for the project.  A Guaranteed Maximum Price or GMP, agreed to by a DB, CMAR or Contractor that is compensated on a cost plus fee basis, can provide an Owner with a specific price limit for a given scope of work.  A profit pool established for an IPD project can set the maximum risk shouldered by the Contractor and Designer, marking a change to a concept of sharing risk between project participants as compared to the risk-shifting concepts of traditional project delivery systems.

Cost-based compensation systems result in more information required in payment applications and require greater scrutiny by the Owner.  Where a GMP has been agreed upon, a determination of the lower amount of allowable cost, versus the value of completed work under the GMP, must be determined.  Given the ongoing administration required by the Owner from selection of project participants to project close out, an Owner might consider the use of consultants or dedicated employees to administer a project that utilizes a progressive project delivery system.

In sum, industry-wide changes in construction along with progressive delivery methods are driving significant changes in the ways project participants communicate, fund, are compensated and allocate risk on a project.  A practical understanding of the shift in project delivery systems will assist Owners, Designers, DB’s CMAR’s and Contractors in surviving and even thriving in the modern era of construction.

 

How Are Your Construction Activities Regulated under OSHA’s Final Silica Rule?

Posted in Articles and Publications, The Americas

By Barry M. Hartman, K&L Gates, Washington, D.C. and Stephen J. Matzura, K&L Gates, Harrisburg

On March 24, 2016, OSHA issued the prepublication version of the final rule regarding occupational exposure to respirable crystalline silica, including one standard for the general industry and maritime, and another standard for construction work (“Final Rule”). The rule applicable to construction work will be codified at 29 C.F.R. § 1926.1153. It becomes effective June 23, with compliance obligations beginning at least a year later (June 23, 2017). The more stringent permissible exposure limit (“PEL”) of 50 μg/m3 and the “action level” of 25 μg/m3 are the same as in the proposed rule that OSHA issued in 2013.

The Final Rule essentially creates three categories of construction activities that are regulated differently depending on levels of exposure to respirable silica: (1) activities excluded from regulation; (2) activities listed in Table 1 that are afforded a “safe harbor” from the requirement to conduct an exposure assessment; and (3) activities that require an exposure assessment. Any employers that perform “construction work” – which may also include employers outside of the construction industry – must consider where their activities fall within the construction standard for silica.

1. Activities Excluded from All Compliance Obligations

OSHA entirely excluded from all obligations in the standard any employee exposures that remain below 25 μg/m3 (without a respirator) under any foreseeable conditions. Activities involving such minimal exposures to respirable crystalline silica do not fall within the scope of the standard. Tasks performed in isolation from others that generate significant exposures to respirable crystalline silica may qualify, including mixing mortar; pouring concrete footers, slab foundation, and foundation walls; and removal of concrete formwork.

2. Safe Harbor for Construction Tasks Listed in Table 1

OSHA lists several construction tasks that are presumed to be below the PEL where employers maintain compliance with the specified engineering and work practice controls. This means that employers need not conduct a more-burdensome and costly exposure assessment, as long as they comply with Table 1. In the Final Rule, OSHA removed the entry for drywall finishing, revised other entries, and added several more. Some of the additional tasks that OSHA included in Table 1 in the Final Rule include:

  • Handheld power saws for cutting fiber-cement board (with blade diameter of 8 inches or less)
  • Rig-mounted core saws and drills
  • Dowel drilling rigs for concrete
  • Small drivable milling machines (less than half-lane)
  • Large drivable milling machines (half-lane and larger for cuts of any depth on asphalt only and for cuts of four inches in depth or less on any other substrate)
  • Heavy equipment and utility vehicles used to abrade or fracture silica-containing materials (e.g., hoe-ramming, rock ripping) or used during demolition activities involving silica-containing materials
  • Heavy equipment and utility vehicles for tasks such as grading and excavating but not including: demolishing, abrading, or fracturing silica-containing materials

Employers should carefully check Table 1 to determine whether their silica-generating activities fall within the safe harbor. Employers will need to closely follow equipment manufacturers’ instructions to ensure compliance with Table 1. Those who comply with the specified controls when conducting activities listed in Table 1 are not required to conduct an exposure assessment, or implement other controls aside from those specified. They are, however, required to follow some other portions of the rule highlighted below. The following are some of the significant changes to the standard since the proposed rule:

  • Written Control Plan. The proposed rule did not require a written exposure control plan. The Final Rule requires a “competent person” to implement this plan to describe the controls used to limit employee exposures, including procedures used to restrict access to work areas when necessary. The competent person must be qualified to implement the plan, be capable of identifying existing and foreseeable respirable crystalline silica hazards in the workplace, and have authorization to take prompt corrective measures to eliminate or minimize them. The plan must be reviewed and updated annually and made available to employees and OSHA upon request.
  • Hazard Communication and Training. The standard requires employers to provide training to each employee on the hazards of silica in the same manner as in the proposed rule, but now requires identification of the “competent person” described above. The Final Rule also incorporates compliance with the Hazard Communication Standard (“HCS”) by reference for silica exposures in the workplace. Since the proposed rule, new requirements under OSHA’s HCS have become effective. Employers should be aware that another deadline for compliance with the HCS is approaching in June 2016 (before the compliance obligations under the Final Rule become effective). Compliance with the HCS will be critical to compliance with the silica standard, including Table 1, because safety data sheets and labels from product manufacturers should specify information about potential exposures.
  • Housekeeping. Unlike the proposed rule, the Final Rule allows compressed air for cleanup purposes in certain limited circumstances. But the circumstances under which dry sweeping and compressed air may be used for cleanup are very limited.
  • Personal Protective Equipment (“PPE”). The Final Rule does not require use of PPE, as the proposed rule did.
3. Activities Not Within the Safe Harbor of Table 1 Requiring an Exposure Assessment

In addition to the requirements above, exposures that do not fall within the safe harbor of Table 1 require an exposure assessment to determine if the action level is reached. Exposure assessments may entail use of objective data (such as industry-wide studies), or initial monitoring of employees. Additional engineering and work practice controls will be required to ensure compliance with the PEL. Depending on results of the initial exposure assessment, more-stringent requirements such as respiratory protection and medical surveillance may be required. The Final Rule revised several aspects of the proposed medical surveillance requirements. The recordkeeping requirements are substantively the same as those in the proposed rule. They mandate records of data related to exposure assessments to be maintained for at least 30 years.

Allocating and Managing Risk in Major Rail Projects: International Railway Summit 2016

Posted in Asia Pacific, Europe, Industry Events, Middle East, The Americas

Nicola Ellis, Special Counsel in the London office, recently presented at the International Railway Summit 2016 in Vienna. The International Railway Summit provides a meeting ground for senior decision makers from the world’s key rail operators, transport ministries and solution providers.

K&L Gates served as the Legal Sponsor for the annual event.

Nicola’s presentation covered the common risks which should be carefully considered at the outset of procuring a major rail projects. To view a copy of Nicola’s presentation titled “Allocating and Managing Risk in Major Rail Projects,” please click here.

Implementing Building Information Modelling (BIM) in Germany

Posted in Articles and Publications, Europe

By Christoph Mank, K&L Gates, Berlin

In recent years, numerous issues have accumulated in connection with the realisation of large building projects planned and financed by the public sector, such as the new international airport in Berlin, the Elb-Philharmonie in Hamburg and the Stuttgart 21 train station project. In particular, issues included delays, huge cost increases and communicating the projects and the attendant problems affecting the public. The ensuing discussions in the German public triggered the formation of a reform commission by the Federal Ministry of Transport and Digital Infrastructure (Bundesministerium für Verkehr und digitale Infrastruktur), called “Bau von Großprojekten” or “Large-Scale Construction Projects”. One recommendation in the reform commission’s final report is that Building Information Modelling (BIM) should be implemented in Germany.

What is BIM?

BIM refers to a cooperative work method based on the digital modelling of a building that consistently gathers and manages the data relevant to a building’s life cycle and, by means of transparent communication, ensures this information is exchanged between the parties involved or is transferred for further processing.

Or, quite simply put: first construct in the virtual, then in the real, world.

The aim is to minimise the risks involved in construction projects and to shorten the actual construction time and reduce costs; a further desire is to achieve improved project communication with the public by creating a visual representation of the project using digital planning.

BIM is already used on a regular basis in European countries such as the UK, the Netherlands and Norway, and also in the United States. BIM is still in its infancy in Germany. The public sector — led by the Federal Ministry of Transport and Digital Infrastructure — now intends to promote the implementation and dissemination of BIM in Germany by means of a phased plan. If all goes according to the Federal Ministry’s plans, BIM will be regularly applied for all transport infrastructure projects in Germany from 2020 onwards. Bearing in mind that there are currently only four public-sector pilot projects, two for road engineering and two for railroad construction, this seems rather ambitious. An extensive application of BIM requires market participants have corresponding knowledge and skills; it can be assumed that a huge backlog exists in this respect.

Are changes to the legal framework required?

According to the Ministry, introducing BIM will not require extensive reform to Germany’s planning and construction legal framework. However, consequences for legal policies and common contract forms and models are inevitable. Debates in the coming months and years will demonstrate whether the need for change has been underestimated. At present, the legal amendments being discussed are in connection with procurement, pricing and contract law.

However, considering contract law alone, the introduction of BIM could give rise to an unpredictable need for solutions. It is doubtful whether the commitment to cooperation required of all parties by BIM is adequately reflected in the current system of individual contracts. It is possible that a sui generis system of multi-party contracts has to be developed for BIM that at present neither exists nor is applied. It is impossible to foresee the repercussions cooperative BIM will have on the allocation and distribution of liability; it must therefore be expected the insurance industry will intervene in the just-begun debate.

As the anticipated benefits of BIM far outweigh the risks and challenges posed by its introduction, it is expected that implementing BIM for civil engineering projects will gradually lead to its adoption into large-scale and, subsequently, small-scale construction projects.

BIM affects not only the planning and construction phase; the model’s information is relevant to the entire life span of a property, including the building’s operation and maintenance after it has been completed and handed over. BIM is, thus, not only immensely significant to the construction industry, but also to the real estate sector.

Pennsylvania Superior Court Holds that Economic Loss Doctrine Does Not Shield Design Professionals from Liability for Faulty Information Implicitly Represented in Design Documents

Posted in Case Summaries, The Americas

By Michael P. Cotton, K&L Gates, Pittsburgh

In its July 8, 2015 opinion, the Superior Court of Pennsylvania held that design professionals are potentially subject to liability for negligent misrepresentation claims when it is alleged that their design documents negligently included false information via implicit representations.  Gongloff Contracting, L.L.C. v. L. Robert Kimball & Associates, Architects & Engineers, Inc., 119 A.3d 1070 (Pa. Super. 2015).  In so doing, the Superior Court clarified the scope of Section 552 of the Restatement (Second) of Torts and found that the Section does not require a design professional to make an explicit negligent misrepresentation of a specific fact for a third party to recover economic damages.

Background

In 2009, California University of Pennsylvania hired L. Robert Kimball & Associates, Architects and Engineers, Inc. (“Kimball”) as the architect-engineer for the construction of a convocation center.  After Kimball completed the design, Gongloff Contracting, LLC (“Gongloff”) was hired as a sub-subcontractor by the structural steel subcontractor to provide labor, materials, and equipment to erect the structural steel for $990,230.

During preconstruction meetings, a professional engineer assisting in the structural steel design and the subcontractor for steel truss fabrication both raised concerns that Kimball’s roof design was faulty due to undersized roof trusses.  Kimball denied the roof was undersized, and Gongloff began construction in March 2010.  Approximately five weeks into the project, Gongloff began experiencing complications, and Kimball acknowledged that the as-designed trusses could not accommodate the construction loads.  Subsequent attempts to redesign the structure greatly increased Gongloff’s costs.  Gongloff submitted eighty-one change order requests, many of which were not paid.  Unable to pay its vendors, Gongloff left the job site and sued Kimball for negligent misrepresentation.

In its opinion, the trial court explained, “The economic loss rule is that tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement.  To recover in negligence there must be a showing of harm above and beyond disappointed expectations evolving solely from a prior agreement.”  However, the trial court noted that Section 552 of the Restatement (Second) of Torts provides a narrow exception to this general rule where “the design professional make[s] a negligent misrepresentation that is relied upon by the third party and causes the third party economic harm.”  Although Gongloff alleged that Kimball either expressly or impliedly represented that the structure could safely sustain all required loads, the trial court granted Kimball’s motion for judgment on the pleadings, stating, “[Gongloff] may have suffered economic loss but cannot point to the negligent misrepresentation by Kimball that led to the loss.  The fact that the design was complex and required further engineering and design by the contractor cannot be attributed to any representation by Kimball.”  Gongloff appealed.

The Superior Court’s Decision

On appeal, the Superior Court focused its discussion on the Pennsylvania Supreme Court’s rationale for adopting Section 552 in Bilt-Rite Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (2005).  In Bilt-Rite, the Pennsylvania Supreme Court explained that liability to third parties in these instances is tied to “the common law duty of care flowing from the parties’ working relationship.”  Pursuant to this duty, an architect “is required to exercise the ability, skill, and care customarily used by architects upon such projects” when performing his contract with his employer.  The Court also cited the decisions of other courts holding architects liable “[w]here breach of such contract results in foreseeable injury, economic or otherwise, to persons so situated by their economic relations, and community of interests as to impose a duty of due care.”

In consideration of this rationale, the Superior Court reaffirmed the elements necessary to establish liability under Section 552(1): “the defendant is in the business of supplying information for the guidance of others and the information provider must have a pecuniary interest in the transaction; the information is false; the information was justifiably relied upon; and the defendant failed to exercise reasonable care in obtaining or communicating the information.”  The court also acknowledged the limiting effect of Section 552(2), which limits the scope of such liability to those persons the information provider knows exist, who are contemplating a specific commercial transaction the information provider knows about, and whom the information provider intends to influence in that transaction by using the provider’s information.

The Superior Court found that the forgoing rationale and requirements directly apply to cases like Gongloff’s, in which a subcontractor pleads justifiable reliance upon faulty information negligently, albeit implicitly, included in an architect’s design documents.  The court noted that the Pennsylvania Supreme Court’s interpretation of Section 552 “requires only that information, a rather general term, be negligently supplied by the design professional.”  Although Kimball argued that binding precedent required the plaintiff to expressly identify an “actual misrepresentation” in order to state a negligent misrepresentation claim, the Superior Court distinguished actual misrepresentations from express misrepresentations and rejected Kimball’s argument.  Defining “actual” as the “opposite meaning as assumed,” the court found that the “actual misrepresentation alleged by Gongloff here was Kimball’s roof design, composed of tangible documents which exist in fact.”  The court held, “The design itself can be construed as a representation by the architect that the plans and specifications, if followed, will result in a successful project.”

Upon acknowledging the trial court’s mistake of law, the Superior Court then concluded that Gongloff alleged sufficient facts to satisfy the necessary elements for a negligent misrepresentation claim.  Specifically, the court noted: (1) Gongloff alleged that Kimball supplied its design to the parties working on the project in order to provide guidance as to how the structure was to be built, which taken as true, sufficiently alleged that Kimball understood it was foreseeable that the information would be relied upon by third persons; (2) Kimball qualified as a design professional in the business of supplying information; and (3) Gongloff alleged numerous instances where the constructability of the structure’s roof in accordance with Kimball’s design was either called into question or determined to be impossible, thereby permitting an inference that the design included false information.

Conclusion

The Superior Court’s ruling in Gongloff enhances the ability of contractors and subcontractors to recover economic losses from negligent design professionals.  Now, errors in plans and specifications, even if by omission or silence, can result in the finding of an actual misrepresentation.  Similar to an owner’s implied warranty of constructability, a design can be interpreted as a representation by the designer that the design, if followed, will result in a successful project.  Architects, engineers, and others engaged in construction project design need to be aware of their exposure to liability for negligent misrepresentation, even where the misrepresentation was not expressly made.

Suspension and Termination Under the Civil Law, Part 2

Posted in Articles and Publications, Middle East

By Alex Brightman, K&L Gates, Doha and Donal Scott, K&L Gates, Dubai

In a previous blog post, we looked at suspension and termination of a construction contract under a Civil Code system.  We focused, in particular, on the FIDIC form of contract and looked at how that would be treated under the Qatar Civil Code.

In this article, we will continue that review, but look at how suspension and termination would operate under the UAE Civil Code.

UAE Civil Code

The general termination provisions of the UAE Civil Code are found in Articles 267–273. Article 267 states that binding contracts may only be varied or rescinded by mutual consent, an order of court or by operation of a provision of the law. In addition, there are also special rules which only apply to Muqawala contracts. A Muqawala contract, which is the equivalent of a construction contract, is defined in Article 872 as “a contract whereby one of the parties thereto undertakes to make a thing or to perform work in consideration which the other party undertakes to provide.”  Article 892 specifies three methods for the termination of a Muqawala contract:

  1. Following completion of the agreed works or services;
  2. By mutual consent; and
  3. By court order.

The first of these options would apply in any event as contractual obligations come to a natural end when they have been fully performed. It is generally accepted that contractual provisions covering termination rights amount to mutual consent within Articles 267 and 892. Even where there is no consent to terminate and in the absence of a court order, Article 247 permits a party to lawfully refuse to comply with its obligations under a contract in situations where the other party has neglected to perform its contractual obligations. For example, if a contractor does not receive the agreed remuneration under a construction contract, it is not obliged to continue carrying out unpaid construction work. However, this does not mean the contract is terminated. Should the employer resume making payments, the contractor will be obliged to fulfil its contractual obligations to perform the works. In order to avoid the contract being resumed in such a manner, the contractor could apply to the court for an order declaring the contract terminated.

In order to reduce formalities in the termination process, it is advisable to insert wording to the effect that any termination of the contract is deemed to be exercised within the meaning of mutual consent as contemplated by Articles 267 and 892 of the UAE Civil Code. This will ensure that the mutual decision to terminate the contract has legal force and alleviates the need to obtain a court order. It goes without saying that prior to terminating the contract, the terminating party should ensure that it has the legal right to do so and that it complies with any contractually agreed procedures (such as notice requirements). It is common in construction contracts to see termination clauses which provide for minimal procedural and notice requirements. Such an arrangement is referred to as “termination for convenience”. Unlike the law in Egypt, Kuwait and Qatar, UAE law does not expressly recognise the validity of termination for convenience clauses. However, it is still common to see such clauses used in practice and we have not seen precedent from the UAE courts to suggest they are inconsistent with UAE law.

Article 273 states that if a force majeure event renders performance of the contract impossible, the contract will be automatically cancelled. Article 893 provides that, if “any cause” arises that prevents the performance or completion of a Muqawala contract, either of the parties under the contract may require it to be cancelled or terminated. This Article likely applies to unforeseen force majeure events in the same manner as Article 273. It gives parties the option to terminate the contract in such an event. This can be contrasted which Article 273, which provides that the contract is automatically terminated.

Furthermore, Article 894 provides that if a contractor performs work and then becomes incapable of completing it for a cause in which he played no part, it shall be entitled to “the value of the work which he has completed and the expenses he has incurred in the performance thereof up to the amount of the benefit the employer has derived therefrom”. This provision is similar to the equivalent wording in the Qatar Civil Code and the parties should agree on the level of compensation in advance due to the inherent difficulties in objectively measuring the benefit obtained by the employer.

Finally, although the UAE Civil Code does not mention suspension expressly, as noted above, Article 247 ensures that a party need not continue performing its contractual obligation where the other party is in beach. It provides the following:

“In contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do”.

A party seeking to rely on Article 247 in the absence of a contractual right to suspend work should proceed with caution. A party should not suddenly suspend its contractual performance without prior notice to the other party. It is advisable to begin by writing to the other party and requesting that it comply with its obligations. The letter should specify a deadline for this performance, after which the aggrieved party will suspend its work. As is the case with equivalent rights under Article 191 of the Qatar Civil Code, suspension is a difficult right to enforce in practice as it is likely to require a serious breach by the other party before it can be relied upon. As stated in my analysis of suspension and termination under the Qatar Civil Code (part 1), there is an inherent danger in treating the contract as at an end when, for example, payment has not been made as the other party could treat this as an attempt to terminate the contract and this could expose the terminating party to a damages claim. Accordingly, before exercising the right to suspend work for non-payment, a contractor should take into account and address any issues that the employer may have raised as justifications for non-payment. This is primarily to show that the suspension of work is proportionate to the default in question and that the contractor has acted in good faith. The latter consideration is particularly pertinent given that the court will generally interpret Article 247 of the UAE Civil Code in the context of the parties’ mutual obligations of good faith implied under Article 246.

FIDIC Update: Termination and the Employer’s obligations under the Red Book

Posted in Articles and Publications, Europe

By Mike R. Stewart, Mary E. Lindsay, and Nita Mistry, K&L Gates, London

A Privy Council case last year provided some important guidance on the provisions in the FIDIC Red Book in relation to Employer’s financial arrangements and claims.  Whatever your perspective might be, when negotiating or managing a contract based on the FIDIC Books, employers and contractors should be aware of the Privy Council’s findings in NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago) [2015] UKPC 37.

The Contract

National Insurance Property Development Company Ltd (Trinidad and Tobago), the Employer, employed NH International (Caribbean) Ltd, the Contractor, to construct a hospital in Tobago under a contract in the form of the FIDIC Red Book.

On 2 November 2006, the Contractor terminated the contract pursuant to Clause 16.2.  The Employer did not agree the termination was valid but the parties proceeded as if the contract had been terminated.  A number of issues arose during the Engineer’s assessment of the work to the date of termination and these matters, including the validity of the termination, were referred to arbitration.

The arbitrator’s decisions in relation to Clauses 2.4 and 2.5 and Clause 16.1 were later appealed first to the High Court and the Court of Appeal in Tobago and then to the Privy Council.

FIDIC Red Book Clause 2.4 and the Privy Council Judgment

Clause 2.4 provides that the Employer “shall submit within 28 days after receiving any request from the Contractor, reasonable evidence that financial arrangements have been made and are being maintained which will enable the Employer to pay the Contract Price … in accordance with clause 14”. Clause 16 allows the contractor to suspend and terminate if reasonable evidence is not provided within certain timescales.

Pursuant to that provision, the Contractor made a request under clause 2.4 for evidence of the Employer’s financial arrangements incuding evidence that the funding for the project had Government approval.  The Employer confirmed that it was able to pay but, when the Employer would not confirm that payment had been approved by the government, the Contractor suspended work.  The Employer later confirmed that  the money was available and that the Contractor would be paid.  However, the Employer still failed to answer the Contractor’s request for confirmation that the government had specifically approved funds.  Consequently the Contractor terminated pursuant to Clause 16.2.

In relation to Clause 2.4, the arbitrator found that, in order to comply with the provisions of the clause, the Employer was required to do more than show “the employer is able to pay” and “was enthusiastic about the project”.  The Privy Council agreed with the arbitrator that the Contractor’s termination of the contract in these circumstances was valid.

FIDIC Red Book Clause 2.5 and the Privy Council Judgment

Clause 2.5 provides that:

  1. If an employer “considers itself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract”, it should, subject to certain specified exceptions “give notice and particulars to the Contractor”;
  2. The notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim”;
  3. The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount … to which the Employer considers [it]self to be entitled”, that the amount should be assessed by the Engineer, and that it “may be included as a deduction in the Contract Price and Payment Certificates”;  and
  4. The amount so determined “may be included as a deduction in the Contract Price and Payment Certificates” but that the Employer should only be entitled “to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this sub-clause”.

Clause 16.4 entitles a contractor to claim loss of profit or other loss or damage suffered as a result of the termination.  In response to the Contractor’s claims under Clause 16.4, the Employer counterclaimed a right to set-off its claims pursuant to the provisions of Clause 2.5.  The arbitrator decided that the wording of Clause 2.5 was not sufficiently clear “to exclude common law rights of set-off and/or abatement of legitimate cross-claims”.  The Employer’s “counterclaims” should be allowed.

The Privy Council, however, disagreed with the arbitrator.  The Privy Council said, at paragraph 38 of the judgment, that the purpose of Clause 2.5 “is to ensure that claims which an employer wishes to raise, whether or not they are intended to be relied on as set-offs or cross-claims, should not be allowed unless they have been the subject of a notice, which must have been given “as soon as practicable””.  Otherwise, if “the Employer could rely on claims which were first notified well after that, it is hard to see what the point of the first two parts of clause 2.5 was meant to be””.

The Consequences for Employers

In its interpretation of Clause 2.4 and of Clause 2.5 the Privy Council decided upon the interpretation that favours best that giving both parties’ full knowledge of circumstances.

For good reason, the Privy Council held that it was not sufficient under a re-measurement contract to simply say that it has access to funds and an intention to pay.  Instead, the employer must, in response to a Clause 2.4 request, provide “evidence of ’positive steps’ on the part of the employer which showed that ’financial arrangements’ had been made to pay sums due under the Agreement”.

An employer’s obligation to give full financial information, as described above, follows the obligation to pay the contract price.  It is ultimately fair that a contractor under a re-measurement contract should be entitled to confirmation and comfort that it will be paid in the event of a variation.  The time period to do so, 28 days, may not be long enough for many employers and particularly so for larger employers who often have complex financial reporting requirements.  It was not enough time for the Employer in NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago).  Thought should be given at the outset of a contract as to how an employer will respond to a Clause 2.4 request, if the clause is to remain unaltered.  Alternatively, the parties might consider amending the clause so as to satisfy a requirement for financial information at the outset.

Similarly, the Privy Council was clear that Clause 2.5 applies to any claims which an employer might wish to bring.  In addition, the clause meant that the  employer must make its claim “promptly and in a particularised form” otherwise it will not be able to bring the claim.

The Privy Council noted also that, to allow otherwise and permit claims that were made late, these claims could not be determined by the Engineer.  The Engineer’s function in this regard is linked to the particulars which must be contained within the notice given as soon as practicable.

Again, employers must be wary of delay in making any claims and so should manage the contract so as to be able to make any such claims as soon early as possible.

Personal Property Securities and the Construction Industry

Posted in Articles and Publications, Asia Pacific

By Belinda Montgomery, Leonard McCarthy and Sandra Steele, K&L Gates, Sydney

It seems hard to believe but come 30 January 2016, the Personal Property Securities Act 2009 (Cth) (PPSA) and the register it established will have been operating for 4 years. The PPSA has introduced far reaching conceptual and practical changes to Australian law. If you are part of the construction industry, to protect your rights, you need to ensure that any registerable interests are registered on the Personal Property Securities Register (PPSR).

How is the PPSA relevant to construction industry players?

Practices and concepts within the construction industry throw up a variety of ‘red button’ issues arising under the PPSA. These include:

  • equipment hire and temporary works – if the hire of equipment and temporary works is for more than a year, in certain circumstances, the supplier must register its interest to avoid losing the property, should the party to who the equipment and temporary works have been supplied, become insolvent. This also applies to certain goods required to be registered by serial numbers (e.g. motor vehicles), if the hire of the goods is for more than 90 days and the hire agreement was entered prior to 1 October 2015;
  • retention of title provisions – commonly, items are sold or supplied on the basis that they remain the property of the supplier unless and until the purchaser pays the purchase price for the items. For the purposes of the PPSA, this creates a security interest and should be registered;
  • retention money– although this is a ‘grey’ area under PPSA, the right to retain money by a principal (in respect of a head contractor) or a head contractor (in respect of a subcontractor) may constitute a security interest under the Act. Arguably therefore, a retention agreement in a construction contract constitutes a security interest created by the retaining principal or head contractor (as relevant) and should be registered; and
  • ‘step in’ rights – under a construction contract, if a contractor materially breaches the contract, it is common for the principal to have the right to take work out of the hands of the contractor to complete the works. The right to use any of the contractor’s property to complete the work on site, needs to be registered under the PPSA by the principal.

Practical considerations

The PPSA and PPSR come into particular focus when a company goes into insolvency.

The Hastie Group is a useful case study. The companies in the Hastie Group carried on a diverse engineering business with a focus on mechanical, electrical, plumbing, refrigeration and ventilation services.  In 2011, the revenue of the Hastie Group was approximately $1.9 billion. However, in May 2012, administrators were appointed to the Hastie Group. At that time, the business had approximately 1,600 projects underway throughout Australia and was engaged on approximately 1000 sites. It also operated from up to 40 different locations, in each state and territory of Australia.

The administrators appointed to the Hastie Group had a substantial amount of equipment in their possession belonging to third parties. The administrators were concerned that they would face particular difficulties trying to ascertain what property was in the possession of the Hastie Group and what rights the administrators should exercise in respect of that property.

There were 995 registrations noted in the PPSR. However, most of the registrations failed to specify in a meaningful way, which piece of equipment or security agreement the registration related to. The administrator wrote to all creditors who had an interest recorded against the Hastie Group in the PPSR, requesting that the creditor urgently provide notification of its interest. A substantial majority of those creditors failed to respond to the correspondence. Many of the creditors who did respond, failed to provide details that allowed the Administrator to identify which particular property the security interest related to.

The administrators applied (and obtained) orders under the Corporations Act 2001 (Cth) enabling them to sell the unclaimed equipment and keep the proceeds in a separate account until those claiming an interest in the property sold were able to establish their claim. If no claim was made within a certain period, then the administrators were able to use the proceeds of sale for the benefit of general creditors.

This represents the practical difficulties that arise under the PPSA and PPSR and the need for secured creditors, including lessors, to be able to quickly identify their equipment.

Washington Court of Appeals Confirms Enforceability of Termination-for-Convenience Clauses and Holds that Implied Covenant of Good Faith Places No Limits on Express Termination-for-Convenience Clauses

Posted in Case Summaries, The Americas

By D.C. Wolf, Brad Lewis, and Jesse O. Franklin, K&L Gates, Seattle

The contract law concept of a “termination for convenience” allows one contracting party to terminate a contract that has become inconvenient or unnecessary and settle with the terminated party for partial performance.  The doctrine originated during the U.S. Civil War to give the Union government flexibility when quickly changing battlefield conditions rendered a planned project or procurement overly costly or no longer necessary.[1]

In its recent decision in SAK & Associates, Inc. v. Ferguson Construction, Inc., No. 72258-1-1, 2015 WL 4726912 (Wash. Ct. App. Aug. 10, 2015), the Washington Court of Appeals, Division One, given very limited existing authority, clarified that partial performance of a construction project is sufficient consideration to support a termination-for-convenience clause and rejected the argument that the implied covenant of good faith and fair dealing limits a party’s ability to invoke such a clause.

In SAK, the subcontractor entered into a fixed-sum contract with the general contractor to provide concrete and paving services for the construction of airplane hangars.  Their agreement contained a termination-for-convenience clause, which provided as follows:

In addition to the rights listed above, Contractor may, after providing Subcontractor with written notice, terminate (without prejudice to any right or remedy of Contractor) the Subcontract, or any part of it, for its own convenience and require Subcontractor to immediately stop work.  In such event, the Contractor shall pay the Subcontractor for the work actually performed in an amount proportionate to the total Subcontract price.  Contractor shall not be liable to the Subcontractor for any other costs, including anticipated profits on work not performed or unabsorbed overhead.

After the subcontractor had been working for about four months, the general contractor invoked the termination-for-convenience clause, citing “phasing restrictions, site logistics, and basic convenience,” and required the subcontractor to stop work immediately.  The subcontractor sued, alleging that the contractor had breached their agreement by terminating it without cause.  The trial court granted summary judgment for the contractor, holding that it had properly invoked the termination-for-convenience provision of the contract.  The subcontractor appealed.

The Court of Appeals, Division One, affirmed the grant of summary judgment.  The subcontractor’s primary argument on appeal was that because the disputed clause allowed the contractor to terminate at its discretion, it was an unenforceable, illusory promise.  The Court of Appeals disagreed, noting that so long as there is “some restriction upon the power to terminate,” the right to terminate for convenience is not illusory.  The subcontractor in SAK had completed 24% of the project before being terminated, and the contractor had paid it for that proportion of the fixed contract price.  The court determined that this payment for partial performance was sufficient consideration to render the termination-for-convenience clause valid and enforceable.  Also, as is often the case in negotiated contracts, the contractor and subcontractor in SAK agreed that in the event the contractor exercised its power to terminate, the subcontractor was entitled only to a proportionate share of its overhead and profit based on the completed portion of the work.  The Court of Appeals reasoned that this too made enforcing the termination-for-convenience clause proper, because doing so would effectuate the parties’ intent as shown objectively by the express terms of the contract.

The Court of Appeals also held that the implied covenant of good faith and fair dealing does not limit a party’s ability to invoke a termination for-convenience clause.  Relying on a previous Washington case involving a government contract with a similar clause,[2]  the Court of Appeals held that the covenant of good faith and fair dealing does not trump express contract terms.

The SAK case reinforces the enforceability of termination-for-convenience clauses in Washington.  It also rejects the notion that the implied covenant of good faith precludes a party from invoking a termination-for-convenience clause.  The Court of Appeals cautioned, however, that “[w]e are not faced with an attempt to invoke a termination for convenience clause before the commencement of any work or only after a nominal amount of work.”  Thus, this decision leaves open whether a termination-for-convenience clause is enforceable if invoked before or just after the subcontractor has started work.  It also raises the question of how much restriction upon the power to terminate is sufficient to avoid a finding that the termination-for-convenience clause is illusory.  Parties should carefully consider these issues before invoking a termination-for-convenience clause.


[1] See, e.g., United States v. Corliss Steam-Engine Co., 91 U.S. 321 (1876).

[2] Myers v. State, 152 Wn. App. 823, 828, 218 P.3d 241 (2009).

Suspension and Termination Under the Civil Law, Part 1

Posted in Articles and Publications, Middle East

By Alexander Brightman, K&L Gates, Doha

INTRODUCTION

Although “freedom of contract” is a concept that is recognised in both the common law and civil law jurisdictions, the codified and prescriptive nature of a civil law system means that the relevant provisions of the Civil Code may even be implied into robustly drafted contracts, including standard forms. As set out below, such implied provisions could have the undesirable effect of delaying termination whilst a court order is obtained or exposing the terminating party to a claim for breach of contract (and compensation) for unlawful termination. In this article, I will be discussing suspension and termination rights under the FIDIC Contract (Red and Yellow Books), before examining the position under the Qatar Civil Code.  In a follow-up blog post, I will look at suspension and termination under the UAE Civil Code.

SUSPENDING AND TERMINATING UNDER FIDIC

Although suspension and termination rights are recognised in many Civil Codes, parties should always try and expressly agree on such provisions in their contracts. Contractual suspension and termination rights are often less ambiguous and more advantageous than equivalent rights under civil law.

Clauses 15 and 16 of the FIDIC Contract (Red and Yellow Books) set out the circumstances that may lead to a termination of the contract by the employer and, in the case of the contractor, suspension and termination (the former principally for payment related breaches). Both clauses describe the procedures that must be followed and the financial arrangements that will apply following suspension or termination. Critically, both clauses also contain wide-ranging termination events. For example, the employer can terminate the contract under sub-clause 15.2 due to abandonment of the works, failure by the contractor to provide a performance security, failure to comply with a Notice to Correct and contractor’s insolvency (to name a few). The employer is also entitled to terminate the contract for convenience under sub-clause 15.5.

Although most standard form subcontracts (including FIDIC) entitle the main contractor to terminate the subcontract immediately on notice in the event that the main contract is terminated, contracting parties should not assume that subcontracts have “back-to-back” suspension and termination rights. This point is particularly pertinent in the Middle East given the propensity for contracting parties to heavily amend standard form contracts. Furthermore, “back to back” is not a legal term and may not mean much to a Qatari judge or to a dispute resolution authority under Qatari law if its substance is not reflected in the subcontract with an express explanation of what clauses of the main contract are to apply by analogy or verbatim to the subcontract. As yet, no court in the State of Qatar has addressed the issue and no legal provision directly states whether such clauses are valid or not.

Further, as explained below, unless the termination clause in the subcontract unequivocally states the parties’ intention to allow termination by notice, the contract may not automatically terminate without a court order giving effect to the termination. Accordingly, a contractor seeking to terminate a subcontract on a “back-to-back” basis following the termination of the main contract without express wording permitting it to do so may inadvertently expose itself to a claim for wrongful termination.

SUSPENDING AND TERMINATING UNDER CIVIL LAW

Qatar Civil Code

If the contract is governed by Qatar law, the contract may only be terminated by the agreement of the parties, as prescribed by law or by an order of the court. If a contract is silent or the contractual terms are ambiguous in respect of the right of a party to terminate the contract unilaterally, a contractual party may under Article 183(1) apply to the court for an order terminating the contract in the event that the other party has failed to fulfil its contractual obligations. Before making the application, Article 183(1) requires the party seeking to terminate the contract to first give notice to the defaulting party of the default and its intention to terminate the contract. Article 183(2) grants the judge wide discretion in such circumstance to terminate the contract or determine a grace period within which the defaulting party must rectify the breach (e.g. a period in which the employer must certify or make payment to the contractor). It may also reject the terminating party’s application if it considers the breach is minimal in light of the defaulting party’s overall obligations under the contract.

Article 184(1) permits the contractual parties to agree to terminate the contract without obtaining a court judgment in the event of a breach by one party. Article 184(2) requires that “the terms of the contract are explicit in demonstrating that it is the will of the parties”. In other words, unless the language of the contract clearly states the parties’ intention to permit termination of the contract by notice, the termination will be unlawful without a court order giving effect to the termination. Based on the foregoing, contracting parties should give careful consideration when drafting termination provisions to avoid exposing the terminating party to claims for compensation as well as placing it in the invidious position of being in breach for non-performance of their contractual obligations.

In addition to the aforementioned termination rights, a contracting party may also terminate a construction contract under Article 704 if “the agreed work is impossible to perform due to a foreign cause beyond the control of either party”. In such event, the employer may be liable to the contractor for costs incurred (including wages) within the scope of the benefit obtained by the employer from such work. It is important to emphasise that work will need to be “impossible” to perform rather than onerous. To avoid any ambiguity and mitigate the risk of disputes, it is in the parties’ best interests that force majeure is clearly defined in the contract and that compensation is agreed at the outset as it may be difficult to objectively measure the scope of the benefit obtained by the employer.

Finally, a contractor may have a right to suspend the contract under Article 191, which provides as follows “…if the corresponding obligations are outstanding, either party may decline to perform its own obligation unless the other party performs its own obligation, unless the parties agree otherwise or unless the practice provides otherwise”. What this could mean (in theory at least) is that unless it is otherwise agreed between the parties, the contractor may refrain from performing its obligations in the event that an employer fails to certify, or pay, sums due to the main contractor for works already carried out under a contract. However, suspension is a difficult right to enforce in practice as it is likely to require a substantial failure of performance by the other party before it can be relied upon.

CONCLUSION

Relying exclusively on the Qatar Civil Code for the ability to suspend work or terminate a contract is a risky strategy. It is not uncommon for parties to incorrectly assume that they have a right to suspend or terminate in a particular situation and to purport to suspend or terminate the contract without any legal right to do so. This can result in the suspension or termination being ineffective and the party seeking to rely on such rights being exposed to a damages claim. The risk of unlawful suspension or termination can be mitigated in large part by setting out clearly in the contract the specific circumstances in which rights of suspension and/or termination may be invoked and the procedures that need to be followed. This will give the parties greater confidence in the termination process and avoid the requirement of having to obtain a court order to bring the contract to an end.